Switching 3PL Providers: The Grass Isn't Always Greener

The Better Shipping Podcast | ShipNetwork

In this episode, we talk about moving from one 3PL to another and what we have seen often happen when the expectations and the reality don't align. Here are key takeaways from that discussion. Transcript has been edited for conciseness, listen to the full recording here.

Let's talk about switching 3PLs

Scott Riddle, Chief Operating Officer

You can imagine that switching 3PLs is fairly challenging; there's a lot of logistics involved and a lot of risk in a business that it creates. Minimally, you'd want to put yourself in a position where you're getting what you expected, making the transition to a new 3PL by taking the risk. We've seen enough times that it's very clear that it's really challenging for the average customer to truly understand what their invoice is going to look like at partners X, Y, or Z.

What's typically done in these scenarios is that some kind of rate card is presented. Clients will compare the rate card they're getting from their current provider to the rate card they're getting from the new provider.

The client, in this case, does some kind of extrapolation or math exercise and says, "We think that we're going to have some savings by moving over to a new provider." And then we find out months later that, in fact, when they got their invoices, that expectation hasn't come to fruition to the degree they'd hoped.

What we often hear is that clients assume that all these providers would have similar service performance levels, and that's not the case either.

This is really an exercise or a discussion around: If mom were considering changing 3PLs, what advice would I give her to make the best decision for her business?

How do you mitigate these risks and put yourself in the best position to win and get this best combination of price and service from whomever you're doing business with? And that's a good place to start.

Start with the rate card, but also draw your 3PL into the discussion with a few simple questions like:

  • With this basket of shipments, this volume, let's just say over the last six months or a year, what would you in fact, have charged me to receive all this product?
  • What would you have charged me to pick, pack, and ship all this product?
  • What would my transportation spend on this have been using the current 2023 rates? What would it have looked like if you used your 2022 rates?

Now you start to put yourself in a position where you lean on your 3PL and their ability to run analytics for you to start to answer some foundational questions. You won't be able to get a perfect picture, but that's a good place to start.

Devin Johnson, CEO

We had this apparel company that was a sizable account for us, and things seemed to be going fairly well. And then we started seeing that we were losing a decent chunk of this business. After some discussion with them, we found out that they had looked at some additional shipping tariffs from another provider.

Based on that arithmetic, they decided the economics were such that they needed to transition from us to another provider. And at some point, they realized, "We're not really feeding in the green pasture that we thought we were going to be."

Scott Riddle

The first problem we discovered (when we re-engaged them on their experience with the new provider) was a much larger lag time or lead time to receive items. That is important because if you've delivered containers to your 3PL and they can't receive those for 4 weeks at a time, then those items aren't available for inventory. It starts to affect your ability to sell. You're going to show items out of stock that are at your 3PL waiting to be in stock, but because the 3PL can't receive and put these items away quickly enough, you're not able to pick them, and they go into these backorder statuses.

The second item of feedback we got was that the picking accuracy or the error rate on outbound picking was higher.

It didn't seem like the error rate would be a lot higher when comparing on paper, say, 98% versus 99.XX%, but they needed to understand one percentage point's impact.

The last piece was that, although the base rates they were offered appear to be better than the base rates they had with us, the all-in pricing for their transportation was actually more fully landed with all the accessorials, fuel, and other fees. Additionally, there were a number of fulfillment/handling charges that were $50 for this or $50 for that, which doesn't seem like much, but when you need it frequently-- it starts to add up.

So that combination of items started to have a negative impact on this particular brand's business, so much so that they'd contemplated shifting volume back our way. It's a good representative story that shows there are opportunities to really do your homework on these things to help avoid potential pitfalls. It doesn't mean that they always occur, but this is certainly a cautionary tale.

Minimally, put yourself in a position where they've given you an analysis that you can lean on. So to the degree that your shipping volume and order volume are similar in the go-forward period to what they've been looking back, you would expect the rates would be similar to what they showed in their analysis.

Have something more concrete to lean on by asking for a historical analysis versus what is often the standard practice of only being given those rate cards and then relying on you to do the math.

You don't want to be put in a position where you may not understand how to properly apply all those rates. Then you're in a spot where you may not be making a decision with all the facts you need to make a smart one.

Devin Johnson

The math equation needs to extend far beyond what's on our rate card from a transportation standpoint. For example, we know in a lot of these 4PL models for example, it sounds really nice to be able to have your products in one of 3000 locations, 1000 locations or 200 locations. But that inventory has to be positioned at some point, and there's a cost to that.

Say, here's a great USPS shipping rate, and you don't pay X, Y, or Z fees, and here's a pick and pack rate that's five cents cheaper, which looks really attractive. But what you don't realize is that you're going to pay this much more for them to receive your product into one warehouse and then pay a fee to get it dispositioned to 100 different facilities or 50 different facilities and transfer this inventory from here to there... And that's not free; someone's paying for that. All of a sudden, these sorts of things would be hard to add back into just a transportation comparison.

