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Cliff Holste is Supply Chain Digest's Material Handling Editor. With more than 30 years experience in designing and implementing material handling and order picking systems in distribution, Holste has worked with dozens of large and smaller companies to improve distribution performance.

Logistics News

By Cliff Holste

August 1, 2012

Will The Trend Towards High End DC Automation Drive More Companies to 3PL Adoption?

Distributors Looking To Gain a Competitive Advantage Find Outsourcing a Viable Alternative

Holste Says:

By combining the elements of experienced people, order processing efficiency, and material handling automation, 3PLs can assist them by broaden their service offerings, reduce order turnaround time, increase competitive capability, while providing the ability to adapt quickly to market changes.
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As supply chains and distribution logistics become more complex driven by faster order cycle times, at some point for small to medium size distributors, outsourcing order fulfillment operations becomes an increasingly attractive alternative. For 3PLs looking to win this emerging business, speed, flexibility, and agility are must-have capabilities.

Many distributors are looking to satisfy their retail/wholesale and Internet customers’ demand for more customized services, including next-day delivery, through the adoption of high end automated material handling technologies. However, most small to medium size operations find it difficult to justify investing scarce capital funds in sophisticated DC automation projects. Nor do they have the internal staff required to manage and support hi-tech systems.

Understandably, many specialty and/or boutique operations look to 3PLs for alternative solutions. By combining the elements of experienced people, order processing efficiency, and material handling automation, 3PLs can assist them by broaden their service offerings, reduce order turnaround time, increase competitive capability, while providing the ability to adapt quickly to market changes.

But first these companies need to understand the limits of their own operations and reasons for outsourcing. This will better enable them to evaluate what 3PL services are most beneficial.

What Distributors Need to Know About 3PLs

There are many reasons for adopting a third-party logistics strategy.

The following bullet points were developed by LTD Management an independent Supply Chain Logistics consulting firm:

  • to acquire an expertise, talent and resources that don't exist internally
  • to let the company focus on its core competency which it has determined is not logistics
  • to develop value-added capabilities to better service its customers
  • to improve operations or customer service
  • or simply to improve its processes

All these are good and positive reasons. However, according to LTD Management there are other less positive but still valid reasons:


to cut costs
• to avoid capital expenditures
• to avoid labor problems
• to avoid costs of regulations

Given the differences in 3PLs and the differences in why companies outsource, LTD suggests that the company look hard at the alternatives and its reasons for outsourcing. It must ask some difficult questions:

  • What am I looking to outsource - all of my logistics operation or just a portion of it?
  • Why am I looking to outsource? How do I describe my logistics and company operation?
  • What are the costs of the operation to be outsourced? Fixed costs? Variable costs?
  • What are its capabilities? What are its strengths, limitations?
  • What do my customers require of each of their own supply chain specifications?
  • How well do I service my customers?
  • If there are service problems, what are they and what causes them?
  • What do we expect from the third party? How will we know if it is meeting our expectations?
  • What about the management responsibility of the third party? How will it be done and by whom? How do I effectively transition from my own operations to an outsourced one? How long will it take to transition? Are there problems during transition? If so, what are they and why?
  • What if it doesn't work? What are the down sides to this? How serious are they to my business and my customers?

Against this self assessment, LTD says that the company can then begin to look for a 3PL that has the specific capabilities and services it needs. These questions will help evaluate potential 3PLs:

  • What do you bring to the table? What are your experiences with my industry, with my customers?
  • What problems have you encountered with setting up third-party operations and why?
  • What will it cost?
  • How will it operate?
  • How long will it take to set up and have running properly?
  • How will we interface? What do you require of my business? Is this requirement for start-up or is it ongoing?
  • Why do you want my business?
  • Why should I select you?

A company looking to outsource its logistics operations, or a portion thereof, must thoroughly understand what they are doing and what they want to accomplish. There are no shortcuts to doing it right, but there are real problems in doing it wrong.

The decision to outsource DC logistics operations has long-term strategic implications. Because the two parties typically share both risks and rewards, they each have a stake in finding opportunities for improvement. Or, to put it another way, they become vested in one another’s success.

Final Thoughts

Given the growing trend towards high-end DC automation, logistics companies of all sizes and shapes are becoming more automated. Technology is infectious. Just think about how many laptop PCs and cell phones are in common use. Initially, they were slow, not user friendly, and very expensive. Now they are relatively inexpensive and definitely indispensable. In a few years, robotic picking and automated mixed SKU palletizing operations will be as common in DCs as automated sorting systems are today.


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