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3PL Outsourcing

Set 3PL Contract Length to Allow Investment

Alex Stark | November 21, 2016

Set 3PL Contract Length to Allow InvestmentLet’s say you’re a homeowner and you’re considering replacing all the windows in your house. They’re not the worst windows, but there are definitely gaps that allow heat to escape, and your energy bills to rise.

You read up on the ROI of replacement windows and learn that you can recoup around 70% of the investment when you resell the home and the rest in yearly energy cost savings.

But here’s the rub. You’re selling your home next year, so there is no way to recoup all of your investment. Are you really going to invest in a more energy-efficient home (good for you, good for the environment, good all around) if it means a $5,000 net reduction in your bank account?

That scenario is not unlike the dilemma logistics providers face if 3PL contract lengths are of a shorter duration.

Define 3PL contract length to support investments in people and technology

3PLs need the guts to take on prudent financial risk, certainly. But this risk must be matched by a shipper’s willingness to have these costs amortized over a longer period.

Many 3PL warehousing users are hesitant to commit to long-term contracts – for different reasons. Some may simply not know where the business will be in two years and don’t want to make a commitment. Many others believe that frequent contract renegotiation and bid processes sustain their leverage to negotiate costs down. This latter view relegates logistics services to commodity status and, ironically, may have the unintended result of increasing costs over the long term.

Strategic relationships benefit from longer-term agreements because they give 3PLs the ability to THINK BIG. To consider breakthrough strategies involving technology and automation that could literally transform your operation and drastically reduce costs.

When operating under short-term 3PL contracts, it becomes more difficult for a provider to rationalize major investments in new engineers to develop solutions, or system upgrades that enable a next level of optimization, or new automation equipment that could double distribution throughput.

The Best 3PL Outsourcing Partnerships Involve Mutual Investment

According to Dr. John Langley, lead author of the annual State of Logistics Outsourcing study, “Effective client-3PL relationships exhibit a mutual commitment to the creation of value for both parties and to the overall supply chain. Too much emphasis on the ‘price’ of the 3PL’s services makes it challenging to focus on innovation and programs that drive savings and improved performance.”

With short-term 3PL contracts, the outsourcing company’s focus tends to be on getting the best rate for a service, which is only a component of overall costs. Strategic partners that agree on longer-term 3PL contracts place more emphasis on actual cost reduction, recognizing that investments may be required to realize the 7-figure and 8-figure cost savings that can come from major changes.

Longer term contracts are just one way to maximize the benefits of your outsourced 3PL relationships. We suggest a total of 12 ways in our eBook: The Ultimate Guide to Being a Great 3PL Customer.