For many companies considering partnering with a third party logistics provider (3PL) the process can quickly become overwhelming when you are met with hundreds of options to choose from.
Fortunately there are some steps and processes you can follow to sort through how to choose a 3PL and confidently select the right partnership. But first, how do you know when it is time to work with a 3PL?
Step One: Evaluating if it is Time to Partner with a 3PL
The primary reason that many companies begin to explore partnering with a 3PL is that transportation and warehousing is simply not a core competency of their business. Because of this, their resources, capital, and time is spent fueling the growth of their business and focusing on their area of expertise.
Another key factor that drives companies to consider partnering with a 3PL is an overall dissatisfaction with the current performance of their supply chain. This could stem from underperforming internal operations, system limitations or lackluster results delivered by current providers.
A third driver that could cause a business work with a 3PL is that they have outgrown their capabilities and need to scale quickly in order to stay up on inventory needs, customer demands, and overall quality standards.
Once the decision has been made to seek a 3PL partnership, the next phase of exploring and evaluating options begins.
Step Two: Assemble a Team and Explore Your Options
Partnering with a 3PL is an important decision that will impact the entire organization. It is important to start the process by identifying those team members who should be involved in the evaluation and decision making process.
Each segment of a business has unique industry knowledge, concerns, questions, and insights—so combining the brainpower behind these different groups will enhance the evaluation and ensure that full due diligence has been proactively implemented.
the Makeup of the Evaluation Team
The team makeup will depend on the size and type of organization, but in general it should be comprised of folks from these departments:
- Operations - Understands the daily functions and operations of the entire supply chain
- Distribution and Transportation – Has an intimate knowledge of the costs and deliverables associated with transportation and inventory
- Production – Understands the production workflows and impact on the supply chain
- Finance & Procurement – Knowledge of bottom line financial impact of supply chain costs
- Quality Assurance – Regulatory knowledge
- Information Technology – Integration of IT systems and Electronic Data Interchange
- Human Resources – Familiar with labor costs and impact on the supply chain.
Overall the more perspectives a company can bring to the table the better. Of the departments highlighted it should be noted that many organizations make the mistake of excluding IT from the initial vetting process. This is a critical mistake as aligning IT systems and identifying potential issues up front can save a lot of integration hurdles down the road and help avoid potential pitfalls.
Consider Working with a Specialized Supply Chain Consultant
When assembling a team, it is important to know the limitations within the organization. Consultants provide a deep functional expertise to help navigate uncertainty in your current supply chain. Focus can include, but is not limited to: distribution center design, network analysis, transportation management, Lean distribution, supply chain technology, and 3PL outsourcing. Companies will consider working with an experienced supply chain consultant that can develop a specific business strategy that will minimize costs for manufacturing and distribution.
Because of the complexity of supply chains and how unique they are to every business situation, consultants can be helpful in identifying gaps between your business strategy and supply chain design. Should the process of managing the partnership of a 3PL appear to be too complex, a consultant can help navigate the steps and provide guidance to ensure successful implementation.
Step Three: Create Your Evaluation Checklist and Interview
Once a team has been established, the next step is to develop a grid or matrix for evaluating the 3PL candidates and begin the interviewing process. This is a critical step when assessing 3PLs because it will ensure that all options are scored fairly and on the same standards.
Consider the following criteria when developing your Evaluation Checklist:
1. Cultural Fit and Ethics
Cultural fit and ethics unearth qualities about the organization such as how investment decisions are made, employees are hired, and how teams strategically function together. These are critical to include in the matrix to determine how well you align on core values of the business. A bad culture fit will almost certainly lead to an underperforming partnership in the long term.
The following factors contribute to the organization's culture and ethics:
- Organization ownership structure
- domestic vs. global operations
- Organized labor vs. non-organized labor
- Company history and milestones
- Company values
- Mission and strategy. Short-term and long-term company goals
- Experience within the organization with outsourcing a key functional area
Culture Fit Interview Tip: Ask in advance for information relating to the above and during the interview ask for specific examples of how their values drive internal operations and client service.
2. Company Structure
Understanding the 3PL company structure will give visibility to capital resources, leadership, organizational charts, and how the business operates. Below are several factors to consider when evaluating the 3PLs company structure.
- Capital resources and how they are deployed
- Annual revenue
- Number of employees and labor deployment measures
- Number of locations (particularly with warehouse operations)
- Industry experience
- Economic health
- Internal transparency and corporate communication
Another important factor to consider when examining a 3PLs structure is the retention rates of employees. If the company invests in their employees who build relationships with clients, they are likely seeking to work with long-term clients.
Company Structure Interview Tip: Ask the 3PLs how their leadership team is engaged in the relationship to get a better understanding of how close they will be to your business.
3. Industry FIT and experience
Focus on 3PLs that have experience in your vertical. A 3PL with experience in your industry will have a better understanding of regulations, similar order profiles, retailer relationships (including vendor score cards and best practices) and inventory management. If they understand your business, they can be a partner who will provide proactive recommendations to continuously improve your supply chain.
