3PL selection

The basis lies in your specific reasons for outsourcing, the selection of the logistics partner that suits your requirements best, and the way in which the agreements are established among you and the LSP. However, many choices can be made in a market that is highly fragmented. How do you select the best service provider for your logistical challenges?

Recent research from the ‘Annual Third-Party Logistics Study’ by NTT Data/Penske shows that almost 50% percent of LSPs interviewed mentioned that their clients are considering shifting LSP or insourcing (part of) their outsourced activities. Reason: they are (somehow) dissatisfied with their current LSP. The reasons for the dissatisfaction vary greatly: non-compliance with contractual KPIs; insufficient knowledge of the specific market and industry; not flexible enough to act on business changes with service and/or costs; lack of IT capabilities; too little attention for new technologies; too high rates and insufficient drive to proactively improve on performance and cost levels.

The real reason for dissatisfaction often has a deeper cause and can be found, for example, in minimum volume thresholds in contracts, changing order characteristics, increasing cost and inflation, changing market conditions, increasing customer requirements and also in the strategic or cultural (mis)match between LSP and client. The outsourcing party is responsible for the choices and ultimately, to a large extend can control the satisfaction with the services of your LSP yourself. The basis for this is in the selection of the right partner and the reasons for outsourcing as such. The options are numerous, and the market is highly fragmented: there are hundreds of logistics service providers to choose from. But how do you select the best logistics service provider for your company?

The 5-step approach of selecting a service provider include: (A) evaluation of the needs & requirements; (B) identification & shortlisting RFP candidates; (C) requesting the proposals and the quotes; (D) narrowing down candidates & running the 2nd bid round; and (E) making the decision & the contracting.  The approach is visualized below.

The real complexity is in the degree of detail of the specifications that really matter; understanding the true qualities of a logistics service provider and finding out whether there is also a strategic and cultural match with the LSP you would like to select.

Schematic overview of the logistics service provider selection process

The 5-step approach explained

Step A: Evaluate the needs & requirements

• The kick off meeting in which the detail timeline and roles & responsibilities are defined
• The needs & requirements definition, an essential element to ensure that the RFQ candidate understands what they need to deliver in RFQ phase and of course during operations
• The gathering of the relevant data that demonstrate elements such as order characteristics, volumes, seasonality and peak volumes

Step B: Identify & shortlisting RFP candidates

• The longlisting of relevant LSPs base upon needs & requirements and the strategic profile of preferred candidates
• Meeting with (part of) longlisted candidates to familiarize and test the real interest of the LSPs
• Short list relevant number (4-8) of candidates to be included in the RFP to make the process effective and efficient at both sides

Step C: Request the proposals and the quotes

• Detailed RFP process including Q&A share with all candidates to ensure level playing field
• Review and assess quotes, eventually supported by LSP presentations to not just rely upon the nice commercial slides and wordings
• Create financial and qualitative score cards that result in preliminary score card and LSP ranking

Step D: Narrow down candidates and run 2nd bid round

• Narrow down to limited number of candidates that really match requirements
• Detailed presentations of candidates and feedback to candidates for LSP to sharpen their bids
• Run 2nd bid round and detailed quote analysis including the fair negotiations on the pricing

Step E: Make your decision & contract

• Identify preferred candidate and conduct detailed due diligence to be sure the preferred LSP really can deliver what they promise
• Make final decision
• Contract the preferred candidate eventually supported by a final negotiation