For 3PLs, understanding your true cost to serve is crucial. But the process can feel like chasing a moving target.
Modern 3PLs are looking to automation to help control and reduce cost to serve. AI-powered tools reduce manual work, provide in depth analytics, and let teams focus on higher-value tasks.
When teams understand how their actions impact costs, they’re more likely to find ways to improve efficiency and cut unnecessary expenses. This changes how companies operate. Meaning managing cost to serve is about more than numbers, it requires a mindset shift.
Let’s break down cost to serve for 3PLs, how to measure it, and tips to tackle it effectively.
Understanding the components of cost to serve
Cost to serve for a 3PL includes every expense involved in moving freight from point A to point B. This might sound simple, but in practice, it’s anything but…
- People Costs: Many smaller 3PLs, especially those with limited tech, rely heavily on people to handle tasks like matching loads, tracking shipments, and managing customer accounts. This includes account managers who interact with clients, carrier sales reps who negotiate with carriers, and back-office staff handling accounts payable, accounts receivable, and claims.
- Operational Workflows: Different tasks are often managed by specialized teams—carrier sales, account management, tracking, and billing—each with its own cost implications. Some 3PLs measure costs per team or per task, which can break down the workflows that contribute most heavily to overall cost.
- Technology and Automation: Larger, tech-enabled 3PLs may automate parts of these workflows and reduce their reliance on manual processes. With AI-powered tools, some companies automate routine tasks like calling carriers or updating shipment status. This can significantly reduce the cost of labor and improve efficiency across the board.
Top-down and bottom-up cost calculations
3PLs generally use two main methods to calculate their cost to serve: top-down and bottom-up. Using a blend of both methods allows executives to see the bigger picture while individual teams can focus on their specific cost drivers.
- Top-down: This high-level approach adds up costs by department (e.g., payroll for account managers) and divides by the number of loads. It’s simple, but it misses some details. For instance, account managers often do more than handle loads—they build client relationships and help with pricing. These tasks are hard to measure by load.
- Bottom-up: This method tracks costs for specific tasks. For example, it looks at the time and expense of tracking a load, managing exceptions, or calling carriers. But it relies on data, which doesn’t always cover every task. People who handle multiple responsibilities are especially hard to track.
Key factors that impact cost to serve
Several key factors directly influence a 3PL’s cost to serve:
- External Market Conditions: The freight market is cyclical and fragmented, which can make stable costs hard to maintain. Even large 3PLs struggle with pricing power in a volatile market. When rates drop, carriers may leave, which impacts availability and increases costs for those who remain.
- Contract vs. Spot Freight: Contracted freight offers stability but usually has lower margins, while spot freight is more profitable but unpredictable. Many 3PLs rely on spot freight for higher margins, especially for urgent or high-demand loads. This balance requires close alignment between sales and operations to optimize both volume and profitability.
- Customer-Specific Requirements: Some customers have unique requirements that increase costs, like restricted pickup times or additional services. Tracking these added needs helps 3PLs understand which customers may be driving up costs disproportionately so they can adjust services or pricing as needed.
- Efficiency of Operational Processes: The more efficiently a 3PL can manage workflows like load booking, tracking, and exception handling, the lower the cost to serve. Automation in tasks like carrier sales or load tracking reduces the need for manual work.
Measuring progress with data-driven insights
Executives often care more about cost trends over time than exact dollar amounts. Tracking improvement metrics helps companies focus on ongoing efficiency rather than just static measurements.
Progress in cost to serve can be tracked with metrics like:
- Load booking efficiency: How quickly and efficiently loads are matched with carriers.
- Carrier rate accuracy: How closely carrier costs align with market rates.
- Margin targets: Weekly or monthly margin goals to stay profitable without undercutting rates.
- Cost per load or shipment: This can be hard to track precisely, but it helps identify trends and areas to improve.
Building a sustainable cost structure with automation
For many 3PLs, automation is the key to controlling and reducing cost to serve. Routine tasks—like matching loads or updating shipment statuses—can be handled by AI-powered tools. This reduces manual work and lets teams focus on higher-value tasks.
Automation can streamline carrier sales, load tracking, and back-office tasks, which reduces the need for large back-office teams. 3PLs can make smarter decisions, allocate resources effectively, and adjust operations quickly with more data available from automated systems.
Loadsmart found that they were spending too much on manual audits and outsourcing. By teaming up with Loop, they began automating 80% of their audits, and were able to uncover $1.3 million in missed savings, and cut outsourcing costs by 60%.
Cultivating a culture of financial awareness
Managing cost to serve is about more than numbers. It requires a mindset shift. When teams understand how their actions impact costs, they’re more likely to find ways to improve efficiency and cut unnecessary expenses.
Collaboration between departments is essential. For example, carrier sales (focused on supply) and account management (focused on demand) must work together to balance service quality with cost control. By fostering a culture of financial awareness, 3PLs can keep their cost to serve aligned with their goals and drive profitability across the organization.
Interested in cutting costs and boosting efficiency? Contact us to learn how Loop can streamline your 3PL operations.
