IN-HOUSE VS. 3PL: WHAT TO CONSIDER
Otherwise known as a third-party logistics provider, a 3PL is utilized by a range of businesses to support logistics and supply-chain management specifically as it applies to distribution and fulfillment services. Pre-1970s transportation contracts were comprised of the shipper (the giant retailers, wholesalers and manufacturers) and the shipping carrier. This all changed however with the introduction of an increased number of “sellers” to the market. These sellers didn’t count on logistics as part of their core competencies, and that produced what economists refer to as a “gap” (in the market). The 3PL jumped in to occupy said gap and the rest is history.
Major legislation passed in 2008 legally held 3PLs as responsible for the inventory they receive/hold/transport as the actual owner said inventory. Roughly 86 percent of Fortune 500 companies and nearly all (96 percent to be exact) of Fortune 100 companies use 3PLs today.
Despite the high uptake of 3PLs, like most industries there are detractors when it comes to outsourcing order fulfillment. Some of the pros listed for keeping things in-house are:
-You understand your business at a level no third party could.
-Issues are easier to resolve.
-Change and/or minute-by-minute adjustments are more flexible and manageable.
Along the same lines, there are experiences with 3PLs that have left sour tastes because:
-Once a relationship is established and a contract signed with a 3PL, it can be difficult to exit.
-Relinquished control can be complex when it comes to deliveries and client relations.
-It can be difficult to communicate with external drivers/shippers or similar transport personnel in the field.
Of the above, the last point, communication with field personnel, is the principal sticking point. If order fulfillment is linked closely with 3PL transportation personnel, which in most cases it is, having a clear understanding of supervisory roles and what to do in the event of delays or poor communication is vital. Notwithstanding for the most part, the pros to working with a 3PL in a smart and effective manner far outweigh the cons.
For example, concentrating order fulfillment and similar tasks in-house takes up a tremendous amount of resources, which equates to more work and a larger staff. Many relationships, with the carriers most notably, are characterized by a disproportionate number of problems due to the complexity of the job, and it is also equally difficult to know if the rates one is paying in-house are truly competitive with what a 3PL can provide.
A 3PL can compare and select the most competitive rates due to a very wide supply of carriers. They, of course, have lower overhead costs and less staff overall is needed. Then there is perhaps the most compelling argument in 2019 for a 3PL relationship: the latest technology is always up-to-date.
With regards to order fulfillment, a 3PL provides an array of functions, but two areas stand out:
Many 3PLs maintain extensive warehousing facilities and especially when confronting the decision to invest and open a warehouse in a foreign company, a 3PL might make better sense. Granted, one does lose a bit of control not being able to oversee warehouse management processes, but it is likely that a 3PL with warehouse management experience in said foreign country would encounter fewer costly surprises than a new company in a given territory.
At a warehouse level most 3PLs run a warehouse management system (WMS). There is no “one size fits all” solution here as a WMS can be highly complex or as simplistic per firm needs. The value added with a WMS is shippers can access reports, track inventory and easily monitor progress. This is done remotely, of course, and most 3PLs that have an advanced WMS can seamlessly integrate it with enterprise accounting software or enterprise resource planning solutions.
Picking, Packing & Shipping
Once an order is placed or something needs to be retrieved or moved, picking, packing and shipping take place. This is where coordination meets timing meets client expectations. A wrong move will cost money and potentially a client’s contract. One of the more common mistakes that occur when trying to run a warehouse (in-house as opposed to using a 3PL) is if packing and shipping procedures are not clearly understood and/or if the company has little experience in this area, generating the appropriate labeling and being able to negotiate favorable rates with carriers such as UPS, USPS and DHL cannot be leveraged. An experienced 3PL in this instance is an invaluable resource to count on.
Prior to transitioning into “things to consider” before choosing a 3PL, perhaps the best argument for their existence is technology related. A tech-enabled 3PL leverages the latest fulfillment software to streamline the flow of information, which saves time and automates nearly everything along the supply chain. Second, being able to split inventory across fulfillment centers via software integration and advanced analytics drives effective chains and reduces errors over the long term. No one firm can be an expert in everything and successful 3PLs invest in technology knowing that their clients simply do not have the time nor resources to do the same. They are rightly betting the 3PL will do that for them.
Things to Consider
Prior to embarking on a relationship with a 3PL in the order fulfillment arena, there are several issues that should be addressed:
-Can the 3PL commit to ongoing and irregular investments that will always be needed to keep up with augmenting capacity?
-Is it beneficial to commit to these investments on an ongoing basis?
-With seasonal drops or sales spikes, unplanned expenses generally come together: A good 3PL provider can manage these market fluctuations and protect businesses accordingly.
-Regarding handling, the amount of time spent handling special packing materials can be onerous: a 3PL provider can maintain consistency and decrease costs.
Specific Questions for the 3PL Provider
-How do you administer your accounts?
-Will I have access to your reporting data?
-Does the firm count on personnel with regulatory experience?
These issue areas and questions will help in the initial vetting process. Regardless of whether the firm chooses to stay in-house or contract a 3PL for order fulfillment duties, knowing what the other scenario that has not been selected will cost and look like is vital to any intelligent decision.