To 3PL or go it alone, that is the question

To go with a third-party logistics provider (3PL) or to go it alone—for many manufacturers, that is a tough question they find themselves grappling with every day. While the decision to outsource warehousing, logistics, transportation and order-to-cash management functions may be relatively easy for smaller or start-up manufacturers, it’s often not such a simple decision for larger manufacturers. Although scale and other factors may make it more cost-effective for larger manufacturers to go it alone, many are finding that 3PL providers can be the more effective and cost-efficient choice to handle select parts of the logistics process. On the other hand, those that are already working with 3PL providers may still find themselves wondering whether they’re getting the most return on their logistics investment.

Regardless where you fall on this spectrum, here are some simple questions and suggestions to help you decide if working with a 3PL provider is the right move for you, and to make sure you’re getting the best return on your logistics investments. A recurring theme in this analysis is that many 3PLs, especially larger ones, have economies of scale because they are handling the varying demands of multiple clients. That scale is usually not available to the single manufacturer.

Think beyond the one-time infrastructure investment.

Most smaller manufacturers outsource their 3PL needs because they usually don’t have the scale to build, staff and operate the team, facilities, infrastructure, and processes needed to ship direct to customers, and few have the resources to manage the related customer service, returns and order-to-cash management services on their own.

For mid-sized manufacturers, the decision may not be as simple—particularly as they develop the scale that increases the return on initial infrastructure investments needed to go it alone. If you’re in this camp, it’s important to think beyond the initial investments needed to handle logistics on your own. Consider whether you can, or want, to commit to the often unpredictable continual investments and manpower that are needed to improve capacity and capabilities as you add new products to your portfolio—particularly if those products may require refrigeration and other costly special handling procedures. Also consider whether it’s in your best long-term financial interest to commit to the continual infrastructure and technology investments needed to comply with constantly evolving state and federal product integrity, track-and-trace, and support pedigree requirements.

Can you cost-efficiently staff to handle ebbs and flows in demand?

If you experience significant peaks in demand due to seasonality, supply chain partner purchasing dynamics or plain old spikes in sales, you may have to deal with unplanned or inconsistent expenses, like paying warehouse staff overtime or adding additional shipping routes. Because they handle the specialized shipping needs of multiple manufacturers, some 3PL providers can often handle those ebbs and flows more easily—and can shield you from the related impact.

Do you have the resources to invest in truly best-in-class technology for products that require refrigeration and other special handling?

3PL providers that focus on specialty medications usually have the scale to invest in best-in-class, specialized equipment to ensure products are compliantly handled from the time they leave your dock until the moment they reach the wholesaler’s dock. Ask yourself how much you annually spend or will need to spend on pack-out materials like validated coolers and gel packs, which can range anywhere from up to $80 per shipment, before transportation costs. 3PL providers that use dedicated, refrigerated trucks can eliminate those pack-out costs completely, while also ensuring more consistency in the way refrigerated products are handled. Again, the investment in best-in-class, refrigerated truck technology can be leveraged across multiple customers to achieve the economies of scale that help those investments earn a meaningful return.

Nervous about outsourcing customer service?

Think again. Hiring, training and staffing a competent customer service team, and making them available 24/7 to respond to customer inquiries, concerns and emergencies, can take a considerable investment. Given the critical role quality customer service can play when it comes to building customer trust and loyalty, it’s easy to understand why many manufacturers consider that a smart investment.

But the reality is that 3PL providers can often handle customer service more cost-efficiently, and should have processes in place, like in-depth product education and training, dedicated product- or manufacturer-specific phone lines, and customized greetings, to ensure their customer service staff seamlessly functions as a true extension of your team.

If outsourcing your customer-facing services gives you pause, ask potential 3PL providers what kind of customer reporting and feedback metrics they offer, so you can measure their performance. A good 3PL will mutually agree on key performance indicators (KPIs), like order accuracy and returns processing, and report on those on a regular basis, so you can keep close tabs on customer satisfaction and ways to improve it. If you’re currently handling customer service in-house and still aren’t sold on outsourcing this important function, then consider tracking how your own customer response team performs against those same KPIs. If your team isn’t performing with 99% accuracy on each of them, chances are improvements are necessary.

