13 Key Considerations When Selecting a 3PL and The Difference Between a 3PL & 4PL

What Is A 3PL?
A 3PL, also sometimes known as a TPL, is a third-party logistics provider. A 3PL helps your organization by providing expertise and best practices that can effectively integrate into your existing supply chain. 3PLs can specialize in various logistical areas and geographic regions.

How Does A 3PL Benefit My Enterprise?
A 3PL brings with it an existing network of valuable carrier relationships as well as a clear understanding of how to optimize performance on given routes. That being the case, a 3PL’s assistance is ideal for cost control, improving customer experience or expanding routes.

How Should I Go About Choosing A 3PL?
Choosing a 3PL can be challenging, because there are so many factors involved in making sure you have selected the right one before you even begin to work together.

Hard data should be the deciding factor in any new 3PL relationship. Any company that plans to provide freight services to you should be able to indicate the specific ways in which you stand to save money.

Before you start, make sure you understand your own needs before you start the search for a new 3PL by using our handy checklist found here. In order to utilize that checklist fully, first gather the following information from these 3 key areas:

Current freight logistics, supply chain, and costs, and an estimate of costs per mile and hundred weight.
Current freight accounting and audit performance.
A discussion of existing carrier relationships and improvements or extensions that could be made.

However, this is really only scratching the surface of starting with what you must do as a shipper to get prepared. Another key point before you start is to understand what to expect in a logistics service level agreement contract. We highly encourage you to download our white paper regarding Logistics Service Level Agreement & KPIs to get a clear understanding of what you should expect to see from the 3PL you ultimately choose as your logistics partner.

13 Considerations & Areas of Focus in your Search for a 3PL Perfect for Your Company

The following 13 considerations are the next step for you as a shipper after you have your own data and are prepared to know what to look for in a contract. 13 may seem like a lot, but handing over the management of a division in your business, transportation, that can be 60% of your supply chain costs, and anywhere from 4 to 9% of your revenue, is something you should not take lightly.

1. Consider getting outside help: You understand your logistics operations better than anyone else, but you may not understand completely what a 3PL relationship can represent to your operation, and to its profitability. Getting outside help when choosing a 3PL might simplify the process, and reduce staff and time commitment. Seek someone knowledgeable in third-party logistics who can demonstrate experience with a broad scope of outsource operations and providers. A great 3PL consultant and Cerasis blogger we recommend is Chuck Intrieri.

2. Define a clear process for interfacing with potential 3PLs: One of the greatest frustrations reported by individuals who attempt to evaluate third-party logistics providers is that too often no defined process exists. Nobody is clear as to what results are expected and in what order. However, if you understand your own needs using that handy checklist, gather your data, and know what to look for in a contract, you are off to a good start.

3. Consider a maximum of three 3PLs: With or without external assistance, conduct advanced research on potential 3PLs that fit your requirements and do a detailed evaluation of only those entities. If you are dissatisfied with the end result, you can modify the process and investigate others, but trying to evaluate more than three 3PLs thoroughly will prove extremely demanding.

4. Don’t use an RFP: An RFP limits you to functional costs. A good 3PL relationship should result in a quantifiable value significantly more dramatic than any RFP can identify. It is imperative that you choose the 3PL that offers the clearest quantitative value to your company.

5. Institute an internal 3PL evaluation team: This team must include representation from the supply chain/logistics, information technology, sales/marketing, purchasing, and finance departments. Doing this ensures corporate-wide buy-in for your ultimate decision. It also demonstrates the impact logistics has on the broader business and provides insight that will enhance the dollar value represented in the ultimate agreement.

6. Create an enforceable, mutual non-disclosure agreement: Do this before starting formal meetings with your third-party logistics provider candidates; ask your legal department to help. Execute this agreement before you initiate the development of a value proposition.

7. Payment history & financial stability: Having your 3PL suddenly fall apart could be one of the most devastating challenges your company faces. Finding a partner that has proven their financial stability will at least keep your operations from being brought to a screeching halt as you attempt to recover from someone else’s mismanagement.

While evaluating your top logistics candidates, ask for a list of partners and enquire about their history with the provider. Have they consistently made payments? Has their ever been disagreement or lack of follow through from the company?

How a logistics provider handles their partners will be a good indication of how they will handle your business and talking to their partners might give you a clearer picture than talking to their hand-picked list of references.

8. Proven track record: Going beyond the finances of a potential logistics provider, what is their overall track record like? Are they known for being a state of the art company? Do they have multiple long-term clients?

As a service oriented business, the reputation of a logistics provider will speak volumes as to the efficiency and reliability that you can expect.

9. Excellent industry references: The references you have for a logistics provider should not be good or passable; they should be adulatory. For a logistics provider to be worth your time, their clients should hesitate to speak volumes on their security, reliability, and flexibility. Clients should rave about the results they have delivered.

Furthermore, references should be able to speak to the character and culture of the provider. Whether good or service oriented, companies should be delivering a higher value proposition than simple efficiency.

10. Show the impact on sales throughout the process: Nearly all logistics projects are actually marketing projects. When evaluating the true quantitative value proposition of partnering with a 3PL, make sure you note the impact on sales. Often, attaining the lowest costs determined from a traditional RFP can lead to customer service problems, resulting in a negative impact on sales.

11. Insist on regular meetings with senior executives: Any agreement must require that senior executives from the 3PL participate in a quarterly, at minimum, meeting with a multi-department team. Treating the 3PL as an integral part of management, rather than as a vendor, evokes a degree of interest and responsibility in achieving overall corporate goals.

12. Scalability: First and foremost, can the 3PL efficiently scale their operations to fit your changing needs?

Bi-directional scalability directly influences how efficient your supply chain will be. You’re doubtlessly striving to grow your company, but the fact remains that there will be ups and downs to business. Demand might contract for any number of reasons. You need a 3PL that can rapidly scale down the processes within your supply chain.

Conversely, you also need a logistics provider that can handle sudden spikes in demand without skipping a beat. Growing pains happen for everyone, but if you find a 3PL that has already experienced them with another company, you’ll spare yourself the brunt of the problems.

Find a 3PL that already has clients both larger and smaller than your organization. A 3PL that can scale will constantly be making small adjustments, e.g. aggregating or multiplying shipments, as your requirements move in one direction.

13. Clearly define a timetable for handing off responsibilities to the 3PL, and document the responsibilities you will retain in-house: The relationship should not be initiated until this process is put in place.

As the new 3PL relationship is ramped up, communication is crucial. Failure to communication at a given time may lead to ongoing issues with the 3PL relationship, at least until the enterprise has completely gotten used to the new 3PL.

3PL vs. 4PL
Learning the difference between a third party logistics (3PL) and fourth party logistics (4PL) as well as 1PL and 2PL , and the rise of even Fifth Party Logistics (5PLs) is both confusing and highly debated among those in the supply chain industry. It’s also VITAL to know the players as you are selecting your 3PL.