3PL tender contracts only scratch the surface

The traditional procurement models that organisations deploy when tendering for a third-party logistic provider’s (3PL) services are no longer fit-for-purpose. Simple metrics and selection criteria, such as cost per pallet stored, capacity, and location proximity to centre of gravity, fail to account for the complex, ever-changing realities of modern supply chains.

 

Even simple alterations in circumstances, for example in consumer fulfilment channel preference, product range, or supplier discount structures, can have a significant impact on warehouse operations. This can lead to hidden costs, operational friction, and missed opportunities for growth. Instead, collaborative partnerships need more than hard-coded contract commitments and basic expectations to ensure greater resilience.

 

 

An ever-evolving environment

The volatility of supply chain operations today means that buying organisations can’t just agree on basic terms with a 3PL focused on costs alone and let the contract run its course. Incremental changes during a partnership can ultimately prove detrimental.

 

For example, say that a buyer negotiates full truckload deliveries from a supplier to secure a better margin. This makes sense when product demand from customers is high and goods are being turned over rapidly. But if demand slows, those truckload quantities remain in the warehouse much longer, perhaps even for weeks rather than days. The anticipated margin improvement is negated by increased costs of carrying excess inventory, and if there isn’t joined-up decision making between buyers and 3PLs, this inefficiency may be unaddressed.

 

It’s not the only nuance in modern supply chain operations which means many 3PL contracts aren’t worth the paper they’re written on. Some of the simplest deals with 3PLs might stipulate a per pallet per week storage fee, which works for stable situations where pallets arrive occasionally and remain stored. But if those pallets are moved in and out of storage numerous times a day, the agreed contract model becomes problematic as it doesn’t factor in the extra handling costs. This can lead to a rapid accumulation in unexpected costs for the 3PL.

 

It often doesn’t take long for operational complexities and seemingly harmless incremental changes to break the viability of agreed contracts. Before any deal is signed, both buyers and 3PL providers need a way to test a facility’s operations under different scenarios.

 

 

The role of simulation

Simulation can play a central role in supporting modern partnerships between buyers and 3PLs. A simulation platform offers both entities the opportunity to model and test a wide range of operational scenarios and potential events before contracts are signed. This allows the 3PL to demonstrate they can meet their contract requirements, and the buyer has the opportunity to understand the impact of their requests.

 

The operational scenarios that can be tested with simulation include varying product volumes, range changes, product dimensions, and even supplier failures. These scenarios can be fully visualised with simulation digital twins, which show the realities of a facility in detail.

 

By testing these scenarios, both parties can identify operational sensitivities and understand any potential bottlenecks. Even incremental changes, which in the short-term don’t pose a challenge, can accumulate, such as SKU range additions, or a gradual move from single SKU to multi-SKU pallets.

 

Simulation can assess the long-term impact of this alteration ahead of time, removing any surprises and potential friction. Both human and automation technology resources can be ramped up or down to deal with demand changes and macro factors.

 

 

Collaborative foresight

Foresight with simulation is also crucial for both sides to assess the specific storage and handling approaches associated with different goods, ranging from small electronic components to larger difficult to handle items. Without simulation, it’s almost impossible to anticipate every operational requirement or challenge during the tender process, and issues can arise because both parties were unaware of the complexities.

 

Simulation offers a place for seamless collaboration between the two entities as the partnership progresses. Without this technology, the flow of information may not be as seamless as hoped, with supply chain professionals within 3PLs focusing on their internal operational efficiency. Digital twins provide the outlet for these key conversations, with accountability and responsibilities made clear.

 

Simulation in this context acts as the foundation for a “living contract”, where partnerships are built on representative real world data, iterative improvement, and scenario testing, rather than static assumptions.

 

 

A living contract grounded in real evidence

A basic tender can no longer carry the weight of modern logistics. When demand patterns, product mixes, routes to market and supplier terms constantly shift, rigid models misprice the work and strain established relationships. The answer is to establish a smarter way of agreeing and governing the partnership.

 

By using simulation before and during a partnership, buyers and 3PLs can surface operational sensitivities, set fair mechanisms for storage and handling, and adjust them as conditions change.

 

This creates a living contract grounded in real evidence. Commercial commitments are tied to observable system behaviour and service levels are protected with fewer surprises. Crucially, both sides gain the confidence to recommend and introduce changes without triggering disputes, building resilience over time to deal with the volatile supply chain conditions of today. 

 

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Will Lovatt is Chief Revenue Officer at Kallikor

 

Main image courtesy of iStockPhoto.com and champpixs