Third Party Logistics
Many companies are choosing to use contractors for storing and shipping of materials. This can have both advantages and disadvantages.
Many companies are deviating from having their own warehouses and transportation services to that of contracting with various fulfillment services such as UPS Supply Chain Solutions. The use of third party logistics, or 3PL, means a substantial cost savings to companies who would ordinarily have to lease or otherwise contract these services. For the small company who lacks space for building a warehouse, with room for a fleet of trucks, the cost can be prohibitive. For companies who have the space, but don't currently have warehouse or transportation services, the capital expenditure may not be within the scope of their current budget allowance.
For many companies, contracting with a fulfillment services company is easier and cheaper than doing the work themselves. After all, they don't have to worry about storage, transportation, or distribution of the material. With a phone call to the 3PL company, they arrange for the material to be shipped to their customer or they pre-arrange a schedule for a specified amount of product to be released to the customer on certain days of the week or month. They don't even have to call a trucking company, since most fulfillment services companies have their own fleet of trucks for transportation of goods. It takes the responsibility off the company, and they can concentrate on producing more product.
More companies are choosing to contract services with a 3PL company, so they don't have to concern themselves with the warehouse, distribution, and transportation of finished goods. Delegating these functions to someone else gives the company more opportunity to concentrate on providing the finished goods that will eventually be stored at the warehouse facility for later transportation to customers. It's a function that companies tend to find time consuming and often boring from a paperwork standpoint, so if they can leave all that up to a third party, that improves their efficiency. It also means the company doesn't have to hire warehouse workers, an effort that is often difficult because of the low rate of pay that companies tend to pay their warehouse workers. This lends itself to a high turnover in that area of the company, and thus, the need for additional training hours.
Depending on the terms of the contract, sometimes the 3PL company also handles billing and collecting payments from your customers for the products it ships. This frees time that your accounting department can use to take care of other financial matters. Freeing the company of continually hiring warehouse workers, replacing fleets of trucks, and paying bills for shipments to customers will allow them to operate more economically, as they will be able to operate with less staff.
Using a third party logistics company can be a financial advantage for many companies. This is especially true for small companies who may otherwise have to go to the expense of building or leasing a warehouse and vehicle fleet for transportation of goods to their customers. For the small company, this means they are able to contract the work to a 3PL company instead of leasing a warehouse and then having to transport material themselves.
Since the warehouse worker is usually paid less than other unskilled laborers, there tends to be a high turnover of personnel in that area. When companies manage their own warehousing, they have to replace personnel that leave, recruit, hire, and train new workers, which costs the company money. By outsourcing those functions, they don't have to be concerned with hiring workers for the warehouse and distribution areas, thus saving money on benefits and training. This allows them to focus their budget on production efficiency and assures that they are paying the lowest prices available for their outsourcing needs.
When a company outsources its warehouse and transportation needs, there is less payroll expense. Depending on the size of the company, choices may be made to outsource that function, as well, using outsourcing services such as PayChex or ADP, thus cutting costs in the accounting department.
No matter how good a plan is, there are always going to be a few disadvantages. The use of fulfillment services to handle your transportation, warehouse, and distribution needs is no exception. For one thing, if the company has previously handled these functions in-house and chooses to outsource those functions, it means a loss of income for those employees who are currently performing those functions, unless the company can place them elsewhere. In most cases that doesn't happen, because once a company begins outsourcing, they tend to make cuts elsewhere within the company as a cost-cutting measure. Unless there are open positions on the production line, this means that those who previously worked in the logistics areas are delegated to the unemployment line. This has a tendency to cause a breakdown in morale for the remaining employees who worry that their jobs may be next.
Another disadvantage of outsourcing is that the company doing the outsourcing loses control over the finished goods once they are transferred to the warehouse location. What this means is that although the 3PL company may have a computerized inventory system to which you have access, you lack the ability to perform a physical count in the event of a discrepancy. You also lack the ability to confirm shipping dates to your customers or promise quick shipment for orders that were short shipped or not delivered at all.
Even though your warehouse and transportation functions are outsourced, you will still be responsible for inquiries from your customers. Though a company will expect to handle inquiries about production schedules in a manufacturing environment, even companies who order from a wholesale distributor on behalf of their customers will be the ones to answer to their customers about delivery schedules. Of course, there are times when the 3PL company may deal directly with their customers such as drugstores and other retail outlets who utilize fulfillment services to store their overstock inventory. In most cases, however, the company who contracted the 3PL company will be responsible for handling inquiries from their own customers and will in turn need to contact the 3PL company with the answers their customers seek.
