Outsourcing transportation and logistics functions has become very popular. All sorts of third-party logistics providers today hold themselves out to provide “all of your transportation, warehousing and distribution needs, by all modes, anywhere in the world.” Outsourcing can have benefits, and it can have serious disadvantages.
Here is a checklist with some suggestions on how to avoid the pitfalls.
1. Who wants to outsource? Has there been a bid package, an arms-length negotiation or is the contract to be awarded to the vice president’s golfing buddy?
2. Is the proposed candidate a corporation, a partnership, a limited liability company, and where is it incorporated or domiciled? Is it publicly or privately owned, and if so, who owns it? Investigate whether there is any possibility of conflict of interest in terms of common ownership or control.
3. Is the service provider asset-based — does it own the trucks, trailers, containers, warehouses or other facilities that will be used? Or will it “broker” or subcontract the services that are contemplated? Ask whether the subcontracting will be to an affiliated entity or to truly independent contractors.
4. What services will actually be provided — “consultant,” motor carrier, freight forwarder, transportation broker, domestic airfreight forwarder, international airfreight forwarder, ocean freight forwarder, NVOCC, customs broker, intermodal marketing company, warehouseman, freight audit/payment service, cargo claims service, etc. Ask whether these functions will be performed by the 3PL or “farmed out” to affiliates or other contractors.
5. Even with “deregulation,” many services cannot legally be provided without proper licensing or authorization. Does the 3PL have legal authority to provide the service? Check with the Federal Motor Carrier Safety Administration (motor carriers, forwarders, brokers), with the Federal Maritime Commission (ocean forwarders, NVOCCs), with the International Air Transport Association (international air forwarders) and with Customs and Border Protection (customs brokers). If they are not licensed, don't do business!
6. Creative personal-injury lawyers often look for a “deep pocket” when there is serious injury or death in highway or “loading/unloading” accidents. Shippers can be exposed to liability if they are negligent in selecting or instructing service providers. Make sure your company exercises due diligence, maintains appropriate procedures and has adequate insurance, that the 3PL has adequate insurance as well, and put indemnity provisions in your contracts with 3PLs.
7. 3PLs generally have liability as a bailee for loss, damage or delay to merchandise in their possession (as a carrier, forwarder, NVOCC, warehouseman, etc.), but they usually attempt to limit their liability through tariffs or terms and conditions of service. Make sure that liability for loss and damage is covered in your contract. Most 3PLs disclaim any liability for loss, damage or delay while goods are not in their physical possession — while in transit or in a warehouse, for example. You can include strict requirements as to subcontractor selection, insurance and liability in a properly drafted contract.
8. Will your 3PL have responsibility for auditing and paying other service providers? What happens if you pay the 3PL and it doesn't pay the motor carrier or other service provider? Since the payment service provider is your agent, you can remain liable to a third party even if you have paid the 3PL. Insist on a bond or employee fidelity insurance.
9. Will the 3PL assign employees to work at your plant or facility? If so, you will need to detail the requirements for such things as space, parking, utilities, washrooms, phone/cable connections, access and security, and insurance.
10. Will the 3PL provide proprietary software such as transportation or warehouse management systems? If so, you should be concerned about who will own the software (and the data) when the contract is terminated.
Even experienced risk managers and in-house counsel may be unfamiliar with the transportation and logistics area. Therefore, you would be well advised to seek out and use professionals who have expertise in this area and ask them to review your outsourcing program before you go too far.