To 3PL or Not to 3PL:

To 3PL or Not to 3PL: An Overview of Third Party Logistics Outsourcing 866.672.2862 m33integrated.com 511 Rhett Street, Suite 3 Greenville, South Carolina 29601

Third party logistics (3PL) is the business of managing various elements of the supply chain via contract or outsourcing. A third-party logistics provider is a firm that provides logistics services for part or all of the supply chain management functions of its customers. Third party logistics providers typically specialize in integrated warehousing, operation and transportation services that can be scaled and customized to customers needs based on market conditions, such as the demands and delivery service requirements for their products and materials. Often, these services go beyond logistics and include value-added services related to the production or procurement of goods. The 3PL industry plays a central role in managing domestic and global supply chains. 3PL providers help companies lower transportation costs, improve on-time performance, and even reduce carbon emissions by increasing cargo weight and running fewer shipping routes. Process expertise, customized services, economies of scale and state of the art information technology (IT) result from serving a number of shipper customers and maintaining long-term relationships, and are among the key factors that make 3PLs valuable to their customers. Over the last 10 to 15 years, outsourcing logistics activities to 3PL service providers has become increasingly popular. This has been the healthiest market within the slow, five-year economic recovery for domestic and international freight transportation. The 3PL segment has grown steadily to $171 billion and increased 7.4% in 2014, according to The 2015 Third Party Logistics Study conducted annually by logistics industry vendors. The study indicates 67% of shippers increased their use of outsourced logistics services in 2014. By utilizing 3PL providers, shippers reported logistics cost reductions of 11%, inventory cost reductions of 5% and logistics fixed asset reductions of 15%. A distinct majority (92%) report that their relationships with their 3PLs have been successful. 2

TABLE OF CONTENTS Executive Summary 2 Why Outsource With a 3PL? 4-5 Benefits of 3PL Outsourcing 6-7 Misconceptions About 3PL Outsourcing 8-9 Selecting a 3PL 10-11 Key Drivers to an Effective 3PL Relationship 12-15 3

A third-party logistics (3PL) provider is a firm that provides outsourced logistics services for part or all of the supply chain management functions of its customers. 4

WHY DO ORGANIZATIONS OUTSOURCE LOGISTICS OPERATIONS? There are many rationales as to why companies outsource, but there are four principal reasons: 1. Core values A maxim of organizational success is sticking to the knitting. Companies that stray from their core business risk their management s and employees attention being diverted from that business to the point where they lose focus on what matters most. Many manufacturing enterprises have determined that inbound and outbound transport and warehousing are consequential processes of their business rather than fundamental or core business processes. This has fuelled growth of the third-party outsourcing industry and the expansion of logistics service providers. 2. Optimal performance Additionally, organizations that have a strategic focus other than in transport or warehousing may not be able to attain the desired performance levels and key performance indicators (KPIs) required by their customers. Companies that have their own in-house truck fleet often struggle to deliver products on time. For instance, a service ratio of less than 98% of deliveries delivered on time is a major issue for modern consumers who have become far more demanding. Merely dealing with the complexity of transport networks, contractors, inventories, industrial unions, and cost control is tough enough for many enterprises, so achieving 98% on-time performance is, for some, a real challenge. On the warehousing front, checking performance against a few industry KPIs can quickly help managers determine the effectiveness of their operations. The telling signs are low levels of inventory accuracy, low stock turns and low order output ratios per labor hour, high operating costs, customer performance complaints, and high employee turnover. When these signs are evident, firms often choose to outsource. 3. Capital gains Warehouses and vehicles are expensive to purchase or lease and can tie up millions of dollars that could otherwise be invested in the core business of the firm. Consequently, there is a trend for firms to remove warehouse and fleet assets from the balance sheet through outsourcing and redirect capital gained from sale of assets to working capital and/or core asset investments. 4. Flexibility and scalability With the advent of e-commerce and increasing globalization, today s marketplace demands fast, flexible and efficient supply chains. Coupled with shorter strategic planning horizons, the use of 3PL service providers gives organizations flexibility to expand or change their method to market and volumes handled. 5

Nearly 70% of shippers increased their use of outsourced logistics services in 2014. By utilizing 3PLs, shippers reported logistics cost reductions of 11%, inventory cost reductions of 5% and logistics fixed asset reductions of 15%. 6

