Table of Contents
Many businesses regardless of being small or big are facing supply chain management related challenges. Third party logistics or popularly known as 3PL can help businesses resolve many of those challenges. However, along with advantages of using 3PLs for logistics, there are risks involved.
This article explains the meaning and role of 3PL companies and the risks of using third party logistics.
What is third party logistics?
The definition of 3PL is to outsource logistics services to a logistics company. However, the role of a 3PL company is often not limited to transportation only. It encompasses other activities such as storing, warehousing, and shipping on behalf of the client.
The 3PL company may also undertakes procurement, warehousing, transportation, packaging and distribution of goods. Many times, 3PL partners also take the responsibility of goods returns and management, i.e., reverse logistics. Although there are various advantages of having a third-party logistics partner, it comes along with a set of risks too.
5 Common risks involved in using third party logistics
Here are some of the risks involved in having a third party logistics partner. While there are some risks that can be easily mitigated by being careful, the others remain strategic planning.
The safety of your products in transit is a major risk factor with a 3PL partners. Unforeseen incidents such as fire, natural calamities, etc., need to be considered. However, what sets each 3PL company apart is the way of dealing with such incidents.
How to mitigate: You need to have a strong SLA in place to ensure that the 3PL company emphasises on safety and security of your products. Check for certifications that the company has acquired, the kind of training that is provided to employees, amenities that its warehouse and storing facilities have, etc. Here are some of the questions that you may ask to get clarity:
- Is the facility covered under any insurance?
- What precautions are taken in case of an unforeseen incident, such as a fire?
You can also check on the certifications of its facilities to ensure all standard norms are followed.
2. Products handling
The risk of product handling mainly occurs for products that need to be handled differently. For example, bulk commodities such as steel, fragile products, perishable goods, goods that require controlled temperature and humidity, etc. In such cases, it is important that the 3PL company has capability and experience to handle these goods.
Moreover, there is also the question of the number of times the products are being moved. For instance, if you are using PTL services for shipping your goods (over LTL services), the risks of poor product/material handling are minimized. PTL shipping has lesser stop points with lesser loading and unloading, and also helps to keep logistics costs less.
How to mitigate: In case your product require experts for loading, unloading and handling, check with the 3PL on the following:
- Does your company have experience in handling the particular product category?
- Does your 3PL partner have the right equipment to handle the products?
- Are the employees well-trained to use this equipment?
3. Data breach
This is one of the major risks of hiring 3PL logistics providers. When you outsource an entire function to an external entity, you are exposing them to insight into your company. It has details of your consignments, customer data, products and volume provided to each customer, and so on. There is the risk of data breach. Hence, be alert while drawing a contract.
How to mitigate: You need to ensure that the shortlisted 3PL company has fair business practices. You can learn about how the company ensures data security and avoid data breaches.
Scalability is yet another risk factor with 3Pl solutions. You may have plans to expand your business geographically or product category-wise. Your 3PL partner may turn to be irrelevant for your future needs. Moreover, demand for any product remain constant throughout. Therefore, your 3PL partner should be such as that accommodates current and future needs as well.
How to mitigate: Ensure that the shortlisted 3PL company is able to handle high and low demands. Additionally, if you have growth/expansion plans, ensure that the company is aligned with it and is capable of scaling up services when the need be.
5. Hidden costs
Consider this scenario: While finalising a 3PL company and drawing a contract, you might be happy that you are reducing logistics expenses significantly. And then, there comes a bill that exceeds your expected amount drastically, due to the hidden charges.
Solution: In the end, everything comes down to economic feasibility. Make sure there are no additional hidden charges, which may become a burden to you at later stage. Also, check if the pricing model of the 3PL company is suitable for you. See the scope of negotiating and negotiate it to the best of your capacity.
Tips for choosing a right 3PL partner
Apart from the risk mitigating factors mentioned above, here are some pointers that can help you to narrow down on the best suitable 3PL partner for your business.
- Geographical coverage: First, you need to determine if the 3PL company serves all locations where your customers are based. If you plan to expand the business geographically, check if the company has services in those regions too. Depending on your needs you can also check where the company’s warehousing/storage facilities are located, if any new ones are coming up since logistics parks are being developed countrywide, etc. This will help you to understand the company’s capabilities and ability to serve newer markets.
- Customer service: The 3PL company that you choose should have good customer service. It should have the capability to respond quickly and accurately. The importance of good customer service in logistics cannot be ignored, considering the intense competition in the sector.
- Documentation: Be clear about who would take care of the documentation part – will it be the 3PL company or you? Most 3PL companies do documentation as well. However, it needs to be clear before you start doing business with them.
- Reputation: You may check with your peer about the reputation of the market. Ultimately, with whom you do business with affects your reputation too.
Apart from the points mentioned above as per your needs, you can check the level of technology adoption the 3PL partner has, the level of customisation it can offer to your business, etc. Remember, there are different types of third-party logistics providers, and finding the right one for your business is going to make all the difference to your business.
Having a 3PL partner keeps you hassle-free from day-to-day logistics operations and documentation. However, it is important that you choose the right company that suits your requirements.