Selecting the Right Systems for Your Third Party Logistics Business

More and more companies today are using third party logistics providers to avoid making investments in that non-core area, or in technology necessary for it. We’ve also seen hundreds of start up eCommerce companies that simply don’t want to be in the fulfillment business. All of these companies are turning to third party logistics providers. With so much riding on it, it is very important that as a third party logistics provider, your order management system (call center, customer service, and marketing) and warehouse management system (warehousing, order management, and fulfillment) and technology give you a continuing competitive advantage. The systems you select will have significant ramifications for your personnel’s productivity, as well as how effectively you serve your customers and help them grow their businesses—and the management information these systems provide can help you grow your business. No matter what type of system you’re considering, the purchase is a long-term investment. In short, selecting the right order management system and warehouse management system for your third party logistics business is a major undertaking.
READ: 10 Critical Mistakes to Avoid in Systems Selection and Implementation  Projects

In this article, we’re going to lay out the major functional considerations for new software and the methodology for selecting an order management system and warehouse management system. Over our past 26 years as supply chain and system consultants, we have both assisted companies in selecting third party logistics partners and helped third party logistics select new order management systems and warehouse management systems to improve their supply chain logistics services, reduce costs and improve customer service.

Download: 10 Critical Systems Mistakes & How to Avoid These with Your Next WMS  or ERP

General Considerations
As you start to review systems, it’s important to consider the uses for which these systems will be implemented. As we all know, there are many types of products and services that have different order management system and warehouse management system requirements. These business differences include:

  • Catalog order management
  • eCommerce
  •  Retail store replenishment
  • Infomercial/DRTV
  •  Printed point of sale and point of purchase materials
  • Collateral and printed materials
  • Replacement parts
  • Returns processing

    The point is that you need to be sure the focus of your supply chain logistics operation can be accommodated functionally by the system. A good example is catalog management. Does the order management system allow identification of eCommerce versus catalog orders? Does the pricing engine accommodate all the pricing, discounts and services that a catalog requires? Are the analysis systems geared to page, depiction, merchandise analysis price range, and other catalog-specific requirements? Additionally, some types of products such as apparel with color size matrix or multi-dimensional matrix require on-line displays and reporting geared to this merchandise.

    Overall, since a company using third party logistics is giving up direct contact and control with the customer, the order management system and process needs to be highly functional. But there isn’t a single “one size fits all” solution that typically fits all businesses. The application needs to be scalable to high peak volumes and be very flexible to accommodate differences in client businesses. And since not all clients will want the full line of services, can the order management system be used in a modular fashion?

    With these general comments in mind, the following specific points are important for order management system, warehouse management system, and analytical tools required by third party logistics providers. In each major system function we will list key functionality to be considered.

    Today, the traditional catalog company has more than 50 percent of its sales coming from eCommerce. Most management feels that a high percentage of eCommerce sales result from receipt of the catalog. So the functionality that third party logistics partners have to provide must support the expansive growth of eCommerce. Many third party logistics companies offer expanded services to build and support client websites as a way of providing a one-stop service. Among the major eCommerce functions:

    • Order management system to website integration for inventory, customer and shipment tracking
    • Search engine optimization (SEO)
    • Personalization
    • Ability to build and support client websites
    • Ability to customize the look and feel of the website
    • Integration with other industry leading web analytics, search, rich media and review systems
    • Support of email campaigns

    Call Center, Customer Service and CRM
    One of the major areas of functionality at which third party logistics and their order management system has to excel is to have complete multi-company functionality throughout the entire application. Even for eCommerce and “bricks and mortar” companies that don’t have catalog, there are call center requirements that have to be provided. Some of the larger providers have many major retailers that have outsourced their call center and eCommerce support. Additionally, the more effective call centers are really tuned into revenue generation for the client. This not only takes the form of up-selling and cross-selling functions, but also outbound selling of product.

    Important functionality for the order management system in this area includes:

    • Multi-client, multi-title front end
    • PCI compliance
    • Expanded customer and order notes
    • Multiple addresses for ordered by, bill to and ship to
    • Ability to flag customers for future action using a workbench or workflow system
    • Ability to handle pop-up of company and customer through CTI
    • Full customer order-taking and service for catalog and Internet
    • Up-selling and cross-selling capabilities
    • Remote call monitoring through the ACD
    • Customer purchase, segmentation and lifetime value history
    • Outbound selling
    • Internal fraud checking
    • Ability to set credit limits and thresholds
    • Interface to major credit card processing providers

    Pricing Engine
    A third party logistics order management system needs a good pricing engine in order to be able to effectively handle multiple clients’ business rules, as well as various rules imposed by individual clients, for promotional pricing, discounting, targeted pricing by customer segmentation, free shipping, and a multitude of other options.

