3PL Outsourcing Assessment
3PL Outsourcing Assessment

3PL Outsourcing Assessment

Outsourcing to a 3rd party logistics provider (3PL) allows your organisation to focus on its core strengths, build on their competencies and grow the business with a strategic supply chain partner. While most organisations have realised the benefits of expanding their operations without the need to invest in operating their own warehouses or distribution centres, other organisations find this approach challenging due to lack of control and loss of direct customer interface.

A Turn Key Solution helps organisations through this minefield to provide your business with an independent perspective of the pros and cons for changing your supply chain strategy. We have assisted clients by:

  1. Evaluating and selecting 3PL vendors capability and fit with your organisation, common values and fiscal strength.
  2. Conducting cost versus benefit scenarios on the alternatives available, moving to a 3PL provider or operating your own distribution centre.
  3. Review or develop contract documentation and Service Level performance metrics; cost control performance against budget.
  4. Transition planning for multiple warehouses, stock relocation only or complete operations with stock and systems connectivity.
  5. Project managing the warehouse operations migration program to a 3PL operation, fully commissioned and operational.

Starting out on this process in search of a new 3rd party provider can be challenging and requires, not only specialised knowledge of the industry, more importantly "time" for your resources to be free from the operational challenges of running your business.

A Turn Key Solution are able to assist in the search and evaluation phase or simply road testing your current 3PL providers supply chain performance. With the exception of the evaluation and selection phase, the requirements of both are quite similar and involve an understanding of our clients needs against the operational capability and service proposition of the 3rd party logistics provider. We offer our 3PL outsource assessment or a customised version to suit your specific purpose.

3PL Evaluation and selection

Our primary aim is to establish "Fit for Purpose" where both organisations have established clear service and contractual expectations; 3PL has operational capability; Service level agreements and performance reporting is managed, reviewed and published regularly with clear accountability and finally, both organisations show a willingness to share cost control initiatives that further strengthen a strategic partnership.

We follow a detailed process with specific 3PL evaluation criteria that is rated by our team in consultation with our clients. This criteria is extremely specific and requires a baseline standard which is established by our client. The RFP's are issued to a minimum of 3 service providers for consideration. Each provider will complete their submissions and we use this data to measure each submission against the published standard. Site visits are essential and form part of the review process to ensure that actual capability can be observe within a live operation. It is important to get a feel for the site during a busy period, the flow of inventory, type of materials handling equipment, warehouse management systems, scanning, resources, housekeeping and service culture. 

3PL arrangements have tended to fail over the years, primarily due to conflicting objectives and a poor alignment of expectations. A major client within a multi-vendor 3PL will always receive a higher standard of service supported by a strong resource pool to meet peak season demand. While smaller vendors do not have the scale and volume, service levels tend to be impacted due to limited resources. The challenge is the level of transparency with performance metrics and the management of costs to support business requirements. Cost can easily escalate, if there is limited knowledge of the contracts structure and cost base for services.

3PL Cost Benefit Analysis

We have provided our customers with a full cost benefit analysis for the purpose of evaluating the proposition to change their business to a 3PL model. As the cost structure is similar to any warehouse operation where both fixed costs and variable costs are captured, the primary difference between the two models is that a 3Pl operation is run as a profit centre, while a warehouse operation is usually a cost centre.

When comparing your current warehouse costs to a 3PL operation, the challenge is often in aligning these costs correctly to get a fair comparison. As the fixed costs such as the building, warehouse racking, WMS and MHE are easier to align, the variable costs are where challenge lies. A 3PL costing model is usually made up of activities linked with time and a cost for the time unit.

Organisations provide annual demand which is then broken down into smaller time buckets to closely reflect tasks and activities. We refer to these activities as touch points where a resource is used to inspect, process or move inventory in various forms. Whether your resource uses a forklift to unload a truck, this is a touch point with a cost. Breaking down a pallet to book inventory into the system is a touch point and a cost.

The sum total of these touch points represents the total variable cost for your operation within a time bucket. Now you can understand why it is difficult to get an accurate estimate on your future variable costs using a 3PL.

A Turn Key supply chain consultants are experienced to work through this 3PL minefield and provide you an assessment with clarity for your understanding. Working with your team and the 3PL prospect, we compile a cost benefit analysis to help you make the best decision for your organisation.

3PL contracts and service level agreement

Your organisation may be considering signing off on a new 3PL contract or are having difficulty understanding how your cost structure and performance metrics work with your existing contract. In either scenario our supply chain consultants can assist you in understanding the cost drivers, the risks and how the right metrics should be structured to get a realistic measure of your 3PL providers performance.

Too few organisations are at the mercy of a 3PL provider who offers a standard contract and may contain specific SLA's for regular performance reporting. Our experience shows that any arrangement must have a level of balance where both parties work together on common objectives. Over a 3 to 5 year timeframe, your organisation could be committing $5m to $10m annually to a 3PL provider.

Therefore that stands to reason that such a financial commitment should have a number of provisions that allow both parties to maximise their returns by working together. A clients growth curve is a self funding mechanism for a 3PL provider, whereas the client needs to be assured that the cost of running a 3PL is fair and reasonable.

3PL transition planning

A Turn Key solution has assisted organisations in moving a part of their business to a 3PL or integrating their entire operation to a fully outsourced 3PL distribution model. As each of these integration projects varies in scale and complexity, the transition process is the same. We become project managers and develop a transition program with input from both sets of teams.

A master timeline is developed that can be based on two types of planning methods: A forward plan which has a variable go live date without restrictions, or a backward plan which has a fixed go live date that is restricted. Each planning process will consist of objectives, milestones, tasks, responsibilities, costs and timeframes. A change management program will support the timeline identifying the implementation plan, risks and mitigation plans.

This project delivery cycle is managed by experienced project managers who have done this before and delivered projects on time and within budget.

3PL Project management

This project delivery cycle is managed by experienced project managers who have done this before and delivered projects on time and within budget. We take the transition plan and administer the program by micro managing all aspects of the delivery cycle.

A small scale project can be managed in weeks from planning phase to execution. Large scale projects which involve systems integration, storage systems set up, inventory relocation etc take a few months to deploy. Our focus is on the quality of the delivery and we understand the commercial realities of a lease expiry driving tight timelines for transition.

At a high level, the assessment will cover:

  • Understanding of client requirements, planned cost and service expectations.
  • Understand the existing or proposed cost base against demand patterns.
  • Review of contract agreement to understand the terms of reference.
  • Review of performance metrics and service capability to determine level of scale.

Our aim is to identify the "Best fit for purpose" solution between our client, their customers and the right 3PL provider to ensure that growth, profitability and service are sustainable. The core outcomes being:

  • Identification and selection of the right 3PL provider to support your business.
  • A clear understanding of the supply chain costs and opportunities for savings.
  • Formulation of a balanced heads of agreement with cost and service levers.
  • Identification of shared performance improvement opportunities

Next Steps:

Feel free to contact our office for advice or to discuss any specific project requirements.