February 2010 | Commentary | Viewpoint

Building Better 3PL Relationships

Tags: 3PL, Partnership

Chip Smith is president, CS Advisory Group., 612-868-6536

Third-party logistics (3PL) providers are tremendously popular with shippers for surface transportation in North America. Freight brokers, forwarders, and intermodal marketing companies offer capacity, expertise, technology, and buying power on a scale no shipper can replicate on its own.

Not all 3PLs are the same, however. Here are a few tips to help you get the most out of yours.

  • Make sure your 3PL has the legal authority to provide the services it is offering. Federal law requires any company arranging motor carrier transportation for compensation to either have a property broker license from the Federal Motor Carrier Safety Administration and a $10,000 surety bond or be registered with that agency as a domestic freight forwarder. This rule applies to warehousing companies and motor carriers that broker shipments to other carriers when short on equipment. If a claim or accident occurs, don't assume the insurance covering their business assets will cover a brokered shipment.
  • Ask your 3PL how it qualifies carriers. 3PLs utilize other companies' assets to serve you, and you entrust them to select the appropriate carriers to move your freight. At a minimum, they should verify operating authority and insurance, and assess each carrier's safety rating. What process do they have to prevent unscrupulous carriers from re-brokering your freight without consent? Make sure they execute a written contract with each carrier that includes clauses to protect you.
  • Find out what technology tools the 3PL offers that could help you work smarter, faster, and more efficiently. Information is a 3PL's greatest asset, and many invest heavily in IT systems designed to streamline information flow and access. Most 3PLs offer online tools ranging from full logistics management outsource platforms to standalone tools for rating, optimization, tracing, and document retrieval. If you have special needs, some will even customize an application for you. Choosing the right 3PL can save you costly IT investments of your own.
  • Check out the 3PL's financial health. Run a credit report. Is the 3PL paying carriers on time? Does it have any judgments against it? If you're dealing with a broker, get a copy of its surety bond to verify it is current and offers adequate coverage. Many brokers now have bonds of $25,000, $50,000, or even $100,000. A certificate of insurance shows the 3PL's coverage for cargo, liability, and errors and omissions. Be aware of "follow form" cargo policies, which are subject to the exclusions and terms in the underlying carrier's insurance. If any red flags are raised, ask for an explanation.
  • Execute the correct type of 3PL contract. Many shippers mistakenly use a motor carrier contract with 3PLs. Unfortunately, these contracts include many clauses that are not enforceable with 3PLs and omit key protections. If you use 3PL services from asset-based providers, make sure your contract with them includes specific language addressing those services. Don't assume your relationship with the asset side of their business does.

3PLs are market makers and the natural product of a free market economy. They offer tremendous value—if you do your homework.