    Inventory Control & Fulfillment
    Third party logistics' inventory control and fulfillment embodies what we consider to be the most critical functionality for the warehouse management system. In order to ensure profitability, the warehouse management system has to make the third party logistics provider efficient in terms of labor, capacity and facility utilization. Among the most important areas:

    • Picking options: batch pick, zone pick, pick to cart, pick to tote, pick to light, etc.
    • Velocity slotting and cube utilization
    • Random or directed put away
    • Pick slot replenishment
    • Hot pick processing

    Labor involved with picking and packing is more than half the total direct labor cost, while direct labor is more than 50 percent of the cost per order, not including outbound shipping costs. Functionality such as picking methods, slotting, hot pick areas, streamlined returns processing, etc. all help to keep costs in line.

    • Wide variety of product types and sizes requires different warehouse management system functionality

    A major challenge facing third party logistics is the frequent need for storage and fulfillment of a wide variety of products encompassing various weights and dimensions.

    • Rate shop shipping methods
    • Interface to major shipping systems

    Outbound shipping has become the largest single expense, even exceeding direct labor costs. Rate shopping and interfaces to major shipping systems are critical to helping your customers reduce freight costs.

    • Bar code scanning receiving, put away, replenishment, picking, packing, shipping, returns, cycle counting

    Bar coding inventory through the processes will allow you to reduce shrinkage and to track inventory throughout the distribution center.

    • Multi-warehouse capabilities

    For multi-facility operations, consider: what are the business rules that are under your control? Issues include partial shipment of multi-line orders and the ability to project item inventory by distribution center.

    • Expedite warehouse processing of returns

    Streamlining returns processing, especially in apparel businesses, is important because returns can vary between 10% and 40% by category, depending on its fashion content. Tailored fit and color/size selection also increase the return rate. Your objective should be to handle returns in as few steps as possible, including the inventory disposition and the customer return, credits, refunds and exchanges.

    • Drop ship vendor processing

    Vendor processing systems have greatly improved with regard to drop shipments. Even though the client is not asking you to warehouse 100% of their product, a streamlined drop ship system can greatly increase sales without having the inventory in stock.  The better systems put low cost terminal/printer combinations in the vendor environment. Orders are downloaded online or in batches. Confirmed pick transactions are interfaced to the customer service files. The client can track the vendor’s shipping status, service levels, etc.

    Other important areas of inventory control and fulfilllent functionality include:

    • Multichannel support for catalog/Internet, retail, wholesale which have radically different order and product profiles
    • Extremely flexible to handle different client operating requirements
    • Security between client info and data
    • Supports vendor compliance programs which differ by client
    • Cartonization for box size selection
    • Scalable for peak volume processing
    • DC inventory management including cycle counting and shrinkage control
    • Productivity transaction capture and reporting
    • Track client transactions and activities for billing purposes

    Inventory Management
    Inventory is the major balance sheet asset in most direct and retail businesses. Accurate inventory tracking reduces shrinkage and identifies bestsellers and candidates for liquidation, assisting clients in building sales and earning more margin. To provide services to the client’s merchants and inventory control departments, planning and forecasting functionality includes:

    • Catalog pre-season planning
    • In-season forecasting product requirements by campaign, offer, drop
    • Demand planning products across promotions
    • Master scheduling of when stock-outs will occur
    • Some or all of these functions may be provided by interfacing standalone specialized inventory management systems

    Most third party logistics partners provide the systems functions for purchase order (PO) placement. One trend in third party logistics is to actually do the purchasing and printing of collateral for clients. Purchasing functionality can include:

    • Ability to generate POs
    • Full function support for client vendors and factors
    • Advance shipping notices from vendor (ASNs)
    • Visibility into inbound receiving
    • Vendor portals for processing POs, invoicing, viewing inventories, etc.

    Understanding the complex nature of multichannel marketing is a key function you need from an order management system. How can you help your clients better understand their businesses from a marketing perspective?

    • Measurement of catalog, space, e-mail media and offer results
    • Customer purchase segmentation analysis
    • Lifetime Value Analysis
    • Analyzing customer channel preference and profitability by channel

    Offering unique and profitable product is at the heart of a direct marketer and retailer’s success. How will your order management system assist your client’s merchants to be better selectors and sell more product?  Functionality in this area may include:

    • Multichannel category and item sales trends
    • Fast and slow seller results
    • Contribution to profit by channel and by product
    • Vendor scorecards based on merchandise analysis and meeting fulfillment standards

    Plans and History
    Many order management systems do not capture and archive history sufficiently to support multichannel businesses, but can be found in inventory management systems. Functionality needed includes:

    • Multi-year and seasonal history for channels, catalogs/promotions, products and retail stores

    Executive Analytics and Dashboards
    Industry third party logistics leaders have developed executive analytics, KPI alerts and business intelligence tools/dashboards which make senior management users of the customer service, fulfillment, merchandising, marketing systems, etc. for the first time. This will generally provide an advantage that in-house IT departments usually only develop or acquire in the largest companies.

