25 July 2013

What Is 3PL And Why Is Everyone Doing It?

3PL is an acronym for third party logistics, what used to be called contract warehousing and distribution. The idea is that, instead of each importer or exporter having their own storage and handling facilities, they subcontract those functions to a specialist. In recent years, the move to contractors has accelerated, as evidenced by the number of large new facilities being built every month around airports and other industrial areas.

The economics are compelling. Take an example of a small importer, who rents a small warehouse cum showroom with an office in the mezzanine. The office employs the boss and two clerks, the warehouse has a manager, a forklift, some racking and one picker. The sales are outsourced to commission agents and temporary warehouse workers are employed during peak times. The annual cost of the warehouse and equipment rent plus staff amounts to at least $200,000.

Any 3PL operator should be able to handle that importer’s volume for about $50,000. An experienced operator should be able to offer significant improvements in operational efficiency. The boss has a clear choice: continue business as usual or add $150,000 to the bottom line. A no-brainer, surely.

The 3PL model enables efficiencies that are not otherwise possible. Take for example the case of some clothing retailers that we work with. A significant proportion of their sales is of base products, which can be more or less predicted quite a bit in advance. In those cases, it makes sense to have them packed by store in China, where labour costs are still marginally lower than ours.

On arrival, the 3PL operator simply cross-docks the cartons and immediately ships them to the final destinations, after recording the movement for tracking purposes. The rest of the stock is received in bulk and put away in locations, to be distributed daily against store allocations. All items stored and shipped, whether cross-docked or picked locally, have total visibility through a tracking website.

The same model applies in reverse for exports. The 3PL operator can consolidate orders to be cross-docked on arrival by his agents overseas and manage stocks for local fulfilment. The key to both of these models is that the 3PL operator must have a robust network of experienced overseas agents capable of accurately sending and receiving the large amounts of data involved, providing real-time visibility.

The ability to handle large volumes of data and reporting movements accurately is at the heart of a successful 3PL operation. In DSL Logistics, we like to boast that our warehouse management system is very good indeed, as it includes every error that we have made in the last 15 years! The fact that we developed it in-house has helped a lot, as off-the-shelf systems rarely cater for more than one type of industry and, when they try, they become too complex, expensive and inflexible.

So, what can go wrong when moving to 3PL? Quite a lot, really. Importers and exporters need to satisfy themselves that the intended contractors have the ability to accurately manage their stocks and report movements. They need to have robust and tested software – and that does not mean Excel spreadsheets! The contract itself needs to be well designed, with performance targets that are measurable and reviewable.

Some importers want the selected 3PL provider to operate their legacy warehouse management system, going so far as to provide remote terminals with VPN tunnels to their own network. This may help to keep down the costs of integration, but is not true 3PL; it merely amounts to outsourcing the warehouse rent and employment of pickers. The major efficiencies of 3PL are simply not possible under that model. A true 3PL model involves the trader exchanging information with the 3PL operator, system to system.

The best way for an importer or exporter to assess the suitability of a 3PL provider is to talk to existing client references, particularly in the same or similar industries. When no reference sites are provided, importers shouldn’t rush to be the first. Companies that own lots of ships and planes or move large amounts of cargo throughout the world are not necessarily those best suited to do local 3PL work. Taking care with the appointment and negotiation of the contract will pay handsome dividends.

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