5 ESSENTIAL QUESTIONS FOR YOUR 3PL

Writing requests for proposals (RFP), evaluating responses, meeting with third-party logistics providers (3PL) and interviewing customer references are standard practice when it comes to selecting your organization’s 3PL. But what other questions should you ask before signing on the dotted line?

Here are five key questions that shippers and 3PLs agree should be part of any 3PL interview process.

No. 1

What are your financial and market strengths, and your strategic commitments?

“Any 3PL you are considering should be able to specifically describe the value it can bring to your company,” says Emmanuel Cambresy, Country Category manager of Strategic Sourcing for one of the largest worldwide healthcare companies. “The 3PL’s business plan must also be able to be aligned with your long-term vision and strategic development plan. As part of this, you should determine whether the 3PL has a joint strategic decision-making process with its customers that facilitates a strong business partnership.”

Frank McGuigan, Transplace executive vice president and COO, notes that the 3PL marketplace is getting crowded. “Companies need to be able to distinguish between the marketing ‘noise’ that they hear and the value that actually gets delivered,” he says. “You want a value-based relationship with your 3PL that can address your specific business model and what it is you have to accomplish. At the end of day, the relationship you build with your 3PL should be based upon the value that it can deliver.”

Derek Leathers, president and COO of Werner Enterprises, says that any 3PL should be able to fully describe its service footprint and particular market strengths. “Interview the 3PL on its global reach and define where current and future markets come into play,” he says. “Most 3PLs know local landscapes better than their customers and can provide global trade management services to enable trade compliance. … Expansion into new markets is a primary reason that shippers select 3PLs; you should have full confidence that your provider has both immediate as well as longer-term account management capacity across various geographies.”

No. 2

Can you provide examples of your implemented capabilities and expertise as well as demonstrated performance-based results?

“Any 3PL that you consider for logistics needs to be able to provide several examples of case studies and references of customers in like industries, with similar supply-chain or distribution challenges, that represent proven measurable and sustainable results,” says Sean Coakley, SVP of Kenco, a logistics provider. “It is important to fully understand the 3PL’s capabilities with similar organizations, discuss obstacles they may have encountered and how they overcame them, as well as examine their average client tenure and the reasons why contracts may have expired in the past. In addition to service capabilities, look for attributes such as the organization’s culture and reputation, talent development and retention, and industry stewardship.”

Emmanuel Cambresy stresses the importance of holding 3PLs accountable for their results when you interview them. “Always ask the 3PL how it has proactively been contributing to the delivery of sustained innovation and business transformation for its customers,” he says. “Also ask the 3PL how its current commercial structure supports fairness, flexibility and transparency in the supply chain.”

Talking to 3PL customers is also highly important. “Sometimes the 3PL only gives you a list of its ‘good’ customers for references,” says John Brooks, director of Distribution and Transportation for Philips Global Purchasing Group, which handles both Philips’ healthcare and electronics divisions. “But it’s very important during the interview process that you speak with a variety of other customers so you can gain a thorough understanding of the 3PL and what it can deliver. This means that you should ask for full customer lists that you can choose from.”

McGuigan seconds the importance of drilling deep into customer references. “Few companies interviewing 3PLs develop detailed lists of questions to ask references during their RFP processes,” says McGuigan. “You should ask the 3PL what the average length of its customer relationships is, and if it has ever lost a customer. If a 3PL has long-term relationships with its customers, this demonstrates the 3PL’s ability to keep returning value to these organizations. … As a shipper, you want to see successful business cases out there—not just summary results for a series of 30-minute phone calls.”

No. 3

What are your IT capabilities?

“Always fully understand and interview 3PLs regarding their IT capabilities,” says Werner Enterprise’s Leathers. “The information that IT systems provide is the lifeblood of supply-chain planning and execution. It is essential in a 3PL relationship to align and understand how and where information will be managed, how the system’s architecture is linked to supply-chain strategy and how future enhancements will be financed and implemented.”

Fred Schardt, president and COO of FedEx Trade Networks, says that companies should look not only at present 3PL IT capabilities but also whether the 3PL is making appropriate investments in future technology that will bring value to the supply chain.

“Systems and IT are very important,” affirms Philips’ Brooks. “We have often found that we don’t get the reports we want. Key technology areas that a 3PL should excel in are track-and-trace, reporting, contracts, operations and feedback. The systems the 3PL uses must be flexible and able to change rapidly to respond to new market conditions.”

McGuigan adds, “A shipper should ask its 3PLs what systems, people and processes they have that will improve the shipper’s processes beyond the first year the shipper is with them. You want someone that can lower expense or produce savings—and that has the technology and organizational infrastructure in place to keep delivering to these goals.”

