Avoid making a bad 3PL decision
3PL’s are not created equal but most of them will look similar to the uninitiated. Similarly, new business owners often think all accountants are the same because they are accountants it’s not until they are older that they realise some are very good and others not so much, ones that you might pay a bit more for normally end up saving you the most in the long run, for this reason it’s not wise to purchase an accountant on price. Or a 3PL.
The way you purchase services should vary depending on the strategic importance of it. For this reason many large companies have specialist procurement divisions, procurement is a science, here are some handy hints.
SCS is often referred to as the ambulance at the bottom of the cliff, over 80% of clients come from competitors who have promised one thing and delivered another. We’ve seen it all. There are over 100 3PLs in NZ, we personally rate 4 of them.
Assessing a 3PL for your business is a complex process; it has many similarities to purchasing bespoke software. If you take shortcuts you’ll get a great price but ultimately the solution wont work to your expectaions and will cost you more than if you had taken a professionally considered approach. Done successfully 80% of the work is done up front, most first time 3PL buyers tactically purchase 3PL thinking it is cheaper and eventually find out it costs more than strategically purchasing the service. Here’s the difference.
|Tactical Purchasing||Strategic Procurement|
|Rates||Total cost of ownership|
|Service||Robust KPI structure that fits into contract that aligns with business strategy|
|Transactional view||Integrated view|
|IT offering||IT capability and platform flexibility|
|Size (incorrectly include freight network)||Core capabilities|
Supply Market complexity
|Domestic freight||International Freight||3PLSC IT tools|
Key areas we frequently see it go wrong
- 3PL buyers underestimate the importance of KPIs, every degradation of 0.5% in KPI is equivalent to .5% cost of turnover e.g. if a company turns over 10M each 0.5% drop in KPI is worth 50k p.a. loss (loss and damage, additional customer service and admin, additional executive management time, lost customers). Knowledgeable 3PL buyers will factor this into their price consideration and will dive deep to understand if the KPI system/offering is robust (most are not)
- Awed by size, big must be good, often it’s not especially if the size is in the freight division. Alternatively they choose small because they think they will get better service, again this is rarely true in fact a 3PL with less than 10,00 pallets is unlikely to even break even, if they say they are they are either charging you too much or they will be getting you somewhere else. If they are not breaking even then how can they invest in the business to give you amazing service? The key is to find a reasonably sized business (we needed 17500 pallets to break even in a 20,000 pallet facility) that offers the benefits of scale but has a structure that supports small company service.
- Reference checking is not done, or it is done but it’s not impartial; they go into the reference checking process with their mind already made up so they don’t receive the actual value from a robust check. i.e. they hear what they want to hear. Equally they are not qualified to ask the correct questions because they don’t know what they don’t know. As with software, if you don’t get it, buy in the expertise. The issue here is that most of the logistics consultants we know have their favourites and some even receive backhanders, you are better off finding a consultant through a recommendation than Google or the yellow pages.
- Tenders are almost always the wrong way to procure a 3PL.
- Don’t understand their own business, this is the biggest issue buying software, companies do not understand their own business processes well enough, therefore they do not articulate their requirements well (the scope). In most cases poor software outcomes are because the buyer skipped the business requirements and process mapping stage (and who wouldn’t? its boring, tedious and expensive) in hindsight, the final solution had no chance of success because it could not align brilliantly to the business needs because they were not explicitly defined. In 3PL some buyers throw their business at a provider hoping to forget about that ‘part’…train smash in the making. Buyers still need to take an active part making sure the business needs are aligned with the 3PL capabilities, communicating forecasts and product changes. It’s an active partnership.
- 3PL solutions are sold by salespeople, of course they can do everything you want, the bits they don’t have yet are ‘just about there’, it’s not until you’re in there that you can discover they can’t deliver as exepected, a lot of 3PL providers know and bank on the fact that because it’s so expensive to move in, it’s a lot harder for you to move out (cost and business interruption) a lot of 3PLs actively use the strategy to buy your business then crank up your rates in 3-12 months to far more than the ‘sell in’ rate knowing that you will probably be forced to accept it as the cost to change is too high.
- They buy your 3PL cheap so they can make money on your freight, I can’t believe people still fall for this, 3PL is much more complex than freight, at SCS we make a 5% net profit (not unusual for a service industry) and we are open about this and happy to share our books (some publically listed companies insist on this as part of their procurement process) we have a LOT of technology and IP that allows us to offer our rates at the low level they are (plus we have no corporate overhead like our multinational competitors) so if someone is 10% less than us then they are obviously losing money on your account (duh), probably 10-20% below cost. So how can you not expect the service to be poor, because the salesperson said it would be ok? clearly they are ripping you blind on the freight to make up for the loss, obviously if they are loosing money in the 3PL they can not invest in the systems or people so the duty of care will be low, the staff turnover high, the systems poor and the service will be poor, seriously what do you expect? You will get exactly what you deserve when you buy on price and accept this strategy – don’t come crying to momma.
- Buyers think that because a 3PL is a 3PL they must be good at it and know what they are doing, if I had a dollar every time I heard that from a disgruntled 3PL buyer…
- Buyers don’t ask for guarantees, our standard rates agreements states we will move you at our cost to any store in AKL if we don’t perform to our contractual standards. We believe in our service and put our money where our mouth is – if your 3pl isn’t prepared to offer you this peace of mind, you should be worried.