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How to Choose a 3PL Warehouse Provider

Given the complexity of the 3PL selection process, it is imperative to begin with a thoroughly planned strategy.

Q1 2022
As a business looking to outsource 3PL (third-party logistics) services, you’ve most likely encountered an overwhelming list of companies vying for your business. Because the sheer number of companies is so large, it is extremely difficult vetting the various options to determine which would be the best for your specific scenario. There are a multitude of factors that should be considered, from fulfillment pricing to reviews and experience to technology integrations and location. At the heart of the 3PL selection process is choosing a long-term partnership that meets your:
  • Specific service needs
  • Volume, product, and technology characteristics
  • Performance requirements
  • Location requirements
  • Customer service objectives
  • Cost and pricing conditions
Why “Getting It Right the First Time” Is so Critical with 3rd Party Logistics
Outsourced warehousing and logistics has become a vital component of omni-channel operations. With customer expectations at peak levels, even small hiccups in performance can lead to catastrophic customer service issues and loss of sales. Finding the right partner on the first pass will insulate your company from performance and service issues that could take place if the wrong 3PL partner is chosen. Furthermore, changing 3PLs during a firestorm of problems only compounds the issue — because moving from one partner to another is no small feat. Getting it right the first time not only avoids the pitfalls of poor performance but also reduces the chances of having to make a difficult change in the future.

Start by Identifying Your Business Objectives
Outsourced warehousing and logistics has become a vital component of omni-channel operations. The journey of 3PL selection, if done correctly, is a long and tedious process that requires a detail-oriented approach. To begin with, it is important to start with a high-level picture of your organizational goals and objectives. What business objectives is your organization looking to achieve by outsourcing? Some of the more common outsourced 3PL business objectives include:
  • Cost reductions
  • Increase performance
  • Scaled operations
  • Expansion into new sales channels
  • Improved shipping and transit times to customers
  • Penetration into new geographic markets
  • Reduced capital investments in facilities or technology
  • New product launches
Seasonal demand management
These objectives should be outlined clearly in your 3PL request for proposal (RFP), which can be reviewed by all potential 3PL candidates. Your RFP will be a guiding document for the 3PLs, outlining your objectives and goals, challenges, company details, scope of services needed, performance and selection criteria, pricing and cost format, and questions to be answered. Once your guiding principles have been determined, it’s time to explore the “meat and potatoes” of your RFP — the most important factors that you will use in considering 3PL options.

Creating Your 3PL RFP: The Most Important Considerations
Each business has differing needs for 3PL services. Some companies may require a 3PL that can handle small items and large numbers of SKUs sent to consumers directly, while other companies may have extremely large and bulky products that necessitate detailed kitting and retail compliance. But regardless of the unique characteristics and requirements needed, the same basic parameters can be used in outlining the specific requirements for a successful 3PL relationship. The main categories of requirements fall into these main segments:
  • Specific service needs
  • Volume, product, and technology characteristics
  • Performance requirements
  • Location requirements
  • Customer service objectives
  • Cost and pricing conditions
Your Specific Service Needs
While some 3PL warehouses are fully capable of a multitude of service offerings, most choose to specialize in specific niches to gain competitive synergies and advantages. The biggest differentiator is oftentimes the target “end customer” for each shipment — either business-to-consumer shipments (B2C) or business-to-business (B2B) shipments.

B2C fulfillment companies have extensive abilities to integrate with many different online shopping carts and online marketplaces in general, whereas B2B fulfillment services are geared toward fulfilling orders to small mom-and-pop specialty retailers, as well as complex EDI (Electronic Data Interchange) integrations with larger and big-box retailers. But it doesn’t end there — some 3PLs focus on general storage and “pallet in/pallet out” scenarios, while others specialize in highly targeted and nuanced projects, such as subscription box fulfillment, crowdfunded campaign fulfillment, or FBA (fulfillment by Amazon) prep and storage. Choosing a 3PL with specific service capabilities that match your needs is imperative.

Your Volume, Product, and Technology Characteristics

Detailing your company’s volume, product, and technology requirements is a key step in the selection process.

Volume characteristics address the size and scope of order volume, shipping volume, SKU counts, and storage space needed. Not only must you incorporate historical volumes and measures, but you must also project any future needs as well. Some 3PL warehouses will be a great fit based upon your current and future volume needs, while others can be automatically disqualified.

Product characteristics refer to the actual size, weight, and scope of the product itself. There is a wealth of different product types, and 3PLs may or may not specialize in your niche. Just a few examples of 3PL product specializations include apparel and accessories, chemicals and hazardous materials, pharmaceutical and medical and supplement products, food grade products, temperature-sensitive materials, and literature, books, and printed matter.

