Damco eGuide

WHAT TO LOOK FOR WHEN

SELECTING A 3PL
Six criteria for a successful long-term partnership

Jens Rmer Sode

Table of Content
01. MANAGEMENT SUMMARY

02. WHAT EXACTLY IS A 3PL?

02.01. An international supply chain: a co-operation of many parties

02.02. Incoterms: standards for transactions

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03. 3PL SERVICES: FREIGHT FORWARDING AND

SUPPLY CHAIN MANAGEMENT

03.01. Freight Forwarding services

03.02. Supply Chain Management services

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04. WHAT TO REQUEST FROM YOUR 3PL

04.01. End-to-end operational excellence

04.02. IT integration
04.03. Product innovation
04.04. Key account management
04.05. Legal compliance
04.06. Ethics and environmental awareness
04.07. One final recommendation

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About the author

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About Damco

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01. MANAGEMENT SUMMARY

THIS eGuide is primarily intended for people in all sorts of companies who need a partner
for their international logistics. Whether you work for a manufacturing or retail organisation,
in consumer goods, lifestyle or electronics: goods will have to be moved from one place to
another to reach their final destination, the end customer.
Today, third-party logistics providers play an important role in this process. The number of
organisations deciding to take care of their transportation needs themselves is shrinking,
because in most cases contracting specialised suppliers has significant advantages. Usually
these suppliers work for the same client for several years, enabling them to adapt their services
to exactly what the customer needs. This makes it crucial that you select the right provider:
one that will grow and develop with you and your needs.
It turns out that there are a number of specific criteria that any prospective client of a 3PL
should look for, although their relative weight will be different in different cases. These criteria
are:

End-to-end operational excellence

IT integration
Product innovation
Key account management
Legal compliance
Ethics and environmental awareness

After a general introduction into the world of international logistics, we will discuss each of
these in some depth.

02. WHAT EXACTLY IS A 3PL?

BEFORE addressing the criteria involved in selecting a third-party logistics provider, it will

be helpful to have an overview of some of the terms and concepts used in supply chain
management. If you are familiar with the field, you can easily skip this section and continue by
reading the next chapter.
According to the Council of Supply Chain Management (CSCM), a third-party logistics
provider or 3PL can be defined as: a firm that provides multiple logistics services for use by
customers. These services are integrated, or bundled together, by the provider. Secondparty logistics providers or 2PLs include trucking companies, shipping companies and airlines
providing freight service.
02.01. An international supply chain: a co-operation of many parties
The basic logistics setup for an end-to-end supply chain is illustrated in figure 1.
DOMESTIC B2B

INTERNATIONAL B2B

2PL

2PL

Factory
CUSTOMS

2PL

Consolidate

2PL

DC
eCOMMERCE

CUSTOMS

2PL

SHOP

2PL

Customs

2PL

De-consolidate

2PL

CUSTOMER

Figure 1 - End-to-end supply chain

To explain the flow of goods through the supply chain we follow a pair of shoes on its journey
from the factory to the end consumer.
A shoe and sportswear company places an order with a factory; let us assume this is Trinhs
Shoe Manufacturing, located in a suburb of Ho Chi Minh City, Vietnam. The shoe company
has contracted a 3PL for the transport from Trinhs factory to a distribution centre (DC) in the
US.
The shoes are picked up by truck at Trinhs factory and transported to a local warehouse. At
the warehouse the shoes are consolidated with other goods, for example jeans manufactured
in other Vietnam locations, to optimise the fill rate of the container used for shipping the
goods. This will lower the transportation costs. The container is then transported to the port
(or airport), where customs handling and paperwork processing are done before loading onto
the ship (or plane). Next, the container is sailed (or flown) to its destination port in the USA, for
example Los Angeles. Prior to further transportation to the local warehouse the import customs
paperwork is processed. At the local destination warehouse the deconsolidation of the goods
takes place. The shoes are taken out and transported by truck to a US distribution centre in
Memphis, while the jeans undergo a similar process and are transported to San Francisco.
The distribution centre is the place where the service of international 3PLs most often ends
and local transportation takes over, delivering the goods to the final shop or consumer.