No. 4

Who will be managing my account and supporting my organization on a daily basis?

Mike Stark, CEO of Pacer Distribution Services, says that companies should investigate what kind of relationship they can have with a prospective 3PL before they sign a contract. “Shippers should ask themselves whether they will have access to the top person if something happens.”

From here, it’s a question of ongoing communication and execution. “This is why companies should also find out what the 3PL’s account management structure is,” says FedEx’s Schardt.

“Another question they should ask is, ‘Once the business is awarded, how will I be serviced?’” Schardt says. “Shippers should make sure the 3PL’s account management structure is capable of building and sustaining a business partnership with constant access. Your 3PL should do what it says it can do. Finally, turnover of personnel is important. You want a 3PL where the skilled people stay and are happy with and understand their jobs.”

“Look for how well you can access key personnel and what kind of internal training programs the 3PL has to ensure that its personnel are well trained in the areas where they work,” adds Philips’ Brooks.

No. 5

What obstacles do you see in my organization that prevent me from taking full advantage of your services?

Pacer’s Stark encourages shippers to ask their 3PLs what services they can provide that the shippers aren’t presently getting. “Also ask the 3PL where it expects to be with its service offerings a year from now,” he says, “and then tell them that you want to be there with them when they’re planning because it’s important that the two of you speak the same language.”

“When we look at a 3PL, we expect it to be the expert,” says Brooks. “We want our business processes to be driven by 3PLs in the sense that if they are aware of best practices and can recommend changes or improvements we can make to our operations. We want to hear about these so we can consider adopting them.”

“These are healthy conversations that should take place one or two times a year,” says McGuigan, who acknowledges that he sees many businesses that want the 3PL to unilaterally change the business without changing anything that they do. “There are natural resistance points within these organizations, because new workflows require up and down buyoffs from stakeholders and the process of consensus takes time.”

He says that in the ideal situation the 3PL and shipper should be able to originate eight new ideas.

“Maybe three or four of them that get shot down, but then you discover that there are three or four that you really haven’t looked at,” he says. “This is when a beneficial business paradigm shift can occur.”

Vaccines, pharmaceuticals and many foods must be kept at specific temperatures while in transit or risk harming consumers. So how are carriers assuring temperatures—and safety?

The costs of cold-chain instability can be enormous—in both dollars and human lives. “We depend on cold chain and carefully forecast our need for vaccines as much as possible,” says Paul Molinaro, senior manager of Change & Development at UNICEF Supply Division. “Losing vaccines to spoilage or any other supply-chain factor is something we just can’t afford, since vaccines are life-critical and also very long to manufacture if they are lost.”

When refrigeration is inadequate, perishables like medicine and food can spoil and their quality alter by chemical reactions that begin to take place. This makes it essential to monitor the “cold chain”— the origin-to-destination distribution network of refrigerated products in temperature-controlled containers (reefers), trucks and warehouses.

“The vaccine cold chain is needed from the time a vaccine leaves a manufacturer to the point of delivery at the health center or immunization point,” says Andrea Sioris, a manager at UNICEF. “The cold chain is monitored through various mechanisms, such as vaccine vial monitors that check exposure to heat, as well as electronic time temperature monitoring devices, which track temperatures during international transport.”

“Countries return Vaccine Arrival Reports to UNICEF, in which the status of vaccines—including any temperature exposure—is recorded,” says Sioris.

Richard Smith, director of Life Sciences and Special Services at FedEx Express, says the life sciences and healthcare industries also have stringent demands for refrigeration. Pharmaceuticals must often be kept at temperatures between 15-55 degrees Celsius. “In other cases, a broader 10-30 degree Celsius range is acceptable,” he says. Biotech products and drugs on clinical trials both frequently require refrigeration between 2 and 8 degrees Celsius—significantly below the ranges of standard product refrigeration.

“We see high demand for cold-chain services in produce, flowers, fresh fish and other perishable goods,” says Smith. “During transit, time-sensitive and highly perishable goods like fish must be maintained at refrigerated temperatures to ensure freshness and prevent spoilage.”

To answer the challenge, container atmospheric controls today go well beyond maintaining temperature. Fruits and vegetables respire as they mature, consuming oxygen and producing carbon dioxide and a hormone called ethylene. Kartik Kumar, director of Marketing and Strategic Planning, Global Container Refrigeration at Carrier Transicold, says his company “uses technologies that enable shippers to control levels of these gases in ways that can further slow the ripening process and help extend shipping time.”

