What to Look for When Selecting a 3pl

7/23/2019 What to Look for When Selecting a 3pl

http://slidepdf.com/reader/full/what-to-look-for-when-selecting-a-3pl 1/111

Damco eGuide

WHAT TO LOOK FOR WHEN

SELECTING A 3PLSix criteria for a successful long-term partnership

Jens Rømer Sode



Table of Content

01. MANAGEMENT SUMMARY 3

02.WHAT EXACTLY IS A 3PL? 4

02.01. An international supply chain: a co-operation of many parties 4

02.02. Incoterms: standards for transactions 5

03. 3PL SERVICES: FREIGHT FORWARDING AND

SUPPLY CHAIN MANAGEMENT 6

03.01. Freight Forwarding services 603.02. Supply Chain Management services 6

04. WHAT TO REQUEST FROM YOUR 3PL 8

04.01. End-to-end operational excellence 8

04.02. IT integration 8

04.03. Product innovation 9

04.04. Key account management 904.05. Legal compliance 10

04.06. Ethics and environmental awareness 10

04.07. One final recommendation 10

About the author 11

About Damco 11



01. MANAGEMENT SUMMARY

THIS eGuide is primarily intended for people in all sorts of companies who need a partnerfor their international logistics. Whether you work for a manufacturing or retail organisation,

in consumer goods, lifestyle or electronics: goods will have to be moved from one place toanother to reach their final destination, the end customer.

Today, third-party logistics providers play an important role in this process. The number oforganisations deciding to take care of their transportation needs themselves is shrinking,because in most cases contracting specialised suppliers has significant advantages. Usuallythese suppliers work for the same client for several years, enabling them to adapt their servicesto exactly what the customer needs. This makes it crucial that you select the right provider:one that will grow and develop with you and your needs.

It turns out that there are a number of specific criteria that any prospective client of a 3PLshould look for, although their relative weight will be different in different cases. These criteriaare:

• End-to-end operational excellence

• IT integration

• Product innovation

• Key account management

• Legal compliance

• Ethics and environmental awareness

After a general introduction into the world of international logistics, we will discuss each ofthese in some depth.



02. WHAT EXACTLY IS A 3PL?

BEFORE addressing the criteria involved in selecting a third-party logistics provider, it willbe helpful to have an overview of some of the terms and concepts used in supply chain

management. If you are familiar with the field, you can easily skip this section and continue byreading the next chapter.

According to the Council of Supply Chain Management (CSCM), a third-party logisticsprovider or 3PL can be defined as: “a firm that provides multiple logistics services for use bycustomers. These services are integrated, or bundled together, by the provider”. Second-party logistics providers or 2PLs include trucking companies, shipping companies and airlinesproviding freight service.

02.01. An international supply chain: a co-operation of many parties

The basic logistics setup for an end-to-end supply chain is illustrated in figure 1.

CUSTOMS CUSTOMS

2PL 2PL 2PL

2PL

2PL2PL

INTERNATIONAL B2B DOMESTIC B2B

eCOMMERCE

Consolidate

Factory DC

Customs De-consolidate

2PL

SHOP

2PL CUSTOMER

Figure 1 - End-to-end supply chain

To explain the flow of goods through the supply chain we follow a pair of shoes on its journeyfrom the factory to the end consumer.

A shoe and sportswear company places an order with a factory; let us assume this is “Trinh’sShoe Manufacturing,” located in a suburb of Ho Chi Minh City, Vietnam. The shoe companyhas contracted a 3PL for the transport from Trinh’s factory to a distribution centre (DC) in theUS.

The shoes are picked up by truck at Trinh’s factory and transported to a local warehouse. Atthe warehouse the shoes are consolidated with other goods, for example jeans manufacturedin other Vietnam locations, to optimise the fill rate of the container used for shipping thegoods. This will lower the transportation costs. The container is then transported to the port(or airport), where customs handling and paperwork processing are done before loading ontothe ship (or plane). Next, the container is sailed (or flown) to its destination port in the USA, forexample Los Angeles. Prior to further transportation to the local warehouse the import customspaperwork is processed. At the local destination warehouse the deconsolidation of the goodstakes place. The shoes are taken out and transported by truck to a US distribution centre in

Memphis, while the jeans undergo a similar process and are transported to San Francisco. The distribution centre is the place where the service of international 3PLs most often endsand local transportation takes over, delivering the goods to the final shop or consumer.



