How to Select a Third Party Logistics Provider

May 11, 2008
A five-step process for getting a good start on a successful 3PL relationship.

Third-party logistics providers, or 3PLs, which originated on the simple premise of allowing manufacturers the opportunity to let somebody else manage their transportation or warehousing, have become a $122 billion business in the United States, with an overall growth rate estimated at three times the growth of the U.S. gross domestic product. What's more, according to research firm Armstrong & Associates, at current growth rates the U.S. 3PL market will reach $150 billion by 2010. The worldwide market, meanwhile, currently stands at $487 billion, thanks largely to the rapid expansion of Asian economies, particularly China and India.

Some manufacturing verticals are already heavily dependent on 3PLs. For instance, each of the Detroit Three automakers -- General Motors, Ford Motor and Chrysler -- use more than 30 third-party logistics providers. The utilization of 3PLs, according to Armstrong & Associates, is driven by companies outsourcing to focus on their core competencies, a need for supply chain information technology solutions, and globalization.

However, "the decision to outsource some or all of your logistics execution operations is not one to take lightly," cautions John Blanchard, team leader of transportation services with supply chain consulting firm TranSystems/ESYNC. "The logistics landscape is littered with failed relationships between 3PLs and manufacturing companies. In many cases, the seeds for these failed ventures are sown early in the process. Outsourcing may not even be a legitimate option for many organizations, but for those who think it may be, beginning the process with your eyes wide open is the first key to success."

He offers the following steps that can make this process more successful:

1. Outline areas of opportunity.

One reason to outsource is to gain the ability to enter new markets or adapt to competitive forces without building out costly distribution infrastructure, Blanchard notes. "Establish a team to look at the current and future requirements of your business and critically assess your ability to meet those needs internally. This team should be comprised of key members from both your logistics organization and other areas like marketing and customer service. These additional departments can provide insight into future growth projections and shortcomings in the existing process and infrastructure."

2. Critically assess your strengths and weaknesses.

Determining what you're good at, and more importantly, those areas where your company needs the most help, will enable you to find a complimentary partner, Blanchard says. Keep in mind, though, that potential partners will have their own distinct strengths and weaknesses. "Some 3PLs are better at warehousing than transportation and vice versa. Others are great at managing the import process, but have less to offer in functional areas like inventory and order management. Merging your strengths with those of your partners will help ensure a robust result."

3. Decide what is on the table.

Once you've identified opportunities for partnering with a 3PL, determine which of these you are actually willing to pursue. "Logistics functions like warehousing and transportation influence how your customers view your ability to execute," Blanchard points out. "The decision to include some or all of these functions in your outsourcing project should be informed by a clear understanding of your company's willingness to turn over mission critical processes to a logistics partner." The success of your outsourcing project, he observes, will depend on how comfortable you are with the idea of a third party operating on your behalf.

4. Identify a shortlist of providers that meet your requirements.

At this point in the process, you should consider initiating a logistics network optimization study to "identify optimal locations for import or export gateways, assembly, merge-in-transit and other specific operations," Blanchard suggests. "Your geographic needs may require a nationwide or global network or be more focused on specific regions. Create and distribute a concise request for information (RFI) designed to ask potential partners about their capabilities. From this, develop a list of providers that have experience in your industry and markets, as this process will reduce the number of potential partners quickly." Then, examine the network infrastructure of the remaining companies and compare your requirements with the capabilities of potential providers. It's also important that you assess the technological infrastructure of potential partners, especially as it applies to such applications as warehouse management systems, order management systems or transportation management systems.

5. Consider the human element carefully.

"Cultivating relationships between key personnel on both sides throughout the outsourcing process is critical," Blanchard notes. "Ensuring not only a fit between corporate cultures, but individuals will contribute greatly to success. This is especially important during implementation and ongoing operations, but if you wait until this stage to identify issues, it will be too late. Remember you will be trusting your chosen partner with your livelihood."

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