What is the Real Cost of a Bad 3PL?

If your 3PL is performing poorly, the impact goes beyond headaches and sleepless nights. A subpar 3PL can take a real toll on your business and your bottom line.

Near-Term Cost Impact

It doesn’t take long for a 3PL’s poor performance to put a dent in your budget, warns Tom Patterson, Saddle Creek’s Senior Vice President of Warehouse Operations.

Inventory control is one major problem area. If a 3PL does not provide quality inventory control and reporting, you can’t receive or pick properly, and you won’t have the visibility necessary to identify out-of-stocks, lost products or other issues. Inventory costs rise and customer service suffers as a result.

To salvage customer satisfaction, you may need to expedite shipments, thereby incurring increased freight costs as well.

Another short-term impact of poor 3PL performance is lost time – and time is money, after all. “Your time is spent managing exceptions instead of managing your business,” Patterson points out. “You need to figure out how to get products to the DC or to the customer because your 3PL failed to get them there.”

Challenges like these become particularly costly during peak sales periods such as the holidays or major promotions. “A bad 3PL doesn’t get better when volume spikes,” Patterson reasons. “If they’re struggling in August, you’re going to be in really tough shape on Cyber Monday.”

Poor service, of course, leads to lost sales, lost customers and, ultimately, the loss of your good reputation.

Long-Term Cost Impact

If a 3PL’s poor performance goes unchecked, you’ll begin to experience higher operational costs.

When customers lose confidence in your products/company, it can be costly to win them back. The bar is much higher the second time around, Patterson points out.

To ensure that you can meet customer expectations, you’ll need to bolster your safety stock – adding as much as 50 percent for back-up because your 3PL’s inventory reporting is unreliable, he says. Naturally, that requires increased storage space. Inventory costs add up.

You may also need to increase internal staffing– perhaps hiring an inventory planner to compensate for your 3PL’s poor management abilities. In addition, your own staff may become frustrated and more likely to quit because of the negative, reactionary environment.

With the need to focus on short-term, tactical issues, strategic planning can be difficult. “You’re looking one or two weeks out instead of long range,” Patterson says. “You focus on immediate, near-term challenges instead of the bigger picture. That’s when your business really starts to suffer.”

When you lose trust in your 3PL, you’ll find that you can’t place orders, make nimble decisions or make commitments with confidence. Ultimately, the uncertainty prevents business growth.

At this point, you may find yourself incurring yet another cost – that of transitioning to another 3PL.

Early Warning Signs

In today’s direct-to-consumer, omnichannel environment, you’re likely to learn about performance issues quite quickly.

“Your customers expect to get exactly what they want, when they want it. With the prevalence of social media today, you’ll get immediate feedback if they don’t,” Patterson warns. “When your customers are dissatisfied, they will let you know – along with everybody else.”

Prevention is the Best Medicine

To safeguard your business from poor 3PL performance issues, it pays to do your due diligence up front. Take time to research your options and ask plenty of questions before partnering with a third-party provider.

As a rule of thumb, look for an experienced 3PL with the following characteristics:

  • Good communication
  • Extensive resources (space, staffing, equipment and technology)
  • Flexibility/scalability to handle business fluctuations and growth
  • Commitment to quality management/continuous improvement
  • Ability to work with partners throughout supply chain
  • Overall ease of doing business

Investing the time to find a reliable partner pays off in the long run – in reduced costs, increased customer satisfaction and a better night’s sleep.

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