Industry Fit Interview Tip: Ask the 3PLs to describe how they have helped similar clients address and overcome challenges that are specific for your industry.
4. IT Capabilities
When adding IT capabilities to the Evaluation Checklist, it is important to first start with understanding the current systems that you are working with on your own end. Full transparency is the key to successful IT integration. Be open and honest to ensure deliverables can be met. Important questions to ask include:
- Does the 3PL have a proprietary Warehouse Management System (WMS) or Transportation Management System (TMS)? What are the benefits and drawback of their legacy system?
- Contrary to an in-house WMS or TMS, why would a Tier 1 WMS or TMS (JDA, Manhattan or HighJump, 3GTMS) benefit my operation?
- What experience does the provider have using the tool?
- What is the implementation process?
- How are modifications made and handled?
- What costs are associated with the IT integrations?
Keep in mind that IT is not just all about the systems — it is also about the people supporting the system. How does the IT team support the partnership and how will they engage in the ongoing partnership? Vetting these areas will not only help ensure that you have a seamless integration but also that you stay within your designated timeline.
IT Capabilities Interview Tip: Be upfront and honest about your knowledge of your own IT systems. If you are unclear about requests being made, speak up! Additionally, be sure to ask what contingency plans are in place should implementation issues surface.
Few organizations will ever look the same in five years. It is crucial that you have a handle on projecting your company’s growth trajectory and how the 3PL can align to your scaling business. An organization that wants to open one new store in the next 3 years is going to have different needs from one that needs to open 5 locations across the country in the next 12 months.
It is important to understand how the 3PL has scaled their operation with existing customers under similar growth. Ask for examples of companies the 3PL has scaled with, the challenges they faced, and how obstacles were overcome.
Scalability Interview Tip: First wait to see if and how the topics of growth and future projections are addressed. A good provider will be on top of this early and often. Ask for customer scalability examples and if they foresee any hurdles with your specific situation.
6. Ease of Doing Business
As a future client of a 3PL, you can expect that you will regularly need to interact with your provider for various reasons. Because of this, you should explore how easy it is to do business with each organization. Things to consider when evaluating this include:
- Are they active and engaged in the interview process?
- Do they follow up in a timely manner?
- Are they reasonable and trustworthy?
- Are they responsive to your inquires?
- Do you have a primary contact, or will you be working with a group of individuals?
- Do they provide proactive solutions to meet your changing supply chain needs?
Keep in mind that the courting process is an excellent time to determine what your experience as a customer will look like.
Ease of Business Interview Tip: Analyze whether they are just eager to close the deal or if they have taken the time to analyze the ease of doing business with YOU. Clarify what the client relationship would look like and what ongoing resources would be available should you choose them.
One of the most useful things that should be used for the Evaluation Checklist is getting and contacting references provided by the 3PL. It is important to note that some providers may be guarded about providing references too early in the process—wait until you are a little further into the discussions before asking for these.
As great as positive references are, don’t be afraid to ask for references where the partnership wasn’t successful. Failed partnerships are excellent learning experiences to help understand where problems surfaced in the past and how both parties resolved the issue.
References Interview Tip: Always ask for more than one reference. Ideally you want to talk with at least 3 clients and those who may have a similar model/industry to yours.
It is imperative that you shape expectations with regards to your timeline. If you are needing to move quickly, be transparent and request how the 3PL will manage the implementation. By outlining a timeline and being upfront with deliverables, it will help you manage issues moving forward.
All timelines are variable, and you should allow more time than you might think. If you’re looking at establishing a new distribution center, 6 months is a good benchmark to ensure proper planning and organization is aligned. Not taking the time to do the necessary pre-work to make an educated decision can be detrimental for both parties.
Timeline Interview Tip: Be transparent about your timeline and ask the 3PL how the project manager will ensure the implementation is kept on track. Do they use project management software?
Step Four: Keep an Eye Out for Potential Red Flags
If any of these identifying factors arise during an experience, consider slowing down the process before moving forward to resolve any issues:
- If they previously helped your organization in a short-term pinch, do not make the mistake of skipping over the process outlined above and moving forward with them. Do more research and make sure that they can handle all of the nuances of your supply chain.
How many people within the organization have you interacted with? If you have only spoken with the salesperson, ask to meet with other members of their team ranging from IT to Operations. This will make sure that you are getting a consistent perspective throughout the company.
The Bottom Line
No 3PL is a one-size fits all organization. Just like any business, 3PLs have specific areas in which they specialize. What is important is finding the right 3PL provider for all of your current and future needs. This can be done by building a team who will thoroughly evaluate your top options, conduct multiple interviews and grade those organizations based upon a pre-designed matrix.
If you still don't find the perfect fit, don't feel the need to make a decision right away. There are likely better options out there and the additional time spent up front will be well worth the investment over the long haul.