How To Analyze If Third Party Fulfillment Is Right For Your e-Commerce Company

   

There are hundreds of competent third part fulfillment (3PL) facilities in operation today. Many have multiple facilities, which allows clients to be closer to the customer and save shipping costs. Additionally, private equity investors have acquired many major 3PL companies and consolidated them into 3PLs with dozens to hundreds of facilities. Many of these have specialized fulfillment for channels like DirectTV (DTV).

Much of our work at F. Curtis Barry and Company is in making internal fulfillment more efficient and improving customer service. As we do 3PL evaluations for clients we are continually impressed with the efficiency (cost per order), technology employed and the service they provide to large, specialized omnichannel businesses. The 3PL option is not for all companies. However, it is an option more companies should consider.

This article will assist you in evaluating whether 3PL solutions are right for your business. Here are eight major factors you should evaluate.

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1. Your business versus a provider

As you consider various 3PLs, it’s important to identify the expertise that each provider has as its core business strength. Larger 3PL providers may have various facilities and locations dedicated to certain types of fulfillment (e.g. DTV). Here are non-cost factors to consider:

  • Strengths in B2B or B2C fulfillment
  • Merchandise types typically handled (apparel, hard goods, pharma, food, etc.)
  • Systems functionality to support your channels (e.g. e-commerce, wholesale, DTV, store replenishments, etc.)
  • Value added services and degree of high-touch services you require (e.g. kit assembly, personalization, continuity plans, etc.)
  • Size of typical client. Will you be a “small fish in a big pond?”
  • Years in service and financial stability
  • Technology that will be beneficial to your company to remain cost competitive; accuracy of inventory; freight and rate shopping, interface to other services; hosting your websites, etc.
  • Fulfillment flexibility and scalability as your business grows, your market changes, your business and merchandise changes, or you choose to ship internationally, etc.

These factors should describe your business requirements in the Request For Proposal (RFP) and be the criteria against which the vendors’ bids are analyzed. Once again, your evaluation may be centered on a specific facility as well as the company as a whole.

Learn more about our methodology for evaluating and selecting a third party  logistics provider

2. Compare operational costs

Overall, your RFP must provide a profile of your business for a year and solicit all the components of cost that you would expect to pay. This profile will take some effort because you probably do not have the raw data and metrics for a year readily at hand.

For your internal fulfillment, you need to analyze your current costs for a year on what we call a “fully loaded cost.” By “fully loaded costs,” we mean identifying the annual total cost of fulfillment for fulfillment management, direct and indirect labor, total occupancy costs, packing materials, outbound shipping costs, IT processing, etc., then calculating cost for orders, units, shipments, etc.

Many companies do not analyze their businesses in this manner on a regular basis. When you look at the fully loaded cost per order for internal fulfillment versus 3PL costs, how do they compare? What savings are possible? Be sure you have “apples to apples” costs by internal and 3PL approaches and to compare 3PL solutions.

3. Inbound and outbound transportation costs and time to customer

Inbound: Is there a cost and time advantage from a location perspective, such as proximity to key ports and transportation services owned or managed by 3PL providers? This analysis is often left out of the evaluation but is key.

Outbound: Based on the specific carrier freight charts for the 3PL facilities and cities you are considering, determine how two day and ground transit will improve your customer service over your existing fulfillment location and potentially save costs over using overnight service.

Does using the 3PLs carrier contracts save money? Will the savings be shared by 3PL providers?

4. 3PL contract considerations

The length of most 3PL vendor contracts is three to five years. Is the contract fixed cost for services for the term? If not, is the annual increase in costs stated (e.g. CPI).

In our work with 3PL evaluation, one of the most commonly asked questions is if/how you can build penalties into the agreement for violation of the service level agreement. This is very difficult to negotiate. More importantly, negotiate the service level metrics which improve performance, including dock to stock turnaround, percent of orders taken and shipped same day, return processing times, inventory shrinkage and who pays, etc.

5. Avoiding capital expenses

By going with a 3PL, will your business avoid expensive capital investments? For one of our clients, using third party fulfillment meant they did not have to invest in replacing an aging order processing system. This decision saved their business an estimated $1.5 million and several years’ work, which freed up resources for investments in other strategic priorities.

6. Checking references

Requesting references for your type of business, size and growth trajectory will help you evaluate 3PL provider fit. Check out some newly implemented clients as well as longer-term clients. Work up a scripted list of questions so that you are asking the same questions between all vendors.

7. Site visits

Make site visits to at least the top two 3PL providers and to the specific facilities that are being proposed to fill your orders. Be sure to take several team members to get a variety of observations and opinions.

8. Implementation methodology

Your RFP should request the detailed implementation, task plan, time frame and responsibilities for all parties. Typical projects are implemented anywhere from 120 days to six months or more.

Third party fulfillment isn’t for every company, but is a strategic option that should be considered by more businesses seeking growth and cost savings.

Let us help with 3PL vendor selection