In part one of 3PL Implementation steps, we spoke about how you begin the process of implementing a third-party logistics company. He covered important factors shippers, manufacturers, and distributors need to consider when looking to hire a 3PL provider, such as Customer Service requirements, putting together a task force, and of course creating a plan internally to set up your criteria.
Now that you know how to set up the initial process and start looking at 3PLs, the next question is always, “How much will this cost me?” So today, we want to talk about setting up and understanding 3PL pricing structures.
There are many different ways to structure price, but the key ingredient is to make sure your 3PL will maximize both hard and cost savings for your company in order to glean the most value out of the relationship.
NOTE: This article is more holistic in the explanation of all 3PL pricing structures. Cerasis, a freight logistics service provider of both freight technology and freight management services, charges you the cost of freight that you ship, and our pricing monthly is customized based on your companies’ unique needs and service program. Often Cerasis saves you money in our expert negotiations with carriers as we negotiate based on your specific needs via our carrier relationship management services and team.
3PL Pricing Structures Explained
3PLs often charge upfront costs based on the complexity of the service. This cost is for the planning and development of material handling, operational and information systems required for the distribution operation and implementation of the proposed system. Some bill for time needed to calculate your charges.
The first prices you receive are important. But, you must realize that initial pricing is based on ESTIMATED VOLUMES. There are “hidden costs” in these first prices, and more profitability for the 3PL. Constant price negotiation is imperative. It is best to start with “unit rate pricing” or “hourly” pricing in a public, shared warehouse. Variable fees are charged per hour, per item, or per order for each distribution function such as receiving, put-away, pick-pack-ship, customization, inspection, returns processing, etc. Fixed fees are charged monthly or quarterly, irrespective of the number of orders shipped. Lift trucks, equipment, and people are shared in a public warehouse to keep prices down. (There will also be “accessorial pricing” for pallets, hourly fees, and miscellaneous pricing. At times you may be asked to pay for some of your KPIs…just keep negotiating!!).
Being in a shared, public warehouse, you can get a feel for how the 3PL operates while ACTUAL SHIPMENTS are being received by the 3PL. If your actual shipments exceed your estimates, it is time to negotiate again, using the change process clause in the contract for initial monthly reviews during the “honeymoon” period. Once you get by initial negotiations, the goal is to obtain “cost-plus” or “management fee” pricing. This is contract pricing and usually means a two (2) or three (3) year contract obligation with the 3PL partner.
NOTE: Cerasis is non-asset, and we do not offer a warehouse, but again, wanted to be as educational and holistic as possible.
Less-Than-Truckload (LTL) and Truckload (TL)
Pricing for LTL and TL (in an asset-based 3PL environment) is negotiated as a separate contract negotiation. With Cerasis, we focus on LTL, Truckload Freight Brokering, and Small Package. We put in place a contract with several carriers negotiated to your specific lanes. We specialize in this area, with an emphasis on technology and freight management services. We serve multiple locations and those vendors who inbound to you via our freight routing department.
Have a QBR (Quarterly Business Review) as part of the LTL contract so you can review pricing as the 3PL uses their Transportation Management System (TMS) to optimize your freight. Why shouldn’t you realize some cost reduction on your LTL prices if they optimize your freight and find cost savings?
It is a great idea if you can afford to send your Project Leader to the 3PL to focus on your initial shipments. Face-to-face negotiations are the “only way to go.”
Always Have a Back-Up or Fail-Safe Plan
Your team should choose a number two (2) and number three (3) 3PL candidates (s) in case the chosen 3PL fails in some way in meeting your needs. This failure could happen at any time. It is important to have cancellation/modification; change processes in the contract should you need to cancel, modify or change any processes or the 3PL relationship itself.
Contract/Service Level Agreement
Any contract or terms and conditions must be reviewed by the Consultant and your team, and then turned over (with your suggestions) to a contract lawyer. Look out for terms and conditions on the reverse or front side of ANY document received by the 3PL to insure that YOU AGREE to ALL terms and conditions in your 3PL relationship.
Do you want to use your own LIABILITY INSURANCE or the 3PLs liability insurance? Or-get a 3PL quote on insuring your goods to see if their insurance is better for you?
Continuous Improvement (It Should be FREE)
The success of an outsourcing relationship between a company and the 3PL provider requires a combination of trust and collaboration. Trust determines the level of flexibility a company can allow the 3PL in managing the operations to the best of their capability. The outsourcing arrangement can be truly successful only when there is a high level of trust between both parties in the business relationship. Unless there is this sense of trust and collaboration in the client-3PL relationship, it most certainly will fail.
If you are in need of a 3PL consultant or need help in realizing soft and hard cost savings for your freight and logistics departments, please contact us or request a historical freight invoice analysis and consultation.