When is 3rd Party Fulfillment the Right Outsource Option for You

Many multichannel merchants focus on how they can lower operating costs of their supply chain logistics when they consider outsourcing certain tasks. When you use third party fulfillment partners to outsource your operations, you also outsource the investment. Sounds obvious, but the magnitude isn't always clear until you're faced with replacing an order management system, moving into a new fulfillment space or upgrading your website and platform.

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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.
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Supply Chain Strategies to Control and Reduce Expenses

We all know we’re coming out of a tough business climate. With many companies ramping up for fall and holiday seasons, there is an urgent need to increase productivity and reduce costs without having to make major capital purchases to do so. Here are some supply chain strategies to reduce your cost per order, increase capacity without expansion, and improve service levels in your supply chain logistics. The source of this information is experience gained in our supply chain consulting work with multichannel companies.

Perform an Operational Audit

A warehouse assessment is a great starting point. Warehouse assessments will identify your needs, and help recognize potential improvements to process, layout and use of space, staff productivity, warehouse management system (and peripheral systems) and freight analysis. The objectives are to lower the cost per order, increase storage capacity within the existing center, reduce inbound and outbound freight costs, and improve service levels and turnaround times.

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Steps to Evaluate an Order Fulfillment Services Provider

Whether you have been considering the decision to outsource your order  fulfillmentfor the first time or are looking for a new provider, don’t let this  choice be a daunting task.  There are hundreds of order fulfillment services providers. The key is for you is to find the right vendor that can become an extension of your business. You need a vendor that you can trust and that is easy to work with as well as have the best interest of your business in mind. Be methodical and follow a consistent set of steps to get you to the desired result.

The first order of business is to develop a viable list of vendors that fulfill the same type of products and for businesses similar to yours – i.e. hard goods, apparel, continuity, literature/collateral, etc. All product categories are different in how they are fulfilled and the operations and systems needed to support your business. You want a vendor that has the experience and knowledge already established.

Once a list of vendors is identified you must focus on the formal Request For Proposal (RFP) to be developed. In order for an order fulfillment services company to accurately bid on your business you have to provide them with accurate information about your business.  Not only do you need to provide annual statistics (orders, shipments, average lines per order, average units per order, purchase orders, etc.), but you also need to detail these volumes out by month to highlight any seasonal peaks you may have.  If you do not stipulate these details,  an order fulfillment services  provider may assume that it is a relatively flat business and they can handle the increased business on a monthly basis with no problem.  Along with these annual statistics, you need to provide your projected growth for the next two to three years.

Also, specify in the RFP what your performance level standards are, such as all receipts processed same day, all in-stock orders fulfilled in 24 hours, etc.  One of the goals with outsourced order fulfillment services, is to have your business run as efficiently as or better than it is being done currently.  If an order fulfillment services vendor cannot perform to the standards you have or questions the standards set, it may not be the right vendor for your business.

Order fulfillment vendors do not all price for their services in the same way, which will make comparing their bids to ensure you have accounted for all the costs. We have found that developing a cost per order analysis is the best way to get a common thread amongst the vendors. A cost per order analysis not only allows you to compare the vendors against one another,  but also compare them to your internal costs.

In addition to evaluating the RFP responses from the cost perspective, you want to evaluate the 3PL vendors with regard to systems and reporting. You will need to see that each vendor’s system will give you all the functionality that your are requiring to support your business and customers. You need to be certain that the system can be integrated with your internal business systems currently used at your company. In the case of reporting, make certain  the reports that the vendor provides are adequate and will help in the daily management of your business and customers.

Perform additional due diligence by speaking with some of the vendor’s clients.  Prepare a list of questions in advance to be consistent and document the responses during your call, so you can have another item for comparison.  You will want to get a mix of clients that have just recently started utilizing a vendor’s services; for six months up to a year, and some clients who have been with their current provider for three years or more.  This will give you a recent experience as well as long term perspectives from the vendor’s clients.

Once you are down to the two or three finalists,  you will want to make a visit to these vendors' facilities. Again, make a list of items to discuss/review with each vendor and observe the facility - is it clean, organized, seem to be efficient with the different processes observed, etc. You will also want to meet and “interview” the account manager that will be handling your business.  Document your observations for yet another set of comparison items to review after all of the visits are completed to narrow the final decision-making process.

Following these steps will provide consistency in the evaluation process and  aid in your decision regarding the best order fulfillment services provider you can find for your business at a cost that you can afford. We work with all different sized businesses that are looking to evaluate 3PL vendors as either a primary fulfillment house, or as a second warehouse location.
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2 Steps to Reduce Your Third Party Distribution Risk

As we work with clients looking for a third party distribution option to meet their needs, a few recommendations come to mind. One of the greatest fears in giving your fulfillment function to someone else is the unknown factors of how your customers will be treated and what your cost will be for their services. The first concern is best dealt with by calling existing and past clients of the vendor to solicit their reference as to the adherence to the service levels. The second is a bit more complicated.

One complaint we hear often is the surprise that occurs when the first invoice for services arrives. In addition to a detailed Request for Proposal (RFP) outlining requirements and expectations, two additional steps can be used to reduce the risk of surprise.

The first is to make sure the vendor spends time with your operation to review what you do today. Even with all the care and attention you apply to your RFP, some things can be missed. You should ask your proposed vendor to evaluate your operational needs and metrics to make sure their submitted bid is appropriate. If any differences are noted during the site visits, they can be reflected in a revised bid for services. This will permit you to make the most informed decision possible. Make sure the vendor understands that it is their responsibility to discover and point out inconsistencies with the RFP and the actual operation. Your goal should be to have the actual cost per order come within 5% of the proposed cost per order in the RFP response by the vendor.

The second suggestion is to have a set of productivity metrics or standards as part of the contractual Key Performance Indicators (KPI’s). These should reflect the commitment of the vendor to meet certain productivity levels in specific warehouse functions. Many cost estimates are based on applying an hourly pay rate to the hours used to calculate the cost for a functional area. The estimates of cost in the RFP response assume some level of efficiency by the vendor. When the invoice arrives, you should be able to determine if any variance occurring in actual vs. estimated cost is caused by a different volume of activity being required or if the expected level of performance is different than that proposed. Having a committed level of productivity in your contract reduces your risk in this area.

If you are able to use these two suggestions, it should lower your stress level in dealing with the unknown factors of utilizing the third party distribution option.
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