Many direct and e-commerce businesses make strategic and cost-effective use of third-party logistics (3PL) to provide warehousing and distribution services which include order fulfillment for clients. At the heart of this process is finding 3PL companies that provide fulfillment services that are in line with your needs and supply chain strategy. The following six criteria should be used to determine which 3PL companies are a good choice:
- Does the 3PL have experience with your type of business and products?
- Can the 3PL companies accommodate your business growth – both inventory and transactional growth?
- Do the 3PL companies have appropriate systems and technology to meet your requirements?
- Are the fulfillment services cost-effective and efficient?
- Do their supply chain solutions have multiple locations in North America to improve time in transit to your customers?
- Is the 3PL customer service oriented?
Based on our 30+ years of working with e-commerce businesses to evaluate and select 3PL companies, we recommend taking into account the following 11 critical steps when selecting the best fit provider:
Identify The 3PL Order Fulfillment Services Required
What are your objectives for using a 3PL company? Is it to lower cost to ship orders? Or stabilize cost per order as the business grows? Is it to delay or avoid expanding fulfillment facilities or warehouse space? Is it to reduce the shipping in-transit times to your customers and shipping costs? Is it to avoid or delay spending capital on new Warehouse Management Systems (WMS), warehouse technology, and automation?
It’s important to clearly state the project objective when writing your Request for Proposal (RFP) for 3PL supply chain solutions and logistics services.
Utilize A Competitive Bid Process With 3PL Companies
Often, we see companies rush to compile information about 3PL companies that they have come across. This vast, unfocused effort falls short of the intended results expected by management. Use your time more efficiently when evaluating third party logistics companies. Develop a detailed Request for Proposal (RFP) that all interested 3PL companies will bid from.
As part of the RFP, your company needs to provide transactional volumes, growth rates, and expectations regarding the services you are looking for in a logistics solution. With this information in hand, 3PL vendors can provide detailed costs for services including fulfillment services, Value Added Services (VAS) such as kitting and light assembly and returns management.
Making a more informed decision is just one way going through the RFP process will serve your company in the future. You are also in a better position to make a good chase, and fairly negotiate all aspects of these agreements.
Understand 3PL Order Fulfillment Pricing For Services
When pricing their respective logistics solution, 3PL companies typically are either a cost-plus model or a cost per use/transaction. For one-off projects, these are typically bid and invoiced for one a project-by-project basis or cost per hour.
Most small businesses tend to focus on the cost to ship orders, however, there are many more line items that come into play with 3PL companies. Depending on the 3PL company there may be dozens of individual line-item charges for services including:
- Inbound Receiving – Inbound receipt of goods, product inspection, and putaway.
- Order fulfillment – including picking, packing, and shipping services.
- Warehouse space – including bulk storage as well as for picking locations.
- Returns management – processing inbound customer returns, inventory disposition, and refurbishment of products.
- Value-added services – kitting, light assembly, labeling and bagging/boxing of items.
- Systems and technology – including integrations to e-commerce platforms, EDI transactions, ASNs, etc.
- Account management – these fees are associated with the day-to-day management of your account.
Once the costs are received back from 3PLs, be sure to take your business volumes against the line item costs to extend each one to an annual cost. Once you have the first year calculated, take the 3PLs stated annual cost increase and your growth rates to determine year two and three costs.
Without a doubt, the analysis and projection of these detailed costs are time-consuming and require some planning assumptions. Without this analysis and multi-year planning, the costs will not be very accurate. It is your company’s responsibility to identify these costs accurately. Failure to do so is not grounds for termination of the contract with a 3PL. This is one area where experienced warehouse consultants can assist in planning and analysis.
Need help evaluating and selecting a new third-party logistics vendor?
Select A Qualified Short List Of 3PL Companies
Because of the time, it takes to thoroughly investigate 3PL companies, it’s important to focus your search early in the process. Start with a small number of active vendors - three to five - that can provide the systems, technology, and warehouse and distribution services that meet your business objectives and requirements.
There are literally hundreds of 3PLs with different specialties, such as:
- Ecommerce fulfillment and various marketplaces
- Wholesale distribution/B2B supply chain solutions
- Retail cross-docking to stores
- Collateral fulfillment
- Reverse logistics services
Some 3PLs only offer a single warehouse space, where other 3PLs have dozens of warehouses throughout North America. For these reasons, it’s impossible to do a thorough analysis of a large number of 3PL companies.
Selecting a small number of qualified 3PL companies that offer the fulfillment services, systems, cost structure, and warehouse space that best suit your requirements is key.
3PL Request For Proposal (RFP) Content
As previously stated, developing a detailed RFP is critical regardless of whether you are a retailer looking for store replenishment or an e-commerce business searching for a logistics solution. Here are the essential sections to include in your RFP:
- Background and culture of your company and what your project objectives are.
- A high-level overview of your current ERP solution, and your expectations from a data perspective. Some e-commerce businesses opt to utilize their e-commerce platforms from an integration perspective versus an ERP system.
- Request information about their warehouse management system and inventory system.
- Value-added services include kitting, light assembly, any returns or inventory refurbishing that you require as part of a logistics solution.
