The Advantages of Outsourcing Logistics to a Third PartyOctober 30, 2015
Logistics is the management of the flow of objects from a point of origin to an end point. The point of origin will usually be a company or producer of an item, while the end point is usually an individual consumer or business.
Companies may handle logistics on their own, but increasingly, many are turning instead to third-party services. Third-party logistics (3PL) service providers offer many advantages over handling logistics on your own, including:
- A Large Resource Network
One advantage of using a 3PL service provider is access to a sizable resource network, usually one bigger than what companies could access themselves. Between 3PL providers’ ability to access their own network connections, as well as volume discounts, they can provide the best and fastest possible service.
- Time and Cost Savings
Given the abovementioned larger resources available to 3PL providers, they can also save time and money over handling logistics yourself. Using a 3PL provider reduces the need to invest in transportation, warehouse storage, technology and staff. Since 3PL providers are also experienced with logistics, they can also avoid any expensive mistakes, as well as have a large network to leverage to save money and time. 3PL providers can also cut down on the amount of paperwork, billing and audits you would need to perform. The reduction of employee expenses also means reduction of areas such as workers’ compensation and liability costs.
3PL providers are experts with handling logistics. A good 3PL provider will also be able to stay up to date on the latest developments in logistics software, technology and other techniques. They’re also free to be more innovative in ways you might be.
- Freedom to Focus on Your Core Business
Not needing to focus on logistics means your company can focus on its actual core business, instead of spending time, money and attention on a secondary aspect. It’s also reassuring to know that logistics is in the hands of a professional third party, and thus can remove some unneeded stress.
- Flexibility and Scalability
The use of a third-party logistics provider means you can easily scale your logistics needs depending on your requirements. The ability to scale up as needed is useful for instances such as expanding your business into new areas, growth periods or seasonal busy periods such as the holidays. On the other hand, it’s also easy to scale back as needed, in case of slower business periods. It’s also possible and easier to switch among 3PL providers as needed, compared to dealing with reorganizing your own logistics department.
3PL Services Are a Growing Industry
Third-party logistics service is a large and growing industry. In 2014, U.S. business logistics costs came in at $1.45 trillion, up 3.1 percent from the previous year. Logistics costs also formed 8.3 percent of the total gross domestic product (GDP) for 2014, though this is less than half of what logistics costs were as a percentage of GDP in 1979. With the economy recovering from the recent recession, business has been improving, and with that comes an increased need for shipping goods.
The majority of logistics transportation spending is on trucking, which cost $702 billion in 2014. In comparison, railroad, water, air and other transportation means cost $205 billion.
According to consulting firm Armstrong & Associates, 86 percent of domestic Fortune 500 companies make use of third-party logistics. Many of these conglomerates use a large number of 3PL providers. Procter & Gamble uses 53 3PL providers. Other companies that make use of third-party logistics providers: Nestle (42 of them), Unilever (36), PepsiCo (35), General Motors (51), Volkswagen (42), Ford (41), Philips (32), Siemens (30), General Electric (29) and Hewlett-Packard (39).
Types of 3PL Service Providers
There are several types of third-party logistics service providers, such as:
Standard 3PL Providers
These are companies that perform basic logistics functions, such as packaging, shipping, warehousing and distribution of customers’ products. However, they usually don’t offer the variety or range of services other 3PL providers might, instead focusing on a narrow but adequate range of services. Their 3PL services may also come in at a lower rate than others.
3PL Service Developers
These companies offer the services mentioned above, as well as ones that add value for their customers’ product. Such services might include tracking of packages, secure shipping and enhanced packaging. Such companies usually use a strong IT infrastructure.
These companies usually set up a more extensive relationship with their customers, and as such usually have fewer customers in total. Customer adapters exercise complete control over a customer’s logistics operations, taking over all of such operations for them. This level of service may cost more than other types of 3PL providers, but ensures a comprehensive third-party logistics service.
3PL Customer Developers
These companies have the tightest relationship with their customers. Similar to customer adapters, these companies take over all of a customer’s logistics operations, ensuring a tight, comprehensive service. Unlike customer adapters, however, these companies fully integrate themselves into their customers’ business. They’re allowed to make changes to their customers’ logistics operations, including changing processes, developing new solutions and so forth.
Concerns About Using 3PL Service Providers
Maybe you have concerns about licensing out control of logistics to a third party. A good 3PL provider will listen to your concerns, and work with you to ensure that any needs are met.
You might also be worried that poor customer service can harm your business, and rightfully so. A quality 3PL provider will ensure that it provides the best possible customer service, as well as work closely with you to establish positive performance standards.
A good 3PL provider will also be willing to be held accountable for anything that may happen to your merchandise, as well as protect the image of your company’s brand.
Keys to a Successful Outsourcing of Logistics
To successfully outsource your logistics to a third-party provider, it’s important to take various considerations into account. Other factors to consider include:
Clear Communications and Collaboration
When outsourcing logistics, third-party logistics providers should set proper expectations of what they provide. You should expect open and clear communication of issues, including troubleshooting. This should be between all applicable aspects of your logistics ecosystem – your customers, carriers, business partners/shareholders, vendors and suppliers.