02.02. Incoterms: standards for transactions

The terms used for international transactions and procurement processes have beenstandardised by the International Chamber of Commerce and are known as Incoterms1 (International Commercial Terms). The shoe company may buy the shoes from Trinh as “FreeOn Board” (FOB) or “Free Carrier” (FCA) Incoterms. These terms help the shoe company

control the shipping costs from origin through the destination port or distribution centre andenable it to dictate Trinh’s use of 3PL. Other advantages of these Incoterms include full visibilitythroughout the supply chain for the shoe company and the ability to consolidate cargo flowacross several different factories, which will further help reduce cost in the supply chain.

The shoe company could also buy the shoes from Trinh’s on “Deliver Duty Paid” (DDP) terms.In this case they would have much less control of the cost up to delivery at destination point,but could save some inventory days, since the shoes only become part of the shoe company’sinventory once the goods have been delivered at destination instead of at the agreed FOBpoint or time.

In either case, managing the whole supply chain is the business of 3PLs. Because of their scalethey can leverage the consolidated volumes for actual transportation as well as consolidation,deconsolidation and the associated documents handling.

1 International Chamber of Commerce Incoterms definitions on http://www.iccwbo.org/products-and-services/trade-facilitation/

incoterms-2010/



03. 3PL SERVICES: FREIGHT FORWARDING AND

SUPPLY CHAIN MANAGEMENT

THE services offered by 3PLs fall into two main categories:

• Freight forwarding services (FF) and

• Supply chain management (SCM)

We will look at both in more detail to describe the specific services that you as a client maypurchase from a typical 3PL.

03.01. Freight Forwarding services

Freight forwarding services can be classified in two evident subcategories, Air and Ocean,depending on the means of transportation that is involved. The product that you as a clientwould purchase here is the complete management of the transportation process, includingthe contracting process with the actual transportation provider, the 2PL.

In Air FF this could result in the 3PL picking up products on behalf of the shoe company in HoChi Minh City and contracting with a courier company or airline company to fly the containerto Los Angeles. There the goods would then be handed back to the shoe company. The 3PLservices for Air include cargo pick up at factory and customs clearance.

In Ocean FF this could be the 3PL picking up a container on behalf of the shoe companyin Shanghai and contracting with an ocean carrier for sailing the container to Los Angeles,where the goods are then handed back to the shoe company.

The customer can outsource this FF to 3PLs or they can contract themselves directly with the2PL. Many customers do both. The split between direct and outsourced in 2010, accordingto analysis by Nomura2, was:

• Air: 90% outsourced

• Ocean: 35% outsourced

The high percentage of Air FF outsourced to 3PLs is caused by the airlines’ inability to servicethe customers end-to-end. Also, a 3PL has the opportunity to consolidate cargo across manycustomers, which will result in better rates than an individual customer can achieve directlywith the airlines.

2 Nomura Equity Research (2013). Trends in Transport, 21 January 2013



03.02. Supply Chain Management services

Supply chain management goes one significant step beyond freight forwarding by consideringthe supply chain as a whole and managing it from that perspective – remember the earlierdescription of how a 3PL could manage the supply chain all the way from a factory in Vietnamto a distribution centre in the US. This makes it possible to optimise the supply chain for thespecific needs of the client organisation.

Modern supply chain solutions provide end-to-end visibility across all supply chain elements.In practical terms this means that the customer has access to detailed, real-time informationabout his supply chain, enabling him to identify the parts where performance is not optimal.Depending on the situation, these problems may be resolved; but they could also be eliminatedaltogether by redesigning the supply chain. Many organisations use SCM as a foundation foran ongoing supply chain optimisation process.

