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3PLs: Can't We Just Get Along?

By Bob Trebilcock, Editor at Large

Order fulfillment or reverse logistics? Maybe both? Whatever you expect from a third-party logistics provider, you have to bring something to the table.

Several years ago, a leading automotive supplier decided to close its network of 15 distribution centers and turn over its order fulfillment activities to a third-party logistics provider (3PL). On paper, the strategy made sense. Manufacturing, and not distribution, was the supplier's core competency.

Unfortunately, the relationship fell apart faster than a celebrity marriage, with both sides playing the blame game.

What went wrong? 'The parts manufacturer thought they could just hand-off their business and forget about it,' says John Siddell, principal with TranSystems | ESYNC (419-842-2210, ). 'They never took the time to properly define their requirements or establish metrics to determine the success of the relationship.'

The result was missed deadlines, project overruns and poor customer service. The lesson: Turning over your order fulfillment activities doesn't mean you wash your hands of the management of those activities. A manager may no longer worry about whether the lift trucks are in good working order or if enough workers showed up that morning to get product out the door. But the management responsibilities don't go away just because someone else is running the show.

To outsource or not to outsource

In fact, the best 3PL relationships are a partnership, according to Bruce Mantz, vice president of operations for ADS (864-902-0540, ), a 3PL with a number of large retail ( ) clients. 'We want to treat your business as if it's our own,' says Mantz. 'Each of our customers has an account manager who works with the customer's management and reports to our directors, and most of our customers assign a liaison to work directly with us.'

The first step in building that kind of partnership is to decide at the corporate level whether a 3PL is right for your company. That often comes down to a question of whether distribution is a core competency. 'Companies that outsource usually fall into two buckets,' says Siddell. 'In one bucket you have manufacturers who just don't get distribution. In the other bucket, you have companies with a new business unit. They don't have time to build out a distribution network, so they outsource to a 3PL as an interim step.'

Other companies turn to a 3PL when they are entering a new vertical industry or region. 'A 3PL with experience can bring the best practices, capabilities and technology specific to that industry,' says Tony Zasimovich, vice president of international services for APL Logistics (510-272-8000, ).

Those different approaches explain why some relationships last only a few months, while others go on for years.

Once a decision to outsource has been made, 'the 3PL process has to be embraced by all elements of a company,' says Mantz. 'They have to get the manufacturing team on board, along with the sales organization and the executive suite.'

Establishing metrics

With management on board, the next step to building a 3PL relationship is to carefully document your processes and to benchmark your present internal costs. The idea is to provide the 3PL with a history of your performance, including the metrics you're interested in tracking and improving. 'You're not hiring a 3PL to get worse, you're hiring them to get better,' says Ron Cain, president and CEO for TMSi Logistics (603-422-0777, ). 'To do that, we have to understand your operation.'

The problem is that too often companies looking to outsource are doing so because they don't know their costs because distribution is treated like a step-child. 'In those cases, we'll put an engineer in their operation to establish a baseline and educate the customer on how they're currently performing,' says Cain.

Once those first steps are completed, the next step is to create a functional specification document that outlines what is expected from both parties. 'That details what kind of warehouse management system will be in place, what type of materials handling equipment and systems will be used, what type of inventory levels will be maintained and what type of service levels will be provided,' says Mantz. 'If we've all done our work up front preparing that document, we'll limit the surprises.'

What's it worth to you?

3PLs are not non-profits-they charge for their services. Several different pricing models are common in today's 3PL world.

The first is transactional pricing, or traditional unit pricing. The 3PL and the customer agree on a flat fee for each service that's going to be performed. In a warehouse or distribution center, those services will include all of the touch-points in an operation, from receiving and putting away inventory to loading the truck to ship the product out the door. Labor-intensive operations, like reverse logistics, might use a variation of transaction-based billing, with a charge by the piece, case or pallet, which incorporates all of the services.

A second model is activity-based costing. Usually the customer agrees to pay the 3PL a flat fee to cover the fixed costs of running a dedicated facility. In addition to the fixed costs, the customer also agrees to a second fee that covers the variable costs, like labor, fuel, packaging supplies and lift trucks.

The third model is cost-plus pricing. In this model, the customer pays the 3PL a fee based on the actual costs for the services provided, plus an agreed upon profit margin. 3PLs may require cost-plus pricing with customers who can't predict the volume of business or who don't have a good handle on their current costs.

Gain-sharing is the final example. In this model, the 3PL puts their fee on the line by agreeing to be paid based on the improvements they can deliver in key areas that are important to the customer. Gain-sharing works best in long-term relationships where the goal is to provide significant cost and service improvements.

For large users of 3PL services, it's not uncommon to use a combination of all four models, says TMSi's Cain.

You still have to manage

Many novices to the 3PL industry think they can turn their logistics over to someone else, and forget about the problem.

The truth is that just because you're now outsourcing warehousing or order fulfillment to someone else doesn't mean that a warehouse, materials handling or logistics professional's job goes away. It merely changes.

How that happens varies from company to company.

Often it includes a logistics manager who works directly with the 3PL. 'In the best arrangements, there is a primary contact who we talk to every day, and about 75% of our customers install someone on site or very close to the facility,' says Cain. 'Their main role is to be the coordinator between us and their purchasing and transportation departments as well as senior management.' Whether that person is on site or not, it's critical to have someone representing your company that a 3PL can access on a daily basis.

In addition to managing day-to-day operations, the best relationships also include information sharing in a structured way. 'You have to be willing to continually update goals, share strategy and review metrics to make sure you're all still on the same page,' says APL Logistics' Zasimovich.

Typically, that involves weekly, monthly and quarterly reviews. In the short term, those sessions are an opportunity to discuss any changes in business or requirements, or to address any immediate problems. Other meetings are used to review metrics and compare how the 3PL is performing compared to the contract.

'During monthly meetings, our senior management meets with the customer's senior management to set and review short-term objectives,' says Cain. 'During quarterly meetings, we look at what we've just done and discuss what adjustments might need to be made.'

Finally, as with any other business, 3PLs are expected to deliver continuous improvements and year-over-year savings. At an annual review, this year's cost savings set the baseline on which the next year will be judged.

'I'm working with a large food manufacturer now that outsources a significant portion of their logistics,' says Siddell. 'Every year, they go back to their 3PLs and look for ways to do more with less.'

At the end of the day, when a 3PL relationship works best, a manufacturer or retailer concentrates on what they do best, and allows the 3PL to focus on the services where it excels.

'When my team is in synch with my customers' requirements, we can deliver real value,' says ADS's Mantz. 'That's why we've had some customers with us for 12 years.'
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Title Annotation:third party logistics provider
Comment:3PLs: Can't We Just Get Along?(third party logistics provider )
Author:Trebilcock, Bob
Publication:Modern Materials Handling
Geographic Code:1USA
Date:Mar 1, 2008
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