Guest Commentary: Third-party Logistics Providers – Should We Bid Frequently or Not?

by Russell Pressler

I was recently asked a question by a prospect regarding the use of a third-party logistics provider (3PL). The question seemed simple enough, but definitely had strategic implications. This is the question as it was posed to me:

— What are the benefits of having a 3PL operate a specific facility for 10+ years vs. sourcing 3PLs every three years with the chance that a different 3PL would win the business?

Before determining whether an organization should go out to bid for 3PL vendors, the following criteria need to be understood:

— What’s the level of satisfaction with the current service?
— Do you believe you are overpaying for current service based on benchmarking research?
— Do other 3PL providers appear to offer a superior level of service?

Once you have evaluated these factors, the key to success is a structured approach to the request for quote (RFQ) process. When looking at 3PL relationships, we find that new customer relationships fail for various reasons, the most common being that customers do not provide accurate, detailed requirements during the RFQ process – information that is critical for 3PL providers to understand.

Other common challenges/pitfalls with a new relationship are:

— Learning curve – a period of unsatisfactory customer service early in the relationship while the 3PL is learning the service
— Poor management – the service in your specific location is only as good as the local management team

As mentioned above, it is critical to have a structured RFQ process in order to sufficiently demonstrate the customer requirements and correctly align them with the 3PL’s capabilities.

One example of a failure to align customer requirements with a 3PL’s capabilities came to our attention earlier this year. A 3PL began providing services for a global manufacturing company, but neither the provider nor the customer had a structured approach when it came to contract and pricing.

The engagement began with the provider developing pricing for the new customer, which included raw material storage and shipping to plants for production/manufacturing. Due to the absence of a structured approach with specifically outlined requirements upfront, the new provider discovered after only a few months of operation with the new customer that they were unable to provide service at a profit. At best they would be marginally profitable, but more than likely, they were going to lose money on the business.

This situation is not uncommon when an RFQ outlining detailed storage, throughput and process requirements is not used during the evaluation of potential vendors. Requirements that are typically missed and have substantial cost implications for the vendor include:

— Unload product from one pallet type to another prior to shipping
— Sort inbound product by SKU and lot before putting away or shipping
— Label inbound product from non-compliant customer vendors

In this case, the provider will reassess the operations, including the unforeseen process requirements that were not outlined in the initial proposal, with the intent of negotiating a future price increase to offset the additional costs. What might have initially seemed to be an attractive cost reduction to the customer could ultimately result in a cost increase due to the lack of detail in the RFQ and the 3PL underestimating its real costs.

Another example in which insufficient detail in the RFQ requirements results in under-estimated costs and pricing occurs when a customer indicates how many pallets/cases/units are received on a daily basis in the RFQ, but the way in which product is received is not fully detailed.

Following are hypothetical examples demonstrating how receiving 100 cases/day can be much more complicated than simply receiving the cases:

1. The customer receives 100 cases/day on 25 pallets, and they’re each one SKU per pallet, with uniform cases. This allows for ease of verifying SKU, quantity and ability to put away.
2. The customer receives 100 cases as 500 SKUs, and each pallet contains five to 15 SKUs on a single pallet that need to be sorted prior to the receiving process.
3. The customer receives 100 cases/day, half of which have mixed SKUs inside where each case must be opened to identify two to 10 SKUs within that case.

With each of the above scenarios, 100 cases are received, but the labor cost correlated with each case is different under each circumstance. What we see with RFQs is that customers are not providing this amount of detail when selecting 3PL providers; therefore, third-party quoting can be misleading regarding costs.

There is obviously much to think about when considering a change in 3PL relationship:

— Time and cost associated with vendor evaluation – Developing a thorough RFQ with detailed requirements is time consuming, and the evaluation process consumes substantial management time and energy.
— Potential for meaningful cost savings – Will you really save 10 percent every three years by changing 3PLs? More than likely, the answer is “no.”
— Learning curve – There is a period of time early on in the arrangement where the 3PL is not providing its best service while the nuances of the business are being learned.
— Transition costs – Inventory relocation, potential product shrinkage and damage, development and testing of information system interfaces and other transition-related costs can be significant.

Considering all of these, the business case to transition to a new 3PL might not be such an attractive option. The customer who looks at a new 3PL relationship with some frequency may actually end up spending more than they were prior to the switch. So if you’re going to evaluate a new 3PL relationship, make sure you thoroughly evaluate potential vendors, select the best candidate, and develop a long-term relationship with your 3PL partner.

Russell Pressler is Business Development/Sales/Marketing at MHI member FORTE.

 

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