Many companies make strategic and cost-effective use of third-party logistics (3PL) to provide fulfillment and distribution for all or part of their business’ needs. At the heart of this transition is finding a long-term partner that meets the following six criteria:
- Has experience with your type of business and products and services;
- Can accommodate your business growth;
- Has appropriate systems and technology;
- Is cost effective and efficient;
- Has multiple locations to improve time to a customer;
- Is customer service oriented.
Identify business objectives
What are your objectives for using a 3PL partner? Is it to lower costs? Or stabilize cost per order as the business grows? Is it to delay or avoid expanding fulfillment facilities? Is it to reduce the package 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 services.
Use a competitive bid process.
Often, we see companies rush to compile statistics about 3PL providers that they run across. This vast, unfocused effort falls short of the intended search. Save time and set yourself up for a more productive bid process by submitting an RFP. As part of the RFP, your company will provide potential vendors with the vital information they need, such as your business’ specific requirements. With this information in hand, vendors can provide detailed projecting costs.
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 fairly negotiate all aspects of these agreements.
Understand 3PL pricing for services
The 3PL industry’s standard pricing approach is to charge based on the number of transactions, their use, and on a project basis. We will explore this approach in more detail in a minute. There may also be dozens of service charges incurred and charged monthly, such as:
- Profile data pricing: Charges based on:
- number of orders, average lines and average units per order;
- single line versus multiline orders;
- number of returns, average lines and units per return;
- single SKU versus mixed SKU cases received;
- the ratio of orders to shipped cartons;
- order and return curves for the seasons and year;
- peak and average week orders, sales, returns, and on-hand dollar inventory.
- Activity pricing: Charges based on transactions and cost per transaction type:
- cost per case or unit received;
- cost per order and line items picked;
- packing cost per order;
- shipping cost per carton;
- return cost per order;
- number of bulk (reserve) locations and forward picking bin/slot locations based on number of SKUs;
- an estimate of the amount of storage required in pallets, cartons, square and cubic feet;
- inventory turnover seasonally.
- Project or per hour activity: Charges based on per hour cost and the number of hours used:
- cycle counting;
- making up kits;
- special project costs.
- Service level metrics:
- receipt to put away time (in hours);
- order pick turn-around (in hours);
- return processing (in hours);
- order accuracy;
- inventory shrinkage rate.
Without a doubt, the analysis and projection of these detail costs are time-consuming and requires 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 an experienced consultant can assist in planning and analysis.
Develop business proforma
Each 3PL company will have its own questionnaire for analyzing and collecting necessary data. These detail requests will vary by the 3PL provider and the volume of business. Do not panic if you do not know all of the answers on first glance. Most companies do not have readily available the essential profile or detail statistics 3PL vendors request when preparing accurate pricing.
It is impossible to get accurate budgetary pricing for a season or year without detail analysis and projection. Typically, 3PL contracts are for a three-year time horizon. It should be a major priority to understand current costs and future costs based on order and return growth, by the vendor.
Select a qualified short list of vendors
Because of the time it takes to thoroughly investigate 3PL vendors, it’s important to focus your search early on. Start with a small number of active vendors - four to six - that can provide the systems and services that meet your business objectives and requirements.
There are literally thousands of 3PLs with different specialties, such as:
- small parcel direct to customer orders delivering to residential customers and businesses;
- retail cross-docking to stores and wholesalers;
- collateral and selling materials distribution;
- certified pharma sample distribution;
- retail vendor compliance distribution for big box stores, Amazon and eBay to name a few.
Some are single location businesses. Others literally have hundreds of warehouses through acquisition. It’s impossible to do a thorough analysis of a large number of 3PL candidates.
Selecting a small number of qualified companies that have the fulfillment characteristics, systems, cost structure and locations that best suit your fulfillment requirements is key. Internet searches, trade shows, publications, and talking to companies using 3PL are all ways to start the research process.
Companies often start analyzing companies by compiling a list of obvious characteristics. The list becomes unwieldy and may not actually focus on what is needed. An experienced 3PL consultant can help you decide on a qualified list quickly.
Request for Proposal content
Here are the essential sections to your RFP:
- Background and culture of your company and what your project objectives are.
- Business proforma metrics (as explained above).
- Information systems requirements, such as support of call center and customer service; merchandise analysis; forecasting; and profit analysis.
- Value-added services that you require, such as kit assembly; any returns refurbishing; monogramming; or engraving.
- Standards and service level metrics you will hold the 3PL partner accountable for, including customer order turn around and shipping cut off; order accuracy; dock-to-stock inbound merchandise compliance and turn around; 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.
- Vendor implementation methodology and costs such as on-site analysis, training, file conversion, and interface programming.
- Boilerplate contract materials.
- Selling material.
- Instructions about your expectations, including the deadline and contact information for the person or consultant running the project.
It takes time and skill to create an “apples to apples” comparison of 3PL vendors. Pick a project manager to spearhead the effort and liaison with the vendors. This person needs to interact daily with the short list of vendors and provide uniform direction for the project to all bidders. An experienced fulfillment consultant with 3PL knowledge can save a great deal of time.
Other analysis required
Depending on the size of the transition and your company’s requirements, you may need 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 the facility;
- Business rules for partial shipment of back orders by the facility, back order costs and loss of shipping revenue.
Don’t overlook these analyses as they are important to your decision.
Define your decision matrix
No matter what instructions you give the 3PL bidders, 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 systems requirement considerations, key criteria to consider include the number and location of facilities; the square or cubic footage 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 up front will also help prevent continually asking questions during the process. The constant back and forth is not just a waste of time. From the vendors’ perspective, you lose their focus and attention.
Comparing internal to 3PL 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 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 communicates where a vendor sits in the evaluation process. Don’t pick a finalist until you have done your due diligence, including an attorney review of the agreements.
Ask the vendors for a list of references whose businesses parallel your business in terms of size, product, services, and systems requirements. You are not trying to get an exact match but to make sure that the core competencies of each 3PL vendor are a general match with your requirements. Develop a scripted set of questions you intend to ask all of the vendors. This will allow you to use multiple people in your company to make the reference calls.
For the two finalists, schedule site visits to the specific facilities the vendors are proposing your company be fulfilled from. Buying companies often short cut visits by either not going at all or sending one person. Rushing does you no favors when establishing this long-term, complex relationship. Give several people involved in the project 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.
How vendors look at your project
In our experience with hundreds of vendors, there are nine ways they tend to look at client projects. Just like you, 3PL vendors want to find the best fit for their business with the least risk. Some projects take only 90 days, while some take four or five months to implement. Vendors also consider how long the selling and analysis effort will take. The management of the 3PL wants to see the decision makers in your project face to face. Knowing how vendors think about projects will help you prepare and manage expectations.
Make final 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. Here are some major considerations we see important to the contracting process, the standards and costs.
Use an experienced 3PL consultant
Completing the fourteen steps described above is a time-consuming and often overwhelming process. An experienced 3PL fulfillment consultant 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.
Fulfillment 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.
For learn more about 3PLs that may be suitable for your business, click here.