The challenges involved in logistics arrangements can be complex and demand careful planning. There’s a delicate balancing act for businesses and third-party logistics providers (3PLs) to achieve on-time, yet cost-effective, logistics solutions. This involves navigating a web of (often capital intensive) distribution centres and transport arrangements, managing the integration of customer and vendor systems and navigating workforce requirements. Here, we provide some top tips to consider when putting in place arrangements with 3PLs.

Most businesses outsource some aspects of their logistics operations to 3PLs. Why? Because 3PLs offer scale, expertise, experience, economies of scale and the ability (cost effectively) to handle high fluctuations in demand, including over ‘peak’ periods. They can also help FDs remove cost from the balance sheet, which is often welcome! Working with a 3PL, rather like an outsourcing, is about finding the optimal long-term partner where objectives and values are aligned.

Selection of 3PL

• A 3PL should be selected because of its specific expertise in what the customer needs. If goods are perishable, the customer should ensure its 3PL is used to dealing with high-maintenance products. If packaging is a key part of a customer’s brand strategy, a 3PL that values aesthetics and is detail-obsessed may be well suited. In short, a 3PL should be aligned and bought into the customer’s goals and the customer should be clear as to why it is choosing a particular 3PL.
• A customer should avoid the temptation to select its 3PL purely on price: scale, resilience and expertise go a long way in this field.

Culture and people

• TUPE issues and potential liabilities on entry and exit will need careful thought and planning, especially if this a second generation outsourcing and/or the 3PL engages a subcontractor (known as a 4PL)
• Culture is key. Are your CSR values and objectives similar? It is important to ensure alignment on cultural values such as transparency, fairness, social mobility (including opportunities for disadvantaged workers) and environmental values and goals. A customer’s 3PL may end up being in the spotlight too, especially if they carry the customer’s livery.
• From 26 October 2024, businesses are required to take reasonable steps to protect their employees from sexual harassment, and the updated guidance suggests that this includes protecting against the behaviour of the employees of a 3PL. Read more about the new employer duty.

Closed book v open book

• On price, is ‘open book’ or ‘closed book’ pricing appropriate? Closed book pricing offers more certainty. However, open book pricing can offer transparency, flexibility and the opportunity to drive incremental savings. Most customers underestimate the amount of time, data, resource and contractual tools needed to manage a logistics contract. Managing an open book contract demands even more time and resource, and even a dedicated role for large operations.
• It’s key in 3PL arrangements to strike an ‘optimal’ balance between service (measured by KPIs) and cost; that needs additional focus in an open book contract to ensure that a 3PL cannot spend customer funds in excess of the agreed annual budget to achieve those KPIs.
• In open book arrangements, the extent to which a customer can influence the 3PL’s workforce should be addressed, including:
  
  • composition (staff v agency)
  • the need for key personnel and the opportunity to have a role in the recruitment process
  • control over contractual terms and remuneration
  • alignment on cultural and policy issues to ensure reputational risk is managed
  • alignment on approach for dealing with unions representing 3PL workforces
  • allocation of potential employment liabilities, including redundancy and TUPE liabilities on entry and exit, in-life redundancy exposure and liability for employee/employer claims, including harassment claims.

Loss, damage, insurance

• Who is responsible for loss of and damage to goods?Who is insuring this risk? Often the 3PL will offer recourse to a certain value per ton, but who is bearing the risk and cost of insuring against any additional value, and how does this square with the liability provisions?
• Some 3PLs require customers to ensure that they obtain a waiver of their insurer’s rights of subrogation against the 3PL, but this may void the customer’s policy

Space, scale and IT integration

• Can the 3PL scale to fit the customer’s future needs: will it have ready access to sheds and depots in the right places? Will it own its or lease its sheds, and if leased, what security of tenure does it have? How you structure the arrangement, and plan for flexibility, may facilitate more options later on (such as changing 3PL).
• Does the 3PL offer co-located space and/or the opportunity for the customer to earn incremental revenue? What’s the impact on TUPE liability allocation?
• What IT integration work is needed to ensure that each party’s sales, inventory and reporting systems speak to each other? Is there a need to license third party software/ SaaS solution? Who will undertake the configuration or API work? Again, how this is structured can avoid an over-reliance on one 3PL.

Customs clearance

• Customs clearance – when shipping internationally, you’ll need to consider customs clearance requirements, such as who has the responsibility for submitting appropriate customs, safety and security declarations and paying import duties. Failure to get this right may risk HMRC seizing, or delaying movement of, your goods. For more information, see our customs article.

KPIs and gainshare to drive the optimal performance

• Setting KPIs (often weighted ones) should incentivise performance and drive the right behaviour. Key KPIs can include stock loss, stock damage, customer feedback, delivery condition, order accuracy, and being on budget in open book arrangements.
• In open book, might a ‘gainshare’ mechanism be appropriate to drive a win-win outcome for both parties? This needs careful thought to ensure that the 3PL is adequately incentivised but not being overpaid due to any fat in a budget or some wins being too easy. Issues to consider here are: who initiates an idea, who has gainshare eligibility approval rights, is gainshare calculated on net or gross savings, for what period is the pay-out to be made, and should gainshare savings floors and ceilings apply.

Make the time to negotiate a decent contract and find the resource to manage it!

• Making enough time to understand and identify each party’s responsibilities, liabilities and remedies, in detail, helps to de-risk 3PL contracts. One of the benefits of making enough time to negotiate a contact thoroughly is that misunderstandings can be flushed out before contract signing. This is better value than ending up with unhappy customers or a dispute with your 3PL.
• A sophisticated contract will include both generic and specific requirements and remedies, audit rights, and strong reporting processes.
• The most successful 3PL relationships are those where the above issues are addressed up front and the customer ensures that someone within its organisation is appointed to manage the contract, especially an open book one.

We’re here to help you achieve an informed and ‘optimal’ outcome in your customer-3PL negotiations.