3PL Selection: Know What You Want Before You Buy

By Gary Weiss

So you've committed to implementing a third-party logistics (3PL) solution to manage parts in your service organization. Now what? Before delving into the laundry list of where you need to be and what inventory to allocate, step back and view this question from a macro level. You are not just implementing a parts management and deployment solution; you are about to radically change the business practices of your service organization.

This is a great opportunity to take a hard look at your current business practices and question what you do and don't like about the way things work now. More importantly, ask yourself why you do or don't like the way things work. Hiring another company to do the same thing that's being done internally today may offer some benefits, such as the capability to scale and a more variable cost model. However, you might miss a golden opportunity to strategically redefine your organization.

Establishing a Vision

To capitalize on this opportunity, third-party logistics must become part of your long-term strategic vision as opposed to simply being viewed as a tactical maneuver. Today's 3PLs offer a range of services that may reduce your organization's administrative requirements. By taking over "back room" activities across a global footprint, third-party logistics providers allow minimal staff to manage only the interface with the service providers as opposed to personally managing the warehouses.

In addition, 3PL suppliers offer IT systems that specialize in managing the services they provide, benefiting from an economy of scale that few companies can attain themselves. They are a resource to manage call flows, returns processes, pipeline management, warranty management, inventory utilization, service-level analysis and many other services that were previously considered to be internal functions only.

However, before you engage with a 3PL, ask yourself what your objectives are. It's gut check time.

  • Do you know what your service organization does best and where you want to focus your internal resources?
  • What areas of your service logistics organization are "off the table" and will remain internal?
  • Which systemic tools are absolute requirements and must be utilized or interfaced with?
  • Can management effectively run your business using data from multiple sources, including both your systems and the 3PL's?
  • Do you and your company have a strategic objective, or are you both just looking for someone else to assume your day-to-day headaches?
  • What are your personal and the company's commitments to implementing this solution as part of a long-term objective?

Other questions are less philosophical but just as important for determining how ready your organization actually is for this change. These may include:

  • Is your company receptive to change?
  • How can you ensure buy-in from executive peers and field staff?
  • Which systemic tools are absolute requirements and must be utilized or interfaced with?
  • Do cultural issues need to be factored in?
  • Will conflicting priorities or projects require your company to juggle resources during the implementation?
  • Will the commitment to implement this program spread beyond the departments that own the parts deployment responsibility?
  • Will these changes be utilized to differentiate your company from the competition?

Selecting a Partner

Now that you've defined your strategic vision and selected those parts of your business that you will shift to a third-party logistics provider, you are ready to begin the selection process.

Before issuing a request for information or quote (RFI or RFQ), invite potential vendors in for a discussion of what you're looking to accomplish, the scope of what you envision you'll need and your timeframe. This will give you an excellent opportunity to gain a sense of the kinds of companies and people with which you are most comfortable. You will see who offers ideas and who can become an enabler of your process as opposed to offering a preset or canned solution. You can start to assess which company you believe will remain in contact with you after the initial project has been implemented.

Talk to references. Clients and partners are often very willing to share their experiences in vendor selection and why they chose the vendor in question. Then consider how the references' selection criteria compare to your own. If this sounds like a dating service, it's because the reality is that we all want to do business with people with whom we feel comfortable and we trust, just as with any long-term relationship that we form.

Once you define your requirements (often with the help of a 3PL) you can research and start to analyze pricing components. Here, it is critical to consider your long-term objectives. Improved customer service, inventory optimization, ability to interface with inventory planning packages, global presence and improved productivity all come at a price. You may view this price differently if you apply activity-based costing methods and realize that the premium you pay is only incurred on an as-needed basis. And, as with most things in life, you often will get what you pay for, so do your due diligence and determine whether the company is financially stable, their tools are accessible and their personnel are and will remain available to you when and where you need them.

Is bigger always better when it comes to selecting a 3PL partner? Some cite the saying that "no one gets fired for picking the best-known name in the business." While this may be true, people do get fired when programs don't deliver the expected results. The trick is to ensure that the 3PL has the "bandwidth" — the full scope of resources — to support your needs in the manner expected, while ensuring that you will be in a position to gain and keep their attention. How do you stack up against their other clients? In addition, your business needs will evolve, and as they do, your 3PL supplier must be in a position to support that growth. Remember: The contract is simply the beginning of the business relationship. This is an organic relationship that must allow for growth, and the contract must serve as the baseline for the expected service level. A third-party logistics provider can be a great source of ongoing value, but a 3PL is not fulfilling its responsibilities if it does not continually bring new value into the relationship.

Now that you have established the criteria most critical to you, outlined a program of deliverables that you can afford, and involved your staff and all the relevant departments in the process so that everyone has a shared sense of ownership, it's time to trust your gut and pick a partner.

Importantly, a reputable 3PL will work with you from the whiteboard stage through implementation and beyond, making an investment when it engages with you in a new relationship. Significant time is spent upfront to design the exact solution, map out and evaluate strategies, model anticipated expenses, and manage the implementation while providing ongoing and simultaneous support/development capacity. Quarterly business reviews and other regular meetings are part of the core services that are to be expected from your 3PL.

The fact is that it is in the best interest of the 3PL to "get it right" the first time and to become a true extension of your service organization. Many expenses incurred by the 3PL should be amortized over a period of time, and this will often apply to your company as well. A long-term relationship will bring increased returns; while the cost of making changes after the fact is significant in terms of money and internal credibility. All parties have a vested interest in making the relationship work, so let the teamwork begin.

About the Author: Gary Weiss is executive vice president of global operations at Choice Logistics, a third-party logistics organization specializing in the design and implementation of mission critical spare parts supply solutions. More information at www.choicelogistics.com.

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