While controlling humidity levels inside containers is important for flower bulbs, paper products, artwork, electronics and certain metals, health is concerned for pharmaceuticals and food items such as garlic, onions, ginger and other root crops. “The food we prepare comes from a variety of vendors,” says Melanie Pipkin, a Red Cross spokeswoman. “As food is checked in, we note the condition in which it arrives. Any food that doesn’t arrive in its acceptable temperature range is rejected.”

Shipments must be monitored throughout the cold chain, and it may be necessary to intervene when there is a failure. Some organizations place data loggers in the boxes of goods they are shipping to monitor for temperature control. Unfortunately, these companies usually receive monitoring results after the fact, so they lack real-time visibility.

“Without real-time visibility, shipments can spoil,” says FedEx’s Smith. “A shipping delay can be as simple as a transportation connection that is missed when you’re trying to expedite the shipping of a temperature-controlled drug or a medical device needed in a surgery.”

Years ago, Smith says, FedEx had a finite number of locations that provided refrigeration, and in many cases refrigeration was done on an ad hoc basis. “We made a strategic decision to grow our healthcare business,” he says. “This encompassed providing temperature-control services such as cold storage, dry ice replenishment and even gel pack exchange. What we wanted to do was to increase our cold-chain infrastructure in order to better manage contingency situations involving time and temperature-sensitive products.”

Today, FedEx averages around 20 scans on each shipment through its end-to-end shipping and distribution network. With some very critical packages, it is even using active sensors the size of a smart phone, which are inserted into shipping boxes and containers. These sensors report on a shipment’s temperature, humidity and integrity via a light sensor in real time and issues alerts in the event of a temperature excursion or package breach. Sensors also report a shipment’s exact location, thanks to incorporation of GPS technology. “Our customers can access this tracking and performance information through a web-based user interface called SenseAware,” says Smith. “We also have a 24/7 monitoring service.”

Even with diligent monitoring, however, failures still occur. “A lost or thawed sample means the patient has to give more blood. This can often mean another three-plus hour drive to get back to the nearest clinic or hospital,” says Mitch Nelles, vice president of Research and Development and Technical Operations for XDx, a molecular diagnostics company.

To improve outcomes, more companies are using electronic data recorders to monitor shipments. “The control systems are compatible with shipboard telemetry systems shippers use to monitor all refrigeration systems onboard,” Kumar says. “Some shipping lines are further engaging telemetry to relay seaborne refrigerated container status via satellite to land-based central monitoring points. But when a failure occurs, shipping lines carry ‘ship kits,’ which include key components for repairing a refrigeration unit at sea.” Carrier Transicold, he says, offers a comprehensive repair and service network with nearly 430 service centers worldwide in all major and developing ports.

FedEx also has a network of local hubs and gateways that protect temperatures of goods. “We look at the entire cold-chain backbone when we address refrigeration,” says Smith. “This means that there are numerous transit points en route to the 220 countries and territories around the globe that we serve which need refrigeration and backup controls and solutions. All of these hubs and stations are catalogued for their temperature-control capabilities and any one of them might be called into service if there is a system failover need generated by a shipment delay due to weather, regulatory hold or other factors.”

Rich Horan, vice president of Support Operations for medFusion, says cold-chain improvement efforts are paying off for his company, which provides clinical trials of new medications and uses sensors in its cold-chain management. “We have never lost a specimen,” he says, “and will continue to improve the process to minimize the potential for future failures from occurring.”

Cold Shipping vs. Global Warming

Shippers want sustainability and economy. Kartik Kumar, director of Marketing and Strategic Planning, Global Container Refrigeration at Carrier Transicold, says that costs of refrigeration vary depending on the number of refrigeration units carried on a ship and the amount and type of commodities within each unit. “The cost of fuel to generate electricity to run refrigeration units, as well as the emissions related to energy production can be significant, especially as fuel prices rise and energy becomes a greater contributor to the total cost of ownership (TCO) of a container refrigeration unit,” Kumar says. “Only 10 years ago, energy’s share of TCO was 28 percent and acquisition cost was the largest part, at around 57 percent (the balance being maintenance and repair costs). Today’s fuel prices put energy costs at about two-thirds of the TCO. Therefore, an upfront investment in fuel-efficient refrigeration units can save significantly over the life of a unit.”

Kumar notes that Carrier Transicold is currently in sea trials on an energy-efficient refrigeration system. The unit enhances its environmental profile by using carbon dioxide—a natural refrigerant with a global warming potential (GWP) of 1—rather than a synthetic refrigerant with a much higher GWP. “We have ushered in a new level of energy efficiency in containers,” says Kumar. “In one case, a shipping line with 6,000 of these energy-efficient containers is projected to eliminate more than 208,000 tons of carbon emissions.”

