WMS Technology Part One: The 3PL Challenge


3PL warehouses have unique challenges that should determine their purchase of WMS software.


3PLs have unique challenges that captive warehouses don’t have. Therefore, the software needs to provide the needed capability to support their customers’ requirements and at the same time, accurately pick, ship, and account for the operation.

3PL organizations are more plentiful these days. In a highly competitive environment, they continue to seek new value-added services to win customer accounts and maintain a long-term relationship.Services range from physical distribution (transportation and warehouse operations), light assembly, returns, repairs, recalls, to software management; as well as more and more of what we call supply chain concierge services, such as pooling inventory (VMI and inventory financing and factoring), procurement, etc.

Conversely, some of the global contract manufacturers are extending their service to provide Logistics, Warehouse and VMI services.In addition, leading heavy equipment makers that have become experts at global logistics (such as Lockheed or CAT) can provide these services as well.

Often we see the so-called 4PL, the ‘asset free’ provider of knowledge and supply chain coordination services.

In all these cases, the one overriding challenge that they share (whether asset based or asset free) is the challenge of accounting for their services.

Let’s look at how these work.

Scenario One

The variety of these scenarios is interesting — from large systems staging in the warehousefor a Telco or high tech equipment company, to bin level parts picking for a service depot.Add to that all the unique labeling, compliance, and packing, and it adds up (if you have the correct software) to quite a challenging accounting/customer billing challenge. Figure 1 simply depicts some issues on process and accounting that a 3PL encounters.

Figure 1: The 3PL Challenge: Scenario 1

Each nuance of the customer service needs to be accounted for, by each shipment. In this simplified version, for our warehouse and the system that operates it, each customer has their own inventory, located in its own bins, cages, or locations.However, as an order is received, there is a strong rule-based engine that should select the proper set of instructions for packing, labeling, etc. Then, for each customer contracted with, unique deals were signed that determine what activities are charged for; and the process of how each order is priced may also be unique.

Shipment 1 has its own set of rules. Shipment 2, to a different customer, has different rules, and different pricing, and so on.

A warehouse is a busy place — lots of ‘moving parts,’ and workers are not fond of paperwork. Scanning can record not only the items, but also the physical work step, so that the systems can account for the activity, based on customer, shipment etc. Thus, an activity basis for billing is created. Quite a challenge. But there is more to this challenge.

Scenario Two

Let us now add a layer of complexity to the challenge. The new model (Figure 2), as we discussed, is the financial supply chain services.

Figure 2: The 3PL Challenge: Scenario 2

In this scenario, we have now added additional layers of challenge/complexity for the 3PL.

  1. The pooling of assets, the financing of that inventory through 3rd party financing (banks and finance companies) surely increases working capital for the customer, and often Return on Invested Capital (ROIC). Obviously, financial services fees replace these, but with rapid cash cycle times, the cost should be low for the financing. But, our 3PL as the intermediary has new services to charge for, and not in such a straightforward way.
  2. Procurement/Supplier Management services. Often not just tracking inbound inventory, but quality/inspection and rejects, and actual contract negations and compliance monitoring for the customer base. Can the 3PL negotiate these contracts?(See supplier contract negotiations article.)
  3. Other services such as reverse logistics, repair, and recalls which have been the domain for several providers
  4. Assembly services
  5. Also, large equipment manufacturers have developed their own log businesses such as Cat, Lockheed, and others. They may charge different rates for customers who use other services, from other divisions of their companies. So how is profit understood for the 3PL division?

Along with procurement, 3PLs may be providing supply status and tracking updates, procurement services, as well as their usual services. Now, if we are providing a ‘pooled inventory,’ how do we account for each customer’s share of the costs? Again, our accounting and billing systems not only have to account for this, but do it in a transparent way.ChainLink often hears about concerns from the ‘recipients’ of these pooled services, that their expectation of economy of scale due to joint purchasing power, or shared services, may not be realized. (Yet, customers continue in these relationships, since they achieve their working capital goals by engaging with the 3PL or contract manufacturers.) So it behooves the 3PL to have a system that can provide a transparent and accurate invoice.

This challenge is critical. If the organization wants to scale, add more customers, more services, it won’t be done manually. 3PLs spend much effort on this challenge, and customers are frustrated and suspicious of what they are paying for.

It’s all about customer service

In this economic climate, with global trade, and with the sheer number of transactions reduced, 3PLs are seeking ways to enhance their revenue and higher margin services, most assuredly. The obvious path is to increase the value of each customer through an expanded services model.This growing sector has many global behemoths, as well as some very well-positioned companies with specialties that they are well known for.

This is a highly competitive market, and competing on cost alone will not ultimately service the needs of the customer or the 3PL. But to provide services, the process methods have to be there to assure profitable operations. The internal ‘scramble’ to succeed at services has surely been known to happen — the customer rarely sees the warehouse. But one thing that they do scrutinize is the invoice. Getting that right is critical to growth.


For more Warehouse Management technology topics in this series see:

SaaS vs. on-premises solutions in the warehouse – Part Two in this series

Vertical/Industry functionality in the warehouse – Part Three in this series

Returns and Recalls – Part Four in this series

Service Management – Part Five in this series

Other recent Warehouse Strategy articles:

Flexible/ responsive warehouse management

Christmas Build-up in the Warehouse

To view other articles from this issue of the brief, click here.

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