Picking the third party logistics (3PL) partner that will be right for your business can be a daunting process. Whether you are outsourcing for the first time or looking for an alternative supplier of logistics services to the company that you already use, there are many things to consider, writes William Walker.
Does the company have a proven track record? Is its geographic location right for you? Will the 3PL offer a scalable service capable of growing with your business’s needs? Does it offer the range of services – warehousing, packaging, transportation and distribution – you are looking for? And so on, and so on.
Then, of course, there’s the financial aspect.
With overcapacity in the logistics market many service providers are adopting aggressive pricing policies, so, if cost is your key driver, finding your ‘ideal’ partner should not be too difficult.
But, in my experience, anyone that buys an outsourced supply chain solution on price alone, is unlikely to feel the same way about their chosen 3PL six months into the contract as they did when they were first wooed by them!
So, while budgetary considerations should never be the overriding concern when vetting 3PLs, the pricing structure of any outsourced e-fulfilment agreement is clearly an important consideration.
There are a number of different approaches that logistics companies take when costing their services and picking the method most suited to your needs will go a long way to ensuring that you get the supply chain benefits you are looking for at the most cost-efficient rate.
Essentially, logistics companies charge for the work they undertake in one of three ways – commonly referred to as ‘transactional’, ‘cost plus’ or ‘hourly rate’.
The ‘transactional’ charging method is, perhaps, the most popular – particularly among online retailers. In simple terms, with a transaction-based charging framework, the client pays a pre-agreed fee for the pallets stored and, beyond that, only incurs costs as and when the 3PL processes an order.
In other words, if you’re not busy, you’re not paying much.
‘Transactional’ agreements are popular with companies who experience spikes as well as sluggish periods in their order patterns.
Under the terms of a ‘cost plus’ or ‘open book’ approach as it is sometimes known, the logistics company undertakes to store, pick, pack and dispatch (along with anything else that is required) its client’s products at cost price before adding a ‘management fee’ on top.
The 3PL should share information about all of the overheads incurred in running a ‘cost plus’ contract with its client openly and honestly. The management fee – usually worked out as a percentage of the costs – is added on a monthly basis.
Clients often find this way of working reassuring as they are able to see precisely how much profit the 3PL is making out of the contract.
‘Cost plus’ agreements often work best in situations where the client company offers a wide range of products that require different processing procedures and, therefore, are hard to accurately budget for using the ‘transactional’ charging method.
A fulfillment solution based around an ‘hourly-rate’ pricing proposition could be described as a mixture between the ‘transactional’ and ‘cost plus’ methods.
The client company is assigned a fixed amount of storage space within the 3PL’s warehouse at an agreed rate and, in addition, is charged on the amount of man-hours the 3PL has to dedicate to processing orders. The client is only billed for labour when the 3PL needs workers to service the account, so the company knows what its fixed storage costs will be and, beyond this, is only invoiced when work that has to be done.
Regardless of which charging system is chosen, if the contract is to be successful, the 3PL must be willing to take a partnership approach to its client relationship. It is particularly important that the client is satisfied that the workers for whom it is paying, are productive and working at optimum efficiency.
At Walker Logistics we employ labour-tracking software to ensure that our warehouse staff are performing to the levels expected of them throughout their shift. RF data capture scanners allow us to record when each employee starts and finishes a task – a facility which enables us to be sure that no one is under-delivering.
We are able to share the information with our clients so they have the peace of mind of knowing that the order processing time for which we are charging them is entirely fair and reasonable.
So, while price should not be the primary concern when reviewing a 3PL’s tender, no one would be so naïve as to suggest that it is not a significant influencing factor and your prospective 3PL partner should be able to offer advice and guidance on the type of charging mechanism that best suits your company’s fulfillment needs.
By avoiding operators that attempt to shoehorn you into a certain type of fee structure you are, in my experience, more likely to find a logistics partner that will provide the service you need at a cost you are comfortable with and can budget for.
William Walker is sales and marketing director of Walker Logistics, the Berkshire-based specialist supply chain services operator
