The Key Factors to Consider When Choosing Third Party Logistics Provider

Written by Subramanian Venkatesh, MSIPMM

The Key Factors to Consider When Choosing Third Party Logistics Provider

Written by Subramanian Venkatesh, MSIPMM

by Subramanian Venkatesh, MSIPMM

Choosing the right third-party logistics (3PL) provider can be challenging. In today’s business environment, the sector is becoming increasingly innovative and fast-paced, and thus the challenge of finding a perfect match is harder than ever before.

When it comes to efficiency and cost-effectiveness in road transportation management it is absolutely crucial that a company works with a trustworthy 3PL. Understanding the potential value of a 3PL early in the process is crucial to saving money and providing great service.

Roles of a Third-Party Logistics (3PL) Provider

A 3PL, also sometimes known as a TPL, is a third-party logistics provider. A 3PL helps an organization by providing expertise and best practices that can effectively integrate into its existing supply chain.
3PLs can specialize in various logistical areas and geographic regions. The diagram below shows the various areas provided by 3PL.

Various areas provided by 3PL

The diagram above shows the various areas provided by 3PL.

Selecting the Right 3PL

Choosing a 3PL can be challenging because there are so many factors involved in making sure that a company selects the right one before beginning to work together. Hard data should be the deciding factor in any new 3PL relationship. Any company that plans to provide freight services should be able to indicate the specific ways in which the client company stands to save money.

Before searching for a new 3PL provider, a company must understand its own needs. The starting point is to gather the following information from these key areas:

1. Current freight logistics, supply chain, and costs, and an estimate of costs per mile and hundred weight.
2. Current freight accounting and audit performance.
3. A discussion of existing carrier relationships and improvements or extensions that could be made.

A key point is to understand what is expected in a logistics service level agreement and the key performance indicators.

The Key Factor of Proven Track Record

Good 3PL providers get the job done. But the best execute it in the most effective way possible, be that through cost-savings or time-to-market improvements. The industry referrals for your chosen provider should go above-and-beyond your expectations.

Their current clients should be singing their praises and raving about the times that they have gone that extra mile and reacted effectively to unexpected changes. Their existing client-base will speak volumes. If your chosen supplier has had clients that have been loyal to them for years, you know they must be doing something right.
Further indication of a quality 3PL are its affiliates. An organisation that takes the time to assure high quality practices will be recognised and acknowledged for it.

The Key Factor of Scalability and Flexibility

Companies need to decide whether they are engaging a 3PL provider in order to expand, or that they are changing their current providers in order to become more efficient. Either way, one of the most important things about choosing a 3PL provider should be its ability to support a company’s growth plans.

When a company’s business has grown and requirements have changed, it will want a provider who has the ability to meet its needs in an efficient and cost-effective way. The company will need a supplier that will not only be able to cope with increased demand, but also with the inevitable changes that come with growth.

The Key Factor of IT Capability and Integration

3PL companies are measured on the efficiencies that they can provide for their clients. Thus, a 3PL company that places innovation and technology at the forefront of its business is an indication of a strong contender. A leading 3PL will actively invest in the latest technologies and be able to provide both real-time data and feedback on all aspects of their clients’ operations.

Nearly all businesses are built on a foundation of data. A huge part of the distribution operations would be undertaken by the 3PL provider, but a company should be entitled to receive all the data surrounding the activities from the 3PL provider.

When evaluating potential providers, ask questions about which systems are used, how the data is fed back in a format that is accessible, how fast can the 3PL provider responds to a query and whether the 3PL provider has a dedicated systems team.

Movement of Goods via various Transportation Modes

The diagram above shows movement of goods via various transportation modes.

The Key Factor of a Bespoke Solution

The 3PL provider should not just offer a service but it should offer a solution, and one that is fully-tailored and unique to a company’s requirements. Every organisation is different and that is why it is important for a company to steer clear of any provider that offers a generic package.