THE BENEFITS OF 3PL OUTSOURCING SHIPPERS CONTINUE TO OUTSOURCE A WIDE VARIETY OF SERVICES Domestic Transportation International Transportation Warehousing Freight Forwarding Customs Brokerage Reverse Logistics 81% 78% 73% 62% 57% 36% Source: 2014 18th Annual Third-Party Logistics Study Cost and time savings Logistics is the core competence of third party logistics providers. 3PLs offer greater expertise which is often combined with global logistics networks that enables a higher time and cost efficiency. State of the art technology The equipment and the IT systems of 3PL providers are constantly updated and adapted to new requirements for their customers and their customer s suppliers. Companies often do not have the time, resources or expertise to upgrade or adapt their equipment and systems as quickly. Low capital commitment As mentioned previously, the fact that most or all operative functions are outsourced to a 3PL provider means there is no need for the client to own its own warehouse, transport assets, or technology systems, lowering the amount of capital required for the customer s business. Flexibility A 3PL can provide much higher flexibility and offer a much larger variety of services than customers can for themselves. In addition, the customer gets flexibility in resources and workforce size, and logistics fixed costs turn into variable costs. Does size matter for 3PL outsourcing? Large corporate enterprises, mid-sized public sector organizations and small businesses all have good reasons to outsource although not necessarily for the same reasons. The variety and richness of specialized expertise and available resources among 3PL providers means there is an option for each outsourcing need. While a small business may use supply chain outsourcing to gain access to manufacturing facilities, a larger corporation may utilize a 3PL s enterprise solutions and services to evaluate and find gaps within their entire supply chain. 7

Although supply chain outsourcing possibilities continue to grow, common misconceptions or ill-founded fears still hold organizations back from reaping the benefits. 8

WHAT STOPS PEOPLE FROM USING SUPPLY CHAIN OUTSOURCING? Although supply chain outsourcing possibilities continue to grow, common misconceptions or ill-founded fears still hold organizations back from reaping the benefits. Only large corporations outsource. Large corporations may have been at the forefront of supply chain outsourcing, but it is now getting a much broader acceptance. A virtual web-based company can outsource the whole supply chain from raw material supply through production to order fulfilment and customer service. The Internet has also brought thousands of third party specialists into the limelight, from independent consultants to regional, national and international 3PLs. There are now service offerings to suit practically all needs and budgets. Supply chain outsourcing is too risky. All business activities have a degree of risk, including both in-house projects and outsourcing agreements. Outsourcing risk is lessened by choosing reliable, competent partners with proven track records. Risk mitigation can be accomplished by maintaining a compact panel of outsourcing suppliers so that there is no single point of potential failure. Outsourcing may even reduce overall organizational risk by giving an enterprise access to knowledge, resources and resilience unavailable within it. Outsourcing is more expensive. As mentioned earlier, The 2015 Third Party Logistics Study reports logistics costs going down by 11%, inventory costs by 5% and logistics fixed assets by 15%. Yet outsourcing could justifiably lead to an increase in costs too, on condition that it led to a proportionately greater increase in value, such as clinching profitable deals with major new end-customers. Expense, however, is only one consideration, with added value and increased revenue also a factor. Customer satisfaction will drop if we don t do it ourselves. Quite the contrary, customer satisfaction could go up instead of down when the right outsourcing partner is selected. Specialists can offer experience and knowledge in their specific supply chain domain, drawn from a range of different customer and company contexts and sectors. Their best practices can become your competitive advantages if you make sure they are properly integrated into your routine planning, monitoring and analyzing activities. 9

Process expertise, customized services, economies of scale and state of the art IT result from serving a number of shipper customers and maintaining long-term relationships, and are among the key factors that make 3PLs valuable to their customers. 10

SELECTING A 3PL WHAT DO SHIPPERS WANT FROM A THIRD PARTY LOGISTICS COMPANY? Shippers 53% More Collaboration 24% About the Same 20% Much More Collaboration 3% Less Collaboration 0% Much Less Collaboration 20% 3% 24% 53% 3PLs 58% More Collaboration 22% About the Same 14% Much More Collaboration 6% Less Collaboration 0% Much Less Collaboration 14% 6% 22% 58% Source: 2014 Capgemini Annual Third-Party Logistics Study Deciding to a use a third party logistics company is a decision that depends on a variety of factors that differ from business to business. The decision to outsource certain business functions will depend on the company s plans, future objectives, product lines, expansions, acquisitions, etc. Once a decision has been made to outsource certain processes, a company will begin the search for the right 3PL that fits their requirements at the best possible price. There are three types of third party logistics companies that operate today: Asset Based Management (Non Asset Based) Integrated Providers Asset based third party logistics companies use their own trucks, warehouses and personnel to operate their business. Management based companies provide the technological and managerial functions to operate the logistics functions of their clients, but do so using the assets of other companies and do not necessarily own any assets. The third category, Integrated Providers, can either be asset based or management based companies that supplement their services with additional services or assets needed by their clients. When selecting a 3PL, the request for information (RFI) or quotation (RFQ) should be as detailed as possible. The company that is selected should be able to fulfill all the logistics requirements needed, which can only be assured if each requirement is communicated to potential 3PL companies. The RFI should include a detailed description of the areas to be outsourced. This will usually include: The scope of the contract, including locations, facilities and departments Information on volumes involved: number of deliveries, warehouse sizes, number of items, etc. The logistics tasks that are to be performed: warehousing, transportation, etc. The level of performance required 11

