3PL cost management: 4 tips to ensure profitability

In today’s supply chain, controlling costs is more important than ever. Interest rates are high, and maintaining working capital comes with risks. For this reason, you need to optimize your network spend to increase profitability.

As a shipper, you must be strategic about which loads you outsource to a third-party logistics provider (3PL).

On one hand, 3PLs take the work off your plate. But the trade-off is that you give up control over your shipping costs, data, and execution. To make a logistics provider work for you, you need to understand your needs and the 3PL’s pricing models.

An overview of 3PLs and 3PL costs

3PL is an umbrella term for any third-party company offering logistics services.

Types of third-party logistics companies

The four common types of 3PLs to be aware of are brokers, freight forwarders, and warehousing and distribution providers.

• Brokers act as intermediaries between shippers and carriers. Since they don’t own assets, they optimize your network based on the best available carrier.

• Freight forwarders serve as agents when shipping orders between countries, particularly via ocean or air freight.

• Warehousing and distribution providers store goods – either in dedicated or shared warehouse space – and ship those goods to the designated regions by the agreed-upon time.

These companies save you money in a variety of ways. Some examples:

• Less-than-truckload (LTL) shipment consolidation: A 3PL manages consolidation and deliveries, eliminating a huge lift for your internal transportation team, even as a small shipper.
• Warehousing and distribution: In addition to handling the basics of order fulfillment, other services such as assembly, and pallet optimization may incur an additional fee. Because of their increased access to facilities, 3PLs help deliver shipments to geographies your individual network may not be able to reach.
• Finding a truck to suit your needs: Your 3PL books the truck you need and makes sure the driver can accommodate the scheduled shipment pickup and delivery times.

3PLs can be a competitive differentiator, providing substantial cost savings for shippers of all sizes despite never-ending network changes. Additionally, they are transportation experts, so they bring industry processes, operational rigor, and carrier performance expectations to small organizations. For shippers who don’t have this expertise, it can be a relief to outsource the work to professionals.

A breakdown of 3PL costs

When you outsource to a 3PL, you agree to either contracted terms or a one-time spot rate. Depending on the 3PL, you can have them negotiate terms specifically for you and a carrier, or use their carrier contract terms. With a spot rate, there is no contract. Instead, you pay a one-time fee for an individual shipment.

Under a 3PL contract, you may pay a recurring subscription or a flat fee. Both can adjust based on each party’s performance (e.g., on-time payment or delivery).

Alternatively, you and your 3PL provider may agree upon personalized contract pricing based on your unique shipping needs. In this case, the 3PL considers factors like shipping geographies, type of truck, volume, handling, and more.

The exact terms and costs will vary depending on your pricing agreement. 3PL invoices will often have the following charges:

• Service-based fees: Most logistics companies charge for transportation, warehousing, and customs brokering. Additional fees apply for value-added services such as inventory management, repackaging, labeling, and customer support.
• Markup on carrier rates: 3PLs often negotiate with carriers for discounted rates. However, they usually mark up carrier rates when providing a quote.
• Volume discounts: You can benefit from tiered pricing when you ship more with a particular logistics company.
• Ancillary charges or accessorials: Your invoices may sometimes include additional 3PL management, such as liftgate, customs, handling and storage, or residential delivery fees.

Once you know what charges to expect, you can work to reduce your costs.

4 tips to manage 3PL costs and improve profitability

Managing the various costs associated with third-party logistics companies is a challenge, but that doesn’t mean it’s impossible. Here are some tips to help you improve profitability.

1. Establish a central repository of shipment data

Supply Chain 2.0’s outdated processes require digging through piles of physical documents to understand your logistics costs. Juggling various dashboards for each carrier and 3PL only adds to the chaos.

The best way to effectively manage 3PL costs is to know where every dollar goes. For this, you need all your shipping data in a central location so you can drill down to the SKU level. This helps you decide which shipments to manage in-house and what sustainable 3PL pricing agreements would look like for those you plan to outsource.

2. Seek transparent and fair pricing

If you’re not careful, hidden costs can significantly reduce your profit margins. To avoid this, push for transparency – whether from the logistics partner you’re considering or those you’re already working with.

Each pricing agreement should outline your shipment specifications, such as truck type, lane, expected accessorials, and other characteristics. If you know the going market rates for your shipment type, you’ll know what is and isn’t a fair price.

Shippers will pursue a request for proposal (RFP) from 3PLs to get the most effective rates. Great shippers will come prepared with pricing benchmarks specific to your shipping needs as leverage. The savviest shippers have benchmarks and their own data to best negotiate optimal rates.

3. Establish a scorecard and associated management reviews

It’s your 3PL’s job to get shipments where they need to go on time. But it’s your job to make sure they do so efficiently, particularly if you have a performance-based contract in place.

Logistics-AI solutions help with this monitoring. For example, Loop generates scorecards that show how often a 3PL gets a load to the destination on time, how accurately they invoice, and so on.

From this big-picture view, you can also see where unexpected charges add up. If a 3PL uses a carrier that regularly charges add-on fees, you pay that accessorial. A scorecard grants visibility into whether the 3PL is using the most cost-effective operations for your shipment.

In tandem with carrier scorecards, Loop runs root-cause analysis on every discrepancy. This insight tells you exactly where the inefficiency lives. With it, you know where to focus your efforts to eliminate service failures.

Full transparency into 3PL operations creates predictability in your deliveries and cash flow. It empowers you to take back control of your 3PL costs.

4. Simplify logistics operations with tech

Technology can help you better manage shipping costs by aggregating data and simplifying workflows.

Logistics-AI software like Loop automatically aggregates data, verifies that 3PL invoices are correct, and ages each invoice so you pay at the right time.

Loop pulls spend data from across different sources into one central repository. It also removes duplicates, standardizes charges, and manages adjustments. All so you have clean, accurate data at your fingertips for financial planning.

Brokers often have invoice issues because they rush to get out their invoices to get paid faster and they take on last-minute spot freight. Automatic audits against the rates specified in your transportation management system (TMS) and warehouse management system (WMS) can find these overcharges, especially in cases where spot rates result in exceptions. Loop’s root-cause analysis identifies the problem for you so you avoid overpaying and overworking.

Seeing each invoice's lifecycle stage at a glance allows you to project future payments, resulting in greater financial predictability. Additionally, consistently paying invoices at term maximizes working capital and builds stronger relationships with 3PLs that can earn you better contract terms.

The bottom line is that software gives both you and your logistics provider complete visibility into each transaction.

Maximize your profits by optimizing 3PL costs

Successful supply chain management requires control over your logistics costs, including those associated with 3PLs.

By centralizing your data, you gain vital product-level profitability. This transparency empowers you to identify and eliminate hidden costs, build strong relationships with 3PL providers, and ultimately maximize your profitability.

Learn how Loop’s intelligent software can help you understand and manage your 3PL costs to boost profits.