How to Evaluate a 3PL Partner
Shippers, carriers, and even small intermediaries increasingly rely on third-party logistics (3PL) service providers to manage non-core logistics and supply functions, access capacity, and tap technology capabilities. 3PLs create value by pushing the envelope and helping customers reduce costs through tactical improvements, and enhance overall supply chain performance with strategic business process enhancements.
Making the decision to work with a 3PL is often predicated by a need—transportation capacity and costs, seasonal warehousing, or global complexity, among others. But as outsourcing partnerships mature, customers need to routinely assess performance and set new goals.
Many 3PLs proactively demonstrate return on investment. It's in their best interest to expand the value proposition and grow the relationship. But it doesn't hurt for customers to ask where functional outsourcing can take their business.
Getting to the C.O.R.E.
Here are four factors companies should consider when assessing 3PL performance:
- Control. 3PLs generally control transportation and distribution capacity, directly or as a broker. They liaise on customers' behalf when contracting with carriers, forwarders, and other intermediaries. But customers need to exert control, as well.
One of the most common reasons 3PL partnerships fail is poorly defined expectations. Scope creep occurs when control is lax. Outsourcers need to assertively communicate objectives and concerns, and constantly benchmark key performance indicators (KPIs) that are most important to them—not their service provider.
A 3PL may be providing world-class service, but unless a customer measures that data and compares it with contractual or industry standards, it will never know.
- Optimization. One way 3PLs create value is by helping customers optimize existing transportation and logistics functions. They do so by collecting and distilling mass amounts of data to granular-level detail, analyzing it, and identifying anomalies and redundancies. They can then address specific process fixes—for example, steering customers toward establishing a core carrier group or enforcing inbound routing guide compliance among suppliers.
Or they may uncover strategic systemwide improvements upstream and downstream in the supply chain that turn problems into new opportunities to drive greater efficiency and economy. With so much change and variability in the supply chain, optimization is a recurring process. When pre-determined goals are met, new objectives should be created.
- Reporting. Reporting is the key to understanding and recognizing 3PL performance, good or bad. Knowing where goods are in real time is an important part of this process, and 3PLs should provide shipment visibility and process information.
Customers need to dictate which status reports are most critical to their needs so they can view performance as it relates to their terms, not the service provider's. Using the right metrics may help companies determine if they are striking the right balance between service and cost.
3PLs will collect, archive, and analyze historical reports to identify improvement areas, alert customers to real-time or recurring problems, and explore opportunities where they may be able to gain further efficiencies and economies.
- Execution. When it comes to execution, 3PLs should strive for continuous improvement—and customers should expect it. If a service provider is responsive to customer priorities—whether it's controlling specific KPIs, optimizing functions, or reporting data—and executes according to plan, there should be obvious gains in terms of customer service, efficiency, cost savings, and innovation. Then the evaluation process begins anew.