Contract Logistics Pricing Methods

Warehousing and Contract Logistics forms an important part of Supply Chain Networks. Contract Logistics projects are of two kinds. The first being a flow through warehouse which can be a Finished Goods warehouse for the purpose of consolidation and merging or documentation purposes or in case of supplier shipments, inventories being consolidated to enable FCL shipments. Often supply chain logistics call for shipments and cargo to be warehoused at the point of origin or destination. In all such cases, warehousing facilities are normally public warehouses or shared and common facilities offered by 3PL are used.

The second kind of Contract Logistics projects involves larger projects which are client specific and dedicated. Such warehousing projects may be called for in Supplier inventory management and supplies to the Plant or manufacturing lines called in plant logistics or models like JIT, VMI warehouses. In case of Finished Goods too, the distribution centers, FG warehouse and hubs at regional or country level entail dedicated facility.

Warehousing Projects are normally managed through an RFQ process where the qualified 3PL vendors bid for the business with the response document containing solution design, followed by presentations and negotiations with final selected 3PL supplier. Many companies prefer to suggest a pricing mechanism or model in the RFQ to enable them to compare the various bids as well as have clarity on costs involved therein.

Types of Pricing Models in Contract Logistics:

  1. Fee based on percentage of Sales Turnover or volume.
  2. Cost Plus model
  3. Price per Sq. Ft
  4. Transaction and Fixed Price combination
  5. Cost per transaction or per unit pricing

Fee based on percentage of Sales Turnover or volume.

Traditionally warehousing service providers who are called carrying and forwarding agencies involved mainly in Finished Goods logistics have practiced the pricing mechanism of charging Warehousing Fee as a percentage of sales billed per month. The fee can vary anywhere from 0.5 to 2% of the monthly gross sales turnover. This practice has been in vogue in a multi tier supply chain network involving distributors at state levels and further regional distributors and so on.

This pricing mechanism includes a basic minimum guarantee pricing called as floor price. Floor price or minimum price covers the fixed cost expenses of the warehouse. The revenue earned by the 3PL varies with the sales revenue. 3PL stands to gain during peak months and loose during slack months. The variable cost that has a major impact on the costing is labor. 3PL service providers manage this costing by employing minimum number of human resources and add on temporary labor only when required.

While 3PL is generally aware of the market conditions and sales estimation for the buyer’s products he stands to make a gain when the sales shoot up. Buyer on the other hand would find it easier to account the cost as a standard percentage of the sales turnover without having to get into other operational details.

Cost Plus model

Large size projects which are dedicated and setup as per a buyer’s requirement are normally run based on Cost plus model. As the name suggests, the pricing mechanism involves estimating the total cost of running operations and profit as a Management Fee which is fixed as a percentage of the total cost.

This costing method works well when the project size is huge and operations include multiple transactions and value added activities within the warehouse. A large size warehousing project calls for huge investments to create the building and infrastructure. The build may have to be built or may be hired by paying a security deposit. Infrastructure investments would include racking or shelving systems, material handling equipments including Forklifts, Reach Trucks, Dock levelers etc, conveyer or any other equipment needed. IT infrastructure can include cost of hardware including servers, desktops, laptops, printers, RF equipment etc.

In view of the size of the project and the investments involved, the contract or project is awarded for 3 years with two extensions of one year each. This helps the 3PL to amortize the investments over the contract period.

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