The Very Real Dangers of Choosing a 3PL on Price Alone

When choosing a 3PL, price will always be a factor, but it shouldn’t be the only one, or even the deciding factor. The right 3PL can make you look like a hero to your customers. A bad 3PL can put you out of business. In fact, that happened this week to about 30 brands that were affected when the 3PL about a mile away from our office closed their doors and went out of business.

Venture Capital Funding and Artificially Low Pricing

The backstory is that this 3PL had Venture Capital funding, and as a result, was able to artificially drive down prices in order to win more contracts. In the 3PL and warehousing world, there is something called ARR or Annual Recurring Revenue. Essentially, this means the money that comes into the company from contracts on a yearly basis. In the business of selling businesses, the value of the business is simply put, that ARR number times a multiplier.

In the case of the 3PL down the street, the 3PL’s COO deflated their pricing in order to load up contracts to make their ARR number look exceptional, so they could sell the company for the most money possible.

The issue was that the deal failed.

And the investors didn’t want to keep putting in more money to subsidize these contracts.

The Implications for These Consumer Product Companies

Then, the 3PL was not able to adequately service these contracts without that supplemental investor income, and as a result, the brands that were warehoused there – with months of bad service – are now not able to access their product because the 3PL closed down yesterday. Their doors are locked and the bank has the key.

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Picture yourself in the shoes of one of these brands

1.You already paid to ship truckloads of goods to this 3PL facility, a transport cost that will have to be paid again to move this product somewhere else.

 

2. The 3PL is at a Full Stop so none of your products are being shipped. Now your supply chain is at a standstill until you find another logistics partner.

3. Despite customers placing orders, their shipments are not going out. You’re now losing money and your customers are going to question your credibility without any shipment tracking follow up.

 4.You could possibly lose access to your products – sometimes in these situations the doors are closed with your product locked inside. You are looking at months of legal red tape before that product is accessible again.

5. If you were underpriced we can guess that you were getting terrible customer service. Misallocation of your products and inventory management means lengthy delays for your customers.

All of these problems cut into your bottom line. And if that cut is deep enough, you may not be able to recover.

Even in cases not as extreme as this, misalignment in your pricing can contribute to other issues.

1. The 3PL realizes that they have priced your contract too low and now they are not making a profit on your business. Now your account has been deemed low priority and you are having issues with customer service.

2. Your orders are delayed and your agreement is not being met. Most facilities advertise they fill 98-99% accurately on time, but in reality, that number is much closer to 70%. If the warehouse is not making money on servicing your account, you will find fulfillment will be at or below this 70% mark.

Solution: Find a warehouse partner that is excited and enthusiastic about working with your business. A true partnership is built on trust and respect to help both parties accomplish their goals. The ideal 3PL partnership will be profitable for the 3PL while ensuring your current and future needs are met 

I am writing about this today because I have leads come in daily that are simply looking for the best price. And that makes me sad for those brands, because I know that there are costs associated with doing the job right, and there’s no magic way to offer the best service for the price that they have in their minds.

My suggestion for anyone considering a 3PL is to really dig into the pricing and ask how those prices were derived. Remember, if you focus only on cost, you may disqualify 3PLs that offer an impressive ROI for your business, and end up with subpar services that actually cost more over time.

A successful 3PL and brand partnership should save you time and money by managing things so that you can focus on growing your business. If you are ready to talk about forming a long-term partnership based on trust, contact us today and we’ll get things back on track for your business.

Wishing you all the very best,

Courtney 

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