Don’t Exclude Procurement from 3PL Supplier Selection

Spend Matters welcomes another guest post from Ana Gomez of GEP.

Many organizations are outsourcing logistical functions to third-party providers to concentrate on their core competencies. This practice began with non-core operations within the supply chain, but over the past several years, some supply chains have outsourced their entire distribution system to third-party suppliers that can distribute products more efficiently.

Economic conditions have forced many organizations to re-evaluate supply chains and relationships with third-party logistics providers. The majority of the users plan to increase their usage of 3PLs while also consolidating the number of these 3PLs, so there is a challenge for the providers to become more competitive.

The process and the criteria used by the organizations to select 3PL suppliers are critical. The 2014 18th Annual Third-Party Logistics Study indicates that both the users and the providers agree that the top factors to evaluate a 3PL are continuous improvement, experience in the user’s industry, and established and ongoing relationships.

Unfortunately, both consider the involvement of procurement in the selection process to be the less important factor. But they recognize that, compared to the last three years, procurement’s participation and involvement in the selection process has increased. There is a fear that the involvement of procurement in the selecting process will lead to decisions being made based on price, disregarding the quality and market experience of the 3PL provider.

When a company has decided to outsourced part or whole of its supply chain to a 3PL provider, it has to design a robust process and define a multifunctional selection team, which includes procurement as one of the key areas. For the selection process, this multifunctional team has to define the qualitative criteria, such as customer service, responsiveness, financial stability, and international scope, if applicable. These criteria can be weighted differently depending on their importance. From the cost and pricing perspective, it is important to calculate the total cost of ownership of selecting one supplier from another, or to outsource one activity from another. This prevents decision-making based solely on the price quoted by the provider.

Procurement’s role has to be that of a facilitator of the evaluation process, making sure that the multifunctional team follows the best practices and benchmarks in the market. A robust evaluation process has to lead the company to select the best solution that not only accomplishes users’ functional requirements but also helps the organization to achieve their cost reduction and efficiency objectives in the supply chain activities. This also maintains transparency and fairness in the eyes of the participants evaluated in the process.

If the 3PL growth continues in the next years, and more strategic activities are outsourced to these suppliers, it is important to see the selection of the new supplier as a strategic process where all the key areas, including procurement, are involved.

For more interesting thinking on procurement, visit the GEP Knowledge Portal.

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