A recent article in Logistics Quarterly noted that 2/3 of the revenues from North American third party logistics companies are dominated by Fortune 500 companies. As logistics outsourcing has become more common and the solutions that 3PLs provide more effective, the world’s largest companies are turning to trusted logistics companies to fine tune their supply chain and find and fix inefficiencies.

When looking at the most utilized supply chain management services by companies outsourcing logistics here are the most used logistics services broken down by industry for companies in the Fortune 500:

• Transportation management and value added logistics services are the primary services purchased by automotive companies.

• Transportation management and warehousing are the leading services for the food and grocery, industrial, and retail companies.

• Warehousing is the most purchased service for technology, healthcare and consumer goods companies.

Today the Georgia Institute of Technology and Capgemini released the results of their 10th Annual Third Party Logistics Study.

The most surprising information that came out of the report is that for the first time in the survey’s ten year history, price has overtaken value-added services becoming the most important attribute in selecting a 3PL provider.

I see these results as a disturbing trend and a very misguided way to go into the 3PL selection process. While there is more pressure than ever before for companies to run lean supply chains, I think that when dealing with the third party logistics industry going with the lowest cost provider is almost always going to come back to bite you in the ass.

You can find logistics services out there for rock bottom prices. That is a fact. And I don’t want to be cliche about it but there really is alot of truth to the old adage, “You get what you pay for.” Sure you’re paying a much lower per pallet and handling charge, but when your supply chain is plagued with missed shipments, poorly picked orders, and your logistics provider’s technology offerings amount to counting your inventory with an abacus did you really save anything?

link: 10th Annual Third Party Logistics Survey

As a quick refresher, Inventory Management can be defined as:

A process in which a retailer, or manufacturer seeks to acquire and maintain a proper product assortment while ordering, shipping, handling, and related costs are kept in check. (Prentice Hall)

This is and will always be the challenge of managing your company’s supply chain. How do you balance between efficiently getting products to your customers and running the increasingly important holy grail of logistics; “ the lean supply chain?”

Herein lies the challenge that companies try to overcome every day, month and year. Controlling stock levels in the warehouse to reach an equilibrium between the need for product availability and the need for minimizing stock holding, handling, ordering, and shipping costs.

If your company’s operations group is finding it increasingly difficult to maintain this balance it may be of interest to explore the option of outsourcing the management of your company’s inventory to a third party logistics provider.

A 3PL can quickly have you up and running with the systems and processes to help you identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status.

Using techniques such as ABC analysis, lot tracking, cycle counting and using the latest in inventory management technologies, third party logistics companies provide clients with a strong visibility of their supply chain enabling them to more effectively find a good balance.

If your company already has an exceptional operations group to maintain this balance then maybe a 3PL may not be the answer. But it is always good to keep your options open and never stop exploring the new opportunities and technologies that are emerging in the logistics industry.

There is an excellent article regarding some of the thought processes logistics decision makers go through when selecting and maintaining a relationship with its third party logistics provider in this months issue of Material Handling and Logistics entitled “The Pros and Cons of 3PLs” by Helen Richardson.

I think the best take away from the article is that the third party logistics industry is continuing to progress and evolve and that 3PLs are continuingto expand their offerings and excel at optimizing their customer’s supply chain’s as a result.

In the article a handful of Logistics professionals point out some of the usual tips when entering a relationship with a logistics company such as having clear expectations, open communication both internally and with your 3PL, and measure performance in order to ensure continual improvement. Overall I think it is definitely worth a read for anyone in the beginning stages of oursourcing their logistics function to a third party provider.

When choosing a third party logistics provider more and more companies are beginning to award 3PLs for continuous operational improvement. By using a “pay for measured performance” strategy with your provider you will ensure that the management of your company’s supply chain will get incrementally better as the relationship with your 3PL grows.

Companies that don’t reward their logistics company with incentives for performance improvements will over time begin to notice operational stagnation as well as diminished value of service provided. This typically happens when contract pricing is fixed at one rate over an extended period of time.

Like anything else in business if you give your provider incentive to keep challenging themselves with your account and continue to create new opportunities for operational efficiency you will be much more satisfied with your service level and will have a much stronger partnership with your 3PL.

Now this isn’t to say that if you don’t move to a “incentive based” program you won’t receive excellent service, but it is definitely a proven method not only in third party logistics but in business in general.

There are many advantages to outsourcing the management of your supply chain to a logistics company, but it is important to do your homework before entering into a partnership with your selected 3PL provider.

Identify what you are trying to achieve and establish goals.
Before entering into a relationship with a third party logistics provider map out what you are trying to accomplish and what you are going to expect from a 3PL. Using this information will aid you in finding a better match that more effectively fits your company. Some of these criteria include: customer service, technology offerings, inventory management practices, facility and staff size, and where your company will fit in with a provider’s other clients.

Develop an Implementation Plan
In order to ensure a smooth transition moving from your current operations to your selected logistics company it is essential to put together an implementation plan. Establishing requirements for service and developing performance metrics for assessment of your 3PL are initial recommended ways for starting account implementation. It is also important to establish strong open communication both internally within your operations group and with key contacts at your logistics provider’s warehouse facility.

Evaluate and Measure 3PL Performance
Especially when beginning a relationship with a 3PL it is important to meet regularly to discuss your distribution program. Upon initial startup everything will not always run as smoothly as you might expect. It is important to work with your provider to get off the ground with a solid program and work to iron out any initial kinks you may come across. Once you are up and running assess your provider using performance metrics to ensure that you are receiving optimal supply chain coverage.