“Improve your competitive advantage, reduce your warehouse and distribution costs by up to 20% and improve customer relations, minimize your CAPEX” etc. These are some of the headlines often espoused by Third Party Logistics companies (3PLs) looking to gain your business and they are not totally wrong, but not all is right either, there is another side to any 3PL arrangement (as with any service arrangement) as many will have found out the hard and usually in very expensive way. As you may have guessed from the opening, for this series I am referring to asset based 3PL warehousing (the services provided by these 3PLs are at their facilities and not owned or operated in anyway by the Client).
To set the scene a little background may be appropriate – 3PLs are those entities to whom Client companies pass responsibility to for the control and management of part of their supply chain, in this case warehousing and distribution. As more control/management of the supply chain is given over to the 3PL, the more complex the agreement/contract becomes. 3PLs are usually engaged to fill the gap between your knowledge, resources and experience – meaning some Clients are often not even aware of how the arrangement works or even what a 3PL can do for them, thus making it difficult for themselves and the 3PL Provider to each get the most from the arrangement in the long term.
I will be writing some articles to help Clients understand the relationship, with the intent of building long term, collaborative relationships with their 3PL Provider. The articles will be broken up into different facets of the function/relationship – for example: information technology, collaboration and expertise, etc – where I provide the benefits and possible downsides. Having a knowledge of potential issues or being able to identify a current one is critical and could be the difference to making a profit or just making the relationship costly for both companies.
The first in focus is:
3PLs have experience in the storage, picking, packing, sorting and arranging distribution of orders. They will have the experience to identify and mitigate potential issues and know how to quickly resolve problems. Having skills in best practice, they will be working efficiently and effectively thus ensuring they can maintain minimum costs to them AND to you, whilst ensuring the integrity of the goods from receipt to delivery.
Whether they are using the latest 3PL Warehouse Management Software (WMS), integrated with Transport Management Software (TMS) or are using a legacy system, they will still be knowledgeable to the point they will know what reports you need and what access you will require to enable you to clearly and simply know your stock situation (24/7) and to know what is happening with each and every sales order/stock transfer up to the point of delivery.
Your chosen 3PL will also have expertise in the same industry you operate in. For example, a beverage 3PL should know how the beverage industry works, along with all the idiosyncrasies that go with that industry, which would be different for FMCG and again for industrial goods. This includes not only the inbound transportation, storage and distribution but also the Reverse Logistics which, due to e-commerce, is a growing business in itself.
All 3PL staff will have the relevant knowledge and experience to support your company and your customers, relative to their role/position.
With you being able to trust that the 3PL (as a whole) has the expertise to store and provide, not only the stock as and when required but also the information supporting the agreement, you can then focus on your own core competencies, resting assured you are leveraging the expertise of reliable and experienced professionals, providing value for money, keeping overheads low and minimizing your need to input time and labour into managing the flow of stock.
Unless you are aware of the potential risks (and indeed opportunities) there is a chance you will miss them, this is especially the case when talking to a perceived “expert” – remember they have many clients and receive regular enquiries from potential clients so they know exactly what to say and when to say it – whereas you would rarely be sourcing a new 3PL (hopefully).
So… I will start with an analogy for clarity. You are a passenger on an Airbus A380, you sit back and relax assuming the aeroplane has been checked correctly by properly trained and qualified LAMEs (Licenced Aircraft Maintenance Engineers). Another LAME, trained on Airbus A320s could probably do most of the checks and reviews but when it comes down to it, you do not want to drop from the sky because the LAME missed something critical to the A380 but not so on an A320. Even worse, a LAME trained on B 737s may have got the role – just because he could “talk the talk”.
Obviously, this would never happen on a commercial flight, as the aircraft are maintained to standards set by the respective domiciled country, for example CASA (Civil Aviation Safety Authority) in Australia, as well as IATA (International Air Transport Association).
Clients of 3PLs must do the same. You must know and agree the minimum standards and require the appropriate level of expertise from all personnel of the 3PL, relative to their position.
Typical problems that may be encountered by having a 3PL with less experienced or suitably skilled management and/or staff include:
- Lower levels of efficiency – this will impact directly on the 3PL as their labour costs will increase, but ramifications may affect your business, for example the 3PL taking shortcuts to get the job done (still charge the same), with your customers not receiving their orders when expected – review the SLA (Service Level Agreement) as the 3PL will may have an unreasonable buffer built in e.g. Sydney to Sydney should be “Next Day” but the agreed SLA might say 1-5 days! Unlikely, but possible.
- Higher expenses – by not correctly checking stock at time of receipt you may miss the chance to place claims on vendors for incorrect supply or on carriers for damaged deliveries. Other higher costs could be internal loss/damage (by warehouse staff) although a 0% SLA is a tough one to get into the agreement it should not be too loose either.
- Increased errors and mistakes – picking, packing and dispatch errors will affect not only you but also your customers, it may cost the 3PL (or you) to correct the situation but this will not make the customer think any better of your customer service (especially if it’s a regular occurrence). Remember, your 3PL’s performance translates to YOUR performance – good and bad.
- Lower levels of DIFOT% (Delivery in Full, on Time) –similar to above but this includes timeliness. If the Customer does not get their full order, when expected, there WILL be repercussions. Whether the under-performance for this SLA for example, was due the 3PL’s stock control being out of sync thus impacting your ability to raise purchase orders effectively, the result is still a very upset customer.
- Miscommunication and slower response times due to a lack of understanding of your specific needs and requirements – Having functional as well as industry expertise ensures the 3PL understands your requirements as to what, when, where and how much and can quickly communicate to you if there is an issue or indeed any form of confusion, i.e. they should not need an interpreter or prompting.
- Cost control – without functional and no less, industry expertise, costs may not be effectively managed along with ideas or suggestions on cost saving measures not presented to you. If the 3PL is also not professional, they may even restrict the presentation of ideas that may reduce their overall revenue e.g. suggesting a different Carrier to lower overall transport costs may affect the 3PL by lowering their mark-up on freight revenue.
Prior to contract
- Included in the Tender Process should be section to ascertain the skill/experience level of the 3PL, this can be by the 3PL providing references from actual clients and providing copies of the full resumes for the management team – from supervisors up.
- Ensure the referees ARE followed up and questions asked regards when things are going well as well as when things go wrong (this will add a lot of value), then review the resumes. Each of the management team should have direct experience of at least 5 years in warehousing (at the respective level) and at least 1-years’ experience within your industry.
- Remember to ask questions about:
a. How they manage the Supply Chain
b. How long they have worked in your Industry/Niche market
c. What SLAs and KPIs (Key Performance Indicators) they have in place to monitor efficiency, effectiveness and accuracy
d. Include subjects such as their Strategic workforce management and
e. Reverse Logistics/End of Life supply chain management (especially for e-commerce)
f. Focus; are they Process Driven or Customer Centric (lucky to have both)
In Current contract
Being in a current agreement with a 3PL you should already have garnered most of the 3PL’s skills. That said, if you have any concerns about your 3PLs performance then ask to see the resumes and review the SLAs and KPIs on a regular basis. If the resumes are lacking or the SLAs and KPIs are anything other than optimum (and reasonable) then you should open discussions with your 3PL Provider and agree new SLAs and KPIs – and what happens if they are not met, and just as importantly, if they are met.
If you have any of your own stories please share them and bring them to the attention of both potential client and 3PLs Providers. Helping everyone this way raises the bar.
My next article in this Series will be on Information Technology used by 3PLs