Exploring Various Pricing Structures with your Strategic 3PL or Logistics Provider
Outsourcing of your logistics function, be it warehousing, fulfillment, e-commerce, transportation, last mile delivery or a combination of these are a critical and strategic component of many businesses. Clearly, pricing is one of many important criteria that needs to be assessed as part of the vendor selection process. However in addition to the pricing, pricing structure is also worthy of consideration and is quite often overlooked throughout the process.
Pricing structures include:
- Fixed (such as dedicated space for warehousing, dedicated runs in transportation etc)
- Cost plus Management Fee
- Percentage of Sale
- Combinations of the above
Each of the above has various advantages and disadvantages relative to your core business. The key is to understand what is best for your organization and then look for suppliers that are flexible enough to quote you in the method that is right for you.
Integrity of any pricing is based on the quality of the underlying data as well as the quality of the analysis done by customer and vendor alike. So the starting point before seeking any pricing is to ensure you know how solid your base data is. Some examples include:
- Understanding of inventory turns is crucial for storage pricing. If this is not well known then going to a fixed storage model allows the savings in turn to accrue to the customer and protects both parties from excessive losses, surprise increases etc.
- Average number of lines per order, cases per line and weight per case are important cost drivers for fulfillment and e-commerce because they impact labour productivity.
- Weight, density and cube are critical drivers of transportation costs as are distributions so shipping destinations are well understood.
If you do not have good underlying data then it may be worth hiring a consultant to put together your historical and or projected data. If the data is inaccurate then you may be leaving money on the table or having a vendor come back for legitimate increases. With the high costs and risks associated with changing vendors you want to do everything possible to ensure your pricing is right. The consultant may just be the best insurance you can get to protect your bid process and pricing.
In the end the best way to accomplish pricing protection is to have rock solid base data, choose the pricing structure that best suits your business and then find a strategic vendor whom you can work with and most importantly trust to be fair.