3PL services often go beyond logistics and include value-added services related to the production or procurement of goods to further help companies lower transportation costs and improve on-time performance. 12

After the company has received all bids from the prospective 3PL s, an evaluation would take place where a multi-discipline team will review each bid based on a pre-defined set of criteria. These will include some of the following: Does the 3PL provide the services required? Does the 3PL have the technology required to perform the tasks required? Does the company have, or can arrange for, the required warehouse space, dock capacity, warehouse personnel, etc.? Is the 3PL financially sound? Are the 3PL s geographical locations suitable to cover the network? Does the 3PL have the flexibility to respond to changes? Are the 3PL s environmental policies compatible? Are the costs of the services detailed enough for comparison to other bids? Are the customer references acceptable? Is the 3PL a good cultural fit? The selection team will usually review each of the bids based on the criteria and give each bidder a score. Depending on the importance of each criterion, a weighting can be given which gives more importance for one or more criteria in the selection process. Once the selection team has evaluated the bids, management will often select the top two or three 3PLs for site visits, face-to-face interviews and more detailed reviews of financial records. Once a company has been identified, contract negotiations would follow before a final agreement could be reached. 13

When seeking to outsource, select a 3PL that aligns with your core values and future plans, and you ll enter into an agreement that is fertile for growth and well-placed to build into a mature and successful relationship. 14

WHAT ARE THE KEY DRIVERS FOR SUCCESS IN ESTABLISHING A GOOD 3PL RELATIONSHIP? Strategic alignment The outsourcing decision must align with the company s strategic direction. This may seem like a common sense statement, but many companies have suffered after outsourcing decisions were made at an operational level, without due regard to the company s overall supply chain strategy and future plans. In some cases, there is no supply chain strategy in place. This can cause organizational stress and can be difficult to remedy after contracts are established. Most third-party providers today are aware that their clients may be lacking in strategy formulation, so they include clauses in contracts which enable them to change pricing and performance mechanisms if a change in company strategy or method to market occurs. Some 3PLs will help bring a supply chain strategy to fruition with the company s core values and future plans in mind. Attention to detail When seeking third-party quotations and contracts, there is no room for best-guesses on order velocities, volumes, processes and service requirements. Detailed specifications must be prepared by enterprises complete with disclosure of all available data before a quotation from service providers is attained. When there is an absence of sensible interpretation of data, major issues in the outsourcing relationship could occur. Build and sustain a partnership Both during implementation and the ongoing partnership, a competent team is essential. The customer and the third-party logistics company must create an open and trusting working relationship. Each company s team should include senior managers from across the organization who meet regularly to monitor progress and performance. Too often, once an agreement is signed, implementation is left under the stewardship of the 3PL provider. This must be a joint and ongoing undertaking. Raise potential issues early Issues that are not dealt with proactively can fester into rifts in the customer/ 3PL provider relationship. Both parties should take a long-term perspective in their outlook and approach. During implementation planning phases, representatives from each company should meet on a regular basis to discuss implementation tasks and focus their full attention on successful outcomes. Use KPIs to manage The contract and agreement should be subject to regular reviews of KPIs. Data speaks volumes in terms of performance. For both warehousing and transport, KPIs should be agreed at the outset. Typical measures include delivery in-full on-time, goods lost in transit, stock damage, inventory accuracy, etc. 15

M33 Integrated M33 s suite of integrated solutions delivers a strategic combination of technology tools, business intelligence and consultative expertise to help you optimize logistics, reduce costs and improve efficiencies. By blending expertise and utilizing a unique co-management approach, M33 works with your team to educate, train and help manage tasks associated with logistics. Featuring round-the-clock support, M33 is equipped to effectively recognize and respond to shifts within your supply chain. M33 s highly qualified logistics specialists can integrate with your team to offer support for all of your transportation needs. With M33 s customizable solutions and premier supply chain services, you can easily overcome existing challenges and drive growth to gain the ultimate competitive advantage. 866.672.2862 m33integrated.com 511 Rhett Street, Suite 3 Greenville, South Carolina 29601