3PL Implementation Steps - Critical Third Party Logistics
Article by Charles M. Intrieri, 3PL/Logistics Consultant
The following strategy can be used for selecting a 3PL for your company:
Part I: Where to begin:
· DETERMINE CUSTOMER SERVICE REQUIREMENTS. Conduct upfront research to identify a select list of preliminary 3PL candidates. All eligible 3PL companies should be surveyed to determine facility locations, ports, if imports are involved, IT: WMS/TMS systems integration, warehousing and distribution (LTL/TL) strengths and weaknesses as well as their service areas in relation to our customer locations. Where are the majority of our customers in relation to the 3PL location? This will help in eliminating companies that cannot adequately address your functional specifications. Developing a detailed method for critically evaluating the capabilities of 3PL candidates can make or break an outsourcing selection process: Do they warehouse our type of product? Do they know how to handle/manage our type of product/SKU? What is most important to us in using a 3PL?
· CREATE A 3PL CROSS-FUNCTIONAL, INTERNAL COMPANY TEAM TO MEET OCCASSIONALLY. Assignments are given to members with dates/names or requests by them to the committee. There should be an internal 3PL Project Leader (Logistics Manager is best, or Supply Chain, etc) aside from the 3PL/Logistics Consultant. Key members: I.T.is very critical (integration to 3PL’s WMS/TMS, what reports will we need, other I.T. issues, SLA/KPI-IT input), Marketing/Sales (Customers: V.O.C.: Voice of the Customer), Customer Service, Returns Management (RMA), Cost Accountant (Internal costs versus quotes received), Warehousing (pallet sizes, freight receipts/shipments, LTL. TL, Warehouse inputs, our Warehouse set-up and current work instructions), Supply Chain, Purchasing, Administration (procedures, work instructions), General Manager, owner and other critical areas within our company.
· Have we DONE THE MATH and know what all of our internal costs are so we can properly judge the 3PLs pricing? Do we realize that there will be transition costs, as we prepare to move freight to a 3PL facility?
· SOLICIT REQUESTS FOR QUOTATION. (OR USE 3PL RFQ format:) The request for information (RFI) or quotation (RFQ) is a tool to gather information and measure the strengths with respect to capabilities and initial, non-negotiated cost effectiveness of outsourcing. Do we have detailed costs for our current warehousing activities to use to judge the 3PL’s initial pricing based on the detailed data give them? What does it cost to ship an average order to our customers? When selecting a 3PL, the RFQ document should be as detailed as possible and it should be accompanied by all relevant documents about the project and expectations: estimated quarterly/ yearly volumes, initial, estimated square foot usage in the 3PL, seasonal demand, all pallet sizes and cubage, container loads/amount of SKUs in a container (unloading costs/LTL costs) The RFQ should include a detailed description of the areas to be outsourced including: the scope of the contract, locations, facilities, departments; information on volumes involved, number of deliveries, warehouse sizes, number of items, etc.; the logistics tasks to be performed; the level of performance required. Furthermore, the RFQ should indicate a format for price quotation and a timeframe for responses.
· There will be times when a 3PL candidate will want to visit the Customer’s facility. They will visit to see how you handle your product, review work instructions, review your cycle counting and other procedures, do you slot your goods, etc. the type of Warehouse you have, and if your company is a fit to be a partner to them. It will help them in their initial pricing to you.
· VISIT THE POTENTIAL PROVIDER’S FACILITIES.(Locally first, then the final city at a later date) Facilitating tours of a potential 3PL provider’s facilities and interviews with their existing clients is an important next step. Send an agenda in advance to outline what information you need during this initial visit. Experiencing the company’s facilities gives you a chance to determine how flexible their operation is and their willingness to work to meet your needs as they change. Do you feel a good chemistry with all of their people and especially the point person you will be working with at this 3PL? Would this make a good partnership? Do they have what you require? Do they meet OSHA/CA requirements, Cleanliness, 5S and LEAN initiatives, Six Sigma qualified people, Kanban, Kaizen, et al? Do they have inter-company competition on meeting their successful 3PL standards? Are they unionized? Are they a private or public company? Are they transportation 3PL or Warehousing/Distribution 3PL or both? Do they have state-of-the-art WMS/TMS/YMS systems in place to meet your needs?
Call on customers of the 3PL to get feedback on their service and pricing negotiations. Get a long list of customers and choose a few so the 3PL does not know who you are calling.
· DEVELOP PROJECT IMPLEMENTATION PLAN. There should be a detailed logistics outsourcing project implementation plan as well as periodic reviews in place to make sure everything is on track and there are no drastic deviations in the scope of the project. The project implementation is the process of translating thoughts into actions and it requires active co-operation and co-ordination on both sides of the relationship. Project implementation includes IT integration, operating procedures customization, understanding the service measures, defining the escalation process etc. All these activities require precise handling and a dedicated team. The 3PL companies usually have their own project implementation methodology. What is critical here is customization, to suit the specific requirements and deliver agreed service levels.
