Outsourcing with third-party logistics
March 23, 2015
What exactly is a third party logistics company (3PL) and what are the benefits and potential cost savings to a company trying to get its products delivered in a timely and efficient manner?
We had the opportunity to speak with Kasia Wenker, director of distribution sales and Ken Tavener, vice president of sales, at ITS Logistics Company in Sparks. Wenker describes their services as managing "all logistics activities for companies so they can focus on their business. This process creates less stress for a company."
The 3PL warehouses the product and designs the optimal way for the product to be distributed and transported. It has the expertise to design a program that best suits each individual company. With the experience of an industrial engineer, the company can construct a specific solution that considers product velocity and configurations that move products most efficiently. A company that chooses a 3PL can reduce fixed costs. Its warehouse has no fixed footprint that enables a company to have "rubber walls," as Wenker explained. A company can literally expand or contract depending on market conditions. Using a 3PL also gives a company location flexibility. In addition, it can be expensive for a company to invest in the technology that creates the best logistics network for its product. To make things even more challenging, there are many government regulations that need to be followed.
Many local 3PL companies have a dedicated fleet with regular shipping schedules that produce an excellent on time shipping record. There is seamless communication with the drivers, so companies can be confident that their products will be received on time. Incidentally, with margins so narrow in the transportation industry, even bulk buying power does not create better rates with national carriers.
So you may be wondering how much all of this costs a company and how is it priced. The 3PL will need detailed information about the prospective client, such as company strategy, product size, product weight, labor involved and space requirement to begin preparing a quote. 3PLs can also offer food-grade warehouses or other specialized climate-controlled buildings.
How to select a 3PL.
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Once a decision has been made to outsource certain processes, 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 3PLs that operate today:
Asset-based 3PLs 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 or quotation 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 to be performed, e.g. warehousing, transportation, etc.
The level of performance required.
After the bids have been received from the prospective 3PLs, 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 it have the technology required to perform the tasks required?
Does the company have the required warehouse space, dock capacity, warehouse personnel, etc.?
Is it financially sound?
Are the 3PL's geographical locations suitable to cover the network?
Does the firm 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?
When to keep in house and when to outsource
Many retailers and merchants are ultimately faced with the challenge of whether or not to keep the storage and distribution of their products in house or use the services of a 3PL warehouse. For companies struggling with the inherent difficulties of a sluggish economy, the appeal of gaining cost savings through the use of a 3PL can be very attractive. Furthermore, companies that sell product have to remain particularly competitive with regard to selling and marketing their products, as more and more retailers enter the market and cost of advertising increases due to increased demand. Being able to focus on the most critical function of the business, namely securing an ongoing pipeline of business, ultimately positions the company for the greatest amount of success.
Not always the best option.
Even still, there are instances when using a 3PL isn't the best option. First, if the business isn't large enough and requires ownership to perform some of the shipping tasks because sufficient cash flow isn't present, then outsourced services obviously won't be an option.
Second, if the distribution process is a "core competency," then keeping the process in house may be the best course of action.
Most importantly, retailers and manufacturers should look at their situation and weigh the pros and cons of in house versus outsourcing. This is a very important function of the business, so much care must be taken with the considering all factors within the equation.
Fred Miller and Sheila Colfer are agents with Dickson Commercial Group.