There are many advantages to using third-party logistics (3PL) including shipping orders, kitting, light assembly, value-added services, as well as reverse logistics for retail, eCommerce businesses, and wholesale distribution. Companies can receive competitive costs; achieve cost savings by avoiding capital expenses for facilities including automation and systems; concentrate on marketing and merchandising rather than managing the fulfillment process.

However, using 3PL services is not for every company. The relationship you are seeking is not just a service, but more importantly, a partnership. From a supply chain strategy perspective, we have clients that have been utilizing 3PL logistics companies for 10+ years. This can only be done by having a strong partnership and utilizing a set of key indicators with the 3PL partner to ensure the operations are on track.

This article discusses 11 indicators to keep the services offered with your 3PL as high as possible, which in turn will provide cost savings while servicing the customer at the highest level. These should be included in the contract, with some being specified in the Service Level Agreements (SLAs). These typically reflect the contractual performance goals and obligations that are reported and discussed regularly with the 3PL.

These are broken out between KPIs that are measurable and reportable, and those indicators that should be monitored internally to know when things go awry and negatively impact the 3PL relationship.

3PL Services and KPIs

The following KPIs are those that should be included in the SLAs contractually, as well as reported and reviewed with the 3PL during the weekly and quarterly meetings.

1. Receiving Dock to Stock Time

One of the main advantages of working with 3PLs is improving the overall warehouse efficiency – which begins with efficient processing of inbound receipts. The primary metric is dock-to-stock time which is measuring the total time from when goods hit the dock until it has been put away in a stock location.

An example of where this becomes critically important is an eCommerce business that does not actively promote inventory on the site in real-time unless it is in a pickable location. The longer it takes to receive and put away goods, the greater the chance of losing sales.

An acceptable dock-to-stock time for most companies is typically 48 hours, with best-in-class striving for 24 hours. The higher the SLA, the higher the costs from the 3PL. This is a KPI that should be specified in your contract and measured on a regular basis.

2. Shipping Orders Accurately

When it comes to shipping orders, it is critical to ensure that the pick pack and ship process captures picking errors prior to the order going out the door to the customer. Mis-picks drive up shipping costs, as the order must be picked and shipped a second time, and the 3PL must handle returns back from the customer. The greatest risk is in losing the customer due to a poor shopping experience.

Most 3PL fulfillment center operations and clients agree upon an outbound order accuracy of 99.9%. This requires reporting on reverse logistics and capturing the return reason codes and complaints from customers.

3. Shipping Orders Same Day

For a consumer eCommerce business, picking and packing orders so that they ship same day is important, as this customer expectation has been driven by Amazon and others. In working with a 3PL, it is important to remember that the small parcel carriers dictate the pickup times, and the 3PL needs enough time to receive the order, pick, and ship.

This often means that the order cutoff time is midafternoon, meaning that orders need to be received by the 3PL by typically 2 PM to 3 PM local time to allow enough time for the 3PL to pick and manifest the order. From an SLA perspective, most clients and 3PLs strive for 95% - 99% of orders shipping same day. There are some caveats related to order volumes that exceed the client forecast that will need to be agreed upon as well.

4. Inventory Management and Accuracy

Often, companies are up against the need to buy new warehouse management software to better manage the inventory. In addition, companies struggle to put in place effective standard operating procedures to ensure that inventory remains accurate and minimizes write-offs due to lost inventory, etc. This decreases the effectiveness of any warehouse management system.

This is a benefit to utilizing 3PL services, as most utilize a warehouse management system with barcode scanning throughout all processes. The cost for companies to implement a system, like what most 3PLs utilize, would be cost-prohibitive.

These solutions ensure that the inventory system tracks all moves, transfers, and adjustments with a high degree of accuracy in real time – including full audit capabilities for resolving problems.

The target with most 3PL services is to maintain an inventory accuracy rate of around 99.5% inventory accuracy. For many companies, this level of inventory management is not currently being achieved with internal fulfillment.

5. Return Processing Time

Another customer service-oriented KPI is the handling of returns. Letting returns sit for days or weeks at a time is a great way to make a 3PL relationship turn sour. It can often lead to loss of sales or loss of sellable product if it sits long enough and hits an expiration date.

An acceptable return processing time for most companies is typically 48 hours, with best-in-class striving for 24 hours. The higher the SLA, the higher the costs from the 3PL. This is a KPI that should be specified in your contract and measured on a regular basis.