Scott Riddle

The rate card is just the tip of the iceberg. There's a rate card not only for transportation but also for inside the four walls activities.

As you said, there's a receiving rate, a picking rate, and many times there's a different add-on per line on an order. Then there's the transportation pricing for a distributed inventory model, which is very common in 4PLs.

This idea is saying: Here's our activity level. Based on your rates, tell me what the additional transportation charges would have been; I want to know what are the charges for storage, for pick and pack with this order volume, two and a half lines per order... Tell me what you would have charged me to pull it out of the warehouse and tell me what you would have charged me to receive all this inventory and put it away in the warehouse...

And what am I not asking? What other charges that are common on your invoices that I haven't asked about?"

There's very commonly a charge for rework. In other words, you've got a container that's coming inbound. And that container isn't organized as well as your 3PL would like. And now they're going to charge you an additional fee to sort out inbound containers, and that could delay the time to put it away.

The next question to ask is: What is the receipt to put away window?

If it takes your provider 10 days to receive a container and put it away, that's 10 days more inventory that you need to carry.

Because if you calculated safety stock, which is the minimum inventory, you would need to account for order volumes while items are transported inbound to your facility. If you have X number of days of safety stock but that doesn't consider the 10 days to receive an item in bulk, now you need 10 more days of safety stock.

  • What's that cost to you going to be?
  • Is there a way to expedite this?

We've seen 3PLs that say, for example, "Normally, it takes us a week to do an inbound, but if you pay us extra, we can expedite that for you." Consider how often you will need to pay those additional expedited fees and so on.

There are a lot of hidden charges

"Hidden" because they're hidden from you as a consumer, but your 3PL knows what they are.

By asking some intelligent questions, you can start to understand:

  • What are those charges? What's my exposure to them?
  • How often might I get dinged for X or Y, or Z?
  • If it takes 10 days to receive, how much more inventory do I need to carry? What's that cost to me to carry the additional inventory?

If I carry expensive items that are hundreds of dollars apiece, 10 days more inventory may be hundreds of thousands for me. If I'm carrying a low-value item, where the cost of goods is $1.50, 10 days more inventory may not be meaningful to me. So if there's enough savings elsewhere, I can more than offset that. Those are items that are really critically important to consider in these decisions. But they're often overlooked and then create this set of problems downstream.

Scott Hale, Chief Finance Officer

Look at a parallel industry, for example, the insurance industry. If you're buying car insurance, you know a handful of car insurance companies that are flashy, have a ton of marketing spend, and always advertise the lowest price; they attract a ton of customers. But when you play out the lifecycle of switching over to an insurance company like that, with the flashy front-end technology and marketing spend, it all looks good on paper, and you're getting this great price. But when you end up in an accident six months down the road, they come back and deny your claim. Now, you've just discovered that lower prices, flashy fronts, and brand recognition didn't get you what you needed at the end of the day.

There are other insurance companies that may not be as flashy, where the price point visible to you upfront may not look quite as attractive. But when that company comes through and pays that claim, you are now way better off. There are a lot of parallels that you could draw when you look at the 3PL industry. One that a lot of times is not being considered is a 3PL's ability to perform during peak. Not all 3PLs are created equal from that standpoint.

Consider if the 3PL is good at ensuring they have enough capacity and labor when things aren't business as usual, like when all that peak volume comes in, a critical time for any eCommerce business. Find out if the 3PL has a good history and track record of managing peak volume and maintaining volumes.

Scott Riddle

The question to ask is, "How often in the past have you suspended your SLAs during peak, and what did those suspensions look like?" Are they asking for an extra day added to the SLA? Are they suspending SLAs altogether? Those are easy questions to answer; it's just going back and seeing what happened in 2022 and what happened in 2021.

And then how did those suspensions and SLA impact the performance of SLI?

If the SLA is that they'll pack and ship your order same-day if it arrives by 3PM, and they promised to do that 98% of the time as an example, what percentage of order volume during peak met the SLA?

Even if the SLA is suspended during peak, the company is still tracking its performance, so I think you can get answers to almost all of those questions. And by the way, a 3PL that says they don't know or can't answer-- or won't answer-- certainly would be a red flag.

Scott Hale

Another item would be the strength of the contracts that the 3PL has with key vendors. A 3PL that has been around for a while that's developed great relationships with key vendors is going to be able to do a much better job at keeping pricing stable over time versus a 3PL that may not have that relationship with its vendors. Because they don't have that deep relationship, the 3PL may get significant price increases on packaging, shipping, and labor rates, for example. There are lots of different key vendors that 3PLs utilize, and those price increases that come through end up turning around and being passed on to the consumer.

Making sure that your 3PL has good long-standing relationships with its key vendors can help protect you from unforeseen price increases down the road.

