Choosing and Managing a 3PL: A Field Checklist for Supply Chain Managers

A third-party logistics provider (3PL) is an external organisation that provides some or all of an organisation's logistics functions -- warehousing, transportation, order fulfilment, customs brokerage, or a combination. 3PLs allow organisations to access logistics capability and capacity without building it themselves. The tradeoff is a dependency on an external provider whose performance, priorities, and financial health are outside the organisation's direct control.

In 2022, with logistics costs elevated by driver shortages, fuel price increases, and supply chain disruption, 3PL selection and management are receiving more attention than in previous years. Here is a field checklist for selecting and managing a 3PL effectively.

Checklist: 3PL Selection

1. Define your service requirements before approaching the market. Before contacting any 3PL, document what you need: volume (orders per day, shipments per week), service level requirements (order-to-dispatch time, on-time delivery target), special handling requirements (temperature control, hazardous materials, oversized items), geographic coverage, and systems integration requirements (which of your systems the 3PL needs to connect to).

2. Evaluate technical capability as rigorously as price. A 3PL that cannot integrate with your WMS, TMS, or ERP will require manual data entry, which introduces errors and delays. Evaluate the 3PL's systems integration capability, not just its warehousing and transportation assets.

3. Check financial stability. A 3PL that becomes insolvent mid-contract can leave your inventory stranded and your supply chain without coverage. Review the 3PL's financial statements or obtain a credit report. The cost of switching 3PLs after a failure is far higher than the cost of a financial due-diligence review before selection.

4. Visit the facility before signing. A site visit reveals operational reality that a proposal document cannot. What is the condition of the facility? How is inventory organised? What safety practices are visible? A 3PL with an impressive proposal and a disorganised facility is a 3PL whose proposal and operational reality do not match.

5. Check references, including references the 3PL did not provide. Ask for references -- and ask those references for other customers you can talk to. The customers a 3PL selects as references are the ones with the most positive experiences. Customers the 3PL did not select will give you a more balanced picture.

Checklist: 3PL Ongoing Management

• Define KPIs in the contract, not just in the transition plan. Service level agreements should specify measurable metrics, measurement methods, reporting frequency, and consequences of non-performance. KPIs that are agreed after contract signature are KPIs that will be disputed.

• Hold monthly performance reviews with your 3PL account manager. The review should cover actual performance against KPIs, open issues and resolution timelines, volume forecasts for the coming period, and any changes to service requirements.

• Maintain contractual exit rights. Ensure your contract includes notice periods for termination, provisions for data and inventory return at end of contract, and non-solicitation clauses for your staff. A 3PL transition is expensive and disruptive even in the best circumstances -- having clear exit rights reduces the leverage the 3PL has over the relationship.

XNM supports public-sector and capital-project organisations in logistics strategy, 3PL selection and management, and supply chain design. Reach out to XNM's procurement, sourcing & contract management team to discuss 3PL selection and logistics strategy for your organisation.