- Standards and service level metrics you will hold the 3PL accountable for, including order, turn around and shipping cut off; order accuracy; dock-to-stock times; returns processing turn around; and shrinkage percent.
- Specific standard operating procedures that 3PLs will need to meet, such as all aspects of return processing; quality control inspection; and appearance of customer packing.
- Client references that you wish to receive from 3PL companies.
- Requested vendor implementation methodology and costs such as on-site analysis, training, file conversion, and interface programming.
- Requested 3PL contract materials including all specified warehousing and distribution services.
Instructions about your expectations, including the deadline, and contact information for the person or warehouse consultants running the project.
Other 3PL Analysis Required
Depending on the size of the transition, and your company’s logistics service requirements, you may need an even more detailed analysis and planning. Here are some examples:
- Multi-year planning of orders, sales, returns, and packages shipped.
- Inbound freight cost changes based on facility location.
- Outbound freight cost changes based on location, customer shipment analysis by location, and time to customer objectives.
- Inventory strategy and product (SKU) assortment by each facility if you plan to be in multiple facilities.
- Business rules for partial shipment of backorders by the facility, back-order costs, and loss of shipping revenue.
Don’t overlook these analyses as they are important to your decision. This is one area where many small businesses can benefit from working with warehouse logistics consultants.
Define Your 3PL Decision Matrix
No matter what instructions you give the 3PL companies, you are going to end up with hundreds of pages of information in completely different formats. Decide early on what key decision data management will consider when selecting a 3PL.
In addition to warehouse management system requirements, key criteria to consider include the number and location of facilities; the warehouse space available; and product knowledge. Knowing what information is necessary for making a decision will help summarize proposals into an efficient decision document.
Thinking through what information you need upfront will also help prevent continually asking questions during the process. The constant back and forth is not just a waste of time, but from the vendors’ perspective, you may lose their focus and attention.
Comparing 3PL Costs To Internal Fulfillment Costs
Once you have 3PL projected costs for an extended period of time (by year for three years), you can estimate a cost per order and package shipped. Calculate these costs by dividing the total projected costs by the number of orders and packages shipped. You can then compare your internal cost for fulfillment and what the costs are as a percent of total sales to these 3PL costs.
Narrow Your Search To Two 3PL Vendors
Always keep two vendors in the negotiations until an agreement is signed. You may think you identified a good fit, only to find out later that the 3PL partner will not meet all of your requirements, your negotiating points, financial review, or reference checks. It is important staff never communicate where a vendor sits in the evaluation process. Don’t pick a finalist until you have done your due diligence, including having an attorney review the agreements.
3PL Due Diligence
Ask the 3PL companies for a list of references whose businesses parallel yours in terms of size, product, services, warehouse management system, and inventory system requirements. You are not trying to get an exact match but to make sure that the core competencies of each 3PL vendor are a close, general match with your requirements. Develop a scripted set of questions you intend to ask all of the vendors' references. This will allow you to use multiple people in your company to make reference calls.
For the two finalists, schedule site visits to the specific facility(s) the vendors are proposing your company ship orders from. Companies often shortcut visits by either not going at all or sending just one person. Rushing does you no favors when establishing this long-term, complex relationship.
Give several stakeholders the ability to see the finalists and make a complete recommendation to you. It’s also a good idea to send any questions you may ask during a tour to the vendors in advance so they can be fully prepared to answer each.
How 3PL Companies View Your Business
In our experience with hundreds of projects, there are nine ways they tend to look at client projects. Just like you, 3PL companies want to find the best fit for their business with the least risk. Some projects take only 90 days, while some take five to six months to implement.
3PL companies also consider how long the sales cycles, resources, and analysis effort will take for your company. The management of the 3PL wants to see know the decision-makers are active within the project, and that your company is serious about the process.
There are some red flags that are important to understand that could turn away some 3PL companies, these include:
- Companies that have a very high amount of inventory, but low order volumes as 3PLs do not want to be a “warehouse”, or a cheap place to store inventory.
- Product lines that are hazardous typically eliminate a fair number of 3PL companies.
- Startups can be risky for many 3PL companies and typically reduce the number of vendors willing to bid on a program.
Knowing how 3PL companies think about projects will help you prepare and manage expectations.
Make Final 3PL Decision And Contract
Make sure you thoroughly review all of the agreements. Be sure to include the standards that you want the vendor to meet in the services agreement. Use an intellectual property attorney to help you review the agreements.
It is important to remember that these are typically long-term relationships, and the agreements should be fair and balanced for both parties. 3PL companies typically are opposed to changing language that is one-sided towards the client.
It is critical to document changes to pricing, special instructions, or processes that the vendor has agreed to – and include these as an addendum to the agreement. If it isn’t in writing, it is not enforceable if needed.
Use An Experienced 3PL Consultant
Completing the eleven steps described above is a time-consuming and often overwhelming process. An experienced warehousing and distribution consultant
to assist with your 3PL project can streamline the selection process and recommend the qualified vendor shortlist. Their expertise is also invaluable when navigating contracting, due diligence, and management of 3PL implementation.
Warehouse consultants should be vendor-independent. One advantage of using a consultant is that they can manage the process either on a “blind basis” or by the client directing communications and analysis through the consultant. This saves many hours and gives each potential provider the same information.