02.02. Incoterms: standards for transactions

The terms used for international transactions and procurement processes have been
standardised by the International Chamber of Commerce and are known as Incoterms1
(International Commercial Terms). The shoe company may buy the shoes from Trinh as Free
On Board (FOB) or Free Carrier (FCA) Incoterms. These terms help the shoe company
control the shipping costs from origin through the destination port or distribution centre and
enable it to dictate Trinhs use of 3PL. Other advantages of these Incoterms include full visibility
throughout the supply chain for the shoe company and the ability to consolidate cargo flow
across several different factories, which will further help reduce cost in the supply chain.
The shoe company could also buy the shoes from Trinhs on Deliver Duty Paid (DDP) terms.
In this case they would have much less control of the cost up to delivery at destination point,
but could save some inventory days, since the shoes only become part of the shoe companys
inventory once the goods have been delivered at destination instead of at the agreed FOB
point or time.
In either case, managing the whole supply chain is the business of 3PLs. Because of their scale
they can leverage the consolidated volumes for actual transportation as well as consolidation,
deconsolidation and the associated documents handling.

1
International Chamber of Commerce Incoterms definitions on http://www.iccwbo.org/products-and-services/trade-facilitation/
incoterms-2010/

03. 3PL SERVICES: FREIGHT FORWARDING AND

SUPPLY CHAIN MANAGEMENT
THE services offered by 3PLs fall into two main categories:
Freight forwarding services (FF) and
Supply chain management (SCM)
We will look at both in more detail to describe the specific services that you as a client may
purchase from a typical 3PL.
03.01. Freight Forwarding services
Freight forwarding services can be classified in two evident subcategories, Air and Ocean,
depending on the means of transportation that is involved. The product that you as a client
would purchase here is the complete management of the transportation process, including
the contracting process with the actual transportation provider, the 2PL.
In Air FF this could result in the 3PL picking up products on behalf of the shoe company in Ho
Chi Minh City and contracting with a courier company or airline company to fly the container
to Los Angeles. There the goods would then be handed back to the shoe company. The 3PL
services for Air include cargo pick up at factory and customs clearance.
In Ocean FF this could be the 3PL picking up a container on behalf of the shoe company
in Shanghai and contracting with an ocean carrier for sailing the container to Los Angeles,
where the goods are then handed back to the shoe company.
The customer can outsource this FF to 3PLs or they can contract themselves directly with the
2PL. Many customers do both. The split between direct and outsourced in 2010, according
to analysis by Nomura2, was:
Air: 90% outsourced
Ocean: 35% outsourced
The high percentage of Air FF outsourced to 3PLs is caused by the airlines inability to service
the customers end-to-end. Also, a 3PL has the opportunity to consolidate cargo across many
customers, which will result in better rates than an individual customer can achieve directly
with the airlines.