Understanding the complete supply chain also creates the possibility to identify weak spots,even when it functions well under standard conditions. What would be the consequencesof a natural disaster, or a strike in a major port? How easy or difficult is it to accommodatea sudden change in product demand? All of these scenarios can be tested and evaluateduntil the supply chain has the required degrees of robustness and flexibility. Obviously there isalways a trade-off: measures to eliminate risks and increase flexibility come at a price. Everyorganisation has its own particular desired level of reliability and agility and the ideal supplychain is always custom-made.

An increasingly important aspect of supply chain management is that, with the right instruments,

it makes it possible to quantify the environmental impact of various alternatives. With completeinformation about the supply chain, including distances and transport modalities used, itis easy to calculate the carbon footprint of a product’s journey from origin to destination.Reducing it is beneficial for the environment but also financially advantageous: a lower carbondioxide emission goes hand in hand with lower fuel consumption and lower costs.

While this description focuses on management of the complete supply chain, there are alsohybrid situations where a 3PL provides a subsection of these services to the customer, whowould then manage the remaining parts himself.



04. WHAT TO REQUEST FROM YOUR 3PL

IN the market of 3PL services, two trends have become visible recently. On the one hand,companies are expanding their usage of 3PLs; on the other hand, companies also try to

consolidate their business to the smallest possible number of providers. If you have fewerproviders, you also have fewer interfaces and simpler internal processes. In general, companiesaim for the minimum number of providers that will still ensure a healthy level of competitionbetween them. In a recent study Morgan Stanley3 concludes: “Three in five … are reducingor consolidating the number of 3PLs they use” and “65% of shippers increase their usage of3PLs” where shippers is synonymous with 3PL customer.

Contracts between clients and 3PLs usually cover several years. The relationship between thetwo parties is not so much that between a customer and a supplier; it will generally have manycharacteristics of a partnership. Selecting the right 3PL is therefore a critical process with far-

reaching consequences, especially since it is virtually impossible to make a rapid switch toanother 3PL if things do not work out as intended.

Research based on data from the major 3PL companies, research houses and interviews hasidentified a number of key criteria used by prospective clients to evaluate their possible 3PLpartners.

04.01. End-to-end operational excellence

It is evident that you may expect that a 3PL is able to operate cost-efficiently across theglobe. According to Gartner4 “3PL Leaders offer a broader set of integrated services across significant global regions”. The same point was stressed in a client interview: “Delivering products In Full On Time is the most critical KPI for our global supply chain and maintainingfocus on cost control” and “lots can do this on paper but cannot execute in reality.”

Along the same lines another company concludes: “The 3PL must be able to integrate fast and accurately…” A third company said, referring to operational excellence and global coverage:“These are basics today and taken for granted … we often choose only two or three 3PLs ..which are big enough and have the infrastructure to service a big customer like us.”

For clients with global supply chains, the global reach of their 3PL is a key success factor.Operational excellence is indispensable in all cases.

04.02. IT integration

From the complexity of the supply chain illustrated in figure 1 it is apparent that IT plays asignificant role. There are a number of different companies that handle the products beforethey reach the end customer. The IT systems of these companies must be integrated togive you continuous visibility and tracking capability, and to enable further optimisation of theprocesses.

3 Morgan Stanley. Transport – Freight Forwarding grapples for growth in 2013, 6 February 20134 Gartner. Magic Quadrant for Global Third-Party Logistics Providers, G00236375, 14 March 2013



Gartner concludes: “Increasingly, 3PL Leaders have been extending their services to increasetheir value. Their usage of IT solutions as an enabler is a key differentiator to their success”.

The logistics vice president of a popular global lifestyle fast fashion company explains: “We have chosen GTNexus as our IT integrator and visibility platform across our supply chain. All3PL partners must be certified by a party like GTNexus in order to be a business partner” andGartner adds: “Emergence of demand driven supply chain requires advanced software and

system to system integration.” The logistics vice president quoted before adds: “IT quality is a real differentiator.”

In a recent extensive study sponsored by Cap Gemini5 they state that: “94% of customers agree that IT is a necessary element of 3PL capability but only 54% indicating they are currently satisfied with 3PL IT capabilities”.