Are you leaving money on the table due to inefficient accounts receivable processes?

If your accounts receivable balance regularly goes just a day or two past due, you’re losing money. And the more overdue those balances become, the more time and effort it takes to collect them in full. Manufacturers that ship directly to hospitals, retail pharmacies, or physicians often find that tracking down and reconciling past-due payments can be a daunting, time-consuming, and expensive task—one that just makes good economic sense to outsource to experts who have developed best practices for keeping them current. Wondering if your accounts receivables process is up to par? If you’re not resolving at least 90% or more of your deductions within 31 days and 98% or more of your invoices within 90 days, improvements are in order.

Chargebacks and returns: the most challenging component of order-to-cash management.

Returns represent the bulk of customer deductions and can cause significant discrepancies between what manufacturers believe they should be paid and what their customers believe they owe. Processing returns, reconciling the deduction and the credit, and collecting the money owed in a timely manner is key to successfully resolving those discrepancies. But it takes considerable time, expertise and persistence. The most experienced 3PL providers specialize in helping manufacturers handle both the physical and financial aspects of the often time-consuming and very individualized returns process, to ensure money isn’t left on the table. While you handle returns, your processes can be pushed to the limit during peak ordering periods or one-time events, such as product recalls. Even during peak return periods by unpredictable events, dedicated healthcare 3PL providers should have the processes in place to quickly scale up the staff necessary to safely and efficiently process returns.

A good 3PL provider can also handle related headaches that can drain staff time, like customer chargebacks, issuing wholesaler credits, and ensuring compliant product disposal or destruction. Outsourcing these services can prove particularly useful to generics manufacturers, who have to deal with tiered contracts, generic sourcing programs, and other factors that drive price changes and require intricate chargeback processes.

Ask the tough questions

If you’re seriously considering outsourcing to a 3PL provider, it’s important to understand that not all 3PL providers are created equal. Here are some top-line issues to consider when evaluating the provider that best meets your needs. If you already have a 3PL provider in place, asking these key questions can help you evaluate whether it’s the best one for you.

What’s your 3PL provider’s approach to account management?

The benefit of working with a 3PL provider should ultimately be that you focus less time, money and energy on warehousing, logistics, order-to-cash management, and returns, and more on your core competencies—usually, R&D. But, if your 3PL provider doesn’t have the right account management structure in place, you can spend more time—and experience more frustration—managing the relationship than it’s worth. Ask potential providers:

• Will I work with multiple account managers or a single account manager who has a bird’s-eye view to everything?
• What processes do you use to monitor customer satisfaction and to continually improve the service you deliver?
• How often do you provide updates to clients regarding key performance indicators, operating metrics and agreed-upon action items?
• What’s your implementation process? How long does it take to get a customer up and running, from the time the contract is signed?

Does the 3PL provide you with flexible, real-time access to reporting data?

The ability to see your logistics, customer service and order-to-cash data is paramount to managing your business efficiently. Your 3PL partner should provide versatile reporting tools, including “canned” or predetermined reports, as well as ad hoc/customized reports. To make sure your partner can meet your data needs, ask:

• Can you provide me with 3PL-related data feeds in a variety of formats?
• Can I access my data in real time, anytime, day or night?
• If I encounter a problem with a report or a data feed, can you resolve it in 24 hours or less?

When it comes to warehouse operations, does it have the basics covered?

Make sure potential 3PL providers offer product receipt, storage and inventory management services. Also make sure they can handle ambient, refrigerated, CII—CV, and hazmat products, as well as end-to-end pick, pack and ship services.

Does the 3PL provider possess appropriate regulatory expertise?

Nothing can hinder a product’s commercialization success more quickly than regulatory issues—particularly ones that could be avoided with the right industry know-how and expertise. Make sure the 3PL provider you choose has proven cGMP expertise; strong and long-term relationships with regulatory agencies, such as the DEA and the FDA, and the proper systems and equipment to continually validate (and when needed, report) that your product has been handled compliantly throughout the chain of custody. Working with a 3PL provider that has specialized expertise in healthcare logistics can also protect you from having to deal with the daunting intricacies of product-specific licensing requirements.