Any changes proposed or made by a third-party logistics provider should be long-term and constructive, not reactionary. In addition, any changes shouldn’t alter what’s already working, unless it improves productivity and profitability.
A 3PL provider should align their goals with yours. This includes the provider clearly stating the goals to all parties involved in your company’s ecosystem, allowing for smoother cooperation and clarity.
Continuous Process Improvements
A 3PL provider shouldn’t just rest on their laurels, but also actively work with you at making improvements to operations. This can include such things as eliminating existing logistics wastes. Ideally, this will result in your business being strengthened, plus an improved return on investment in the logistics outsourcing.
A Long-Lasting Relationship
Strengthening and ensuring a long relationship with a 3PL provider is worth the investment. 3PL providers will be able to improve their services, including possibly finding ways to save you money, the more they know about your business and logistics needs. It also avoids any issues with unfamiliarity with your business.
When dealing with ground transportation facets, the 3PL provider should be able to keep all people involved on good terms when negotiating rates, etc. All parties involved should be able to be kept happy.
Features to Consider When Choosing a Logistics Provider
When choosing a provider to outsource your logistics operations, you should consider the various aspects and quality of their services. While some factors are more important than others, here are the major ones worth considering.
For the 3PL provider’s warehousing, the following factors are worth considering:
- The warehouse’s size
- The number of bay doors the warehouse possesses
- Closeness to major points of transit – airports, railroads, seaports, major highways
- The amount of warehouse space, including during busy periods – such as seasonal periods/holidays, etc. – and for future expansion purposes
- Complementary nature of its product mix – do they have similar busy periods (holidays, etc.), or are they alternating to yours?
Factors to consider for what equipment the 3PL providers own and use:
- Pallet racks
- Flow racks
- Scanning stations
- Packing tables
- What types of forklifts they use, as well as whether they’re covered under a preventative maintenance program
- Carton sealing machines
- Label printers
- UPS and FedEx shipping stations, with scales
- Any specialized extra equipment for your product or services as applicable
- Any other extra services: labeling, taping, banding, assembly, etc.
Staffing factors of a 3PL provider that are worth considering:
- Reading and writing comprehension of employees
- Basic language skills comprehension
- The temporary agencies, if any, used to staff employees
- Whether or not the workers are unionized, and if so, which union
- The rate of turnover
- Educational levels of the administrative staff, including management
- Initial hiring issues for employees, including training, background checks and probationary periods
- Disciplinary procedures
- Motivational items used to encourage workers, such as bonuses, prizes, raises or promotions
Information technology (IT) system issues that are worth considering include:
- The names of important IT staff
- Warehouse and transportation management systems
- Yard management systems (YMS)
- Freight tracking systems
- How theft management is handled
- File transfer systems
- Any other shortcomings of both the provider and your IT systems
- Document formats used
- Order management
- RFID or voice control technology used
- The costs of the 3PL providers’ systems
- 24 hours a day, 7 days a week availability of the providers’ IT systems
Flexibility of 3PL Providers’ Services
The 3PL provider should offer some flexibility in its services:
- Does the 3PL provider offer the necessary services you require? If not, do they have partners and other resources available for such?
- Whether they’re available on various shifts, as well as weekends
- If overtime is offered, and what it’ll cost
- The provider’s ability to add staff as necessary
- Does the provider have the ability to handle emergency orders or rushes?
Communications Between Yourself and the 3PL Provider
Communications issues to consider:
- The provider staff that’ll be your main point of communications contact. Similarly, the provider staff member(s) who’ll be handling conflict resolution issues
- How soon you can expect to hear back from the provider on various issues
- What means of contact are preferred? Email? Fax? Mail?
- What formats are used for communications documents
- What information the 3PL provider will require of you
- Similarly, what information the provider will give you
- Defining terminology used
Qualifications and Experience
The 3PL provider will ideally be an experienced veteran. Issues to consider:
- How long have they been in business?
- Does the provider have any accreditations?
- What are customer comments like about the 3PL provider? A Google search may turn up something about others’ views of the provider
- What is the provider’s core business or commodity specialty?
- Can the provider give any references?
- Does the provider have any experience dealing with your type of product or customers?
- What size company does the provider have experience working with?
- What are the provider’s other companies like?
Expectations you may have of the 3PL provider:
- Timetables for various facets of the provider’s services, including shipping orders, receiving merchandise and information providing
- What is their division of duties? It’s advised to review all aspects of this to ensure who is responsible for various procedures
- What types of contracts does the provider require?
- Is there a safety program or manager? How are they meeting safety and other legal requirements (OSHA, etc.)?
Of course, pricing aspects for any 3PL provider are worth considering:
- What is the provider’s pricing structure like? Is it easy to understand?
- Is the invoice formatted to your requirements?
- What are the desired payment terms?
- Can it provide a comprehensive pricing quote for any and all services required?
While there are a lot of details to consider, there are also a large number of benefits to using a third-party logistics provider to handle your company’s logistics needs. Overall, using 3PL providers can make your business management a lot easier than handling logistics on your own. The growing nature of third-party logistics ensures they’ll be able to provide quality services for years to come.