Should We Outsource Distribution?

Outsourcing distribution and order fulfilment activities is a major decision. Third-party logistics firms (3PLs) provide many advantages, but their performance will directly and significantly impact your customers’ experience. It is imperative to find a 3PL who will approach your operations with the same level of care as you do.

For companies looking to start or change their supply chains, 3PLs can provide benefits such as:

At the same time, using a 3PL means you do not directly control your operations and may result in:

Does it make sense for you to outsource storage and distribution? If so, how do you ensure you select a suitable partner? This page will cover:

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Are You a Good Candidate for a 3PL?

1. “We’re a start-up”

As a young organization, you may not have the operational need nor the time to manage your own distribution center. Take, for example, a home goods start up that had raised significant capital through a Kickstarter campaign. The company had high initial demand and the CEO knew that managing inbound shipping containers, clearing customs and running distribution to thousands of individual online customers was not something the company could initially handle. LIDD assisted to quickly find a 3PL that allowed the startup to focus on quick and effective execution, leaving precious financial and human capital focused on growing future sales.

2. “We could benefit from being in a multi-client facility”

In addition to cutting transportation costs, many firms can achieve economies of scale from the pooling of multiple clients in one facility. Demand fluctuations and seasonality may make it inefficient for you to operate independently. A 3PL can combine the demands of multiple businesses – each with its own peaks and valleys – to attain higher labour and capital utilization rates. The accompanying savings should be passed onto the 3PL’s customers. This is contingent on 3PL performance however; if a facility is poorly designed or managed, inefficiencies and higher costs may be passed onto you.

3. “We’re an established company, but want to expand our geography or services”

A recent client, who has been in the dry goods distribution business for the last 50 years, turned to us when entering the frozen food business for the first time. While experienced in the distribution of ambient temperature products, the company sought a partner in the frozen world for the first few years of their new endeavor. A 3PL provider experienced with frozen operations could provide the right facilities, support and industry know-how.

The same concept applies when entering a new geographic region – a local partner can help navigate local regulations and certifications. Most 3PLs can also procure better transportation rates, leveraging longstanding carrier relationships and exponentially larger shipment volumes over that of a single operator.

4. “We have seasonal or unexpected peaks in demand”

Many companies face disproportionate Thanksgiving or Christmas peaks but often lack the financial justification for additional infrastructure. Instead of building additional in-house capacity, you may be able to service your operations out of a smaller facility, engaging a 3PL for a few peak weeks or months. You may pay a premium on space or labour, but it can be less expensive than sizing your infrastructure to a few peak weeks of the year.

Sometimes peaks are unexpected and a 3PL can be used as an emergency “release valve” to soak up extra demand. For example, when Air Miles announced the expiry of some of their points to their member base of 11 million Canadian households in 2016, many of them scrambled to redeem rewards as the December expiration date neared. The operator of the program was hit with a huge, unanticipated increase in orders to pick and ship. They ended up leaning heavily on their existing 3PL partner and engaging additional external space to absorb the increased inventory and larger picking operation.

How Do We Pick a 3PL?

If you decide to work with a 3PL, you’ll need to pick the ideal partner to meet your business needs. Here’s how to think through the marketplace and find the right match for you.

1. Know the Market

There are different kinds of 3PLs serving different customer segments. One main split is between large national or multi-national companies and regional firms.

A. NATIONALS OR MULTI-NATIONALS

B. REGIONAL PLAYER

2. Identify Potential Partners

Identify potential providers and reach out. Cast the net wide, then narrow down your options using key factors you cannot compromise on. What’s critical for any given company can vary widely, however first round questions should focus on:

A. GEOGRAPHY

Pick firms with locations that align with your distribution needs and future plans. These may or may not be close to your current location.

B. CAPABILITIES

Can a firm complete the basic tasks you require? If you are looking for ambient temperature “each” or case picking, there are a lot of 3PLs that could meet your needs. If you have specialized requirements for your operations – such as cold chain capabilities for each picking, complex kitting, or other value-added services – this will limit the number of potential partners

C. REPUTATION

Speak to people in your network and find firms that have good reputations.

3. Sign Non-Disclosure Agreements

It certainly isn’t required, but it’s very common for companies to ask 3PLs to sign non-disclosure agreements before commencing serious discussions. Get started on this early so that the right documents are signed before it’s time to dive into the details.

4. Prepare a Request for Proposal

After your initial screening, prepare and issue a Request for Proposal (RFP) document to a set of potential partners. Approaching this formally will force you to organize your thoughts on exactly what your operation requires. You’ll put your best foot forward to potential partners and get a chance to see how eager they are for your business. How both parties act in the selection process is indicative of how they’ll behave once a partnership begins.