The 3PL provider should be an extension of the company, providing the service that it needs in the most effective and efficient way possible. Solutions should be flexible and bespoke and as defined by the company.

A bespoke solution is about how far a 3PL provider will go to align its services with a company’s own requirements. But even if the offering is flexible, a company must ensure that it is the best solution. An effective way to evaluate this is to talk to the 3PL provider’s existing client-base. Ask about how the 3PL provider met their needs, from the placing an order, right down to the KPIs that the 3PL provider sends through at the end of each month.

The Key Factor of Communication Channels

Choosing a 3PL provider is a huge responsibility and communication channels need to be defined from the outset. The company is handing over a key operational part of the business to an outside supplier, so it is important to get it right from the start.

The 3PL provider must provide the resources and people to do the job effectively, and the philosophy of the 3PL provider must be ‘our people, your team’. The 3PL provider should be complimentary to the company’s business, which is an extension of the company’s operations and what it stand for.

Various Communication Channels

The diagram above shows the various Communication Channels.

The Key Factor of Strategic Location

There are two different considerations when evaluating location of the 3PL provider, and this is mainly determined by the target distribution area. If the headquarter of a company is located close to the 3PL provider but the distribution area is regional, it makes sense to choose a provider that is local.

The choice of a 3PL provider is as much about preparing for the future as it is about finding a ‘right-now’ solution. Where would be a strategic location for your provider to be in 5 or 10 years’ time?

The Key Factor of Added Value

Every business decision is ultimately driven by cost. Like any investment, the service received has to be efficient and the best solution for the company’s requirements. Now that is not to say that a company has to pay through the nose for outstanding service. Just ensure that the company defines everything that is important to the organisation, be it cost-savings or otherwise, and more importantly, which 3PL provider would be able to provide the best solution in the long run.

Conclusion

This article aims to identify the key steps to be taken when choosing an effective third party logistics provider. The use of a third party logistics provider can enable a company to have a competitive advantage in today’s business world. Many practitioners and researchers have presented the advantages of having a 3PL provider. Building a closeness and long-term relationships between buyers and 3PL providers can be a critical success factor to create the total integrated logistics system.


References:

Banomyong, R. (2005). The impact of port and trade security initiatives on maritime supply-chain management. Maritime Policy & Management, 32(1), 3-13.

Bhatnagar, R., Sohal, A. S., & Millen, R. (1999). Third party logistics services: A Singapore perspective. International Journal of Physical Distribution & Logistics Management, 29(9), 569-587.

Dapiran, P., Lieb, R., Millen, R., & Sohal, A. (1996). Third party logistics service usage by large Australian firms. International Journal of Physical Distribution & Logistics Management, 26(10), 36-45.

Journal of Business Logistics, 17(1), 305-320. Marasco, A. (2008). Third-party logistics: A literature review. International Journal of Production Economics, 113, 127-147.

Lieb, R., & Randall, H. (1996). A comparison of the use of third party logistics services by large American manfacturers, 1991, 1994, and 1996.

http://cerasis. com/2015/03/02/selecting-a-3pl/

https://www.bigcommerce.com/ecommerce-answers/what-is-a-3pl-third-party-logistics-and-ecommerce/

https://www.linkedin.com/pulse/7-things-consider-when-choosing-your-third-party-logistics-leigh-?articleId=6158202805510242304#comments-6158202805510242304&trk=prof-post

https://www.linkedin.com/pulse/7-things-consider-when-choosing-your-third-party-logistics-leigh-?trk=mp-reader-card

https://www.bigcommerce.com/blog/author/natekristy/

About the Author: Subramanian Venkatesh has substantive years of experience in the Oil & Gas industry, and has developed a special interest in transportation logistics and delivery solutions. He is a member of the Singapore Institute of Purchasing and Materials Management (MSIPMM).

He is currently completing a course on Diploma in Logistics Management (DLM) at SIPMM Academy.

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