There are many things to consider before terminating your 3PL. In a previous post I a wrote about the 3 Steps for Improving 3PL Performance and I suggest that these strategies are implemented well before any serious thought is given to terminating your 3PL.
Dissatisfaction with your 3PL’s performance will probably stem from an issue associated with one or more of the 4 Rs of Managing 3PL Service Providers.
- Rates – the costs of doing business have increased or are no longer meeting expectations
- Reliability – the expected service levels have reduced or are no longer meeting expectations
- Responsiveness – the quality of the communication and the level of proactiveness is no longer meeting expectations
- Relationship – the process of managing the relationship is no longer meeting expectations (regularity of reviews, timeliness of reporting, focus on continuous improvement)
Unfortunately, there will be times when no matter how much effort you put into trying to improve the situation with the 3PL service provider there will come a time when you realize that terminating your 3PL relationship is the only option
Before the final decision is made and well before any formal notification is given to the 3PL we need to consider the following:
- The contractual obligations
- The process of sourcing and selecting an alternative 3PL service provider
- The costs associated with the move and
- The impact on normal business operations during the transition
The contractual obligations
All 3PL contracts will have a termination clause. The termination clause sets out the specific requirements of each party in relation to terminating the agreement. Depending on the terms of the agreement, termination can occur with or without cause and can be initiated by either party. Therefore, it is imperative that we not only understand our own rights in regard to initiating the termination clause but also the rights of the 3PL once formal notification has been given. Furthermore we must also be aware of the circumstances that might allow the 3PL service provider to trigger a termination clause.
As mentioned above most agreements will have both a “without cause” and a “for cause” termination clause.
Agreements with a “without cause” clause are more flexible for both parties and allow the agreement to be terminated for no reason by either party.The clause will simply stipulate how the notice needs to be served (usually in writing and to specified address) and the notice period (typically no less than 90 days) that is required to effect the termination process. This type of 3PL contract also usually allows for a notice period that is either longer or shorter and providing it is mutually agreed by both parties.
The “for cause” termination clause is typically enacted when one of the parties is in breach of its contractual obligations. This type of termination clause will normally include a “cure period” that allows the defaulting party a specified period of time to rectify the situation to the reasonable satisfaction of the non-defaulting party. If the situation is not rectified, then the non-defaulting party has cause to terminate the agreement.
From a client perspective the cause could be in relation to the 3PL not meeting one or more of its agreed key performance indicators. From a 3PL perspective a termination clause might be triggered because the client is not meeting its payment terms. The 3PL contract will stipulate how the notice needs to be served (usually in writing and to specified address) and the length of the cure period (typically 30 days)
When communicating your desire to terminate a 3PL contract it is important to ensure that the 3PL service provider also provides written confirmation that they have received your notification.
Depending on the state of the relationship at the time the termination notice is given it is possible that the 3PL may become hostile. If this is the case, we need to be prepared for any potential scenario prior to issuing the notice.
The process of sourcing and selecting an alternative 3PL service provider
Regardless of whether you anticipate a smooth or a hostile transition it is imperative that the process of sourcing and selecting an alternative 3PL service provider has commenced before the intention to terminate your existing 3PL has been communicated.
Prior to the notification being issued several alternative 3PL service providers should be have been identified and contacted to ascertain their interest, understand if they have the capability to provide the services that are required and most importantly determine if they have the space and resources available to implement a solution within the required time frame.
If a hostile situation it is anticipated then it is suggested that the sourcing and selection process is well advanced prior to the termination notice being issued.
The costs associated with the move
The costs associated with terminating a 3PL agreement should not be underestimated. Some of the costs associated with the physical move include:
- The cost of removing the stock from the existing facility – labour and handling costs
- Any unpaid amortized start-up costs that have been incurred by the 3PL
- Any outstanding charges for services performed including those not yet invoiced
- The cost of transporting the stock form one 3PL facility to another
- The cost of receiving the stock at the new 3PL facility
In addition to the cost of physically moving there will also be the costs associated with sourcing and selecting a new 3PL service provider relationship.
Furthermore, if the primary reason for terminating your 3PL is due to their costs no longer meeting your expectations it is important to factor the above costs into your total cost equation to ensure that any benefit that you are expecting to achieve by making the move is not eroded or completely lost. Whilst there may be a reduction in the rates being charged by the new 3PL service provider when the transition costs are included, the overall operating costs may well be higher.
The impact on normal business operations during the transition
It is inevitable that changing from one 3PL service provider to another will disrupt your normal business operations in some way. It may be as simple as the downtime required to move from one 3PL facility to another but from my experience there will be other challenges that need to be managed or mitigated along the way.
Whilst we hope that the existing 3PL would be professional enough to ensure that there is no intentional degradation to the quality of the services being provided we need to be prepared for this to occur. It is also possible that the 3PL service provider will tighten up on some the processes that have been relaxed on the basis of expecting the relationship to be ongoing. Things like charging for every transaction strictly in line with the rate schedule and the strict enforcement of payment and credit terms may start occurring once the relationship has been terminated.
Many other non 3PL related potential disruptions can be avoided by developing a detailed project plan to manage the transition. Among other things the project plan should include a communication strategy that ensures both customers and suppliers aware of what is happening and what actions they need to take to minimize the impact of the change.
Download this FREE report to understand:
– In addition to cost what other criteria must always be considered
– Why the power of intuition should not be overlooked
– What you can do to ensure that you make the right decision