Fundamentals to review before 3PL vendor selection

.

Third Party Logistics (3PL) is the function by which the owner of goods (The Client Company) outsources various elements of the supply chain to one 3PL company that can perform the management function of the clients inbound freight, customs, warehousing, order fulfilment, distribution, and outbound freight to the clients customers. Utilizing the services of a 3PL company is one activity, demand for which has not gone down much even in these testing times. Though more and more organizations are going towards the 3PL companies for specialized logistics solutions, it is imperative that we all pay attention to few fundamentals points before selecting a 3PL partner company. (Also see: 3PL Industry Trends: Emerging Markets, Sustainability, and Fuel Costs Weigh Heavily at AMRResearch).

.

Knowing Demand is key
Material flow information through a supply chain is very important to understand the requirements of you supply chain. Gather all historical data and record the number of items, costing information, how many times the demand comes for that item etc. The data should be for finished goods as well as raw material as it is critical to synchronize planning, material requirements planning (MRP), material delivery, conversion to finished goods and outbound product movement. Modeling the past, with appropriate normalization to accommodate projected future changes, will help manufacturers understand the cost-impacting decisions that drive supply chain requirements and identify which components to outsource or retain.

.

.

.

Start taking forecasting more seriously
If you can predict your requirements and subsequently pass that forecast to your suppliers, then you are much more likely to get what you need, when you need it. However, demand forecasts are notoriously inaccurate. So, do not just multiply (or divide) the historical data with a number to get a forecast for future. Forecast needs inputs from a variety of stakeholders, including procurement, manufacturing, distribution and commercial. Participation from these stakeholders is critical to establish an accurate forecast and articulate key constraints, and ultimately can drive the success of the transaction, as the provider's ability to meet a company's needs and targeted cost structure will be largely dependent on the accuracy of the forecast. An inaccurate forecast likely will result in either excess capacity (and cost) or constrained capacity (and lost sales), with the implications becoming more pronounced as forecast accuracy decreases. Furthermore, stakeholder understanding of the supply chain performance dependencies is necessary to ensure valid root-cause analysis and issue resolution in an outsourced environment. Remember, a better forecast means less error and that predicts a smaller standard deviation, which in turn means you need to provide less buffer inventory.

.

Accountability of Demand
The decisions of business leaders and other stakeholder departments like transportation, warehousing, handling/labor, working capital and obsolescence, heavily impact the Supply chain costs Supply chain leaders may determine where inventory is stored, how much warehouse space to lease/own, or specific transportation carriers and modes, but directives such as customer fulfillment rates and order-to-delivery time drive stocking location decisions, inventory levels and transportation carrier selections. While 3PL providers must be held accountable for optimizing costs within their span of control, internal stakeholders also must take responsibility for the cost implications of their decisions, many of which may limit a 3PL's ability to truly optimize.

.

A 3PL can improve many aspects of a company's supply chain, but likely will focus on the objectives articulated by its client and reasonably within its control. Set clear objectives to drive provider behavior, such as specific cost savings or reporting, escalation and explanation. Engage the 3PL in discussions prior to finalizing objectives, as its experience and input can provide better visibility into the trade offs of supply chain decisions.

.

SMART Goals
The business impact needs to be measured against the key performance indicators like the number of inventory turns per annum, total cost per unit sold, number of stock outs in an year, ontime delivery etc. and this measurement needs to be a continuous process.