Best Practices for the Cold Chain

Technology advances will continue to change the cold chain. Shippers can capitalize on these advances by:

• Gaining end-to-end visibility of the cold chain

This starts with verifying the capabilities of your cold-chain service providers. You should strive for no “custodial breaks” in your cold chain—from the time you ship goods until they arrive at their final destinations. To achieve this, you need systems that monitor environmental controls every step of the way.

• Minimizing “handoffs”

The more you can work end-to-end with fewer service providers, the less coordination you will have to do between parties—and the less complexity.

• Improving internal cost management

Shippers tend to focus on containment of external costs, but there are also internal opportunities. “Traditionally, shippers endure heavy schedules on Monday, Tuesday and Wednesday, because they want to ship their temperature-sensitive goods so these goods aren’t stored in a warehouse over a weekend,” says Kinei Lin, manager, Customer Engineering at FedEx Express. “But with refrigerated trucks and distributed warehouse hubs with cold storage, we can pick up shipments on a Thursday or Friday. This flexibility helps to normalize the work week for shippers, because they can now spread their workload over the full five days and have their packages delivered earlier.”

Negotiating to Grow Global Capabilities

Serving a global clientele and keeping customers happy shook one e-retailer down to the ground—where logistics made the difference. Part of the dilemma was learning how to consolidate shipments into containers, sometimes even with competitor companies, so that no container left port in one country partially filled. Then there were traditional logistics problems to grapple with. Once in port at the receiving country, should goods be shipped by truck or via inter-modal transportation? These were decisions the retailer relied on their global logistics provider to make—but that wasn’t all.

There were issues with localization in the destination countries, like ensuring that instructions on the boxes of packaged goods were printed in local languages. Providing local services and order-taking were also challenges. The company considered whether it was more efficient to have their own employees “on the ground” in these distant locales, or enlist a 3PL (third party logistics provider) that could offer value-added services like localizing package instructions, warehousing and distribution, and even order taking and customer service.

It was decided to outsource warehousing, distribution, order taking and customer service functions to the 3PL. With the help of its 3PL, the e-retailer also rerouted much of its air freight to ocean freight, because the 3PL could expeditiously manage inventory demands locally with a make-to-order approach. This resulted in a seven-figure annual savings.

“Our customers are asking us to do more and more things for them that are not even thought of in traditional supply-chain logistics,” says Mark Sell, CEO of MD Logistics, a 3PL specializing in supply-chain solutions. “The services they are asking for and that we are offering include taking orders for goods, managing order systems, invoicing customers and even managing receivables. The largest growth areas for value-added services have been in packaging, kitting and labeling. Customers want us to deliver these elements as a turnkey service to them, so what we are seeing is considerable business process outsourcing.”

3PL value-added services become attractive as companies continue to seek ways to reduce their spending on transportation and back-office functions like warehousing, order taking and packing. A second supply-chain impetus is the push for visibility of everything that happens to an order or a shipment throughout the end-to-end process. It can be daunting for many retailers and manufacturers to acquire the technology that creates this kind of visibility—and have the people on staff who know how to run it. If they go with a sophisticated 3PL, chances are good that the 3PL already has the system and people in place. “We’ve seen great change over the past four or five years,” says Jason Pitt, vice president of Warehousing and Distribution for M&W Logistics Group, a 3PL with customized supply-chain solutions. “Companies are coming to us, and they are asking for a broad spectrum of value-added services. Just-in-time business processes are coming into play, and we find that customers are using multiple 3PLs throughout their distribution networks to address the work that has to be done.” This makes logistics an extremely competitive environment in which 3PLs must be able to offer solutions that streamline the supply chain, along with suites of services not even heard of in the past.

(Driven by Savings and Sustainability, Air Carriers Like American Airlines are Cleaning Up the Cargo Business)

Value-Added Services that 3PLs Provide Today

Over the past decade, 3PLs have added services that touch nearly every aspect of logistics. Most of these value-added services have evolved as customers have asked for them. Nearly all these services have one thing in common: the elimination of traditional headaches for customers.

“We do line sequencing and assembly work that we didn’t do 10 years ago,” says M&W’s Pitt. “This includes quality inspections for parts that are incoming or outgoing to overseas markets—at both the front and back ends of the logistics process. We also provide pick and pack services where orders are assembled from raw inventory. The items are packed to ship. We do the kitting of final assemblies and also special labeling. We even perform merchandising at the end customer sites by placing displays in aisles for the items to be sold.”

