Selecting a specialized third-party logistics provider (3PL) can be a difficult and time-consuming task. Operational officials and Supply Chain managers often find themselves limited in their options and generally overwhelmed about key metrics and hidden stumbling blocks to look out for when diving into the search for a 3PL provider.
Even though each business and operational setup has its own respective needs and requirements towards a 3PL provider, there are three general steps that can serve as a best practice guideline for a complex selection process. These will be examined in the following blog post.
Step 1: pre-screening criteria
First, it is essential to understand the market dynamics and granularly assess the differences between providers in terms of their location, operational focus, flexibility, customization, and IT capabilities. These five factors should always play a critical role in your search and can function as the foundation of your decision process. However, you may want to expand the list of these factors depending on your specific operational needs and challenges.
Choosing a 3PL close to your focus markets ensures fast and cheap delivery to end-customers, thus increasing conversion rates and lowering cart abandonments. In case your sales volume is significantly growing in a new market, it makes sense to think about opening a second, local fulfillment center at a certain point.
Given the complex nature of logistics operations, a 3PL can barely offer high competitiveness across all product categories and sales channels. While some might rather focus on a diverse operational setup, others specialize in deep expertise for a specific product portfolio. Once again it highly depends on your business how you evaluate this factor. But keep in mind that it is essential to understand the degree in which a logistic partner will support your operations in reaching your end-customers on a daily basis.
Order volumes in e-commerce can be quite unpredictable and demand may vary strongly based on promotions or seasonality. Thus, it is very important to select a 3PL that offers flexibility in two directions – minimum requirements and growth. Your provider should be quite flexible in terms of minimum order volume or contract durations, which is especially relevant in the start-up phase. Equally important is the continuous flexibility to expand operations at a certain 3PL in order to keep your service level promises once you have started scaling your operations.
Customization & value-added services
When establishing a direct to consumer brand, the end-customer experience is key to your success. Your customers should have an unboxing experience they will never forget. Many 3PLs offer the flexibility to re-pack goods, to use your custom packaging materials or to insert specific gifts/inlays. As the trend towards individualization increases steadily, the reliability and importance of specific value-added services (like laser engraving or flocking) offered by your 3PL should also continue to grow.
Particularly within E-Commerce, the technical integration between your system and the warehouse management system (WMS) of the logistics provider is very important. Orders and inventory levels should be received in real-time to avoid disappointing customer experiences from unexpected stock-outs. Furthermore, a 3PL should provide you with an insightful dashboard to view and manage your operations effectively.
Step 2: setup of an efficient RFQ process
In the beginning of a request for proposal (RFQ) process it is vital to prepare your own information in advance before reaching out to multiple different 3PLs. We have compiled a checklist with the most relevant information you can refer to. This includes:
- Order sources and IT systems (Shopify, Amazon, etc.)
- Product descriptions, # SKUs, special handling or certification requirements
- Sales volume per distribution channel (B2C, B2B, FBA, etc.), cyclicality in demand
- Special picking or custom packaging requirements
- Carrier selection, delivery preferences (e.g. Express) and destinations
- Return handling requirements, incoming goods handling and storage needs
- Service level requirements like cut-off times or specific reportings
Step 3: quotes and pricing structure
After receiving quotes based on the information package from step 2, you will realize that prices can vary significantly between logistics providers depending on the five factors named in step 1. Therefore, you should always collect three different quotes to compare price points before finalizing a decision. Even though 3PLs use different names in their pricing calculations, they mainly fall into the following buckets:
- IT costs for setting up and maintaining the integration between your shop system and the systems of the warehouse.
- Incoming goods cover the quality control at the warehouse ranging from simple visual control to a detailed completeness check and are highly dependent on your product.
- Storage refers to occupied pallets and shelf spaces per month.
- Picking and Packing (also known as commissioning) represents the order-specific collection and packaging of individual products to prepare them for shipping.
- Shipping refers to the costs related to the delivery of the product to your end-customers by selected carriers.
- Return handling can include multiple different services like receiving, controlling, polishing and re-stocking of returned products.
- Value Added Services are often customization services and can vary a lot depending on your needs. The pricing is mostly based on time consumed and the machinery used for one specific service. It is advisable to ask for a pre-calculation.
- Working hours refer to human labor costs within a warehouse and fulfillment center for extra work not yet covered in the cost buckets above.
Once you’ve received all the essential information from the 3PLs that you included in your selection process, it makes sense to prepare a master comparison sheet to benchmark the most critical factors against each other.
“Based on our experience, we believe that you should base your selection on the criteria location, operational focus, flexibility, customization and IT capabilities – as well as the price.”
Finding the right 3PL for your individual operational needs is very important for the success of your business, but often operations- and supply chain managers managers feel overwhelmed with the task of finding a suitable logistics partner. Plus, this process can be quite lengthy and time-consuming, and thus it is often deprioritized or simply swept under the carpet within operations teams.
We at everstox know about the challenges and struggle of finding perfect logistics partners and are here to support you with the selection process. We have specialized in building strong relationships with trusted 3PL companies across Europe and can quickly provide you with multiple quotes of pre-selected partners upon request. Moreover, our 3PLs are connected to everstox cloud-technology offering you full operational visibility and control in daily logistics operations.
If you are currently looking for a new logistics partner, would like to expand your operations into new markets or discover how we provide maximum flexibility and full operational control for our customers, please get in touch with us following this link.