The number of 3PL service providers is growing rapidly. There are many small and big specialized logistics service providers for almost every specific need and then there are providers who will meet all generic requirements. The challenge is which one should you pick for your business? The one who provides every kind (or many kinds) of service or a one who offers a specific type (or just a few kinds) of service. A wrong 3PL will either fall short of the requirement or eat into the capital eroding the margins of the business. Choosing the right sort of 3PL can make or break a business. So, the question comes: How does one select the right type of 3PL provider for his company. We will run through some parameters that can be used to decide the type of 3PL that a company should hire.
Services required – Before selecting any 3PL provider, one must understand the services that are needed for one’s business. While it is not complicated, many new companies don’t fully understand the supply chain of their own business. They make mistakes while defining what kind of services they need for their supply chain operations. For example, the grocery startups may typically think that they will be served better with cold delivery chain (for vegetables, milk, meat and other similar products). They often overestimate the amount of cold food that needs to be delivered as part of a grocery order (for delivery- based grocery). In another kind of business, such as apparel business, ease of return of merchandise could be far more critical than other parameters. If a 3PL who specializes in delivery only (and not return pickups) is selected for such business, the logistics alone can eat into all the margins of the company. Some businesses hugely overestimate the volumes they will achieve and end up overpaying for specialized 3PL service providers (think of utilizing only 50% of the contracted capacity of cold storage chain and paying for 100% of it)
Many times, new businesses don’t really understand their customers and end up with under-utilized resources at disposal and thus decrease their capital and cost efficiency. It may be wise for new businesses to start with generalized service providers and gradually move onto specialized ones as they grow their volumes and develop better insights into their requirements.
Specialized expertise – Businesses today have to carve their niche to stay relevant in the market. Within groceries business, some specialize in fresh food products, while others specialize in quick delivery. In apparel, some may specialize sending multiple items and then return all except what customer wants to buy, while another may concentrate on quick delivery but with no returns. There may be yet another apparel business which may have carved a niche in ‘made to order’ clothing (this is delivered from factory to customer, directly without any warehousing). All these services need specialized 3PL skills that should be in-line with the business’s chosen specialization. One needs to ensure that the right logistics skills – as required by the business and offered by the 3PL are identified and matched to avoid any disaster.
Costs – If a business provides an excellent service but incurs massive costs, it may not be able to sustain. Imagine, providing a rush delivery as standard for a $10 item (which has $5 margin ) and absorbing a $5 delivery charge for it. The customers will love it, the volumes will be huge, but this kind of delivery charges will eat up all the margins. Contrary to the popular wisdom, the high volumes will kill this business. Logistics costs are of great importance to any business and must be kept under control at all times. If they cannot be passed onto the customer, they must form a small a part of expenses, as possible. Here again, there is no saying which type of 3PL will be better suited. Spending $5 on the cold delivery of $10 or $15 grocery (e.g., vegetables) may not be sensible. But if you have a truck-full of deliveries of vegetables, then the specialized cold delivery chain will be more cost efficient, and the value proposition will be higher.
Volumes – If a business has larger volumes, it makes sense for it go for specialized 3PL provider. With high volumes, it is possible to cut a deal with the specialized 3PL provider for getting good rates. For smaller quantities, one may want to settle with a general service provider. However, today many specialize players club the delivery from multiple vendors to increase their utilization. A new trend is emerging where multiple businesses join hands and negotiate with 3PL providers to get better value for each one of them.
The decision to choose a 3PL provider is never straightforward. Multiple factors need to be borne in mind before making a choice. As a general rule of thumb, it is recommended that one should start with general provider and move to the specialized one as the business grows and there is clarity of requirements.
A key advantages of choosing a general service provider from the start is that as the business grows, the service provider’s volumes also grow and he will make investment specifically for your growing needs. This, in turn, makes him specialized provider for your requirements. In fact, he would develop services for your specific needs making it a strategic fit for your business.