The following are “indicators” that point to problems that should be reviewed with the 3PL to keep the service levels high, minimize impacts felt by the customer, and keep the 3PL relationship strong. These are often indicators that can’t necessarily be systematically reported or are not contractual obligations with the 3PL vendor.

6. Customer Complaints from Pick Pack and Ship

Companies need to capture complaints from customers via phone, email, and chat – as well as return reason codes that point to other challenges. These could include:

Items that become damaged in transit need additional void fill or product protection.
Excessive box sizes, too much void fill or tape.
Whether the shipping boxes and void fill are meeting the customers' expectations from a sustainability perspective.

These may require you and the 3PL to test various packaging options to meet the shipping needs and customer expectations. It is important to think about how you will report and quantify the complaints so that you can work towards a resolution.

7. Vendor Compliance

One of the most important aspects of a 3PL offering logistics services is adherence to vendor compliance. Properly recording and tracking the problems associated with inbound inventory is critical to ensuring product comes in and is put away properly.

To recognize the cost savings with vendor compliance, the 3PL vendor must first understand your requirements, and then actively monitor, record, and report non-compliance to you. If this is not managed properly, you will most certainly see certain invoice amounts that were not planned due to non-compliance, this is usually the first indicator that something is amiss.

8. 3PL Invoicing

Invoicing by 3PLs is one of the areas where clients quickly gather that something isn’t right within the operations – and further investigation is necessary. As warehouse consultants we see quite a few 3PL relationships going south due to inconsistencies or unexpected variances in the billing.

As discussed in vendor compliance, the 3PL invoicing is where problems arise. A few examples include:

Hourly billing on an invoice for warehouse staff to take corrective action by the 3PL. It is important to understand why the time was spent, how will this be avoided in the future, and whether this can be charged back to a merchandise vendor. Regardless, there shouldn’t be any surprises on the invoice, the vendor should be proactively discussing these with you. If not, this is certainly an indicator that something has changed.
Unexpected increases in warehouse space on an invoice. This could be the result of inbound pallets being a shorter TiHi configuration than expected, or the vendor not working on bin consolidations to assist with reducing the number of bin locations utilized.

Problems in reconciling 3PL invoices often lead to a deterioration of the relationship with clients questioning whether or not the vendor can adequately explain the invoicing. 3PL vendors often rely on some manual tallies for clients if the warehouse management software can’t traffic a given activity. This can lead to billing discrepancies with clients. Address these issues quickly with a 3PL and ensure that proper attention is placed on reconciling invoices, do not just pay the invoice, and ignore the details within each invoice.

9. Hourly Based Activities

One thing to investigate is if any services shift to hourly invoicing with the vendor, especially if the line item was previously on a per-unit basis. This can occur when a 3PL partner presents a new contract renewal, or is needing to re-price certain services.

With hourly invoicing for labor, it can be very difficult to reconcile the work performed from one period to the costs and work performed in another period. In situations where the vendor is proposing hourly costs, work with the vendor to use a three-month trial period for the tasks being performed, and then consider converting this to a per-unit basis once the vendor has built up some history with your task.

There are several environments where hourly invoicing is the best practice, however, in smaller programs and activities, be cautious. A cost-per-unit basis gives the 3PL incentive to measure and manage productivity closer.

10. Fails to Bring You New Ideas

3PLs should be the epitome of supply chain management, their sole focus is efficient handling of goods and people. Your 3PL should be focused on continual process improvement, which often means suggesting new ways to handle your volumes.

Even vendors that operate in a cost-plus manner are focused on developing greater efficiency as they want to be good stewards of their clients’ budgets. If you do not have a vendor that is recommending improvements that will help lower costs, and improve other KPIs, then you need to consider how the vendor views your account.

11. Ineffective Account Management

Last, the 3PL vendor's account management team is the conduit to which all communications funnel, including problem identification and resolution. Ineffective account management ranks right behind billing problems and inventory issues for reasons why 3PL relationships degrade.

Your account manager should be your advocate; providing timely, consistent service to your organization to answer questions, and teach your people how their systems and services work and resolve issues. The account manager is the key to providing great service.

If this is a struggle, this should be escalated higher up within your 3PL for resolution. A breakdown at this level often leads to greater problems.

Also: Learn more about F. Curtis Barry & Company's Third Party Logistics (3PL) and Fulfillment Services