Successful 3PL Selection
The First Step, Requirements Definition
by Hugh D. Kinney, Jr.
a white paper from The Progress Group
© 2013, The Progress Group, LLC
No part of this document may be distributed, reproduced or posted
without the express written permission of The Progress Group, LLC
The Progress Group, LLC | 1200 Abernathy Road, Suite 1700 | Atlanta, Georgia 30328 |770.804.9920 | TheProgressGroup.com
Successful 3PL Selection: The First Step, Requirements Definition
By Hugh D. Kinney, Jr, The Progress Group
Companies choose to outsource warehousing and transportation operations for a variety of reasons. Once the
decision to outsource is made, partnering with logistics focused companies that have built core competencies in
logistics operations management is a great technique for strengthening a company’s capabilities relatively quickly
with minimal investment of capital resources. However, outsourcing these critical, customer facing activities does
not mean that a company is relieved of management responsibility and oversight and it does not mean that a
company can successfully outsource the functions without developing and communicating detailed knowledge and
operational requirements. Clear definition of operational requirements in terms that 3PL partners can understand
and use to design effective operations is critical to selecting a 3PL partner, receiving the most cost effective pricing,
and managing an ongoing 3PL relationship.
Many well managed companies, even ones that have previously outsourced operations, do not take the time or
expend the resources to clearly define their operational requirements in a format that can be effectively utilized by
potential 3PL partners. The data that can be easily reported from financial systems and some execution systems is
typically not adequate for designing effective operational processes, warehouse layouts, and transportation
networks. In most cases, data from corporate databases must be “translated” into operational information that
can be utilized to design cost effective warehousing and transportation solutions. Failure to clearly define and
communicate operational and performance requirements results in longer time to select a partner, higher contract
pricing, longer and more difficult contract negotiations, implementation problems and delays, and higher
probability of performance failures and relationship dissolution.
For example, a company that is
Figure 1. Inbound Item Profile
outsourcing warehouse operations may
specify that they receive 20 truckloads
per week that contain a total of 200
items. A 3PL needs much more detailed
information in order to produce a best
price bid. How is the load configured? Is
the freight palletized? Do the pallets have
more than one item? What is the profile
of items per inbound load (How many
loads with one item, two, three, etc.)?
Figure 1 provides one view of the inbound
order profile. Is the freight on slipsheets
that must be transferred to pallets? Is the
freight floorstacked which will require hand unloading and sortation? Is the product lot controlled and must lots
be separated on unique pallets? Will Advanced Shipment Notification (ASN) EDI transactions precede physical
receipt of the goods? Does the product, either unit load or case, have machine readable labels which can be
scanned into the WMS? Accurate answers to these questions will dramatically impact the labor and space
required to efficiently and effectively manage inbound operations and the cost of the operation.
Information regarding outbound operations can be much more complex and difficult to quantify for a potential 3PL
partner. Customer order characteristics can vary by product line, business segment, season of the year,
promotional calendar, and other reasons. Averages may be very deceiving to both the user and the 3PL if orders
are not homogenous and if profiles are not fully quantified and understood (See Figure 2). For example, if
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Figure 2. Outbound Lines per Order
outbound orders are comprised of both
case picks and full pallet picks, the
resulting average mix may vary
significantly from day to day or customer
to customer. Activity details by operation
or function must be provided in order to
design efficient operations and achieve
the most competitive rates. These
activities should be quantified in terms
and units of work that the 3PL associates
will perform, whether eaches, units,
cases, pallets, etc.
Inventory requirements and movement characteristics impact storage technologies and space utilization (See
Figure 3). Typical company data which is normally tracked and available may include total dollars, units, cases, and
dollar turnover. For parts distribution operations, units may be the appropriate storage metric, but for most
operations, some form of pallet storage is
Figure 3. Item Activity – Inventory Summary
also appropriate. Specifying the total skus
and pallets stored for potential 3PL
partners is necessary but not sufficient for
an effective warehouse layout. Acceptable
stack heights by sku and details of planned
inventory and movement by sku are critical
to efficient layout and space utilization. In
the case of a food manufacturer, the
reported inventory may be 250 skus and
5,000 pallets with and average stack height
of 3 (and the method of computing the
average stack height is questionable).
Twenty pallets per sku with a stack height
of 3 may indicate that 4-deep floor storage
would be an efficient layout and a 3PL may
quote this business on that basis. In reality,
a significant amount of the inventory stacks single high and a very limited number of skus comprise the majority of
the inventory. A combination of deeper floor lanes and selective use of pallet rack would render a significantly
smaller space footprint and a more economical price for the user.
Transportation requirements can quickly lose validity when consolidated or averaged. In order to receive accurate
pricing for comparison and partner selection purposes provide 3PLs or potential transportation partners with
detailed shipment data. If shipment details are not maintained in corporate systems, establish a process for
accumulating detailed samples or utilize your freight payment provider data if your company contracts freight
audit and payment services. Minimum shipment data should include date, source location, destination location,
mode, lines, cartons or pallets, weight, and cube. An annual sample is best but if the volumes are very high, a
sample of the lowest, highest, and “average months should be provided. Identifying the shipment mode in the
data files will enable providers to determine opportunities for savings through shifting freight between modes if
appropriate.
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Service and quality performance requirements set the foundation for service level agreements that will be
negotiated into the contract and can be a distinguishing feature between potential 3PL partners. Transaction and
cycle times may be critical to an operation’s effectiveness and should be defined and communicated. Inbound dock
to stock time may be critical in a high turn environment but less critical in a seasonal inventory build scenario.
Outbound order to shipment cycle times are important service elements but requirements vary between products
and industries. Time requirements for system updates and information reporting such as normal reporting vs recall
reporting should be specified based on necessary transaction processing. Operational quality metrics such as order
accuracy, inventory accuracy, and damage reporting and allowances must be specified. Specification should
include the data sources, computation formulas and the acceptable performance thresholds for these metrics.
Other requirements to clearly communicate include expected growth, IT integration, reporting, and special needs.
Specify the expected volume growth in order for providers to plan space, equipment and labor to accommodate
expected activity levels. IT integration requirements may include EDI transaction sets and formats, utilization or
integration with ERP systems, web access requirements, and transmission of data to client’s customers or carriers.
Specify daily, weekly, and monthly activity and inventory reporting requirements. Most 3PLs will have a standard
suite of reports which should also be reviewed and utilized when appropriate. Finally, specify any special needs
such as security requirements, return processes, damage handling, lot management, and other processes that may
be required to effectively manage the business.
Outsourcing logistics operations to an experienced 3PL partner can result in significant benefits to a manufacturing
or distribution entity. Many companies do not take the time or expend the resources to clearly define their
logistics requirements. As a result, the cost is higher than it should be, service levels suffer, operational transition
takes longer and incurs more problems with startup, and the relationship starts out with mistrust and potential
animosity. Proper definition and documentation of logistics operations requirements ultimately leads to better 3PL
partner selections, operational transitions, and partner relationships.
About The Progress Group
The Progress Group is an independent management consulting firm delivering strategy to
implementation services in logistics/supply chain, operations design, performance management and
program management. Our clients benefit from our depth in experience, thought leadership, analyticsbased thinking and always objective client advocate viewpoint. Founded in 1991 by industry leaders, we
partner with our clients to enhance competitive position and improve performance. The Progress Group
is headquartered in Atlanta, GA. For more information, visit www.TheProgressGroup.com.
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