Are You Ready for a Third Party Logistics Provider?

Sep 27, 2007 12:16 AM  By

Successful businesses are adaptable businesses. The corporate environment is constantly evolving, and companies that stay static will fall behind and, ultimately, risk failure. One area where successful companies are increasingly applying their adaptability is in their logistics and supply chain operations by outsourcing to a third-party logistics provider (3PL).

A 3PL manages one or more logistics processes or operations, such as transportation and warehousing for another business.

Outsourcing your supply chain is a big step. Logistics analysts of the Council of Supply Chain Management Professionals surveyed companies in 2006 and found that those who don’t outsource repeatedly cite a lack of confidence in 3PL providers and an insecurity about maintaining transparency, security, and control over their supply chain. If a company has always managed its own logistics, not knowing exactly where shipments are at any given time can be stressful – and put strain on the relationships with long-time customers. Factors like these can make outsourcing a company’s supply chain for the first time scary, but if you ask the right questions, it doesn’t have to be.

Here are a few to consider:

1) Is your current supply chain working as well as it should be?

Growing businesses frequently confront logistics challenges. Everyone is prepared for a 10% increase in business, but companies that see rapid and significant expansion frequently see their supply chain turn into a traffic jam – or worse, a total train wreck. Entrepreneurs naturally focus on their core mission and frequently treat their supply chain as an afterthought. Keeping your core mission at the center of your focus shouldn’t be the problem – it’s the way great companies succeed. Managing a logistics chain is no different.

If your supply chain is not broken, don’t fix it by outsourcing. If you’re tracking your logistics, shipping, and warehousing expenses monthly or from quarter to quarter, you should be able to easily see if those costs are increasing and at what rate. In some cases, this will immediately make it clear that your supply chain needs to be improved.

2) Are you losing focus on your core mission?

To answer this question, simply ask ‘are my employees most productive handling logistics or would it be more profitable for them to work on our core mission?’ Even employees working efficiently on your supply chain may be more profitably utilized working on your core competencies. No one would use highly-trained diamond cutters to manage a warehouse and, similarly, your employees might be better off working elsewhere. If your employees make more money for the business working on your company’s core goal, a 3PL may be the right choice to handle your logistics.

3PLs fall into two broad categories – asset-based and non-asset based. Asset-based 3PLs own some of the assets used in supply chain management, which often include trucks, distribution centers, and warehouses. Non-asset based 3PLs do not own such assets. Each sort of provider has unique methods, and a brief comparison should help clarify the strengths and weaknesses of each type of 3PL.

Both kinds of 3PLs share common goals. Both work to manage their clients’ supply chains in a manner that will 1) increase overall efficiency, 2) cut costs, 3) deliver with fewer errors, and 4) accomplish these on time. But the methods used to achieve these goals can differ dramatically.

The advantages of asset-based 3PLs include easy availability of trucks, warehouses, distribution-centers, based on its inventory of assets. They are also knowledgeable about their assets and those assets’ strengths and vulnerabilities. And finally, they have demonstrated expertise in the management of these kinds of assets.

However, an asset-based 3PL often needs to use their assets in order to remain profitable. Regardless of the assets they own, asset-based 3PLs work to achieve their goals by routing a client’s supply chain through their existing network. Consequently, the efficiencies that an asset-based 3PL can accomplish are often limited by their inflexibility.

Asset-based 3PLs need to make it clear to new customers, especially those who’ve never outsourced their supply chain, that they can and will be able (and willing) to allow the customer to see into the 3PLs infrastructure at any time. This is important because a company needs to build a trusting relationship with their 3PL; after all, it is ultimately the company, not the 3PL, that will lose customers if deliveries aren’t made correctly and on time.

In contrast, a non-asset based 3PL provider’s primary advantage is their flexibility. A non-asset based 3PL brings to each client an awareness that every client’s supply chain is different, every client’s customers have different demands, and every client has different strengths and weaknesses that effect the efficiency of their supply chain.

Hiring a non-asset based 3PL provider ultimately means hiring expertise, not hardware. By analyzing individual supply chain needs, a non-asset based 3PL can evaluate how a company’s supply chain is work and how it can be improved. By designing a supply chain that fits a company’s specific needs, non-asset based 3PLs can apply the flexibility that allows them to respond to clients’ needs on a case-by-case basis.

On the downside, non-asset based 3PLs are only as good as the plans they develop for a client and the outsourcing contracts they negotiate. Non-asset based 3PLs can also confront higher costs as the costs of shipping, warehousing, and other supply chain costs increase due to market forces. These problems, however, can be successfully managed by tough and effective negotiations with their outsourcing partners

Ron Cain, author of “Are You Ready for a Third Party Logistics Provider” is the President of TMSi Logistics

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Four Questions to Ask a 3PL Provider