Outsourcing More to Less
Recent studies confirm that companies are now outsourcing more of their logistics activities – and they are outsourcing to a fewer number of service providers. Therefore, the selection of your Third Party Logistics (3PL) provider is becoming increasingly important to empower effective and efficient supply chain ecosystems that are essential for competitive advantage.
Whilst the 15th Annual Third-Party Logistics Study found that 65% of shippers are increasing their use of 3PL services, the 2010 Global 3PL & Logistics Outsourcing Strategy survey by Eye-for-Transport also presents some interesting findings:
- 97% of Shippers intend to increase their use of 3PL’s in the future
- Shippers are consolidating their vendor base of 3PL’s – the proportion of shippers using between one and three service providers has more than doubled year-on-year to 58%, whereas in 2009 almost 60% of shippers were using four or more 3PL’s
- 47% of shippers have recently switched 3PL or are currently planning to change 3PL, of these, 31% were changing because of Service and 16% changing due to Cost
- Shippers report that Best Quality Service is most important when choosing a new 3PL, whereas 3PL’s think Shippers consider Lowest Price to be most important
With the increasing reliance on a fewer number of 3PL providers to execute even more of your supply chain, selecting your 3PL provider becomes increasingly critical, and so it is essential to have both a clear selection process and appropriate evaluation criteria.
Challenges in selecting a 3PL provider
The selection process will typically take 3-4 months and involves considerable effort managing the RFQ (Request For Quotation) project. With the majority of 3PL service providers offering a comprehensive range of capabilities, it can be quite challenging to differentiate between them.
It is also challenging to evaluate the different providers and their offerings – as opposed to the selection and evaluation of physical products, for Logistics Services there is no opportunity to touch, feel and test the offering prior to making your selection. Your have to be able to see through and beyond the power-point and the sales pitch to determine how the provider will be able to deliver on the promise – consistently, reliably and cost effectively. The resulting agreements will typically be long term commitments (3-5 years is typical) thereby reinforcing the importance of making the right choice.
The consequences of selecting an unsuitable 3PL provider are significant. The potential impact on your business’ supply chain ecosystem could adversely impact customer service, profitability and stakeholder value. The process to repair an incorrect selection is lengthy, painful and costly. Fully recovering from an unsuitable selection – from trying to fix the situation through to migrating to a new 3PL provider – could take up to two years.
Engaging an external resource on a contract basis can benefit the process of evaluation and selection by combining project leadership – alleviating the burden on in-house resources from the additional workload – together with industry experience and expertise, to provide an independent and knowledgeable perspective to the project.
Based on over twenty years global experience in third party logistics, here are some insights into international best practices in Selection Process and Evaluation Criteria.
Process for selecting your 3PL provider
To manage the RFQ (Request for Quotation) process for selecting your 3PL provider, it is best to appoint a multi disciplined project team – typically between six and ten participants – and adopt a structured model for engaging and leading the project team through the selection process. My recommended 9-Step 3PL Selection Process is as follows:
- Define RFQ Requirements
- Detailed scoping of logistics model within your supply chain
- Compile detailed requirements specifications, metrics & templates
- Issue RFQ to invited 3PL Vendors
- Pre qualify Vendors, execute Confidentiality Agreements
- Manage bid process with 3PL’s, including dealing with queries
- Compile queries and responses, collate and issue updates
- Receive Proposals from 3PL Vendors
- Review proposals, map to requirements and criteria
- Collate team views and feedback, compile comments and questions
- Vendor Presentations
- 3PL to present their company, solution and benefits
- Management discussions – process, people, pricing
- Site Visits
- Visit 3PL’s logistics facility – view operations, processes, people
- Review capabilities, capacity, competencies
- Short List (as required)
- Continue with further exploration and evaluation
- Probe deeper into capabilities, pricing models & assumptions
- Consultations with Client references provided by 3PL
- Obtain independent perspective – market reputation, ex-clients
- Executive Engagement
- 3PL present to senior management
- Explore and assess organisational fit
- Evaluation & Selection
- Compare and Contrast – company, solution, economics
- Map shortlisted vendors to evaluation criteria
Evaluation Criteria for selecting your 3PL provider
It is important to compile your criteria for evaluating the potential 3PL providers and for the project team members to independently rate and score the participants. Rather than compiling the actual total scores, compare each team member’s resulting ranking of the bidders (first, second, third place) – this will neutralise the impact of some team members being more generous with their scores than others. Having collated the rankings, explore any significant areas of difference through discussion and review of specific line item details.
