Recently, a shipping manager asked me what selection criteria he should use when selecting a 3PL. As a sales guy for a 3PL I am always anxious to impress shipping managers, so I created the following 9 things to consider when selecting a 3PL.
1. Understand the 3PL Business Models – Asset based, Non-asset based, Asset light
- Asset based 3PLs own physical assets like trucks, planes, warehouses, etc. Pros: Since they own their assets, these 3PLs are able to use their own equipment to service customers. Truck availability is not a problem. Cons: Asset based companies typically have a limited service area compared to non-asset based companies that broker shipments through partner carriers.
- Non-asset based 3PLs use the assets from other logistics companies. Pros: If the 3PL is good at procurement, they can build a large network of partners / carriers. Cons: Since these 3PLs are dependent on their partners, they may sometimes struggle with difficult lanes. These companies also lack operational knowledge because they do not own assets.
- Asset light 3PLs own physical assets and also partner with other logistics companies similar to non-asset based companies. This is a relatively new model and is considered superior to the other models (asset based & non-asset based). Asset light companies have the best of both worlds – assets and brokerage capabilities. Wall Street values asset light 3PLs higher than asset based or non-asset based companies.
2. Financial Stability
- Dun & Bradstreet. D&B is a business credit rating service. The most important measure is the Paydex metric. Paydex is a numerical credit score for the promptness of their payments to creditors. Look for a 3PL that beats the logistics industry average. In other words, select a 3PL with a higher D&B Paydex score than their industry peers.
- Longevity. Older, more established companies are less likely to have cash flow issues than newer companies. New, fast growing companies burn through a lot of cash, which can cause slow payments.
3. Specialization / Current Customers
- Specialization. Select a 3PL that specializes in LTL and truckload. 3PLs that specialize in other services like air freight, sea freight, warehousing, etc. will often sell over the road services as a side business.
- Similar Customers. Look for a 3PL that has a customer base that has similar requirements as your business. The familiarity will reduce the learning curve and risk during the startup phase.
- Transactional vs. Strategic. High volume LTL shippers should hire a 3PL that has a focus on strategic shippers. Transactional shippers typically don’t ship much and they don’t commit to any one logistics company. Transactional shippers almost always pay more than strategic shippers. 3PLs that have transactional shippers are often not use to the requirements of a strategic shipper. Strategic shippers ship more than transactional shippers and they typically require customized solutions and a dedicated team.
- Customized Solutions. Larger shippers almost always require a customized solution. If you are a high volume LTL shipper, you should pick a 3PL that understands your unique requirements and can customize their service to meet those requirements.
4, Transportation Management System (TMS)
- TMS capabilities vary greatly. Any system will quote, track, audit and pay for shipments, the best systems do so much more.
- The best TMS will do route planning, consolidation and optimization, which will save a lot more money than just negotiating good rates.
- Hire a company using one of the top systems. Also, make sure the 3PL you hire has their own dedicated TMS people on staff.
5. Operational Excellence
- Operational excellence refers to the best practices and activities that get the desired business results including, but not limited to:
- Lean Processes Well defined processes to manage the business. A process orientation will enable cross training and continuous improvement.
- Carrier Network. For non-asset based and asset light 3PLs, the ability to partner with asset based companies is key. Bigger 3PLs will typically have a carrier procurement group and thousands of partner relationships.
- Service Area Footprint. When considering an asset based 3PL, ask about their service area footprint. Most asset based companies will serve only a few states or a region. Asset light companies use their own assets and partner with other carriers to cover a much larger footprint.
- Risk Management. A focus on risk mitigation is key. Reducing risk is really important during the transition to a new 3PL.
- Metrics / Key Performance Indicators (KPI). The best 3PLs use objective metrics / KPIs to measure performance.
- Canada & Mexico. Hire a company with significant experience in shipping to and from Canada and Mexico. Custom’s requirements are ever changing, so hire a company that moves freight daily over these borders.
- Every Mode / Worldwide. Even if your company doesn’t need the services, hire a 3PL that has the capability to ship worldwide and in every mode. Many shippers find themselves stuck with the wrong 3PL, when their business requires additional 3PL expertise.
- 24/7. Your 3PL should have support available 24 hours a day, 7 days a week. Choose a 3PL that can deal with exceptions, emergencies and expedites.
6. People and Organization
- Senior Management. The best 3PLs have the best management. Look for companies that have stable, hands on senior management that has been around for at least 3 years.
- Dedicated Resources/People should be assigned to large accounts. There should be multiple points of contact including: salesman, director of operations, logistics coordinator / analyst and payment & auditing analyst. The 3PL team should become an extension of your logistics group.
- Solid Organization. Many sales driven companies have grown through far flung franchises / agents that lack adequate ties to the home office. Choose a company with management oversight, accountability and a focus on operations.
- Experienced team. During the Great Recession, a lot of older, experienced people left the logistics business. Logistics companies now employ younger people, make sure they are well trained and managed.
7. Company Culture Dictates Behavior
- Every company has it’s own unique culture. Look for the following cultural traits when picking a 3PL:
- Integrity. Your 3PL should be a trusted partner.
- Proactive. An extra phone call or email can prevent a lot of problems.
- Responsive & Flexible. Able to quickly address new challenges and opportunities.
- Win-Win Relationships.
- Communication is the game changer in the logistics business.
- Ownership of Problems. A good 3PL is always looking to take on new problems from the customer.
- Whatever it Takes Attitude. Hire a 3PL that will go the extra mile.
8. Check Reputation & References when Selecting a 3PL
- Google. Check a company’s website. If a company has a poor website or none at all, it should raise a red flag. Also search for relevant news about your prospective 3PL.
- Linkedin is a great way to investigate the people who work at a company.
- Check References. Talking to current customers will provide good insights to a 3PL’s performance. Note: many shippers who use 3PLs are reluctant to discuss their 3PL relationships, so this option is sometimes limited.
9. Statement of Work
- The 3PL statement of work (or contract) should be fair, simple and contain the right level of details. The roles and responsibilities of the 3PL and the shipper should be listed.
- Excessive penalties, legal jargon and clauses are not the right way to begin a relationship.
- Collaboration and communication during the early stages will save lots of problems in the future
For a great article on this subject, check out Selecting a 3PL Without an RFP by Deborah Catalano Ruriani.
What do you think? Is there anything that should be added, deleted or elaborated on?