While some 3PL warehouses are fully capable of a multitude of service offerings, most choose to specialize in specific niches to gain competitive synergies and advantages. But the product itself isn’t the only factor in determining a proper fit — fulfillment warehouses may focus on light versus heavier products, and small versus larger items. At the end of the day, by specializing in specific areas and shipping higher volumes of those unique items, the 3PLs gain process efficiencies as well as leverage better picking and shipping rates, which can be passed onto your organization.

Like volume and product characteristics, 3PLs have differing focal points in terms of technology employed and integration capabilities. Each 3PL uses a warehouse management system (WMS) to track inventory, orders, and shipments. WMS technologies have differing competencies regarding customization and flexibility, as well as simple integrations with other technologies and online reporting mechanisms.

Knowing your volume, product, and technology characteristics will enable your company to seek out a one-for-one match that will translate into additional expertise and cost savings.

Your Performance Requirements
A 3PL warehouse can look great on paper, but without high performance and quality standards, you will be left with sizeable error rates and customer service issues. Therefore, finding a 3PL solution that has extensive experience, great reviews, thoroughly detailed processes and systems, and clearly defined ways of measuring performance is a must. Many companies that are searching for a 3PL detail extensive service level requirements (SLRs) that must be met for the relationship to be in compliance. From time to receive product and inventory accuracy to order processing cut-off times and order and shipping accuracy rates, SLRs govern the entire relationship (including penalties for noncompliance).

Your Location Requirements
As 3PL fulfillment has exploded in popularity over the years, so too has the importance of on-time deliveries and speedy order processing. To meet the stringent demands of consumers and businesses alike, many businesses are employing a multiple location fulfillment strategy — placing inventory in various geographic areas to meet demands. But multiple 3PL locations are overkill for many, so knowing the scope of your warehouse location needs will drive your selection process. Furthermore, some locations are more popular than others in the logistics industry. Most importantly, businesses must consider the origin of the goods and the outbound distribution of orders to make an intelligent decision regarding location. The geographic scope of operations will significantly limit options for 3PLs.

Your Customer Service Objectives
No 3PL selection would be complete without consideration for customer service requirements and needs. Make no mistake about it — receiving, storage, fulfillment, and shipping via an outsourced relationship requires extensive communication. Choosing a company with clearly established lines of communication, regularly scheduled communication points, and mechanisms for emergency communication will help weather any potential storm. The good news is that these points can be clearly flushed out during the vetting process, as any top-notch service-oriented 3PL will have previously established communication processes outlined for you to review well in advance of signing on the dotted line.

Like volume and product characteristics, 3PLs have differing focal points in terms of technology employed and integration capabilities. Your Cost and Pricing Conditions
Pricing and costs are a given in any negotiation, and the 3PL world is no different. However, while it is important to get the best rates possible from your 3PL, cutting corners to achieve better rates may result is undesired outcomes. Therefore, it is important to find a balance between cost-effective and near flawless execution when it comes to pricing. One way to achieve this end is to not only respect the age-old adage that quality doesn’t necessarily come with rock bottom prices, but also to utilize longer-term strategies to lower costs. For example, negotiating longer terms to your agreement or attempting to capitalize on product and size-related characteristics can help your company achieve its pricing goals.

Other Areas of Consideration
The items discussed above formulate the foundation of any 3PL review. However, they aren’t by any means the end of the discussion. Oftentimes, other smaller and less common points become important to address. For example, many companies require a high degree of flexibility and customization that some 3PLs will not be able to practically employ. Also, it is important to note that there are a growing number of hybrid 3PL and 4PL solutions in the marketplace. For some, using a managed relationship is perfectly acceptable, whereas others would prefer to be in direct communication with the 3PL that performs the actual work. Exploring these other subtleties in full detail will avoid any potential issues.

A Quick Guide to How the 3PL Process Should Look
Once you know your business objectives and “must haves” in terms of your overall 3PL requirements, your organization is ready to start the extensive process of interviewing the various outsourced providers. With your 3PL RFP in hand, you are armed to proceed through the vetting process, which includes:
  • Obtaining a full list of potential 3PL providers (this can be done via references, online searches, etc.)
  • Narrowing to a short list after 3PLs have answered your initial RFP
  • Obtaining quotes for your short list of 3PLs (with your specific volumes and characteristics to provide for an “apples-to-apples” comparison)
  • Reviewing the agreements of any finalist 3PLs
  • Following up on references
  • Interviewing the leadership team and each layer of support at the prospective 3PLs
  • Further narrowing to your top two to three choices
  • Touring and having demonstrated all technologies and integrations
  • Agreeing upon KPIs (Key Performance Indicators) and timeframes to follow up on performance
  • Making a final decision (with a potential test period to ensure the right choice was made)
Making the right decision when outsourcing 3PL warehousing and logistics is complicated and requires in-depth planning. While it may seem overly tedious, taking time and great care will result in a much better long-term decision that you won’t regret. By following a tried-and-true formula, the chances of making the right decision grow exponentially.

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