3PL is an awesome business model, from our perspective SCS manages this function for the same or less than our customers, additionally we offer significantly improved service levels and IT solutions, remove the risk around H&S and eliminate the hassle of labour allowing our customer to focus on their core competencies and where we are engaged as an SCP we add value strategically and help grow businesses faster than they can by themselves. We’ve just recently completed another 3PL vs DIY for a 300 pallet account that is growing and proven a cost saving of over 250k/annum. When you own your own facility you’re always the wrong size too big or too small.
Yet 85% of 3PL relationships under-perform and end up costing 30% more than expected.
Those stats are my experience over 15 years building SCS to be the largest 3PL PurePlay in NZ, speaking to 3PL users, reading countless articles as well as speaking to logistics consultants and consulting firms here and in Australia who also agree these numbers reflect their experience.
I often ask myself why and I’ve determined there are three reasons:
Reason One – 3PL and ERP vendors dine out on uneducated buyers.
A lot of 3PL buyers naively think all 3pls are created equal and in the same breath most ERP purchasers make the mistake of thinking that what they want should be simple as other people in the same industry must have similar requirements. I can tell you right now that those people reading this article just split into 2 groups, one went “yeah well that’s obvious”, the other winced as a painful, highly expensive and stressful experience just came rushing back.
A lot of IT vendors depend on this naivety to come back after the sale and start cranking in all the scope creep development costs rubbing their hands in glee. Certainly I’ve been up against numerous competitors who have tried to convince potential customers they have SCS’s capability and where they are open to listen I have to spend time educating them why they are not, why the rates look similar but deliver materially different outcomes etc… we do a lot in the ERP space nowadays and we see exactly the same problems here and when you think about it its easy to understand why. A 3pl purchase is very similar to an ERP purchase, it requires a special level of skill to do well yet it is an infrequent purchase and invariably not a core competency.
Reason two – Distressed 3PL providers and sales targets.
With few exceptions, 3PLs in NZ don’t make commercial returns on their 3pl and most lose money. Traditional 3PLs in NZ are a secondary business to a core freight business and it is common for these divisions to loose 6 and 7 figures annually. They are only able to survive by cross subsidising the losses from their large freight networks. Imagine how much margin they are making off your freight to be able to do this. The key issue is that 3PL is not a core business so it rarely gets the investment, senior management attention or a big issue is that that the senior executive team rarely understand the complexities of 3PL (its far more complex than freight). This creates a perpetuating cycle, e.g.
- Freight company decides they must have 3PL capability for important freight customers who want it so they lease large facilities (cant compete with a small one) so they take on an overhead of at least 700k/annum. That’s a small 5000 sqm facility.
- Lack of capability and understanding of 3PL means they end up loosing customers they initially convinced to use them and find they struggle to attract new ones this makes them distressed.
- Drop rates to below cost to reduce the loss and provide some relief to the P&L which is now hemorrhaging.
- Lack of investment in systems and people to develop capability keeps service levels underwhelming.
- Keep pressure on the sales team to fill the space who tell prospective customers that the service is brilliant.
Reason three – The third issue is that most 3PL customers don’t know how to procure 3PL.
Using a tender for 3PL and IT assumes that these services have the same strategic importance and management requirement as a domestic freight or international freight provider for which a tender process is fine.
Referring to this matrix above, the reality is that a tender can always be used in A, often in B and C but never in D.
In 15 years as a leading 3PL we have never had one tender drill down and seek to understand how we manage and train our people to ensure good tenure, handover between staff changes, training capability, methods and measurements. Yet this is a leading reason why 3PL relationships fail, most of our customers come from competitors and a common complaint is that the staff kept changing whereby knowledge walked out the door ergo there was terrible handovers thus this creates a washing machine of perpetual insanity as all the old problems are doomed to repeat. I have never been asked what our methods are to manage pricing with suppliers, facilities and people and prove it. Yet unexpected pricing outcomes is another key reason why 3PL relationships fail (SCS has kept overall increases to under 2% for our customers over 15 years . I have never been asked about our investment in B2C technology and processing methodology nor been challenged to prove it, yet this is the biggest change effecting business today and on a growth curve heading towards 20% of retail sales. I have never been asked to prove our KPI capability or have the integrity of our system challenged yet accuracy and the management of issues (root cause analysis and corrective actions) is a key reason why 3PL relationships fail and the post mortem usually reveals a spreadsheet being managed subjectively by someone who is in the gun if the result is poor? Most people purchasing 3PL fail to do proper due diligence and reference check properly; if they do reference check the questions are rarely sufficient.
Most 3PL buyers struggle when it comes to procuring this service, this may sound surprising considering it can make or break them. But in reality it is not surprising, its no more surprising than me expecting I can simply shoot off to China and find the next big item and expect to sell it. That road is fraught with danger, supplier quality issues, finding a market to sell into and funding cashflow – its a massive skill-set. Purchasing a 3PL solution is very similar to procuring an IT solution. Buyers know what they want as an outcome but for SME it’s not a day to day activity nor is it a skill they would or should be expected to have because it is specialised. Consider that most IT implementations are terrible yet there can be enormous investment and supposedly expert people applied to the task. The reality is that a truly successful IT implementation takes a staggering amount of planning, experience, scoping, training and problem solving to execute brilliantly, this is always undersold by the sales people and underestimated by the buyer.
A 3PL in today and tomorrows environment is a formidable weapon to win battles, defend positions and dominate channels. The strategic value is immense however even today many people use 1970’s tendering methods to buy it?
If you accept that hiring a key senior manager is a strategic role the irony is that not one organisations would disagree that tendering for role is a stupid idea. Yet 3pl isa strategic purchase and even today many people still tender of it. Procuring an employee for a strategic role is a highly complex and mission critical job, it involves psychometric testing, reference checking, interviews conducted by qualified people who use relevant questions. Proof of performance is validated. Contrast this to selecting a 3PL and the tenders test very little, reference checking is often a case of ticking a box to say it was done and the key questions rarely get asked. Tendering for 3PL is fraught with danger and ultimately relies on good luck.
We’ve found a better way is to use the SCP vs 3PL model this way both parties get what they want and they pave the way for better outcomes by sharing risk and value.