The next question someone who is considering outsourcing these functions may ask is whether it's cost effective when you have to have to make two telephone calls to answer an inquiry. What you need to do is ask yourself how many inquiries you actually have concerning issues that you would have to address with the 3PL company. Aside from that, how many are you currently answering that involve going to the logistics area for answers. In all likelihood, you will not be making any more inquiries of the fulfillment services company than you are currently doing with other departments.
Whether you are currently using your own staff and are considering outsourcing your logistics functions, or your company is new and you want to compare pricing, the thought process remains the same. For those who do not have a current budget with which to make a comparison, think of outsourcing logistics in terms of expenditures. Some of those include warehouse expenses (staff, training, and operating expenditures), transportation costs (fleet, insurance, drivers, maintenance costs, and training), and distribution costs (staff and equipment to move finished goods from the production area to the warehouse and then onto trucks when ready for delivery). By outsourcing these functions, you will need only to move the finished goods to the loading dock where the 3PL company will pick them up and take them to the warehouse location for storage until your customer is ready for delivery.
Though you still have to transport the goods from the production area to the warehouse, there is no further need for you to do anything. You can handle this function with one staff member, who may even be one of your production workers or maintenance staff capable of making sure that finished goods are protected on the dock area or other pick-up zone until the 3PL company arrives to transport them to the storage facility. Depending on how much staff you previously maintained in the logistics area, you could expect to reduce costs anywhere from 25-50%, even after paying the fees to the fulfillment services company.
Once you decide to enlist the services of a 3PL company, you need to make a decision concerning which company best suits your needs. It's important to consider all the options such as location of warehouse facilities, age and number of vehicles in the fleet, experience of drivers and distribution workers, turnaround time, and most importantly, quality of the service. Though it is certain that the cost factor will be a consideration, that should not be the first thing you consider. In fact, you should only use price as the final contributing factor when you have two logistics companies with similar services, and you need to decide which one to utilize. When two companies both offer the same services and have similar records of accomplishment for quality, then and only then should you choose based upon price.
One of the best sources of information concerning 3PL companies is to speak with other companies who outsource their logistics functions for recommendations. Of course, online is another good source, but you have to make sure that you know whether the company services your area. You don't want to choose a company that is going to store finished goods for your customers in a location several hours away. In fact, your customers will probably like to know that they have quick access to their products in the event of an emergency and need to send someone to pick up a small amount of product.
Now that you know all the important information about 3PL companies and what they do, you need to decide if outsourcing is the right decision for you and your company. This means you want to weigh the cost factors against what you now pay and consider employee morale if it would mean downsizing. It's not a decision to make quickly, but one that will determine the future profitability of your company and its employees. Though you do want to seriously consider the impact that outsourcing will have on your employees, in the end, you do need to make the decision that will have the most positive impact on the company.
If you decide that you want to utilize a fulfillment services company, make sure that it is one with the capability and desire to meet the needs of your customers, or your company, as the case may be. Whether you're storing overstock inventory for your company or product for your customers, you want to be sure that the company you choose will be there when you need them. Check their record of reliability of on-time pickup, shipment, and delivery, so you don't choose a company that is going to be unable to fulfill your needs in a timely fashion.
Choosing the services of a 3PL company is a big decision, but it is one that can save a company a great deal of money, especially a company that really doesn't have the room for a warehouse and delivery trucks. For companies who already have a warehouse and delivery fleet, they are the answer to additional storage space without having to build another warehouse. For a small company or one located in an area lacking space for a warehouse, fulfillment services companies are a better choice than leasing warehouse space and still having to utilize the services of common carriers for delivery.
Make certain that you investigate fully the 3PL company that you choose, so your customers are not upset when products arrive late or damaged, because they were not properly stored or carefully loaded and secured when loaded on the trucks. You certainly want to choose the least expensive company, but not at the expense of your customers. Make sure you know for what you are paying, and that you are contracting with a company that will provide excellent quality, impeccable service, and delivery when it is required. This means they must guarantee on-time pickup and delivery as well as excellence in storage and loading abilities.