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Evaluating Your Contract With a 3PL

Posted by Bob McCulloch on Jun 14, 2018 8:00:00 AM

evaluating-contract

Your contract is the foundation of your partnership when you work with a service provider, and for that reason, it tends to be very information-rich. That also means there's a lot of variables to comb through when you're researching your 3PL costs. Even though a contract tends to be a fairly static document, it's still an excellent place to start weighing and measuring your business relationship costs.

When negotiating, re-negotiating, creating, or considering a contract with a third party logistics provider, you'll need to make sure your contract isn't just serving as a placeholder: it should be setting your company up for success as well. Here's what you need to consider when maximizing your ROI through your contracts:

Creating a Partnership With Your 3PL

Think of your 3PL contract like a marriage: you'll need to know one another well before entering into it, you should clarify what you expect from the partnership before it's official, and, ideally, plan out the best way to work with one another every day. While there are terms, grading systems, and other concrete boundaries that need to be ironed out, if you don't have the foundations of those three important considerations in place, you're not fostering your B2B relationship from a very stable place.

Typical Formats of a 3PL Contract

Your existing 3PL contract likely falls into 2 categories:

Multi-Client Contracts (generally 1-3 year contracts)

These type of contracts denote services provided by a 3PL with a shared space. Rather than demanding a single client take on-paper possession of a warehouse, your business effectively "rents" a portion of a warehouse space already controlled by the 3PL and populated with other clients' products.

This is a smart financial choice for small to medium businesses that anticipate growth or geographical movement in the coming years; without the burden of an entire warehouse—and its associated lease terms—there's generally more freedom to change things up as new opportunities arise. The downside is less personalized service, shared spaces and services that restrict massive customization, and shorter contract periods that can open your company up to higher costs during re-negotiations.

Contract Warehousing (generally 3-5 year contracts)

These 3PL contracts take your partnership a step further, securing an entire facility for the receiving, processing, and shipping of your products. The 3PL then handles all the logistics needs of your business, allowing you to free up inter-office team members to concentrate on sales, marketing, research and development, and so on. These types of contracts are best suited to larger businesses, those with a wide range of SKUs, and those that aren't planning outsized growth or relocation in the coming years. It isn't to say that contract warehousing can't handle relocation and growth contingencies, but a multi-client style contract would likely be a better fit.

Depending on the time period covered by your contract, set a date to go back into that contract and measure promises against performance.

Regular assessments help cement that both company and 3PL partner are operating as agreed—if something has gone awry, the sooner it's highlighted, the sooner it can be fixed. That brings us to the next crucial part of the contract:

How to Evaluate Your 3PL Contract

handshake-agreementIn a 3PL relationship, there is always change in the volume or profile of the business. These changes can adversely or advantageously affect the 3PL’s performance. The key is having fair language in the contract and in the metrics to deal with those shifts. The metrics in the contract by which the 3PL is measured for performance must be smart goals that take these shifts in profile into account without the need for a graduate student from MIT to keep track of those contractual metrics.

Remember that while efficient change is always the goal in B2B dealings, you'll need to give a reasonable amount of time for improvement. Discuss a time frame for revisiting the issue and lock it in writing to give both sides—your business needs and their service capabilities—the room needed to make lasting change.

While it’s not a result either side hopes for, be sure to build in exit clauses as well. The only thing worse than being saddled with a service provider that isn’t meeting goals is being contractually saddled with an underperforming provider. It may feel like you’re being pessimistic about performance, but this is a very normal, standard practice that prevents a bad actor from holding your company in an undesirable financial position.

To Sum It Up

In short, to empower your business, you'll need to examine your contract to find room for improvement and build in a specific time period to allow for improvement if and when these qualifying events occur. Reference clauses within the contract to exercise their exit and spare your company—and legal team—the headache of a drawn-out extraction.

Your contracts can and will serve you well if you keep both of these points in mind while dealing with a 3PL. With the team power, strategies, and options you need to grow your business, working with a 3PL is a must for a forward-minded business—so making sure you choose the right contractual partner is equally important. Double-check your contract options and ensure they’re the right fit by reading our 3PL Contract Best Practices Guide.

Bob McCulloch

Written by Bob McCulloch

Manager of Solution Design/Pricing and Senior Logistics Engineer at Kenco