Pitt tells the story of a European customer maintaining an eight-person office in the U.S. for a localized presence. “They were taking orders on an 8 a.m.-8 p.m. basis,” he says. “We were able to handle the order process through our call center, and to leverage people we already had who were servicing other clients. It allowed the company to streamline its U.S. operations and to save money. In another case, we were able to take on a build-to-order process for a client. Because we were able to serve the local market in the U.S. and to build on demand, the company was able to reduce its inventory carrying costs and there was less waste.”

Companies are also turning to 3PLs for new shipping strategies. “One value-added service that is still under the radar for many companies is collaborative distribution,” says Alex Stark, director of marketing for Kane is Able, a consumer packaged goods (CPG) logistics provider. “It’s not exactly a new concept, but we are finding today that more companies are willing to consider it. In collaborative distribution, the goal is to fill each trailer to the max, even if it means combining your goods with the goods of a competitor. Companies used to hesitate doing this, because they didn’t want to collaborate with competitors. However, working together in a shared infrastructure, consumer goods companies efficiently deliver their goods to retailers in less time in full truckload quality, which is a win for the retailer as well. Shippers don’t compete on a pallet; they compete at the shelf.” Stark says that many companies see as much as a 35 percent savings in their shipping costs by collaborating in this way.

Companies will also look for savings by relying on 3PL systems that give greater supply-chain visibility. “We’ve had many customers do this,” says Tim Nolan, senior vice president and general manager, international division, Yusen Logistics, a 3PL with supply-chain and freight-forwarding services. “They leverage us for supply-chain data and information.” Services like this help companies bridge gaps in supply-chain systems, as the logistics providers can offer visibility in areas that a company’s system can’t. “The other thing we try to do with information is to provide intelligent, real-time exception reporting,” says Nolan. “In other words, instead of giving the customer’s supply chain manager a report that details out everything happening in the supply-chain, we deliver an ‘exception report’ that allows him to focus on the ‘hot spots.’”

Successful partnerships between a company and their 3PL go beyond operations into strategy-setting and execution. Nolan’s example of intelligent exception reporting demonstrates this—because the 3PL can’t be in position to “exception report” if it isn’t aware of the key performance indicators (KPIs) in the customer’s business.

“Understanding the customer’s business is very important in a good partnership,” says MD Logistics’ Mark Sell. “This is why we spend a great deal of time consulting with our customers on how to grow their businesses. We also build a relationship matrix with each customer so they know exactly who to go to with any question that they might have. We have KPI meetings and we meet quarterly to review SLAs (service level agreements) and rate. We are always addressing business objectives like our clients’ new promotions, initiatives and sales goals. We talk about new products that are being released, and how we are going to address these from the logistics side.”

Effective Negotiation

Since logistics today is multi-faceted, it gives companies great opportunities to optimize their strategies with of all the value-added services that are available. At the same time, it is equally important for companies to effectively negotiate for these services, since it is the negotiation that ultimately results in a contract—and the contract sets the stage for how the partnership will operate. The following is a set of negotiation “best practices” that companies with logistics needs will want to put in their “bag of tricks.”

1. Know your business and know your 3PL

3PLs differ in their core competencies and in their value-added services. The better you understand the nature and the pressures of your business, and the most beneficial types of value-added services, the likelier you are to find a “best-match” 3PL partner. If in your strategy you are also looking to outsource business processes because you feel a 3PL can do them better, have these processes identified prior to negotiation—and know what your expectations are (in the form of KPIs).

2. Present both SLAs and KPIs to the vendor

Logistics providers know their business and most have their own internal sets of KPIs, but a business is better positioned for negotiation for 3PL value-added services if it comes to the negotiation table with its own set of KPIs. This is an important point, as many companies present 3PLs with a set of SLAs to ensure service effectiveness—but SLAs may not be as impactive to the business as KPIs, because KPIs actually measure end results for the business like time to market, revenue capture and cost reductions.

3. Thoroughly check references before you negotiate a contract

“Existing customers, especially those with similar businesses, are the best source of information about a vendor,” says Tim Nolan. “When you speak to the vendor, get six to eight different references, not just the first two the vendor provides you with.”

4. Use more than one vendor

It always helps a negotiating position if you aren’t locked in to just one vendor

5. Approach the vendor as a partner with a negotiation that can grow the vendor’s business as well as your own

When the two of you sit down together, explain how you are going to grow your business. Often, you can secure tiered pricing based upon the increases in sales volumes you anticipate. This helps your business as well as your vendor’s, and you are able to grow together.