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Best Practices for Selecting and Managing A Third Party Logistics Provider

Posted by Dr. Paul Dittmann


Today’s 3PL is not your grandfather’s 3PL. Third-party logistics used to mean basic transportation and warehousing, and it still does. But in addition, it now encompasses outsourcing for a wide range of logistics activities and planning services; such as supply chain modeling, consulting, analytics, and information technology. Third-party logistics companies are evolving rapidly from tactical providers of transportation and warehousing services to collaborative partners providing a wide range of products.

The 3PL phenomenon took root over a half-century ago, and since the mid-nineties has grown and expanded dramatically. Seventy-two percent of shippers expect to increase their use of outsourced logistics services in the next year. Ninety-four percent of 3PLs have increased sales by at least 5 percent annually over the past five years.

Overall the industry is huge. The United States third-party logistics gross revenue exceeds $150 billion and is continuing to grow at a rate of 5-8 percent annually. While this is somewhat slower than the rate 3PLs experienced from 2000-2008, when revenues more than doubled from $56.6 billion to $127 billion, it continues to be an extremely healthy industry.

Most companies selling or producing goods, use a 3PL for at least some distribution functions. The reason being, third-party logistic providers generate a range of benefits for companies who engage them. Companies we surveyed said they see benefits from using a 3PL in at least five areas:

  1. Current cost reduction by having an operator that knows how to run operations very efficiently.
  2. Future cost reduction by leveraging the 3PLs expertise and technology.
  3. Customer satisfaction improvement.
  4. Risk management.
  5. Start-up enablement.

Companies expect their 3PL to not only take direction, but also respond rapidly, and generate ideas for improvement.  They further expect the 3PL to become a strategic partner in efficiently growing the business. Aggressive continuous improvement is the goal.

All of this third-party logistics activity and accelerating expectations does not mean firms are employing best practices to select and manage 3PLs. That is why we wrote the recent white paper: Best Practices for Selecting and Managing Your 3PL. We have access to many companies at the University of Tennessee’s Haslam College of Business, both shippers and third-party logistics providers.  Based on extensive interviews with a wide range of these companies as well as industry data, we assembled the white paper guide. In the white paper we discuss in depth each of the criteria summarized below:

To select a third-party logistics provider:

  1. Start with an internal assessment of your current and future needs.
  2. Develop a detailed plan for the 3PL selection process.
  3. Review the checklist of 3PL capabilities as you develop your RFI/RFP.
  4. Evaluate, interview, and select.

To manage a third-party logistics provider:

  1. Develop the contract based on the type of 3PL relationship you are trying to create.
  2. Select the appropriate metrics based on the objective of your 3PL relationship, and develop a scorecard.
  3. Establish and implement governance mechanisms to effectively manage the

        business and collaborate with your 3PL.

By employing these best practices, we strongly believe your 3PL partner can be a critical asset in creating sustainable competitive advantage for your firm.

Best Practices Selecting a 3PL

Dr. Paul Dittmann

Written by Dr. Paul Dittmann

Paul Dittmann is Executive Director of The Global Supply Chain Institute at the University of Tennessee. In addition, he teaches supply chain courses in the business school, and lectures in the executive education programs.


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