    General Requirements
    • Ability for clients to log in and manage their business remotely
    • Individual company ability to get reports as they desire
    • Interface to other corporate systems (order management system, warehouse management system, inventory management system, merchandising, marketing, accounting, websites, etc.)

The Selection Process
As a third party logistics provider, we recommend you follow a four-step selection process; these four major steps will ensure that you have taken into account and considered all the use and functionality required to replace your existing order management system or warehouse management system.

Step 1: Organize the Project Internally

  • Management should appoint a senior management “sponsor” to represent system user interests and get management’s input— to elevate the project’s perceived importance and encourage participation in the process.
  • Set up a project steering committee representing all areas affected by the new system. Steering committee draws up written plan for evaluating and selecting vendor and installing system; meets monthly to review progress.
  • Identify business functions to be accomplished by the new system. Management should provide company growth plans; anticipated changes in business direction; budget guidelines; and decide whether the new system should run on existing hardware.
  • A project coordinator who is well disciplined and organized can help keep the project on schedule and within budget.  This person is responsible for the day-to-day system selection and vendor activities.
Step 2: Define Your Requirements
  • Deciding what system functions you want is critical to pick the right “match” for your needs. The most effective order management system or warehouse management system generally has a 70 to 80 percent fit before modification. Modifications and complex integrations are risky, expensive and can cause serious delays.
  • Prioritize functional requirements and get department manager input for each subsystem (e.g., order-entry, inventory, fulfillment, merchandising, marketing, etc.). Include unique requirements, key data elements missing from the current system, major screens and reports, and/or data interfaces to other systems.
  • A decision matrix is critical to evaluating a vendor’s specific system functionality against those you require, and to make comparisons on an apples-to-apples basis between vendors.

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Step 3: Evaluate the Vendors
  •  Document business requirements; list each and every task the new application needs to accomplish now and in the future.
  • Send a detailed request for proposal (RFP) to each vendor.
  • Specify that bidders include in writing all of the pricing, guarantees and schedules for the application; the software and hardware to be provided; pre-installation training; modifications required before and after installation; a list of other order management system and warehouse management system vendors with which it has successfully integrated; and file conversion and support.
  • Evaluate responses in a comparative format, as discussed above.
  • Narrow choices down to two or three; bring the top two vendors in for scripted demos, keeping a third vendor “in reserve” just in case.
  • Base scripted demos on business functions and transactions specific to your business. Work with each user department to address their major concerns, reviewing in detail how the software can accomplish these requirements. Remember, you control the software demonstration; require vendors to show functions that you want to see rather than the functions that the vendor wants to show you.
    • While still fresh in everyone’s mind, get participants from each functional area to rank the pluses and minuses of the software demonstration on the matrix.
  • Use the RFP responses and scripted demos to work through which system has a better fit for your company.
  • Review in detail what the vendors feel the costs of customization and integration will be. The purchase price when installed will often be 40% to 50% professional services. These are at best difficult to estimate. Determine what reporting is available compared to your current system. What will need to be developed? What integrations will require additional services?
  • Determine the total cost of ownership for replacing your complete application.
  • Request a detailed implementation schedule and what the vendor’s assumptions are regarding involvement and time required of your company’s personnel. It usually involves a major time commitment by your company.
  • Include as part of your evaluation process how well the vendor will continue to update, enhance and support the system.
  • Check vendor references. Ask to see the full customer list, not just the vendor’s selected references. Make sure that you will not be either the largest or smallest client of a particular vendor.
    • For the reference checks, ask the same questions of each vendor’s clients, allowing comparison later.
  • Choose one or two of each vendor’s clients that are similar to your business to visit for a much deeper perspective than you would get from a phone conversation. If possible, make these trips without the vendor present, to allow users to be as open and frank as possible.
Step 4: Examine the System’s Potential ROI

  • Determine the ROI of a new order management system or warehouse management system purchase before you make that major investment. What savings and benefits do you expect to gain
  • Don’t base your ROI calculation on the vendor’s promotional data. To get the most accurate sense of your potential ROI upfront, ask: How long will it take to recoup the investment?

    By the end of this four-step selection process you should have gathered enough information to make a well-founded purchase decision—but don’t rush into anything. Be thorough; the devil is in the details. The more detailed your planning, the better chance of the application being implemented on-time and within budget and delivering real savings.

    Order management systems and warehouse management systems encompassing call center, customer service, marketing, warehousing, order management, and fulfillment functionality are at the heart of the third party logistics services that you provide your fulfillment clients. They are essential to assist your clients in growing their businesses and in making your business as efficient and profitable as possible. Selecting the right systems is critical to your success as a third-party provider.