Outsourcing the Chain
The working relationship with a 3PL requires deep ties and a strong match between organizations.
For companies outsourcing all or some of their supply chain needs to a third-party logistics (3PL) provider, involving procurement in the sourcing and selection process has benefits. Procurement can play a key role in effective RFP writing, supplier evaluation and other crucial areas. Using a 3PL is advantageous for several reasons, says Joe Lombardo, director of transportation and terminal operations at Purolator. A 3PL can offer added flexibility in dealing with volume variations, he says. They also allow organizations to scale up or down, and can leverage its infrastructure and networks to do the job. A company can combine several 3PLs and their networks for better strength.
For purchasers involved in procuring 3PL services, Lombardo recommends defining business requirements as clearly as possible up front. Does the 3PL provide customer reports and score cards? Is there a dedicated account rep or clerk to contact on short notice? Are they proactive in notifications? “These are all things that, if you don’t address them through the RFP and you focus strictly on price, it can end up costing your organization to have to fill the gap,” he says. “We make sure that when we score in an RFP that those factors are considered as the gateway to get to the next step. Once you consider those factors, then you focus in on the price.”
It also pays to survey other procurement professionals—along with other organizations using 3PL services—about their experiences with providers, Lombardo says. Take comments with a grain of salt, but you can get a feel from customer feedback. Lombardo recommends treating the process like a management position job interview. “Spend the right amount of time to interview the candidate and understand who the people are that are going to be managing the account—what their strengths are, what they bring to the table, what their operational execution plans look like,” Lombardo says.
Building relationships is important when several players work together to deliver the service, he says. It pays to have good relationships not only at the executive level, but also with those in operations and execution. Meet regularly with suppliers and develop ways to escalate from the contract’s outset. “Not having rules of engagement or a rule book going into a 3PL relationship will lead to confusion on how to deal with problems as they arise,” he says. “But if you clearly articulate upfront during contract negotiations what that escalation could look like, and what the key relationship points are it helps structure it longer term.” Often, organizations look to hire 3PL services to drive down costs while offloading non-core functions to an outside provider, says Steve Harkins, director of business development, contract logistics at DB Shenker. But that view has evolved, with organizations recognizing a 3PL’s competitive advantage. Harkins also warned against focusing too heavily on price when putting out a request for proposal. Purchasers can be measured on some form of “purchase price variance” metric, he says. The total cost of ownership and other nuances are sometimes considered, but often these factors aren’t given sufficient weight. The result can be less-than-optimal “total cost.”
Harkins recommends involving stakeholders from across an organization in decision-making, including areas like operations, marketing, finance and the leadership team. That not only helps to increase value, but lower total cost of ownership of the 3PL relationship. “Where procurement can bring balance that does as much as possible to truly measure and quantify the total cost to serve or the total cost of ownership, that’s what yields the best long-term financial win,” he says. What aptitudes a 3PL should have depends on what service you’re looking for, Harkins notes. He offers tips for areas companies should consider:
Cultural alignment: When dealing with challenges or establishing a direction, companies and 3PLs must mesh their vision, ethics and other key areas—the stronger the similarities, the better chance for a lasting relationship.
Relevant experience: If a food company wants to procure a warehouse for five years, it needs a 3PL that not only understands how to deal with food products, but has done so before. Depth of resources: When challenges arise, a 3PL can better mitigate those challenges by offering layers of contingency and resources.
Implementation: Look for 3PLs with formalized processes that are repeatable, have predictable outcomes and feature a good track record.
Continuous improvement: Does the 3PL look for innovative ways to reduce cost and waste? Look for a methodology with continuous, consistent improvement.
Risk and reward: If a 3PL is willing to share in the risks as well as rewards, there’s potential for a productive relationship.
Sourcing and using a 3PL is largely about partnering with an organization that has deep expertise in logistics, says Doug Harrison, president and CEO of VersaCold Logistics Services.
A 3PL can bring to the process a larger scale, more capability and greater knowledge because logistics represents its core expertise. Outsourcing allows an organization to focus on its business while allowing the 3PL to flex up or down, bring on staff or reduce head count as need. “It’s really partnering with someone to drive more capability inside the organization, and quite frankly more economics inside the organization, whether it be getting to markets and growing top line or getting control of your balance sheet through someone else investing in assets or reducing cost,” he says. Using a 3PL lets organizations track cost of ownership, since the exact cost appears regularly on an invoice, Harrison says. Similar tasks done in-house rarely have such clarity. The decision to go with a 3PL is strategic, he notes, so understand what the cost is of doing business in-house compared to outsourcing.
The most fruitful 3PL relationships involve a commitment and deep ties, he notes. It pays to ensure shared goals and a shared set of values. Have an agreed-to set of metrics that both organizations are working towards, Harrison says, and—depending on the relationship—monthly and deeper quarterly meetings as well as weekly touch points to review the relationship.
In conclusion, organizations procuring a 3PL should not only keep the total cost of ownership in mind, but also view the relationship as a long-term commitment.
Last modified: 23.03.2016