The 3PL paradox

In my networking, I have met many manufacturers of warehouse automation and WMS vendors. They have all confirmed something I think many of us believed a long time. I call it the “3PL paradox”.

Many companies choose to outsource their warehouse logistics to a 3PL company in the belief that they are more willing (because of the synergy effects) to invest in cost efficient technology in order to remain competitive and secure a profit margin, in that way it is a win-win situation for customers and 3PL providers. However, those who invest most in technology and modernize their warehouses is companies that manage their warehouse logistics in-house. The reason for this is the trend with short-term 3PL contracts with all possible clauses in order to get out of the contracts. The reason for short contracts is probably an ever-changing global market where it is important for the customers of 3PL to be flexible in order to be competitive. Unfortunately, there is a serious negative effect of short-term contracts.

The problem with short-term contracts is it inhibits larger investments and development projects. The lack of long-term business relationships makes it difficult to create reasonable ROI calculations for the 3PL companies. That is a lose-lose situation. The customers paying for a logistic that could be more efficient and having a better quality and the 3PL providers having problems creating a profitable business with the opportunity to invest for the future. Both for themselves and their customers.

Of course, the 3PL paradox does not apply to all 3PL companies. Especially the big players have enough customers and financial muscles to secure their investments in automation or WMS, but remember that is not a guarantee the 3PL company will invest in efficiency-enhancing measures. There is a lot of examples of 3PL Companys with silo mentality regarding their warehouse operations. However, as a customer you should ask the right questions and have some knowledge in warehouse logistics. If the 3PL warehouse is manual and “old school” you can be sure, you are going to pay for that in higher fees and maybe lower quality. Often these companies are trying to reduce labor costs too much with higher staff turnover as a result, and that affects both efficiency and quality.

3PL can be a great alternative but be sure to do your homework first before you decide what provider to choose. If you are striving for a short-term contract, it can hit back on yourself. In a 3PL business relationship, you need to be transparent regarding strategies and ambitions. If you want a cost efficient warehouse with high quality, you need perspective and a long-term relationship with your 3PL provider so they can invest and adapt the flow for your needs. Sometimes it is better to keep the warehouse logistics in-house in that way you know the strategy’s through the company and you are able to adapt the warehouse logistics for your business and you do not commit to anyone.

Whether you intend to outsource your warehouse logistics or run it in-house, it’s extremely important that your company have genuine expertise in warehouse operations, otherwise there is a risk that strategically costly decisions can be taken.

Roberth Karlsson

One thought on “The 3PL paradox

  1. There is a lot to discuss about this topic. I just want to point one thing.
    A company invests in inhouse logistics because they are going to use those investments until the end of their life. The investments that company does are not the same that another “twin” would do. So, a 3PL invests for its customers provided:
    1.- the investment can be used for any other customer. APRacking is a usual one. The 3PL assumes the investment, because of the low risk.
    2. the customer commits to pay the value of the asset at the end of the contract. That is because the high risk for the investment will hardly be used for another customer.
    Last, le me suggest you to read a translated version of the article of the following link written in spanish
    https://loypro.wordpress.com/2014/01/11/necesito-un-operador-logistico/
    Kind regards

    Like

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