A Short Story of An All-Too-Common 3PL Meltdown

Common 3PL Meltdown

Summer, the CFO of Myopic Production Incorporated (MPI), was surprised when she found herself and Myopic the winners of several new business customers on the west coast. The new contracts would require consistent supply of several MPI models.  MPI’s limited presence on the west coast posed a challenge, putting in motion an improvised effort to make the business work.

MPI is not an atypical manufacturer in the US. They produce tech products for both business and consumer customers. Their primary product list is short, but the options for each piece are extensive. And while they have been up and down the last several years, the acquisition of these new contracts is poised to bring about a significant upturn for them.

To help deliver to their new customers, Summer got with her Logistics Director, Darian, to search for a reliable warehousing 3PL that could serve them in the area. After a brief search, they found a 3PL named Adequate Logistics Inc. (ALI). Darian visited Adequate’s facility and found a good-looking facility, responsive sales team, and capacity to hold the 500 pallet spaces they needed. MPI and ALI entered into a basic warehouse agreement.


The 3PL Meltdown Begins

It didn’t take long for Myopic to fill the 500 spaces. Steadily, Darian started shipping more and more pallets to ALI’s facility. Darian didn’t think too much of it, their new 3PL didn’t push back. ALI had space to take the steady expansion, and Darian saw everything going well.

One early morning, Summer called Darian and said one of their customers needed to set up an extensive list of SKUs for a production build their customer was having the next day. They had never done this before, so Summer was worried that they could do this correctly. Darian wasn’t worried. He said he would reach out to Adequate Logistics and make sure they could do it, he was confident it wouldn’t be a problem.

Adequate’s sales team agreed with Darian, and said that wouldn’t be a problem. Darian sent ALI the list.

Without either side realizing it, the two companies have wandered into a manufacturing support relationship.

Within a month of the first production build (one of many), 11 containers of MPI’s “hot” product show up at ALI’s dock. Arriving without notice and no explanation. ALI’s operations manager, Stacey, urgently and frustratingly reached out to MPI. Questioning the unexpected shipments and what they were expected to do with them. MPI defensively forwarded an email that had mentioned the incoming shipments. Stacey quickly pointed out that the message was casually mentioned within a lengthy and ongoing email thread about production builds and excused their oversight.

Stacey was annoyed that Darian would send something so important in an unrelated email thread. Darian was mad that Stacey would let something this important slip through the cracks.

Fingers were firmly pointed.


Attempting a Solution

Wanting to just find a solution, Stacey discussed amongst the Adequate Logistics’ team on how they could resolve the containers sitting at their dock. Without capacity or resources to handle this, they decided to push all 11 containers to a few different competitor warehouses across town just to get them offloaded. This left ALI & MPI with thousands of square feet of product spread out across several buildings, with no solid inventory report and no plan on distribution.

Over the next several weeks, Darian continuously attempted to have product from the 11 containers sent out to their customers. More often than not, ALI could not immediately find the right pieces or even the product at all, causing costly delays. To try and fix the problem, Darian, along with some others from his team, went onsite at ALI and the various other warehouses where their product was sitting. Over several days, members of ALI and MPI went through all the products, spread over several warehouses, to find each piece and attempt to reconcile inventory.

Summer even had to go out on several occasions to provide an update to the rest of the executive team. It wasn’t an update she was happy to give.

Eventually the inventory problem was mostly cleared up. As much as Darian and Summer liked Stacey and the folks at ALI, they knew they had to switch.

Stacey and ALI would miss the business but didn’t try too hard to keep it. The headaches weren’t worth the sales.

No one was happy, everyone was frustrated, and each company lost money.


Who’s to Blame?

So, who’s to blame for this meltdown? Both parties. Myopic put its service in the hands of Adequate Logistics with no attention to detail or foresight. The customer in a 3PL relationship needs to ensure that its service requirements are continually communicated in terms of forecast, cost, timeliness, accuracy, capacity, and velocity. There should be no assumption that your 3PL provider can read minds and can continuously flex service on a whim.

Adequate Logistics is also to blame. They are the experts and should have realized that the service relationship is growing and evolving. They need to guide Myopia on how to effectively work with a 3PL. From the very beginning, Adequate should work with a manufacturing customer to establish regular communication of their evolving logistics. Supply chains never stay still.

As many of you know, this story is not an exaggeration. It continually happens with top-tier customers and 3PLs. Make sure it doesn’t happen to your company.


What Should Have Happened?

So, what should have happened? The right engagement includes 6 basic principles:

  1. Contractual agreement: mutual legal obligations, limitations of liability, reference to Pricing Amendment and Scope of Work Amendment.
  2. Scope of Work (SOW): what, specifically, are the services to be performed and the mutual obligations of the parties.
  3. Service Level Agreement (SLA): what, specifically, constitutes excellent performance in meeting the SOW.
  4. Key Performance Indicators: Quantitative evidence that the 3PL is meeting the SLA requirements.
  5. Pricing: Continually updated to accurately reflect the cost of servicing the SOW and the SLA.
  6. Collaboration: 3PL is an extension of the customer; they need continual specific information to be effective. Often, this includes 3PL account managers and customer-supplier managers to steer the organizations.

An effective 3PL will customize their services around the business needs of a good customer. They just need to know what those needs are.