Considering outsourcing logistics to a third-party logistics (3PL) provider? You’re not alone! However, how do you choose the right one for your business? With so many 3PLs varying in size and offerings, it can be tough to find the perfect fit. Also, should you outsource just a portion or your entire supply chain operation? Additionally, what’s the ideal pricing structure, and how can you ensure you’re getting the best value for your money?
No worries! In this article, I’ll explain a simple, 7-step process that will guide you to finding the ideal 3PL partner for your business. Please note that this article may not cover all the answers to your questions about choosing the right 3PL. However, if you follow this 7-step evaluation process, it will certainly help you uncover everything you need to make an informed decision about logistics outsourcing. Let’s get started.
1. Identify Your Specific Business Requirements For Outsourcing Logistics.
If you do not identify your business requirements, you can easily pick the wrong 3PL to partner with. In fact, there are a lot of great 3PLs, however there may only be a few that actually match your requirements in terms of price and strengths. So, it is a good idea to start a dialog and review the capabilities of many 3PLs. However, do not select a 3PL provider until you have firm requirements. Also if you do not have the expertise, you want to use an independent logistics consultant to help you to make the best decision.
“If you want to kill any idea, get a committee working on it.”
Charles Kettering
2. Match 3PL Supply chain Functional Strengths With What You Need.
In this step, you first list your specific needs such as warehousing or reverse logistics. For a detailed list of supply chain functions that you can outsource, see my article, Types of 3rd Party Logistics Provider Capabilities. Once you have a tailored list of supply chain functions that are candidates for outsourcing, start identifying potential 3PL providers that excel in those specific supply chain functions.
3. Pick A 3PL That Has Experience Outsourcing Logistics In Your Industry.
For a lot of industries such as pharmaceuticals, it is critical that your 3PL has experience in your industry. Indeed, too many times I have seen a company outsource to a 3rd party logistics provider for the wrong reasons. In these cases, the top reason for outsourcing was not because the 3PL excelled in the needed logistics function. For example, wrong reasons include: persuasive salesperson, already had an existing relationship with the 3PL, or worse, it was because a relative worked for the 3PL. Again, a key criteria is that the 3PL has excellent references and experience in your industry.
4. Evaluate The 3PL’s Viability For A Long-Term Partnership.
If you are going to outsource part of your supply chain operation to a 3PL, it is critical for you to take the long view that this partnership should last for many years, if not decades. This is because there are a lot of costs as well as time needed to establish a 3PL relationship. Additionally, there is a lot of costs and time to phase out a 3PL without fully disrupting your operations. You need to ask yourself, “will this company be around 5 years from now?” Unquestionably this includes verifying that the 3PL is financially solvent. Also, does it have the facilities, systems, and operational capabilities to support your future needs.
“The Supply Chain stuff is really tricky.”
Elon Musk
5. Compare Pricing Models When Outsourcing Logistics.
3rd party logistics providers can have a wide variety of cost and pricing models. Hence, check out what is normal for your industry and the logistics function you are outsourcing. Also, many times there is a lot of flexibility on pricing that both parties can agree to. If you are outsourcing, it is critical that you identify the optimal pricing model for your business and it is agreeable to the top 3PLs you are considering.
In many cases, this is a risk management decision based on your business and the logistics operation you are outsourcing. So do not just agree to the pricing model that the 3PL is offering. On the other hand, do not go with a sub par 3PL provider just because they were the only one that agreed to your pricing terms. To list, below are some examples of pricing models that both parties may consider with outsourcing logistics.
- Fixed Cost vs Variable Cost Structures
- Per Unit Pricing Model
- Tiered Pricing Strategy
- Performance-Based Pricing Model
- Volume-Based Discounts
- Flat Rate Pricing Model
- Transaction-Based Pricing Model
- Value-Based Pricing Model
- Hybrid Pricing Model
- Milestone-based Pricing Model
- Cost Plus Markup Pricing Strategy
- Monthly Retainer Fee Structure
6. Determine A 3PL’s Cost-Effectiveness and Value for Money.
For this key step you need to run the numbers, both upfront and on-going costs, to justify moving forward with a particular 3PL. Do this in partnership with your 3PL candidates. As this is potentially a long-term, mutually beneficial contract, both parties should be motivated to uncover all potential costs and risks. Just remember, hidden costs for both the customer and the 3PL can destroy a good 3PL relationship. Key things to remember when doing this analysis includes:
- Assess Pricing Model. This includes its various components such transportation costs, warehousing fees, additional charges, shared startup costs, and penalties.
- Quality of 3PL Services. Do this by examining their track record, customer reviews, and industry reputation. A reliable 3PL should have a proven track record of delivering services efficiently and meeting customer expectations.
- Align With Your Business Goals. Besides streamlining costs and providing your customers better logistics service, you may have other key goals for outsourcing. For example, you may outsource an operation to reduce insurance costs or to minimize other risks. Additionally, there may be other factors such as opening up new revenue opportunities, freeing up working capital to name a few.
Sometimes, as a result of this evaluation you may not find any 3PLs that are qualified. Now, this is not necessarily a bad thing. This usually means that your current operation is doing well when compared to 3PL providers. In this case, maybe it is time to invest in current operation or re-look outsourcing in a couple of years.
7. More Evaluation Criteria When Outsourcing Logistics.
Also, depending on your company’s logistics strengths and weaknesses as well as your specific requirements, you may have additional criteria that need to be considered. To list, below is other 3PL criteria to consider, based on your business needs.
- Technology And Integration.
- Scalability and Flexibility.
- Geographic And Network Coverage.
- Customer Service and Support.
- Industry Standards Compliance.
- Security And Info Security Measures.
“Everybody has a plan until they get punched in the mouth.”
Mike Tyson
By following this 7-step evaluation process, you can confidently narrow down your 3PL choices and then confidently choose the right 3PL partner for your business. For more tips on supplier management, see my article, Supplier Management: Optimize, Make Compliant, Assure Quality, Mitigate Where Risky.
For more information from Supply Chain Tech Insights, see articles on supply chain and outsourcing.
Greetings! As an independent supply chain tech expert with 30+ years of hands-on experience, I take great pleasure in providing actionable insights to logistics leaders. My background includes implementing 100s of innovative solutions using emerging technologies and a data-centric development approach. I have also provided business intelligence (BI) solutions for 1,000s of shippers. For more about me, click here.