Subscribe to our free, weekly email newsletter!


Moore on Pricing: Pricing models for 3PLs

By Peter Moore, Partner at Supply Chain Visions
September 01, 2012

As shippers consider entry into an outsourcing arrangement for freight management, they quickly discover a range of pricing options from various service providers. These service providers have a variety of business models that drive their market offers, and shippers need to understand what these models are so they can evaluate not just the offer, but the potential for long-term satisfaction with the contract.

A shipper that discovers that the third-party logistics provider (3PL) has made larger margins than expected often attempts to terminate early; on the flip side, shippers that find out that 3PL margins are too slim to support their service needs will also try to terminate early.

I tell shippers to consider three main 3PL freight management business models: execution; arbitrage; and dynamic transparent. While there are variations, these descriptions should help sort out what the provider is selling during the evaluation stage.

Execution refers to the outsourcing of the execution of carrier rates already negotiated by the shipper. The shipper relies upon their own market strength and negotiating skills, but turns over dispatch, tracking, audit, settlement, and claims administration to the 3PL. Often this model works in combination with warehousing, but not necessarily. In this case, the contract is transactional and transparent. The value-add is in simplified administrative steps for the shipper and aggregation of data that the shipper might not be able to process well.

Transparency implies that the shipper knows what to do with the information and is capable of providing part of the shared management responsibilities. 

Arbitrage includes an arrangement where the 3PL pays the carrier and charges a higher negotiated rate to the shipper. These are less transparent, and freight brokers rely on this model for at least one transport mode managed for their shipper clients.

The 3PL/broker is in a position to propose lower management fees as they plan to make margin in the market aggregating several shippers’ volumes in their offers to carriers. The shipper needs to understand this business model and insist on openness at least in the business proposal stage. I have seen numerous shipper/3PL contracts end early and in litigation where the arbitrage was not made clear up front. 

Dynamic transparent refers to models where the volume and market strength of the 3PL are leveraged to assist the shipper to make a more successful network fit with carriers. The 3PL should be capable of disaggregating the freight cost elements with the carrier to optimize for their multiple shipper clients. 

At the same time, the 3PL provides transparency to their process and costs and agrees to a fix fee or margin for transactions. With establishment of a cost baseline there are opportunities for innovation and further leverage incentives; and as a rule, I suggest that the base transaction margin is conservative relative to the market, but that the 3PL has the opportunity to make multiples of the market margin through innovation. 

This model incents all parties to be creative, including the carrier. The carrier gains by having a single 3PL team with which to optimize operations, invoicing, claims, and sales coordination. The disaggregation of costs allows the 3PL to work with the carrier to modify operations to drive out mutual costs, hence the “dynamic” reference.

The 3PL can do this with the opportunity to improve margin without the loss of perceived fairness that leads to early cancellation and litigation.

Each model has its place, and all can benefit the shipper. However, the shipper needs to identify what kind of business model they want to work with.

About the Author

Peter Moore
Partner at Supply Chain Visions

Peter Moore is a partner at Supply Chain Visions, Member of the Program Faculty at the University of Tennessee Center for Executive Education and Adjunct professor at The University of South Carolina Beaufort.  Peter can be reached at .(JavaScript must be enabled to view this email address)


Subscribe to Logistics Management magazine

Subscribe today. It's FREE!
Get timely insider information that you can use to better manage your
entire logistics operation.
Start your FREE subscription today!

Recent Entries

FTR says both spot rates and contract rates are heading up in a full capacity environment and with the fall shipping season rapidly approaching, it explained conditions for shippers could further deteriorate.

Read how others are using Business Process Management to achieve ERP success with Microsoft Dynamics AX. Download the free white paper now.

Now that Congress has issued another highway funding Band-Aid – a $10.9 billion highway bill through next May that former Transportation Secretary Ray LaHood blasted as “totally inadequate” – what can we expect as the infamously do-nothing 113th Congress winds down in the next month before taking yet another recess to prep for the mid-term elections?

Seasonally-adjusted (SA) for-hire truck tonnage in July headed up 1.3 percent on the heels of a 0.8 percent increase in June. The ATA’s not seasonally-adjusted (NSA) index, which represents the change in tonnage actually hauled by fleets before any seasonal adjustment, was 133.3 in July, which outpaced June’s 132.3 by 0.8 percent, and was up 2.8 percent annually.

Volumes for the month of July at the Port of Long Beach (POLB) and the Port of Los Angeles (POLA) were mixed, according to data recently issued by the ports. Unlike May and June, which saw higher than usual seasonal volumes, due to the West Coast port labor situation, July was down as retailers had completed filling inventories for back-to-school shopping.

Comments

Post a comment
Commenting is not available in this channel entry.


© Copyright 2013 Peerless Media LLC, a division of EH Publishing, Inc • 111 Speen Street, Ste 200, Framingham, MA 01701 USA