In compiling your evaluation criteria, include both quantitative and qualitative factors, together with consideration of future potential requirements. Consider the following seven main categories for your evaluation criteria to support your selection process. Within each category, expand the detailed expectations and requirements to match your business needs and specific circumstances.
- 3PL Provider – size and scale of their operations, people and finances. What is their standing in the industry? Market reputation, competitive positioning and financial viability; are they the appropriate size for your company? Amount of their senior management involvement in the bid process? Are they committed to your company and your business? Will you be important enough to their business? Consider their corporate DNA – vision, values, approach to corporate responsibility. Are they a good organisational fit for your company?
- Logistics Solution – do they have the operational capabilities? Does the proposed solution meet your business needs? Consider operational aspects such as their warehouse, equipment, space? Do they have the necessary expertise? Similar solutions for similar customers? From the geographic perspective, does their logistics network provide adequate logistics services for the origins and destinations within your supply chain?
- Economics – how do they rank from the financial perspective – are they competitive on price? Are there opportunities for economies of scale? Are they flexible in their pricing approach? Have you addressed the pricing process for new and emerging requirements that will arise further down the line?
- Technology – how robust are their information technology platform and systems, and their ability to integrate with your IT systems? How do you rate their IT capability and competence? What prior experience do they have of similar system integrations?
- Future Proof – are they and their solution able to grow with you as your business grows? Is their solution scalable and flexible? Can they meet your future potential needs? How quickly can they ramp up operations? Do they have the capability and financial means to expand their skills base and operations?
- Value Add – do they have the experience, knowledge and expertise to help you improve your company’s logistics activities? How do you perceive the provider in terms of industry leadership? Will they take a proactive approach to explore and propose mutually beneficial solutions?
- Services Delivery – your confidence levels in their ability to ‘deliver on the promise’ – execute on their proposed solution to deliver the operational requirements and business benefits – consistently, reliably and cost effectively. Will they successfully deliver on your requirements through the three additional marketing P’s that are critically important in Services businesses – the Physical results, the Processes and the People? What are the experiences of other customers – through anecdotal evidence and client references?
When selecting a 3PL provider it is very tempting to focus on evaluating items 2 and 3 – these ‘hard’ dimensions are tangible and relatively straightforward to compare across multiple vendors. However, the soft factors – the intangibles in items 5, 6 and 7 – are of equal if not more, importance. These soft factors are what will determine the long term sustainability and success of your chosen service provider and their logistics solution. Careful consideration of all of the evaluation criteria is essential to ensure a successful outcome.
It is critical to adopt good process and use proven evaluation criteria to choose your 3PL provider. The selection process is an intensive, time-consuming project that requires specific expertise and additional resources – over and above normal business activities – for the duration of the project. Consider engaging an independent, external resource to add value to the process and reduce the burden on in-house resources.
The consequences of making a mistake are significant. At a recent logistics industry conference attended by numerous leading international companies, the anecdotal consensus was that changing your 3PL provider as a result of poor performance is a painful process, that will take 9 to 12 months and will cost between 15 to 25% of your annual logistics spend!
In the context of delivering services, prior experience is a very powerful means to evaluate alternative providers – think about restaurants, schools or hair dressers. Successful service delivery manifests itself through the three P’s of Services – the Physical results, the Processes and the People.
As you do not yet have any prior experience of the service providers being evaluated, you should place considerable emphasis on those that do – existing customers as client references plus market references from former customers and industry advisors. In the context of references in service businesses, I like to use my simple two question litmus test of customer satisfaction: Would you buy again? and Would you recommend?
Mark Millar leverages 25 years of global business experience to develop and deliver enlightening keynote speeches and to provide independent consulting that helps clients improve the performance of their logistics and supply chain activities. Acknowledged as an industry thought leader, clients have engaged Mark Millar as Speaker or Moderator at more than 200 functions in 17 countries. Mark serves on the advisory board of several leading organisations and his industry contributions have been recognised with a number of accolades. Contact him at firstname.lastname@example.org