Posts Tagged ‘3PL agreements’

For the last 15 years the Third Party Logistics industry (3PL’s) have been growing at an average rate of 15% annually.  More and more companies are outsourcing pieces of their supply chains to 3PL’s.  They do this for three primary reasons:

1. The function outsourced is not the company’s core competency
2. Outsourcing provides speed and flexibility
3. To save money

Often, the structure of the agreement between the customer and their 3PL partner is cost plus.  This can come in a number of tailored formats but for the most part, the 3PL is paid their cost plus a management fee.  While fees vary based on the service provided, costs are suppose to be what the 3PL paid.  Here is where many companies overpay.  For most, this overpayment could be avoided by asking a few questions upfront and checking the bills a little closer  throughout the life of the contract.

As stated earlier, cost plus contracts are set up to charge the customer for actual costs paid for goods and services plus a fee, which is ideally the profit for the 3PL.  There are four areas that companies should consider, both when negotiating the agreement with the 3PL and when paying the 3PL’s invoices.

The first area to focus on is benefits.  Unless specified in the contract, benefits charged on wages should be the actual cost of the benefits.  That means that rebates that the 3PL  gets on health insurance and workers comp should be credited to the customer.  If you are charged a “standard percentage” and you don’t ever get a rebate, but the language in the contract says nothing other than cost plus, you are being over charged.

If, however, the contract stipulates that there is to be a standard percentage applied to wages for these categories, then the charge would simply be the percentage applied to actual wages.  Remember, in many operations hourly wages can be as much as 40% to 55% of total operations costs.  If you are charged a couple of extra points over cost of benefits, that could be a lot of money during the life of the contract.

The next area to consider is temporary labor charges.  Many temp agencies offer rebates to 3PL’s based on volume over  the quarter or year.  As the customer, you have the right to see the agreements and call the temp agency to discuss the specific arrangements.  If there is a rebate from a temp agency, or from any supplier for that matter, in a cost plus arrangement, you have the right to your share of the rebate.

Many operators also provide systems and systems support.  While support typically is based on a percentage of software license cost, the actual systems license costs are much less direct, and in reality are in large part profit.  You will hear arguments that the license costs have to cover a lot of R&D, overhead, and other indirect costs you, the customer will never see.  Truth is it is profit.  You should not pay management fee on this. This is one of those areas that should be addressed up front.  If it isn’t spelled out or included as a line item on a budget, you should not be charged a management fee.

The last point to look into is corporate allocation or charges for overhead.  Like some of the topics above, unless this amount is clearly defined as a percentage of total costs or something similar, it should be the actual costs.  The big mistake that many make, however, is that they pay a management fee on top of a corporate allocation / overhead.  In effect, you are compounding the fee paid to your provider.

Most experienced supply chain executives throw out charges associated with corporate allocation / overhead right from the start.  You should have one fee to negotiate.  Don’t allow yourself to be put in the position of negotiating two, three or four fees depending on the activity.  This is a tactic used by some 3PL’s to simply make more profit.

There are many areas that companies must watch out for when negotiating and managing their 3PL agreements.  Hopefully you have these four critical components in control.  If you aren’t sure, at least you know where to start looking.