How to Select a 3PL

June 13, 2009
Look for a company that can help you optimize your supply chain network.

Before selecting a third-party logistics provider (3PL), Marc Tanowitz, principal with Pace Harmon, an outsourcing advisory services firm, suggests that manufacturers consider these five fundamentals:

Know Your Demand

Understanding how materials flow through a supply chain is key to properly defining supply chain requirements. Collect detailed historical data to document the costs, units, frequencies and modes utilized as raw materials are converted to sellable units, as it is critical to synchronize planning, material requirements planning (MRP), material delivery, conversion to finished goods and outbound product movement. Modeling the past, with appropriate normalization to accommodate projected future changes, will help manufacturers understand the cost-impacting decisions that drive supply chain requirements and identify which components to outsource or retain.

Master (and Own) the Forecast

Developing the demand model described above will typically require input and validation from a variety of stakeholders, including procurement, manufacturing, distribution and commercial. Participation from these stakeholders is critical to establishing an accurate forecast and articulating key constraints, and ultimately can drive the success of the transaction, as the provider's ability to meet a company's needs and targeted cost structure will be largely dependent on the accuracy of the forecast. An inaccurate forecast likely will result in either excess capacity (and cost) or constrained capacity (and lost sales), with the implications becoming more pronounced as forecast accuracy decreases. Furthermore, stakeholder understanding of the supply chain performance dependencies is necessary to ensure valid root-cause analysis and issue resolution in an outsourced environment.

Demand Accountability

Supply chain costs -- including transportation, warehousing, handling/labor, working capital and obsolescence -- are heavily impacted by business leaders' and stakeholders' decisions. Supply chain leaders may determine where inventory is stored, how much warehouse space to lease/own, or specific transportation carriers and modes, but directives such as customer fulfillment rates and order-to-delivery time drive stocking location decisions, inventory levels and transportation carrier selections. While 3PL providers must be held accountable for optimizing costs within their span of control, internal stakeholders also must take responsibility for the cost implications of their decisions, many of which may limit a 3PL's ability to truly optimize.

Set Clear and Fair Expectations

A 3PL can improve many aspects of a company's supply chain, but likely will focus on the objectives articulated by its client and reasonably within its control. Set clear objectives to drive provider behavior, such as specific cost savings or reporting, escalation and explanation. Engage the 3PL in discussions prior to finalizing objectives, as its experience and input can provide better visibility into the tradeoffs of supply chain decisions.

Measure Business Impact

An outsourced supply chain should provide some combination of increased supply chain effectiveness, reduced cost and overall flexibility. These results can be measured by looking at end-to-end key performance indicators such as inventory turn rates, total cost per unit sold and customer satisfaction.

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