There are many advantages to using third party logistics (3PL) for order fulfillment, system support and customer service for omnichannel businesses. Companies can achieve competitive costs, avoid capital expenses for facilities, automation and systems and concentrate on marketing and merchandising rather than managing fulfillment.
Using 3PL services is not for everyone. The relationship you’re seeking is not just a service but more importantly, a partnership. In our consulting engagements we have clients that are long-time users of 3PL as well as 3PL providers themselves.
When problems are severe obviously the first course of action is to resolve the issues before deciding to leave the 3PL. Here are 11 key indicators to watch in order to ensure your 3PL is performing up to the level expected in your agreement with them. Many of these metrics should be documented in your service-level agreements (SLAs) with the 3PL and monitored and reported regularly.
Excessive Customer Problems
Customer complaints: Does the level of complaints indicate you are losing customers to the point where the 3PL engagement is threatening your business? What procedures and reporting do you have in place to monitor quality and timeliness of the services provided? We recommend keeping your customer service functions in house to monitor complaints and questions.
Shipment accuracy below 99.9%: Shipment accuracy can be maintained at this high of a level if the fulfillment process is fully bar coded. This includes product, stock locations and processes like picking, ship confirmations and returns.
Same-day shipping misses: There are three categories: When customers request same-day shipment (e.g. overnight delivery); same-day shipment and delivery (e.g. four-hour delivery); and clearing a high percentage of customer orders by a cutoff time. The goal is to ship 100% of orders in the first two categories and 100% by the cutoff time.
Ineffective account management: The 3PL’s account manager should be your advocate, providing timely, consistent service and answer questions, teaching your people how their systems and services work and resolving issues. This person is key to providing you with great service.
Poor customer presentation: How does the product look upon arrival? Is there excessive box taping? Does the 3PL’s sloppy housekeeping (i.e. dusty, dirty, lack of care) carry over to the customer presentation? Restate your standards for packing.
Internal Operations Problems
Inventory accuracy below 99.9%: Maintaining 99.9% accuracy can only be achieved when the internal processes (e.g. receiving, put away, picking, pack confirm, shipping, returns) are fully bar coded along with the products, cases and stock locations. How much must you absorb in lost inventory before the vendor is responsible?
Not enforcing vendor compliance: Not holding vendors to your compliance standards causes all sorts of issues within your fulfillment operations, which in turn cause later problems such as QA failures and increased costs.
Inexplicable billing: Do you have protracted discussions about invoicing which can’t be adequately explained? This can become a credibility issue for the 3PL. Often the issue is the 3PL uses a WMS that wasn’t designed to serve their type of business. As a result, they use manual analysis to come up with the invoice detail, which can be difficult to explain.
Hourly vs. transactional billing: One way to get more predictable billing is to have a cost per transaction model for services provided rather than hourly charges. For example, consider kitting. Can you negotiate a cost for various levels of kitting, i.e. ones with two components vs. more involved ones like a gift basket? Cost per transaction billing gives the 3PL incentive to measure and manage productivity more accurately.
Fails to bring you new ideas: Is your 3PL a good partner that brings you new ideas and ways to save money and improve customer service? This is an essential quality for any good provider.
Lacks continual process improvement: Does the 3PL have a continual improvement process, making them more efficient and passing on the benefits to you? Examples include full use of bar code technology and investing in material handling equipment and automation to gain efficiency. This is also a critical area to watch.
Recommended Actions
Here’s how to proceed to get the 3PL’s performance back on track:
- Address problems with 3PL management. Are there SLAs and procedures that can be implemented without reopening major contract renegotiations? We often see contracts that lack key SLAs. Trying to add them after contract signing may increase costs. The give and take in trying to achieve consistent, high performance often tells you how much the 3PL wants your business.
- Establish a monthly management meeting and review performance. Even though the two organizations talk many times a day, they may not be on the same page as to the quality and cost of the service. Sometimes when problems become severe, we find the 3PL believing it was doing a good job and the user management feels otherwise. Set up brief monthly meetings including senior management of the two organizations to review performance. It’s the best way to stay on track.
- If all else fails, begin the selection process for another 3PL. This should be the last resort considering the expense and disruption involved in making a move or reverting to an internal fulfillment model.
Using a 3PL is a good alternative to internal fulfillment for many companies. Agree beforehand on the measures of customer service as well as the SLAs and review monthly to keep service and performance high.
Brian Barry is President of F. Curtis Barry & Company