Is there a single function you can’t outsource?
Probably not. Companies are now farming out many processes to third parties—everything from marketing to supply chain to back office.
For one thing, it’s affordable. For another, it allows the company to focus on other areas of its business.
According to a study by Georgia Tech University and Capgemini LLC, transportation and warehousing remain the most commonly outsourced business functions. Others include customs clearing and brokerage, forwarding, shipment consolidation, reverse logistics and cross docking.
The study reports that about 80% of companies now use 3PL services, an increase of almost 10% from five years ago. And there’s plenty of room for growth: half of the businesses that do not outsource logistics plan on doing so in the future—at least in part.
But no one enters into a 3PL deal without a little trepidation—and rightly so: If the piece of your company that you want to fix performs even a little bit worse after outsourcing, your whole business could be in peril. That’s why you have form strong relationships with the third parties you go to contract with.
How does one go about picking a 3PL? Well, first you should determine for sure that you really need one. Otherwise anyone will be able to undermine your rationale. Here are six basic questions to ask when considering outsourcing:
1. Is the task highly complex?
2. Is there a risk to the business while performing the task inhouse?
3. Does the task require more than the available resources?
4. Does the task require highly specialized training or tools?
5. Is the task outside of your core competencies?
6. Could outsourcing cut costs and improve service levels?
If you’ve answered some or all of these questions in the affirmative, it’s probably time to outsource. Things you’ll want to keep in mind when going through the selection process include: commitment to quality, price, references and reputation, flexibility of contract terms, resources, value-added capability, culture, location, and existing relationships.
Sendin’ out an RFP
There are several ways to determine if a 3PL is right for your company. One method is to send out both formal and informal/blind RFIs (Requests for Information). From responses to the RFI, you can then request RFPs (Requests for Proposals) from vendors whose RFIs met your established goals and criteria. After evaluating all RFP responses, you should perform as many site visits as possible and begin conducting negotiations with multiple vendors.
As you go around and visit the facilities, pay close attention to the management style and culture of the 3PLs you are considering. Remember that if you are to successfully work together, you’ll need to share similar values.
Asset-based vs. Non-asset-based
Before you get too deep into the selection process, though, you’ll want to decide whether your needs are best suited by an asset-based or non-asset based 3PL. An asset-based 3PL is a logistics provider that owns many or all of the assets necessary to run its clients’ supply chains. This allows the provider to leverage internal strengths and infrastructures to provide direct, immediate solutions; however, an asset-based 3PL may be internally focused rather than customer focused, can have internal biases, or may falsely overemphasize its flexibility. Also, a customer will often pay for all or part of the assets, resources, and tools owned by an asset based 3PL.
A non-asset based logistics provider, on the other hand, is one that does not own the assets to manage the supply chain. This allows non-asset based 3PLs to avoid being limited to one infrastructure of assets, allowing for more creative alternatives. They also possess greater objectivity and typically deliver better ROI, since more capital is available, and since they do not need to realize value from an inventory of assets, their focus is entirely on their clients’ needs. However, with more pieces to manage, it is imperative that a non-asset based 3PL have the experience necessary to negotiate effective contracts and realize sources of improvement in every aspect of the supply chain.
When the best-suited vendor is found, the contract or partnership can be awarded, and both sides should commit resources to the success of the relationship.
Contract is king
Remember that a carefully drafted contract is one of the most important elements of any successful outsourcing plan. A 3PL-client contract should include detailed descriptions of services, performance tracking criteria, clearly measured improvements in service levels, peer-to-peer relationships that provide guidance and sponsorship, and clearly measured cost reductions.
With the right 3PL partner, an outsourcing plan can have a significant impact on the bottom line: for example, companies which outsource their logistics report an average reduction of 18% in fixed logistics assets, a savings of 13% on logistics cost, and a reduction in the average order cycle length of almost four days.
But if your contract isn’t written carefully—and scrutinized by an expert who is familiar with such contracts – you could easily end up in a bad deal.
Time to get closer
Building a close relationship with your 3PL is just as important as getting the right performance metrics down on paper. Right from the start, be sure the lines of communication are open: If possible, make quarterly communication (i.e. reporting) part of the terms of your contract. Remember that building a strong, respectful relationship with your 3PL is key to your success.
A good 3PL relationship should create a performance-based culture and workforce that conveys high expectations and implements incentives that drive behaviors. By investing in continuous improvement in time and capital, maintaining the lines of communication through a quarterly meeting rhythm (not just when there are problems), thinking right to left by always keeping the end state in mind, and remembering that every business has an Achilles’ heel that just needs to be found, a company can feel in control, safe, and secure with its decision to outsource.
Warning Signs
Despite a company’s best efforts, not all 3PL relationships are the right fit, and it is important to be aware of the warning signs. Statements like “the 3PL is on its own” show an absence of trust and respect, and a lack of communication, that can cause a 3PL-client relationship to fail if not addressed.
An absence of cost-out and continuous improvement; one or both parties constantly referring to the contract; or no time spent evaluating productivity and success are also indications that a 3PL relationship has gone sour. When this is the case, the relationship must be evaluated and reworked, or a new 3PL that is more in line with the culture, goals, and expectations must be selected.
Conclusion
Outsourcing is often perceived as complex and error-prone, and indeed it can be if a strong, respectful 3PL relationship is not established. Such a relationship will only be as good as each side makes it, and it should be treated like an equal partnership.
Ron Cain is president /CEO and Andy Dishner is senior director of client solutions for TMSi Logistics.