What processes does it have in place to comply with state-by-state rules, licensing requirements and regulations, which are continuing to evolve?

The regulations that govern product serialization and pedigree issues are constantly evolving. And, they can and currently differ state by state. Make sure your 3PL provider has the resources, processes, and plans in place to ensure they can adhere to product serialization and pedigree regulations at the federal and state level.

Does it have an optimized transportation system? Can it handle the unique challenges of pharmaceutical transportation?

When it comes to transporting products that require special handling, not all are truly best-in-class. Look for industry-standard best practices, such as:

• A dedicated fleet for pharmaceutical products. This can eliminate the need for sorting, which can lead to product stability issues, while temperature-sensitive medications are in route.
• Refrigerated trucks, which eliminate the need for costly gel and ice packs and provide refrigerated products with more consistent temperature controls than other options.
• Preferred carriers, which can be critical to ensuring that the drivers and vehicles that are transporting your products are appropriately qualified, every time.

Are the right quality systems and IT infrastructure in place to ensure compliance with the FDA’s Part 11 guidelines on electronic records and electronic signatures?

It may sound like an insignificant or really technical issue, but it’s not. Having the right IT infrastructure in place not only ensures that you’ll be able to more quickly and easily provide the FDA with information that validates the chain of custody, and that your product was handled appropriately throughout the supply chain. The right IT infrastructure can also provide data that can highlight important information, like exceptions, trends and key performance indicators that need to be improved.

Are the right systems and industry-best practices in place to protect the integrity of the product both in the warehouse and while en route?

When each dose can cost tens of thousands of dollars, protecting the security of your precious cargo is paramount. Ask potential 3PL providers for details about how they protect the integrity of the supply chain—both in their warehouse and when the product is en route. For example, warehouses should have internal and external video surveillance, multi-level intrusion detection systems, badge-only access, 24/7 security monitoring, and more. Also ask what processes are in place to ensure your product is protected en route. For example, look for best practices, like:

• Two-person driver teams that aren’t permitted to stop until a shipment is 200 miles away from the warehouse facility.
• Unmarked trailers to reduce the likelihood of theft.
• Seals to ensure product is untouched en route.
• Geographic tracking of all shipments and the ability to investigate when a shipment veers off route.

Are the right systems and technologies in place to ensure products are kept at the appropriate temperature all the time and to notify you when they aren’t?

Ask potential 3PL providers what ongoing calibration systems they offer to ensure that controlled room temperatures are monitored, continually validated and in the appropriate range until the moment they’re on the wholesaler’s dock. Look for:

• Temperature-mapped facilities that monitor facility temperature and humidity, 24/7.
• Systems that notify you of temperature variances that could impact product integrity.
• Back-up systems to ensure your product is kept at the right temperature, even in the case of power outage.
• The number of destinations a 3PL provider can ship to on a single refrigerated truck. Consolidated shipments lower the overall transportation costs, and by limiting the number of times a product needs to be handled, can also lead to fewer deductions and damages. An added bonus is that these consolidated shipments often carry with them a $1 million insurance policy per truck. An important consideration—particularly if you have high-cost medications.

Regardless of how you’re handling logistics today, it’s important to revisit these key issues at least once annually, to make sure that the model (or provider) you’re using is the best one for your business. Chances are, there are, at minimum, key logistics tasks that you can outsource to a qualified expert, so you can free up time and resources to focus on the competencies for which patients and providers rely on you most: innovating new products that transform patient care.

ABOUT THE AUTHOR

Neil DeHenes serves as director of third-party logistics sales for Cardinal Health Specialty Solutions, which provides a full array of end-to-end services that help pharmaceutical and biotech companies maximize their product commercialization plans. Specialty Solutions has been delivering best-in-class, customized 3PL services for more than 16 years and currently serves more than 75 manufacturers throughout the United States. For more information, visit www.CardinalHealth.com/SpecialtySolutions or contact Neil directly at [email protected].