The RFP has four main components:

A. Overview of the selection process
B. Explanation of your business and needs
C. Questions for the potential 3PL partners
D. Pricing

A. OVERVIEW OF THE SELECTION PROCESS

Explain how you plan to run the selection process. Key elements include evaluation criteria and a timeline highlighting the response due date, provider selection date and when you expect to begin integration with a new partner.

B. EXPLAIN YOUR BUSINESS NEEDS

Tell potential partners about your organization and exactly which services you are looking to hire. It is important to explain your operation accurately in language and numbers that 3PLs can understand. They will use this information to model labour & space requirements and, by extension, develop their pricing. Describe the following:

C. QUESTIONS TO ASK A 3PL

Now, it’s time for the 3PL to shine. Get to know your potential partners by asking qualitative and quantitative questions. Ensure discussions involve the people you’ll be working with – the efforts and expertise of the sales team may differ from those on the floor.

Begin with the basics:

Get details about the facility or facilities that you would be occupying and the management in charge:

You might wonder why you should care about how the 3PL runs their operations internally. If the set-up of their warehouse is not suited to your operations, e.g., your business requires split case pick in a mostly pallet pick facility, they are going to be wildly unproductive when picking your orders.

Someone has to pay for this inefficiency, and it will be your business getting charged higher rates to ensure they can sustain a profit.

D. COSTS

Now to what you really care about: how much is this going to cost?

Pricing questions should cover several areas:

Most firms adhere to one of the following pricing methodologies:

Transportation rates vary by 3PL and are based on each provider’s own total volume and negotiated rates. Some 3PLs add a handling fee as a percentage of transportation costs; others treat transportation as a pass-through. A 3PL can beat down their warehousing and picking costs, but if they can’t secure a great rate with carriers, it will be difficult to remain competitive.

When you ask for pricing you can either dictate which methodology you want or allow potential partners to express their own pricing methods. Regardless, model the responses on an annualized volume to compare apples to apples.

5. Assess the Responses

Review and evaluate the submissions. If a 3PL’s responses are vague or poorly written, consider how this attitude may carry over into managing your operations. Don’t hesitate to reach out if you need any answers clarified – exercising caution at this stage can prevent future difficulties and disruptions. Narrow down your list to two or three finalists to visit.

6. Look Under the Hood

For your top candidates, set aside half a day to walk through their facility. This will give you the opportunity to see them in action, clarify aspects of their proposal and view their software & reporting capabilities. You will also have a chance to meet the people who will be most involved with your account. Good partnerships are built on the foundation of a solid relationship: Is the 3PL willing to make a leap of faith with you where others would be cautious? Do you get along well with management? Are your values aligned?

Ask for references from current clients similar in scope and size to your business and call them. What has their experience been like so far? How long have they been with this 3PL? What do they wish was different?

7. Get Hitched

Now that you have a detailed understanding of each finalist, select the best partner for your business. Negotiate a contract and sign all necessary documentation to begin integration. Your team should be ready to work actively with a project manager from the 3PL throughout onboarding.

On Boarding

1. Project Plan

With help from the project manager, create an exhaustive tasks list detailing:

Once all tasks and deliverables have been organized into a formal project plan, you will need to integrate your operations.

2. Operations Set-Up

Communicate all your activities clearly and validate necessary features. Use process flows to describe all normal operations, exceptions, data requirements, technology interactions and specific configurations or modifications. Ask the 3PL for details on:

3. Integration and Training

Your team and the project manager will oversee specific deliverables identified in the project plan and procure process-specific test cases (i.e. testing the efficiency of picking and or exception handling). Have both parties approve the test cases and begin training.

Start by training super-users (managers). Ensure super-users understand processes in detail as they will be responsible for training the rest of the team. Schedule frequent training sessions and create training manuals as reference points. Once all tasks and training have been completed, your 3PL is ready to start operations.

Final Thoughts

You’ve picked your ideal partner, negotiated a solid contract, completed integration and are running operations smoothly. While it may seem like your distribution is set, fight the temptation to set it on cruise control.

This relationship is a two-way street; it must be mutually beneficial, or it cannot be sustainable. However, the onus is on you, the client, to prioritize your interests and continuously monitor the 3PL’s performance.

You’ve invested significant time and effort to ensure a great experience for your customers. Your 3PL acts an extension of your business and should be held to the same standard you hold yourself to – don’t accept any less.


About the Author

Jasmine Joseph, Project Manager
Jasmine works with operational data to drive strategic recommendations and improve warehouse and/or network operations for companies in retail, manufacturing and distribution sectors. She has successfully managed projects that help companies grow their business and deliver mandates on time. Jasmine holds a degree in Mechanical Engineering from University of Toronto.


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