As a business owner, you need to pay special attention to logistics to run operations smoothly. Logistics is more than just going things from one point to another. It is a critical function that impacts operational efficiency, customer satisfaction, and profitability. When you expand your business, managing logistics in-house becomes challenging.
This is where 3PL services can help you. 3PL providers can take over your business’s logistics operations and offer expertise and networks to streamline processes. However, like any investment, outsourcing logistics to a 3PL provider must deliver measurable returns.
You need to ensure that the partnership is not just reducing costs but also adding value. Now the main concern is how to measure the return on investment (ROI) of your 3PL partnership. Don’t worry! We are here with an extensive manual on it.
A Stepwise Guide to Calculate ROI of Your 3PL Partnership
Step 1: Define Key Performance Indicators (KPIs)
Before measuring ROI, it is essential to establish clear objectives for your 3PL partnership. You must know why you choose to outsource logistics. Was your aim to reduce costs, improve delivery speed, or expand into new markets? Once objectives are identified, translate them into measurable KPIs.
For example, if cost reduction is a goal, you can track metrics such as transportation costs per unit or warehouse operating expenses. For customer satisfaction, you can monitor delivery accuracy and return rates.
Step 2: Calculate Pre-3PL Costs
To understand the impact of your 3PL partnerships, you need to calculate your logistics costs and performance metrics before outsourcing. You must calculate:
- Transportation and freight management charges
- Warehousing and inventory storage expenses.
- Labor and administrative expenses associated with in-house logistics.
Apart from that, you should assess performance metrics such as delivery times, order accuracy, and inventory turnover rates. These figures serve as a benchmark to compare against the data after partnering with a 3PL.
Step 3: Gather Post-3PL Data
Once your 3PL partnership is operational, you should collect data on costs and performance metrics. This includes invoices, reports, and analytics provided by your 3PL provider. You need to compare these figures with the benchmarks established in the previous step.
Step 4: Factor in Cost Savings
One of the primary benefits of working with 3PL partners is cost savings. You must calculate how much your company saves by outsourcing logistics operations. These savings will come from different options, such as for example:
- Reduced labor costs, as 3PL partners handle staffing.
- Lower transportation costs due to bulk shipping discounts.
- Improved inventory management that results in fewer stockout or overstock situations.
Estimating these savings will play a crucial role in calculating return on investment.
Step 5: Evaluate Efficiency Gains
Efficiency is one of the most significant areas where a 3PL partnership can add a lot of value. Therefore, you should assess how your operational processes have improved since outsourcing. For instance, advanced technology of service providers may enable better route optimization, faster deliveries, and reduced order processing times.
Moreover, you should consider the time saved by your internal team. Outsourcing logistics allows your staff to focus on core business activities. It can lead to higher productivity and revenue generation.
Step 6: Measure Customer Impact
Customer satisfaction is a crucial element of ROI. 3PL providers that improve delivery accuracy and shorten lead times can have a significant impact on customer loyalty. You can track customer satisfaction metrics such as repeat purchase rates and online reviews to estimate the return on investment.
If your 3PL partnership results in happier customers, the long-term benefits will likely outweigh the initial costs. Meanwhile, if your customers aren’t satisfied, you should review your partnership and adopt more efficient strategies.
Step 7: Include Hidden Benefits
Most ROI calculations focus on visible metrics. However, you shouldn’t overlook the hidden benefits. Reliable 3PL partners can help mitigate risks, such as supply chain disruptions or compliance issues. They may also provide strategic insights that contribute to better decision-making.
Step 8: Calculate ROI
After calculating all the benefits you get, you should subtract upfront and additional costs. After that, you can calculate the ROI by using the following formula.
ROI (%) = [(Net Benefits – Costs) / Costs] × 100
Calculating the return on investment of your 3PL partnerships is no longer a challenge. All you could have to do is to follow these steps.