Another one that's in line with the insurance company that ends up denying the claim is really just a 3PL's willingness to work with you through adversity. One of the key takeaways I've had over the last decade in this industry is that there are always adversity and unforeseen challenges that come up that, plenty of times, are outside of your control. Not all businesses are good at working through adversity, so make sure that your 3PL has a good track record when difficult circumstances arise, in particular with their customer.

Is your 3PL willing to work with you, as a partner, in weathering through adversity? Or are they more likely to nickel and dime you and make it that much more of an unpleasant experience when things aren't going as smoothly?

Whether that be inventory that you have delayed and is causing a lot of back orders, how are they helping you manage them and work through that? Whether that be a given carrier network that's struggling because of a weather delay, how does the 3PL that's got the shipping relationships and expertise going to route around that and make sure your packages are getting delivered? Think of key times of the year, especially that peak season. Being able to help you weather adversity like that is another key indicator to know if a 3PL can be a good partner for you.

How do we help a client get back on track after a negative experience with a 3PL?

Zach Green, VP of Sales

If you're a good 3PL, you've done all the work to help a customer who is possibly considering an exit. We're all in the business of helping them out. If we do a poor job as they're on their way out, they're clearly going to look for another option when they need to reconsider the decision they made.

So taking care of the customer's needs as they're on their way out and letting them know, "If it doesn't work out, you have a safe landing spot here" is really important.

And that's something we try to do because we've experienced enough of that turnover in the logistics space over the years. And we know that to the point of the conversation: the grass isn't always greener on the other side.

It's been very interesting to me on the sales side to watch and see the industry evolve where not too long ago, we were talking about 3 different fees at the point of fulfillment-- it was storage fees, a per item pick fee, a per item pack fee, and that was it. Now we've evolved into all these other fees that we've now talked about, which makes it a lot more complicated and complex.

We're in a logistics world now that is a lot more complicated, a lot more complex, and it's a lot easier to hide certain fees. So being upfront makes sure that the customer totally understands what they're paying for what they're getting. And if they're possibly making a decision to try something else out, taking care of them and making sure that they know that they can always come back.

Scott Riddle

What has worked for a couple of our clients very well has been this idea of putting a toe in the water with a new provider before fully committing all their inventory.

If you commit all of your inventory and move it from one 3PL to another before you are certain that 3PL is a good fit long-term for you, it could be a very painful experience if you end up removing all that inventory back.

The single largest expense in a transition is the movement of inventory from one 3PL to another that the client needs to bear... it's not transportation going to an end consumer; it's this big move of inventory transportation from one location to another.

That's very expensive, in particular for a large client. And so what we see very typically of our clients, if they have 200 SKUs, it might be 20 or 40 of those SKUs that are their fast-moving skews-- those are the ones that they are most often ordering new containers for. So rather than repositioning inventory from one 3PL to another, take a container of your top moving SKUs and put that in the new 3PL and then see how they perform. Look at a month's worth of invoicing, a month's worth of storage... look at that time to receive, their pick and pack performance, their performance to SLA.

Because now that you have done your homework on the front end, do all those things line up?

  • How does your actual experience line up with what you've been sold?
  • Does the invoice match what they projected? Am I actually seeing the savings that I would expect to see?
  • And then consider-- is there a trade-off?

In other words, "I'm getting savings, but what am I giving up?" Maybe it's receiving time, or it's this performance to SLA.

If you're giving up something around performance, what impact does that have relative to the savings that you're getting, and can you live with the trade-off?

If you can, you know you've made a good decision for your business. Maybe you bring in the second fastest moving SKU or the third fastest moving SKU, rinse and repeat. Try it over another month or two to make sure those numbers still hold up. If they don't, or the trade-off is not something that you can stomach, you still have this very quick ability to fall back to the first provider. Then you're in a spot where it's not very expensive because you've kept all your inventory there and are still keeping order volume with that provider.

When it comes to limiting risk, that would be a good way to make sure that you're getting what you are promised and can live with whatever trade-offs are in that scenario. And if not, then you're in a position where you can pivot back very quickly.

Devin Johnson
The point of this discussion is not meant to be a self-serving message. We are not saying our customers should never leave us or that the way we do things is better than everyone else.

The message is that not every provider is a perfect fit for everyone. We're not going to be the right fit for some customers, and that's a cyclical thing.

Right now, there's no alignment; maybe in the future, there will be. Or maybe we started as a good provider, and for whatever factors that changed, and maybe in the future, we'll be a better provider for you.

Yes, we wish that some of the clients we had would have looked beyond just a UPS tariff that their 3PL sent them. And they would have wished that, too, because they probably would have saved significant money and not had to go through what they did.

That could provide a lesson for somebody else. And so this provides a context to say these are some of the other questions one should consider outside of just a shipping rate, pick and pack rate, and storage fee. Those are the 3 main things you're looking at, and they are a sizable thing...

But all these other things, even beyond economics, like SLAs and performance to SLA, can have a material and significant impact on your business.

There's just so much more to consider when you're evaluating a move to another 3PL.