Moving products from their point of origin to the point of distribution to customers is one of the most important processes for U.S. importers and exporters. When it comes to the global supply chain, companies large and small typically rely on third-party logistics providers, commonly known as 3PLs.
The worldwide 3PL market is a more than $800 billion industry, according to 3PL market research company Armstrong & Associates. These companies provide importers and exporters with supply chain management services, such as transportation, warehousing, documentation technology, special services and logistics.
Many companies, including Fortune 500 firms, outsource supply chain management to a third party. The question is not whether you need a 3PL, the question is which 3PL is the best match for your company, advises 3PL expert Joe Lynch, president of The Logistics of Logistics, based in Detroit.
“In terms of importing and exporting, you probably don't have somebody in Bangkok or Beijing that can manage shipments, but a 3PL does," says Lynch. “They have local knowledge, and that's important when, for example, you have to move product from a manufacturing facility in central China to a Chinese port. That means working with a trucking company and local logistics providers on the other side of the world, and chances are they don't speak English."
—Joe Lynch, president, The Logistics of Logistics
Lynch notes there is a complex supply chain ecosystem that companies have to work with in order to move their products between point A and point B. “Most U.S companies don't have the local knowledge to manage this process," he says. “What's more, there are language issues, time differences, local business practices and customs regulations that you need to understand. There are a million reasons not to work directly."
The bottom line is that most companies don't have the skills and resources to manage a global supply chain, and that's where 3PLs come into the picture. “You need an insider to expedite the process," says Lynch.
The Different Types of 3PLs
Lynch says there are three types of 3PLs: Asset-based, non-asset-based and what he calls asset-light. Most businesses have worked with asset-based 3PLs, such as UPS and FedEx, which own physical assets, such as trucks, planes and warehouses. Non-asset-based 3PLs are essentially brokers that use the assets of other logistics companies. Asset-light companies have some physical assets, but also partner with other providers.
“Some asset-based companies have a limited service area compared to non-asset-based companies that broker shipments through partner carriers," says Lynch. “But non-asset 3PLs are dependent on their partners, and may, for example, struggle with difficult shipping channels. Ultimately, operational knowledge and capabilities vary widely among 3PLs."
Choosing a Supply Chain Partner
When choosing a supply chain partner, advises Lynch, it's important to determine how they align with your specific needs and target markets. After all, he says, “that company is going to be an extension of your supply chain."
The more complex your shipping needs are, the more important it is to ensure that your 3PL partner has the expertise to handle your supply chain needs. Lynch says most 3PLs have capabilities in terms of operational and repetitive activities, such as transportation, basic warehousing and customs brokerage services.
But fewer companies offer integrated value-added services, such as information technology, bill payment and auditing, and reverse logistics. Even more specialized are 3PLs that can provide supply chain consulting and other customized services, such as inventory management and order fulfillment. One starting point for finding a shipping partner is this online list of the top 100 3PLs maintained by logistics magazine Inbound Logistics.
It's important to make sure you do your due diligence and work with a 3PL that has the financial stability, global network infrastructure and operational skills you need. “The biggest risk you have," Lynch says, “is choosing the wrong partner."
Lynch recommends spending time talking to existing customers of potential supply chain partners to determine if the 3PL you are considering has the requisite operational expertise. Your research should include factors such as whether the 3PL you are considering can provide any specialized services your company needs, whether they have experience in your industry sector and whether they align with your transactional and strategic requirements.
“High volume LTL [Less-Than-Truckload] shippers should hire a 3PL that has a focus on strategic shippers," he says. “Transactional shippers typically don't ship as much, and almost always pay more than strategic shippers."
High volume shippers, Lynch adds, should focus first on finding the right strategic partner. In exchange for a contractual commitment, he adds, “you want to be assured a great price and great service."
When entering into an agreement with a 3PL, you'll want to carefully review both the contract and the service level agreement. The contract will spell out details, such as services provided, duration, cost, resources and other specifics. A service level agreement (SLA) typically focuses only on specific performance metrics agreed upon by both parties. “The SLA can be used as a measurement tool as part of the contract," says Lynch. “The rationale for having a separate SLA document is that you can revise the SLA without revising the contract, and it defines the service expectations between the supplier and the customer."
Another important consideration is whether the logistics provider you are considering has the technological capabilities to manage your shipments. “One of the best reasons to hire a 3PL is to take advantage of their supply chain management technology," says Lynch.
Moreover, adds Lynch, your 3PL should have the capability to provide you with key performance indicators (KPIs) on a regular basis. Those KPIs include information such as inventory, product availability, damage, order documentation, processing times and order tracking.
Finally, when deciding on a 3PL, consider whether your partner can scale with the growth of your business. “Even if your company doesn't need the services today, hire a 3PL that has the capability to ship worldwide," says Lynch. “You don't want to be stuck with the wrong logistics partner when your business requires additional 3PL expertise."