Today’s global and digital supply chains are propelling organizations to open new and hidden opportunities for growth. Third-party logistics (3PL) can help ease burdens in the business’s supply chain, but there are pros, cons, and challenges that organizations must be aware of. Data and analytics can help companies get the most mileage out of it by defining and tracking its performance or rectifying it if needed.
Businesses today are reeling under the “Amazon Effect” where speed, experience, convenience, and availability are a product’s selling points. This especially applies to brick-and-mortar stores and has been underscored by the pandemic.
Third-party logistics (3PL) provides the much-needed breathing room if your business is overwhelmed by the hustle and bustle of its supply chain. It’s no wonder that 74% of surveyed decision-makers anticipate an increase in their budget for outsourcing their logistics.
But is 3PL the right for your business? How do you choose a 3PL provider to work with? What metrics do you need to track their performance? Where and when should you measure them, and how do you calculate them?
Let’s explore 3PL — what it can help you with, why it might be a good fit for your business, and how data and analytics can help you ensure a strong, mutually advantageous partnership with 3PL vendors.
What do 3PL providers do?
Third-party logistics (3PL) can serve as a layer in your supply chain that helps your business with logistics. When you make a product, then deliver it straight to the customer, that’d be 1PL. If you involve shippers like UPS or Fedex, that’s 2PL. If you supply your product to a warehouse that then ships it to the customer on your behalf, it becomes 3PL.
3PL providers can be characterized as:
They handle activities such as picking, packing, warehousing, and distributing your products. Some specialize in storing and transporting pallets, racks, and bulk items, while others focus on transporting your products.
They serve as an intermediary between shippers and buyers. They sometimes pick up freight from the original shipper, and they typically handle shipping-related paperwork (e.g., customs, duties). These 3PL providers are common in direct-to-consumer businesses where they work with the shippers and brands for international shipping.
They provide specific or niche services, such as freight auditing, cost accounting, cold chain, or cross-border or geographical location-based businesses.
3PL providers have a physical warehouse that helps businesses with freight, warehousing, and distribution. They can also cater to niche markets, like cold chain in food, beverages, or pharmaceutical or medical industries, and they require specific requirements in storage and handling. If yours is in e-commerce, you should partner with a 3PL vendor that specializes in inventory management, fulfillment, and returns, as they’re key areas that directly affect your business’s performance.
Why work with a 3PL provider?
A 3PL provider can do more than packing and shipping products. 3PL providers work with a network of other vendors so they can combine different but related services under one roof, so you don’t have to go out and source for each of them. Most of them have their own facility, use their own equipment, and maintain a sizable staff, allowing them to fulfill any order volume at any time even during peaks in season.
3PL’s appeal is how it uses economies of scale. While it might be expensive to buy shipping materials a few at a time or to hire staff, 3PL providers allow you to utilize another’s materials, workforce, and equipment and share the costs with other businesses. A 3PL provider, for instance, might buy 10,000 boxes and cartons when you might only need a hundred, so you’re able to purchase materials at discounted rates. The same applies to shipping prices as well as equipment such as racks, pallets, and other materials and machineries that you might need to operate a warehouse.
With economies of scale comes cost sharing. Many 3PL providers have a large workforce and warehouses that cost a lot of money to operate if you purchase or hire on your own. 3PL providers give access to these resources, so businesses don’t have to own assets outright. This reduces startup and operating costs.
3PL’s flexibility can alleviate the logistics pain points of small and medium-sized businesses that want to optimize stocks but don’t have the capital or capacity to maintain a warehouse. 3PL also helps smoothen the transition between seasonal periods and market fluctuations. Depending on their business model, 3PL is also an attractive alternative for enterprises, as they can focus their resources to marketing and business operations and find more opportunities to engage with other vendors to distribute their products. In fact, there are enterprises and manufacturing companies that use 3PL to manage the large equipment they produce.
3PL might also be an appealing option because of the array of services that 3PL providers can offer beyond picking, packing, and shipping. They can organize ocean freight, help kit and bundle, create subscription boxes, and customize packaging, inserts, and labels, to name a few.
While 3PL provides seemingly limitless opportunities, not every 3PL provider offers the same services, uses state-of-the-art equipment or software, or employs a significant workforce. It’s important to understand how a 3PL provider’s performance will affect your own business before engaging with one.
What should I expect when partnering with a 3PL provider?
Working with a 3PL provider that fits your business comes down to numbers. 3PL vendors, for instance, differentiate themselves mainly through:
They charge based on the space that your products take up in their warehouse.
This involves the 3PL vendor’s employees working to rack the pallets as well as grabbing and putting your products in boxes.
Anything you haven’t paid for or sent to them in advance is charged.