Nomura Equity Research (2013). Trends in Transport, 21 January 2013

03.02. Supply Chain Management services

Supply chain management goes one significant step beyond freight forwarding by considering
the supply chain as a whole and managing it from that perspective remember the earlier
description of how a 3PL could manage the supply chain all the way from a factory in Vietnam
to a distribution centre in the US. This makes it possible to optimise the supply chain for the
specific needs of the client organisation.
Modern supply chain solutions provide end-to-end visibility across all supply chain elements.
In practical terms this means that the customer has access to detailed, real-time information
about his supply chain, enabling him to identify the parts where performance is not optimal.
Depending on the situation, these problems may be resolved; but they could also be eliminated
altogether by redesigning the supply chain. Many organisations use SCM as a foundation for
an ongoing supply chain optimisation process.
Understanding the complete supply chain also creates the possibility to identify weak spots,
even when it functions well under standard conditions. What would be the consequences
of a natural disaster, or a strike in a major port? How easy or difficult is it to accommodate
a sudden change in product demand? All of these scenarios can be tested and evaluated
until the supply chain has the required degrees of robustness and flexibility. Obviously there is
always a trade-off: measures to eliminate risks and increase flexibility come at a price. Every
organisation has its own particular desired level of reliability and agility and the ideal supply
chain is always custom-made.
An increasingly important aspect of supply chain management is that, with the right instruments,
it makes it possible to quantify the environmental impact of various alternatives. With complete
information about the supply chain, including distances and transport modalities used, it
is easy to calculate the carbon footprint of a products journey from origin to destination.
Reducing it is beneficial for the environment but also financially advantageous: a lower carbon
dioxide emission goes hand in hand with lower fuel consumption and lower costs.
While this description focuses on management of the complete supply chain, there are also
hybrid situations where a 3PL provides a subsection of these services to the customer, who
would then manage the remaining parts himself.

04. WHAT TO REQUEST FROM YOUR 3PL

IN the market of 3PL services, two trends have become visible recently. On the one hand,

companies are expanding their usage of 3PLs; on the other hand, companies also try to
consolidate their business to the smallest possible number of providers. If you have fewer
providers, you also have fewer interfaces and simpler internal processes. In general, companies
aim for the minimum number of providers that will still ensure a healthy level of competition
between them. In a recent study Morgan Stanley3 concludes: Three in five are reducing
or consolidating the number of 3PLs they use and 65% of shippers increase their usage of
3PLs where shippers is synonymous with 3PL customer.
Contracts between clients and 3PLs usually cover several years. The relationship between the
two parties is not so much that between a customer and a supplier; it will generally have many
characteristics of a partnership. Selecting the right 3PL is therefore a critical process with farreaching consequences, especially since it is virtually impossible to make a rapid switch to
another 3PL if things do not work out as intended.
Research based on data from the major 3PL companies, research houses and interviews has
identified a number of key criteria used by prospective clients to evaluate their possible 3PL
partners.
04.01. End-to-end operational excellence
It is evident that you may expect that a 3PL is able to operate cost-efficiently across the
globe. According to Gartner4 3PL Leaders offer a broader set of integrated services across
significant global regions. The same point was stressed in a client interview: Delivering
products In Full On Time is the most critical KPI for our global supply chain and maintaining
focus on cost control and lots can do this on paper but cannot execute in reality.
Along the same lines another company concludes: The 3PL must be able to integrate fast and
accurately A third company said, referring to operational excellence and global coverage:
These are basics today and taken for granted we often choose only two or three 3PLs ..
which are big enough and have the infrastructure to service a big customer like us.
For clients with global supply chains, the global reach of their 3PL is a key success factor.
Operational excellence is indispensable in all cases.
04.02. IT integration
From the complexity of the supply chain illustrated in figure 1 it is apparent that IT plays a
significant role. There are a number of different companies that handle the products before
they reach the end customer. The IT systems of these companies must be integrated to
give you continuous visibility and tracking capability, and to enable further optimisation of the
processes.
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Morgan Stanley. Transport Freight Forwarding grapples for growth in 2013, 6 February 2013
Gartner. Magic Quadrant for Global Third-Party Logistics Providers, G00236375, 14 March 2013

