Saving your Third Party Warehouse Contract

8 August 2013

Saving your Third Party Warehouse Contract

If you’re fed up with your Third Partly Warehouse (3PL) service provider or you feel your third party warehouse contract is leading you into ruin, don’t despair.

There’s a light at the end of the tunnel. All you need is a little Lean Six Sigma.

Many companies are dissatisfied with their Third Partly Warehouse service provider.

No surprises there! "They don't understand us.” “They don't respond to our needs.” “Our customer service levels are way below expectation and costs are too high." All common complaints.

But what may surprise many customers is that things aren’t so black-and-white when seen from the perspective of the Third Party Service provider:

  • "The information we received to set up is all wrong.” 
  • “Volumes don’t look anything like what was discussed.”
  • ”Peaks are 400% above the averages.” 
  • ”That service was never discussed.”
  • ”The client wants the impossible!”

So how can a third party warehousing contract go so wrong? Your third party service provider undoubtedly had the best of intentions.

And it goes without saying that you – as the customer – did your utmost to explain your needs.

So what fell through the cracks? And how?

While there are definitely some dubious Third Party Warehouse out there, they’re few and far between.

And when you look closely enough, the Third Party Warehouse is rarely the sole cause of under-performing contracts.

In many cases, contracts are awarded in haste, without the necessary attention to detail that underpins success, without proper systems integration and without the ability to make the changes internally to allow the Third Party Warehousing relationship to work.

By virtue of their nature, these responsibilities MUST be shared. They rely upon insider insight AND external experience and expertise.

But the more important question is, can the contract be saved?

Surprisingly enough, in most cases, it Is possible to save your third party warehousing contract. Even when you’re so stressed that you feel nothing can be done, there usually is a resolution. It just takes open communication, willingness and a focus on the facts.

The following case study illustrates how an ailing third party warehouse contract can be resurrected with Lean Six Sigma.

Clients Problem

The client, a fast moving consumer goods manufacturer had been experiencing major problems with their third party warehousing contract, and was intending to breach the contract after just 6 months and bring the warehouse back in-house.

The problems as reported by the client:

  • Poor communications and slow response from the Third Party Warehouse
  • Credits had exploded for over and under-shipments;
  • Inventory was inaccurate; and
  • Order shipment delays.

However, the Third Party Warehouse reported Key Performance Indicators showed:

  • E-mails responded to within 2 hours at 99%;
  • Warehouse related Credits at 0.03%;
  • Inventory at 99.9% at the bin level; and
  • Orders picked on time at 100%.


We reviewed the contract using Lean Six Sigma DMAIC to find out what was really going on and to identify the core problems.

Over a two month period, we reviewed and reconciled all data with the customer’s ERP system and the Warehouse Management System (WMS).


The first step was to understand the problem. The voice of the customer (VOC) was used for the review.

This step is critical and needed to be non-emotive and based on processes and systems.

The VOC identified the problem as:

  • Communications poor and slow

  • Over and under-shipments
  • Inventory accuracy
  • Delays in shipping orders


What was the data showing? This is where the “hack” work needed to be done. A sample of one doesn’t give a true picture or pattern of problems or issues.

The more data that can be collected, the better the result. Measurements taken: Hundreds of e-mails were summarised and collated;

  • Credits year to date were collated
  • A stock take was done to count the inventory in the client’s site and at the Third Party Warehouse site; and
  • Hard copies of orders picked, confirmed and date shipped were collated.


Raw data needs to be shown as information.

After measuring and collecting the data, we needed to turn it into something that could be shown as a trend, comparison or percentage to understand what the data was actually suggesting.

Analyses performed:

  • E-mails sent to warehouse (time, date) and e-mails received from warehouse (time, date), issues and resolution were charted and reviewed based on several criteria
  • Credits processed by line item and cause analysis (for year to date from hard copy credit notes)
  • Inventory accuracy physical stock take
  • Inventory accuracy of stock take in ERP and WMS systems;
  • Orders sent to warehouse (time, date), pick confirmation sent from warehouse (time, date) and invoice date

Analysis revealed the following actual problems

Communications – e-mails were being responded to, but the answers did not make sense to customer service staff as the problems were not understood from inside of the warehouse.

Credits - The credit review identified that both the client and the Third Party Warehouse were correct with their facts. Further investigation identified a process flaw with no return interface implemented.

Human intervention and time pressures for confirming orders forced confirmations without checking what had been picked by the Third Party Warehouse (resulting in paperwork credits).

Inventory accuracy – Prior to the stock take, the client had an in-house and external Third Party Warehouse warehouse in one location on their ERP system.

This was a problem because customer service could not tell where the stock was when placing orders.

The total quantity may have been correct but the location was not.

Delays in shipping orders - Warehouse orders were picked on time but were not leaving the warehouse.

There were delays from order pick confirmation to invoicing (no return interface) as orders could not leave the warehouse without invoicing.

Control – Daily reports for picking, receiving, fill rates and other “tasks” were reported each day by the warehouse.

The customer did not understand (believe) the information that was reported.


As a result of the review and analysis, the following corrections were implemented.

Communications – Weekly review meetings with minutes.

The Third Party Warehouse commissioned an online help desk and communications were centralised to allow all issues to be recorded and system generated measurements to be published.

Credits - Daily credit reconciliation's are now in place. This now allows each order to be reviewed and the cause of the problem to reviewed and fixed if needed.

Inventory accuracy – A finished goods warehouse (Third Party Warehouse) and a bulk warehouse (client) were implemented. The impact of the paperwork credits was backed out.

Delays in shipping orders – A printer was installed at the Third Party Warehouse so when an order is confirmed the invoice is printed in the warehouse.

The Third Party Warehouse also started to report non invoiced orders in the daily report.

Control: Future changes to be managed and reported

Weekly meetings – Face-to-face relationship management events.

Help desk reports – Web based facts on all topics with times and people involved and reporting of issues.

KPI reports - Agreed daily measurements for activity to show the performance of the Third Party Warehouse.

Cycle counts – For inventory accuracy and control.

Daily Inventory reconciliation's – To identify any data entry issues and eliminate errors until the new interface is in place.

New interface – Automation of all processes between the company and the Third Party Warehouse.


The review crossed both the client and Third Party Warehouse systems and identified a gap in the process.

By working together and using the facts, we were able to identify and correct the problems.

According to the client, “The physical stock take results were impressive with the best result in the company’s history.”

The relationship has settled and communications are now based on actual issues and situations.

No issue is left for more than a day or so.

There are cases where orders are entered, processed and ready for despatch within 30 minutes.

When a data entry error occurs, the customer is often called prior to having received the stock and informed of the problem and the credit note number on that call.

Staff are less stressed from being reactive however they are now starting to understand the impact and efforts needed in being proactive.

Customer reported problems have been all but eliminated; now conversations with sales staff are around business, not problems.


The results of this case study highlight the fact that even third party warehouse contracts that seem to be in dire straits can be resurrected.

Although emotional issues may cause irreparable damage to your relationship with the third party service provider, the contract itself and its processes are rarely beyond help.

If however, you do decide to move on, a Lean Six Sigma review will, at the very least, allow you to do so with the confidence that only comes from having a clear understanding of where you went wrong the first time and an effective plan for future success.