4 Steps for Establishing Healthy 3PL Relationships!

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Healthy 3PL Relationships article originally published by, and permission to publish here provided by, Scott Leydin at https://www.3plmanager.com/

The key to establishing healthy 3PL relationships starts with quality of the information that is provided at the time the request for a proposal (RFP) is submitted.

If you ask any 3PL service provider you will find that the lack of quality information provided in RFPs is one of their greatest frustrations.

Ideally proposals should include:

  1. A detailed scope of work
  2. Accurate forecast data
  3. Clearly defined service level expectations

Another important aspect of establishing healthy 3PL relationships is developing and implementing a detailed transition plan but I will come to that later.

Detailed Scope of Work

Ideally a detailed scope of work will include the business requirements being clearly documented and supported by existing transaction data. This will enable the 3PL service provider to prepare the most cost competitive response to your requirements based on previous activity.

A poorly defined scope of work, or one that is submitted with limited data will almost certainly result in the 3PL service provider submitting a proposal that has higher rates than expected. They will increase the rates in their proposal to cater for the uncertain nature of the tasks and the volume of activity that may occur over the life of the contract.

Accurate Forecast Data

Providing accurate forecast data in the request for proposal (RFP) will help in establishing healthy 3PL relationships and is important for a number of reasons. As mentioned above it will ensure a cost competitive quote but will also help to avoid the discussion that will most certainly occur when the actual volume does not match the forecast volume.

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3PL service providers calculate their rates based on their fixed costs divided by the expected volume of transactions. When the volume of transactions is lower than expected but their cost base remains the same they will become unprofitable and therefore seek to recover their losses. 

It is not unusual for a 3PL to include a clause in their agreement that stipulates that the proposed rates are based on a minimum volume requirement being achieved and if this does not occur they can use this clause as the trigger to increase your rates.

On the other hand, if the actual volume turns out to be greater than expected then there also needs to be trigger to reduce the rates. One way of achieving this is to establish a variable rate schedule that is based on the rates deceasing when agreed volume breaks are met.
e.g. 0 to 100 orders per annum @ $5 per order, 101 to 500 orders @ $4.00 per order, 501 to 1000 orders @ $3.00 per order

Clearly Defined Service Level Expectations

Including clearly defined service level expectations in the request for proposal will help in establishing healthy 3PL relationships by reducing

The request for proposal should detail how the 3PL service provider’s performance is going to be measured. The key performance indictators must be clearly defined and include the expected service level and the way in which the KPI is going to be calculated.

This will ensure that the rates that are submitted by the 3PL service provider are consistent with the level of service that is required.

If you have high service level expectations you cannot realistically expect the lowest cost proposal to meet those expectations.

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Ideally we need to find the balance between negotiating the best outcome for our organizations and ensuring the 3PL is also able to make money while delivering the service levels we expect.

It is also important to consider this when comparing 3PL rate proposals. If there is a significant difference between the quotes, particulary if one proposal is much lower than the others, it is likley that the 3PL service provider with the low rates has either got their costng wrong or they are trying to “buy” the business with a view of incresaing the rates sometime in the near future.

Developing and Implementing a Detailed Transition Plan

In most cases not enough time and effort is invested in developing and implementing a detailed transition plan when establishing a 3PL relationship. A project manager should be assigned, and a detailed project plan prepared to facilitate the transition.

The plan should not only include the physical aspects of the move but also cover the tasks associated with setting up and testing the required IT interfaces, communicating to the relevant stakeholders and ensuring that there is adequate attention given to the transfer of operational knowledge to the 3PL.

Whilst most transition plans will include the task of transferring operational knowledge, the project manager will quite often underestimate the level of information that is held by few key employees of their organisation and do not allocate sufficient time to the process of transferring, but more importantly creating standard operating procedures (SOP) to document this information in detail.

Originally published on Supply Chain Game Changer on April 24, 2019.