Gartner concludes: Increasingly, 3PL Leaders have been extending their services to increase
their value. Their usage of IT solutions as an enabler is a key differentiator to their success.
The logistics vice president of a popular global lifestyle fast fashion company explains: We
have chosen GTNexus as our IT integrator and visibility platform across our supply chain. All
3PL partners must be certified by a party like GTNexus in order to be a business partner and
Gartner adds: Emergence of demand driven supply chain requires advanced software and
system to system integration. The logistics vice president quoted before adds: IT quality is
a real differentiator.
In a recent extensive study sponsored by Cap Gemini5 they state that: 94% of customers
agree that IT is a necessary element of 3PL capability but only 54% indicating they are currently
satisfied with 3PL IT capabilities.
Clearly, global IT integration is another key selection criterion.
04.03. Product innovation
3PL services are not a commodity. Due to the complexity of todays global supply chains,
together with the collaborative and strategic partnership that should develop between you
and your 3PL, it is essential that a 3PL can come up with new solutions for the challenges of
its particular clients. The Cap Gemini study finds that customers and 3PLs agree on innovation
being a top requirement.
It is certain that the world will change in unexpected ways during the time period covered by
a contract with a newly-selected 3PL. You want to be able to pro-actively adapt your supply
chain to those changes. Therefore you need to make sure from the beginning that your 3PL
has a proven innovative attitude, supported by the required processes and resources.
04.04. Key account management
If you represent a large organisation, the fact that your relationship with a 3PL is a long-term
partnership needs to be reflected in the internal organisation of the 3PL. One instrument that
appears to be particularly successful is key account management (KAM). The term refers to
a situation where the 3PL has one or more dedicated account managers. The key account
manager, or the KAM team, is responsible for all aspects of the business with you as his
customer and is the central point for all coordination and communication with your company.
The ongoing dialogue between the key account management team and the client is a platform
for new ideas as well as for fine-tuning day-to-day processes. Two quotes from 3PL clients
illustrate why they attach great value to this:
Key account management is important when the scope is big enough. Strong account
management is measured by how much influence they have in their own organisation. You
need someone who can represent you strongly.
Key account management is crucial to create the right integration like IT, sales and operations
planning and new solutions innovation.
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Cap Gemini with Langley, J. 2013 Third-Party Logistics Study the State of Logistics Outsourcing, 2012

04.05. Legal compliance

It may appear too obvious to spend much time on, but for companies selecting a 3PL it is
essential to raise the issue of regulatory and legal compliance. International supply chains are
complicated and are touched by such a wide range of different country legislations that strong
corporate compliance standards and enforcement are indispensable.
In both Europe and the US prominent 3PLs have incurred serious fines for cartel formation6
and fraud7. This is obviously very serious, not only for the 3PL but also for any other company
that is associated with such an affair. Doing business with the wrong 3PL can have a very
negative impact on your company brand.
04.06. Ethics and environmental awareness
Like legal compliance, corporate social responsibility (including good citizenship, minimum
environmental impact and attention for a reduced carbon footprint) are must-haves for 3PLs
wanting to serve their customers according to todays standards. How important this is for a
particular client organisation will depend on their corporate strategies. In general, consumer
brands tend to be more and more aware of these values. A 3PL can support its clients in the
area of sustainability with tools and dashboards that not only show what the current carbon
footprint of (part of) the supply chain is, but also how this can be reduced.
04.07. One final recommendation
The six criteria listed above are the ones we found most strongly supported by clients and
research companies, but of course they will not be the only parameters in your 3PL selection
process. Depending on the particular characteristics of your organisation, additional criteria
will apply and may even be more important for your final decision. It cannot be stressed
enough that partnering with the right 3PL is a critical success factor for the logistics side of
any business. If you are involved in, or responsible for, selecting a 3PL, a final recommendation
would be to ensure enough corporate time, attention and resources for the selection process.

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http://europa.eu/rapid/press-release_IP-12-314_en.htm
http://www.reuters.com/article/2010/04/09/agility-fraud-idUSLDE63803H20100409

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About the author

Jens Rmer Sode is Damcos Global Head of Lifestyle vertical, based in the Damco
headquarters in The Hague, The Netherlands.
About Damco

Damco is one of the worlds leading third party logistics providers specialising in customised
freight forwarding and supply chain solutions. The company has 10,000+ employees
in more than 300 offices around the world and a global presence in about 100 countries.
Damco is part of the Maersk Group. More information about Damco can be found on
www.damco.com.

Damco 2014. All rights reserved. No part of this document may be reproduced or transmitted in any form or
by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission
of Damco International BV.

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