· DESIGN EFFICIENT PERFORMANCE MEASUREMENT SYSTEM: KEY PERFORMANCE INDICATORS (KPIs) to manage the 3PL performance along with the SERVICE LEVEL AGREEMENT (SLA) (or Contract as it is sometimes called by the 3PL) but the SLA/KPI is a key document to manage the Service Level of the 3PL... During the startup phase of the outsourcing relationship the customer must take the initiative to develop performance measurements (KPIs) and reporting methods that support the company’s business goals for the outsourcing strategy. The 3PL’s performance should be measured on qualitative and quantitative performance measures regularly (KPI review monthly during honeymoon period and quarterly thereafter). Sometimes called a Quarterly Business Review (QBR)... Ideally, financial, productivity, utilization, quality and cycle time measures should be considered. List Cycle Counting for Inventory Records Accuracy 98-100%, RMA details, Service to Customer details (VOC), Cost Reduction must be clarified using Continuous Improvement or LEAN concepts, 5S, LTL needs defined, savings from the 3PLs TMS systems based on our freight optimization, rate negotiations,. It is VERY SPECIFIC. One of the objectives of performance measurement is not just to measure the performance but also initiate necessary corrective actions with regard to negative performance and explore the possibility of gain sharing in the case of positive performance so as to encourage continuous improvements. Regular performance measurement presents the perfect opportunity for both the customer and the 3PL to communicate effectively to make the outsourcing relationship a great success.
Part II: Important steps to implementing a 3PL pricing structure:
· UPFRONTCOSTS: 3PLs often charge upfront costs based on the complexity of the service. This cost is for planning and development of material handling, operational and information systems required for the distribution operation and implementation of the proposed system. Some bill for time needed to calculate your charges.
· PRICING: The first prices you receive are important. But, you must realize that initial pricing is based on ESTIMATED VOLUMES. There are “hidden costs” in these first prices, and more profitability for the 3PL. Constant price negotiation is imperative. It is best to start with “unit rate pricing” or “hourly” pricing in a public, shared warehouse. Variable fees are charged per hour, per item or per order for each distribution function such as receiving, put-away, pick-pack-ship, customization, inspection, returns processing, etc. Fixed fees are charged monthly or quarterly, irrespective of the number of orders shipped. Lift trucks, equipment and people are shared in a public warehouse to keep prices down. (There will also be “accessorial pricing” for pallets, hourly fees and miscellaneous pricing. At times you may be asked to pay for some of your KPIs…just keep negotiating!!) Being in a shared, public warehouse, you can get afeel for how the 3PL operates while ACTUAL SHIPMENTS are being received by the 3PL. If your actual shipments exceed your estimates, it is time to negotiate again, using the change process clause in the contract for initial monthly reviews during the “honeymoon” period. Once you get by initial negotiations, the goal is to obtain “cost-plus” or “management fee” pricing. This is contract pricing and usually means a two (2) or three (3) year contract obligation with the 3PL partner.
· LTL/TL pricing is negotiated as a separate contact negotiation. Have a QBR (Quarterly Business Review) as part of the LTL contact so you can review pricing as the 3PL uses their Transportation Management System (TMS) to optimize your freight. Why shouldn’t you get some cost reduction on your LTL prices if they optimize your freight and find cost savings?
· It is a great idea if you can afford to send your Project Leader to the 3PL for focus on your initial shipments. Face-to-face negotiations are the “only way to go.”
· ALWAYS HAVE BACK-UPS OR A FAIL-SAFE PLAN:Your team should choose a number two (2) and number three (3) 3PL candidates (s) in case the chosen 3PL fails in some way in meeting your needs. This failure could happen anytime. It is important to have cancellation/modification; change processes in the contract should you need to cancel, modify or change any processes or the 3PL relationship itself.
· CONTRACT/SERVICE LEVEL AGREEMENT: Any contract or terms and conditions must be reviewed by the Consultant, and your team, and then turned over (with your suggestions) to a contract lawyer. Look out for terms and conditions on the reverse or front side of ANY document received by the 3PL to insure that YOU AGREE to ALL terms and conditions in your 3PL relationship.
· Do you want to use your own LIABILITY INSURANCE or the 3PLs liability insurance? Or-get a 3PL quote on insuring your goods to see if their insurance is better for you?
· TRUST AND COLLABORATION. (SUPPLY CHAIN OPTIMIZATION): The success of an outsourcing relationship between a company and the 3PL provider requires a combination of trust and collaboration. Trust determines the level of flexibility a company can allow the 3PL in managing the operations to the best of their capability. The outsourcing arrangement can be truly successful only when there is a high level of trust between both parties in the business relationship. Unless there is this sense of trust and collaboration in the client-3PL relationship, it most certainly will fail.
SUPPLY CHAIN OPTIMIZATION THROUGH COLLABORATION:
Companies who have managed to build a healthy structure of trust within their organizations are able to create a healthy structure of trust with their 3PL providers. Key to this is the understanding within the client organization that there is a single set of goals and there has to be a commitment to support and live the goals. Once this infrastructure of trust has been created, then the client-3PL relationship can start to produce magnified value (Continuous Improvement, LEAN initiatives, and Cost Reduction,) and prove to be true win-win relationship. Adversarial relationships with the 3PL will not work.
In order to build trust in your relationship with a 3PL it is crucial to select the right 3PL partner that can meet your particular requirements and with whom you can strengthen your relationships. Thus, the key to a successful logistics outsourcing is a well-organized process of selecting and communicating with the potential 3PL providers.
To be effective, this process can take up to six (6) months, depending on the team effort and Project Plan implementation.
The final result has to be going beyond your Customer’s expectations. You should implement a “Voice of the Customer” (VOC) program to insure that your customer is happy with the 3PL’s service via a VOC questionnaire. Someone in your company, be it Sales or Customer Service, has to be responsible for managing this VOC program. Listen to what your Customer has to say and feed this information back to the 3PL.
Charles M. Intrieri
Charles M. Intrieri Consulting
1041 Regis Way Tustin, CA