• Roy Strauss

Supply Chain Profitability –Public Warehouses (3PLs) pros and cons

Third party (3PL) or public warehouses can be a key to one’s company’s success or a reason for its failure. The key to determining if they are the correct solution and hiring the best one for your company requires a complete understanding of how they can help or hurt one’s company and by doing proper due diligence to ensure the correct 3PL is selected. If your company does not have internal talent to understand everything involved, an expert should be retained to ensure the success of the selection process.


Benefits of using a 3PL.

1. Yours is a new company and does not have sufficient cash flow to buy the mobile and

storage equipment, etc. required or pay the staff to run your own DC

2. The cash flow is available, but you would rather spend it on the product and marketing

etc. required to grow the company

3. Your company talent and expertise is in marketing/sales, not operations

4. The 3PL’s capabilities can give your company a competitive advantage

5. The 3PL has years of experience in your market niche

6. Your company is growing rapidly or grows sporadically, and you can’t keep moving to a

facility that is the right size all the time. The correct 3Pl will offer flexibility and scalability

to continually accommodate the company’s needs as it grows or changes for space,

operations, equipment, etc.

6.1. When experiencing growth spurts, one can’t continue to sell and buy buildings or

break leases and continually move

6.2. Sudden business changes require new technology or operational capabilities your

company does not have but are readily available in the correct 3PL

6.3. A key part of the due diligence in selecting the 3PL is learning of their flexibility,

scalability, and capability for potential future requirements


Hazards of using a 3PL

1. It is a mismatch

1.1. Communication systems do not match, you can’t get the information you need in a

continual timely manner

1.2. Their IT capabilities limit their ability to communicate with you, your suppliers, your

customers

1.3. They do not have a proper a manager or operational capabilities to manage your

account

1.4. They cannot deliver on what they promise

1.5. Misunderstanding of the financial agreement and they constantly overbill or misbill

and add fees either on purpose or accidentally

1.6. Crisis management – snowstorm, blackout, etc., they don’t have proper

emergency planning, or they take care of their better customers, and you get

ignored any time their business is stressed

2. Your location in their facility (e.g., furthest from the dock) will continually waste key time

and add to labor costs

3. They lack the capabilities to manage growth or space properly


A recent client asked me to assess the capabilities of the 3PL they were using, and I had to recommend either to stay or find a new company. They had to move on because the current 3PL:

> Mis-ships, short-ships, late ships

> Inaccurate inventory counts

> Disorganized inventory management processes

> Inability to get reports in a timely manner

> Slow returns processing times

> Expensive and slow international shipping

> Extreme challenges with wholesale shipping and inbounding goods

> Sporadic and unreliable communications

> Inability and lack of care or drive to solve fundamental problems

> Lack of accountability or willingness to be our partner when things go wrong

> Random inexplicable fees

> Lack of proper security


We had to find a new provider which meant negotiating the release from the contract with the current 3PL, using their services during transition but things got worse and much inventory could not be accounted for. To find the best choice, I was hired to:

> Assess the situation and determine how much space they would request and design

operations for the higher volume operation

> Write their request for a proposal, visit perspective operations with them, and help them

select the new company, one that could accommodate uneven and hyper growth

> Recommend a course of action. This required me to determine everything about each

option at each company: space, equipment, staffing, complete IT systems and

operating systems and procedures; flexibility and scalability to manage growth;

determine complete costs; and assess the business deal including assessing their

financial stability and negotiate escape clauses if necessary


The client said they would negotiate the final deal using their lawyer without me, but the contract contained deal killers such as:

> If there is a dispute, they would still have to keep paying their bill

> If they did not pay, their goods could be seized

> The productivity being guaranteed was less than day to day requirements

> The lawyer did not have the knowledge necessary to deal with these issues, so I was

called back in and helped them get the deal right


These were the charges and fees listed in the contract - will you know which are appropriate and what the rates should be, that’s where we come in to help. This is the deal from the best company who required:

1. Fulfillment fees

2. Use provider’s trucking services and client agrees to maintain a deposit for two week’s

average shipping revenue

3. Receiving & Put Away Unit Receiving (mixed SKUs) per Unit 0.55. New SKU Setup per

SKU 2.00

4. Ecommerce Order Handling Order Processing (includes First Unit) per Order 2.85;

additional Unit Packing & Packing per Unit 0.70

5. Order Manifesting (packing slip, shipping & return label, sortation to carriers) per

Shipment / per Order 0.35

6. Wholesale Order Handling: order processing per Order 6.50; additional Units, per Unit

0.55

7. Order Manifesting (packing slip, shipping label, return label, sortation to carriers) per

Shipment / per Order 0.30

8. Value Added Services (VAS) Sticker per Sticker 0.25, Tissue Per Tissue 0.45,

9. Marketing Inserts per Insert 0.20, gift orders per Gift Bag / per Order 1.00

10. Returns processing (includes first unit) per Order 2.95 Additional Units per Unit 1.00

11. Inventory Storage: merchandise Pick Storage and Production Space per Cubic Ft. / per

Week 0.30, Supply Pallet Storage per Pallet per Month 20.00

12. Implementation and Account Management: WMS Setup & Training, eCommerce Store

Integration, Warehouse Configuration & Setup One Time 1850.00

13. Client Dashboard and Account Management (up to 20 hrs.) per Week 200.00, Monthly

Minimum per Month 2000.00

14. Additional Services (If required) 7 items were listed with a cost for each

15. International Checkout Services (If required): Included 3 different processing fees

16. Packaging (If Required) Including Supply & Application 5 different costs were listed

17. Ten more services were listed including IT, special project, kitting, warehouse services,

postage, domestic freight charges

18. And this clause: monthly Minimum will begin at $2,000/month and will adjust

proportionately to Client's growth to be calculated as an average of the previous 3

month's fulfillment expenditure multiplied by 70% to proportionate with investments

made by Service Provider in space utilization and human capital to accommodate

growth during the course of the agreement's term


It is clearly obvious that if one can enter into a fair and proper agreement with a 3PL they can avoid the huge capital outlay required for their own operation and experience all the benefits listed above. At the same time, you are entrusting your business and inventory to a third party that can ruin or kill your business when not done properly, make sure you have the skill sets in place to make the right selection (internal staff or outside expertise).