A 3PL supplier evaluation guide for eCommerce retailers considering outsourcing their warehousing and distribution or moving to a new 3PL supplier.
Utilising the services of a 3rd Party Logistics (3PL) supplier for warehousing and distribution is becoming more widespread in UK eCommerce as retailers are looking to capitalise on the economies of scale and shared resource which are part of the 3PL business model. Using a 3PL supplier can offer several advantages when compared to renting and running an in-house distribution centre (DC), as well as some potential disadvantages. As such it is important to consider both the pros and cons of outsourcing this part of your eCommerce operation.
1. Advantages of 3PL warehousing & distribution
A 3PL provider will typically run an estate of distribution centres and house several clients in each DC. This provides a lot more capacity to scale in support a retailer’s projected business growth over a 5-10 year period, as well as the ability to cater for ad-hoc overflow requirements.
Due to the flexibility of a multi-tenant, shared-resource operational model a 3PL supplier can more effectively ramp up warehousing and distribution operations based on demand during promotions, peak periods and sales.
Through economies of scale and sharing resource between multiple clients 3PLs can often provide significant cost savings compared to running an eCommerce warehouse and distribution operation in-house. This can apply to storage and warehouse processing (goods in and fulfillment), and competitive carrier rates based on the aggregated parcel volumes of several clients.
A good 3PL supplier will be able to offer best-in-class business processes, multi-skilled staff and IT investment gained from exposure to different types of eCommerce client organisations, as well as consultative services around supply chain consolidation and optimisation. This can result in increased productivity and efficiency, quality improvements, better stock visibility and management information.
2. Disadvantages of 3PL warehousing & distribution
Bespoke processes & solutions
A potential downside of moving to a 3rd party supplier is that you may lose the ability to do certain things exactly the way you want to, or have done in the past. Your new 3PL supplier may use different warehousing systems and processes, and have different onward freight arrangements. For example the bespoke quality control processes that you have developed and refined in-house over several years may take a considerable amount of time and effort to be implemented by a 3rd party, or they may not be viable altogether due to operational or technical constraints, and may need to be modified.
Loss of control
Moving away from in-house operations to an external supplier by definition introduces a loss of direct control, and a placement of trust in your supplier. This means that checks and balances will need to be put in place to ensure that no loss of quality is experienced during the transition period, as well as in the future. For example supplier management techniques such as agreed SLAs with performance reviews, regular reporting and status updates will need to be implemented and closely managed to obtain the best results.
3. Key things to consider when evaluating prospective 3PL suppliers
Commercial model: activity based vs. open book
The two most common commercial approaches to 3PL contracts are activity based and open book pricing – each with its own advantages and disadvantages. Activity based pricing provides fixed costs for the duration of the contract, and is an effective tool for identifying and eliminating non-value-add activities over time, and improving the efficiency of business processes. On the other hand open book pricing allows for greater transparency in the commercial relationship as the supplier exposes all of its costs to the customer, before applying an agreed margin on top. This can result in cheaper overall costs, especially for operations with a greater degree of unknowns, as it does not encourage the supplier to build an adequate safety buffer into a fixed price.
There may be implications to IT systems architecture with a move to a 3PL supplier. For example, will the 3PL support your current warehouse management system (WMS)? If yes, will that reduce the shared space/resource advantages of the 3PL model and therefore negatively affect the commercials? If no, how will the new WMS integrate to your existing systems including ecommerce platform, POS systems, as well as any other DCs? Will this impact your ability to achieve a single view of inventory and despatch from all stock points?
It is important to capture all of your relevant operational business requirements and closely evaluate your prospective suppliers against those requirements. This is especially important for capturing the nuances of any standard operating procedures that may be taken for granted but that could cause issues when moving to a more standardised provider. Some common examples of these are specialised QC processes, requirements around customs processing, specialised rework processes, as well as special storage or transport requirements.