Successful supply chain management is a series of well rehearsed, established tactical maneuvers. A great deal of strategy is involved in the pick, pack, and ship functions required to distribute a finished product, ship a replacement part, or process a return from a retail store or a consumer.

The decision to keep these functions in-house or contract with a third-party logistics company is entirely strategic, and it can dramatically impact the bottom line of any organization.

Third-party logistics organizations (3PLs) offer a wide variety of services ranging from procurement to inventory forecasting to warehousing—even returns processing. Organizations can outsource some or all of their supply chain management depending upon business requirements.

For many organizations outsourcing logistics is like giving up a first-born. The distribution of product serves as an interface with the customer -- an opportunity to touch them and create a positive experience.

For this reason, many 3PLs distribute products without the end customer ever knowing. The customer believes the product came from the retailer or manufacturer, not the silent partner who is tasked with distributing goods.

The Value of 3PLs
Acting as an unknown entity is just one part of the significant value that a 3PL brings. Using a 3PL can create cost reductions in capital investments and potential inventory reduction. Companies that outsource to 3PLs also benefit from transitioning many of their fixed costs to variable costs. Although there is typically a fixed cost component in 3PL contracts, most of the services paid to a 3PL are transaction-based by the order, line, or piece shipped. In addition, procurement and inventory forecasting is continually being updated utilizing historical data and other variables researched by the 3PL.

Aside from the cost savings opportunity, 3PLs benefit clients by allowing them to focus on their core competencies. Manufacturing and selling products is no easy task, nor is logistics. By outsourcing a portion or all of their supply chain, companies can focus on what they do best, while benefiting from the 3PL’s specialization and best practices gleaned from other clients. When a 3PL helps a client improve on a process, the other clients benefit also.

By using a 3PL, companies also gain access to more advanced supply chain technology that they might not be able to afford or maintain if the services were kept in-house. Many 3PLs leverage warehouse automation to meet the growing demands and shrinking time frames customers expect them to meet. They are required to handle products of varying size and weight, with different packaging and kitting requirements. By using the latest technology and synchronizing business processes with their customers, 3PLs are able to maximize speed and quality of service.

Another benefit of working with a 3PL is vendor management. Organizations who keep supply chain services in-house must deal with dozens, if not hundreds, of suppliers in order to manage the availability, price, and geographic requirements of meeting customer demands. When outsourcing to a 3PL, there is only one relationship to manage. The contracted 3PL takes on the challenge of processing the order; providing information to meet all needs; and can pick, pack, and ship in a timely manner.

How to Evaluate a 3PL
In order to truly benefit their clients, 3PLs must be flexible and willing to customize their services based on customer need. Some 3PLs can only accommodate certain technologies and business processes. Flexibility and customization becomes an important consideration for a potential client- without it, outsourcing can become a costly and timely endeavor to arrange.

Technology is a perfect example of where customization can be an issue. Many 3PL organizations have set expectations of what is required in order to interface with their systems. This can require in some cases a large investment. For smaller organizations or start-ups, some 3PLs offer alternative solutions.

Tom Giovingo, chief operating officer for Fidelitone Logistics, a 3PL headquartered outside Chicago, explains that an important part of what his company offers customers is the ability to operate based on defined business rules established by both organizations. To accommodate some small startups, Fidelitone Logistics has worked from basic technology like e-mail and Excel spreadsheets for order processing.

"Adaptability and flexibility are required when working with supply chain management," said Giovingo.  "Whether you are dealing with warehousing, inventory management or technology, you have to manage and execute your client's established business rules and requirements."

Like many 3PLs, Fidelitone Logistics strives to be flexible in the manner they communicate with each customer in an electronic environment. Although they sometimes use basic technology to process the orders of certain clients, Fidelitone Logistics uses leading-edge technology to manage their operations, keeping all of their clients’ supply chains operating at their maximum potential.

It is no mystery that speedy delivery produces happy customers. The speed in which parts can be acquired is directly correlated to the speed in which products can be shipped, and timeliness is the foremost criteria when reviewing the performance metrics of a 3PL. According to Giovingo, a standard expectation in the industry is that in-stock items ship within 24 hours. Two additional criteria that should be important to a company considering outsourcing logistics are (1) accuracy of deliveries and (2) general product presentation. Companies should also be able to maintain some control of the supply chain processes without having to micromanage the 3PL.

Moving Forward
Once the decision has been made to move forward with a 3PL, getting up and running can take anywhere from six weeks to six months. The time required is dependent upon the complexity of the agreement and the systems integration requirements. Business rules will be established with the 3PL, followed in some cases by a physical move of the product.

Regardless of organizational makeup, relationships with 3PLs are not intended to be short term. A great deal of time and money is invested to make the outsourcing decision and get the relationship started. Supply chain management is a critical function of any business. To be successful, 3PLs and their clients must work together as honest partners, with a focus on accomplishing goals together as two companies appearing to be one. CM

About the Author
Tonya Bjurstrom is a freelance business writer in Monument, Colorado.