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Selecting A Third Party Logistics (3PL) Provider

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Introduction

Third party logistics (3PL) companies are a becoming an important part of today’s supply chain. These companies offer services that can allow businesses to outsource part of all of their supply chain management function. Many 3PL companies offer a wide range of services including; inbound freight, freight consolidation, warehousing, distribution, order fulfillment and outbound freight. The growth of 3PL companies has been driven by the need for businesses to become leaner, reducing assets and allowing focus on core business processes.

Rise Of Third Party Logistics Providers

The growth of 3PL companies began back in the 1980’s when businesses began to look for new ways in which they could outsource logistics functions and concentrate on their core business. One company that has been associated with the 3PL revolution is FedEx. The company’s overnight delivery service changed the way in which business to business and business to customer transactions operated. This offered businesses the opportunity of using just-in-time techniques, which saved warehousing space and reduced overall costs. The introduction of efficient-consumer-response (ECR) techniques led to smaller and more efficient shipment sizes, which in turn further reduced costs.

As companies saw the benefits of outsourcing delivery and warehousing functions, the number of third party logistics companies began to rise offering an ever increasing number of services. The increasing numbers of 3PL’s inevitably led to increased competition between these firms, which led to greater savings for the companies who employed them. The last decade has seen the 3PL provider transitioning from a local or regional business to one that offers national or global coverage. In US, the 3PL market has been growing at a compound annual rate of 14.2 percent since 1996 and in 2006; 3PL’s in the United States reported $89.4 billion in gross revenue.

Selecting A 3PL

Deciding to a use a third party logistics company is a decision that depends on a variety of factors that differ from business to business. The decision to outsource certain business functions will depend on the company’s plans; future objectives, product lines, expansion, acquisitions, etc.

Once a decision has been made to outsource certain processes then a company will begin a search for the right 3PL that fits all their requirements at the best possible price. There are three types of Third Party Logistics Company that operate today.

  • Asset Based
  • Management Based
  • Integrated Providers

Asset based third party logistics companies use their own trucks, warehouses and personnel to operate their business. Management based companies provide the technological and managerial functions to operate the logistics functions of their clients, but do so using the assets of other companies and do not necessarily own any assets. The third category, Integrated Providers, can either be asset based or management based companies that supplement their services with whatever services are needed by their clients.

When selecting a 3PL, the request for information (RFI) or quotation (RFQ) should be as detailed as possible. The company that is selected should be able to fulfill all the logistics requirements and that can only be assured if every requirement is communicated to potential companies. The RFI should include a detailed description of the areas to be outsourced. This will usually include:

  • The scope of the contract, including locations, facilities, departments.
  • Information on volumes involved; number of deliveries, warehouse sizes, number of items, etc.
  • The logistics tasks are to be performed, e.g. warehousing, transportation, etc.
  • The level of performance required.

After the bids have been received by a company from the prospective 3PL’s, an evaluation would take place where a multi-discipline team will review each bid based on a pre-defined set of criteria. These will include some of the following.

  • Does the 3PL provide the services required?
  • Does the 3PL have the technology required to perform the tasks required?
  • Does the company have the required warehouse space, dock capacity, warehouse personnel, etc.?
  • Is the 3PL financially sound?
  • Are the 3PL’s geographical locations suitable to cover the network?
  • Does the 3PL have the flexibility to respond to changes?
  • Are the 3PL’s environmental policies compatible?
  • Are the costs of the services detailed enough for comparison to other bids?
  • Are the customer references acceptable?
  • Is the 3PL a good cultural fit?

The selection team will usually review each of the bids based on the criteria and give each bidder a score. Depending on the importance of each criteria, a weighting can be given which gives more importance for one or more criteria in the selection process. Once the selection team has evaluated the bids, management will often select the top two or three companies for site visits, face to face interviews and more detailed reviews of financial records. Once a company has been identified contract negotiations would follow before a final agreement could be reached.

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