This is what you’d pay for shipping the product to your customer.
There are a few criteria you should consider when partnering with a 3PL provider:
It’s more practical if their warehouses are near where you’re manufacturing your products, or at least geographically optimized for where you’re shipping them.
Fees differ depending on what you’re contracting the 3PL provider to do, so it’s better to spell them out and put them in writing to avoid misunderstanding.
Some 3PL providers might not provide custom packaging, so plan how you’d want your product to look.
It’s important to know if the 3PL provider’s facilities have enough room to fit your business’s growth.
Some 3PL companies also offer integrated supply chain services, which might be useful if your business needs to farm out parts of its operations or if you prefer to have the 3PL provider manage their interdependencies. These can include cross-docking, freight forwarding, inventory management, packaging, transportation, and warehousing.
How can I track my 3PL provider’s performance?
While 3PL can simplify many complexities in your business’s supply chain, there’s a significant caveat: a lack of direct oversight. After all, 3PL providers are an outsourced vendor. Some activities and parts of your operations will happen outside your purview.
The dependency it will create might also be an issue. When entrusting substantial parts of your supply chain to a third party, it can be challenging to change vendors or to take them back in-house if they’re no longer meeting your expectations. And if a 3PL provider doesn’t deliver, customers will blame your business, not the 3PL vendor.
This is where data and analytics can help. Every movement or activity in the warehouse can become a data point that you can measure to see if your 3PL provider stacks up against your expectations and requirements. However, all these movements and activities create seas of data that the data you need ends up becoming a needle in a haystack.
Ask yourself these questions before defining your 3PL provider’s key performance indicators (KPIs):
What is your business’s objective for partnering with a 3PL provider?
How fast should your products arrive to customers?
How much will you save, gain, or lose when using a 3PL provider?
These kinds of questions will help you narrow down the KPIs into metrics that matter to your business and your customers. There are some starting points you can refine and adapt to your business:
Being fast is good, but it wouldn’t matter if the wrong products are shipped to customer. Industry benchmarks are often at 99%, and anything below it can carry penalties. This includes ensuring that inventory levels correctly align with the revenue or demand you’ve forecasted.
Receiving time (inbound)
You don’t want to run into a stockout. The faster the 3PL provider can move your product from dock to stock, the better.
Returns are common in e-commerce, so processing them shouldn’t be unnecessarily complex. Tracking the timeliness and rate of returns is also useful as they provide insights into order accuracy, packaging, material handling, the 3PL vendor’s lead time, the product’s defect rate, and compliance.
Cost per order/unit (CPO) shipped
This is critical to understand how much it’ll cost you to ship your products through a 3PL provider. Costs vary depending on what you’re shipping and where your customers are. It also includes expenses incurred for an order to be acquired (e.g., marketing, shipping). The Warehousing Education and Research Council (WERC) has a benchmark of US $0.23, with a median of US $1.4 for CPO.
How does analytics help?
Monitoring your 3PL provider’s performance is more than just stacking it up against numbers. You need to connect these figures and visualize them in context so you can uncover their meaning and draw rich, actionable insights. By consolidating data points through a reporting capability and harnessing analytics tools and technologies, supply chain decision-makers partnering with 3PL providers can also:
Seasonality, the availability of workforce, marketing, and even weather can affect the timeliness of the placement of orders or delivery of your products. Figuring these out helps you plan and keeps your products from running out of stock.
Uncover gaps and use them as advantage.
There’s more to ensuring that the right carrier is transporting the right product at the right time. Analytics can help you dig deeper into these gaps as it also reveals key indicators, such as errors in invoicing, labeling, or packaging, all of which can delay deliveries. Analyzing the 3PL provider’s speed and reliability, for instance, can be used as leverage to negotiate lower shipping rates.
Streamline product portfolio.
Analytics also helps reveal if it’s time to remove a product line if it’s not doing well, or increase production if sales are up. By tracking KPIs that gauge your 3PL provider’s performance, you can also uncover trends about your product — if you need to restock, replace, or remove them in their inventory, and why you need to.
By knowing where your resources are poured into — and if they’re giving the ROI they’re supposed to — you can assess if they need to be allocated elsewhere and make better decisions that will help decrease fulfillment costs.
Partnering with a 3PL provider can help bridge gaps in your supply chain, but it comes with the responsibility of ensuring that they address your business’s expectations and your customer’s needs. While data helps keep an eye on them, many businesses fail not because they’re tracking KPIs, but often because they don’t know what to track — something that analytics can help supply chain decision-makers with.
If you want to know more about sample metrics and KPIs that you can use to understand and assess your 3PL provider’s performance, download our guide below.