Clearly, global IT integration is another key selection criterion.

04.03. Product innovation

3PL services are not a commodity. Due to the complexity of today’s global supply chains,together with the collaborative and strategic partnership that should develop between youand your 3PL, it is essential that a 3PL can come up with new solutions for the challenges ofits particular clients. The Cap Gemini study finds that customers and 3PLs agree on innovationbeing a top requirement.

It is certain that the world will change in unexpected ways during the time period covered bya contract with a newly-selected 3PL. You want to be able to pro-actively adapt your supplychain to those changes. Therefore you need to make sure from the beginning that your 3PLhas a proven innovative attitude, supported by the required processes and resources.

04.04. Key account management

If you represent a large organisation, the fact that your relationship with a 3PL is a long-termpartnership needs to be reflected in the internal organisation of the 3PL. One instrument thatappears to be particularly successful is key account management (KAM). The term refers toa situation where the 3PL has one or more dedicated account managers. The key account

manager, or the KAM team, is responsible for all aspects of the business with you as hiscustomer and is the central point for all coordination and communication with your company. The ongoing dialogue between the key account management team and the client is a platformfor new ideas as well as for fine-tuning day-to-day processes. Two quotes from 3PL clientsillustrate why they attach great value to this:

“Key account management is important when the scope is big enough. Strong account management is measured by how much influence they have in their own organisation. You need someone who can represent you strongly.”

“Key account management is crucial to create the right integration like IT, sales and operations planning and new solutions innovation.”

5 Cap Gemini with Langley, J. 2013 Third-Party Logistics Study – the State of Logistics Outsourcing, 2012



04.05. Legal compliance

It may appear too obvious to spend much time on, but for companies selecting a 3PL it isessential to raise the issue of regulatory and legal compliance. International supply chains arecomplicated and are touched by such a wide range of different country legislations that strongcorporate compliance standards and enforcement are indispensable.

In both Europe and the US prominent 3PLs have incurred serious fines for cartel formation 6 and fraud7. This is obviously very serious, not only for the 3PL but also for any other companythat is associated with such an affair. Doing business with the wrong 3PL can have a verynegative impact on your company brand.

04.06. Ethics and environmental awareness

Like legal compliance, corporate social responsibility (including good citizenship, minimum

environmental impact and attention for a reduced carbon footprint) are “must-haves” for 3PLswanting to serve their customers according to today’s standards. How important this is for aparticular client organisation will depend on their corporate strategies. In general, consumerbrands tend to be more and more aware of these values. A 3PL can support its clients in thearea of sustainability with tools and dashboards that not only show what the current carbonfootprint of (part of) the supply chain is, but also how this can be reduced.

04.07. One final recommendation

The six criteria listed above are the ones we found most strongly supported by clients andresearch companies, but of course they will not be the only parameters in your 3PL selectionprocess. Depending on the particular characteristics of your organisation, additional criteriawill apply and may even be more important for your final decision. It cannot be stressedenough that partnering with the right 3PL is a critical success factor for the logistics side ofany business. If you are involved in, or responsible for, selecting a 3PL, a final recommendationwould be to ensure enough corporate time, attention and resources for the selection process.

6 http://europa.eu/rapid/press-release_IP-12-314_en.htm7 http://www.reuters.com/article/2010/04/09/agility-fraud-idUSLDE63803H20100409



About the author

Jens Rømer Sode is Damco’s Global Head of Lifestyle vertical, based in the Damcoheadquarters in The Hague, The Netherlands.

About Damco

Damco is one of the world’s leading third party logistics providers specialising in customisedfreight forwarding and supply chain solutions. The company has 10,000+ employeesin more than 300 offices around the world and a global presence in about 100 countries.Damco is part of the Maersk Group. More information about Damco can be found onwww.damco.com.

© Damco 2014. All rights reserved. No part of this document may be reproduced or transmitted in any form or

by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission

of Damco International BV.

Documents

What to Look for When Selecting a 3pl