Does your 3PL have a cost-plus culture?
Estimated reading time: 2 minutes
Have you considered how the commercial model you use with your 3PL impacts their operating culture? Or how their performance and long-term value is impacted by their preferred pricing arrangement? If you are frustrated by stagnant productivity levels within your warehouse, then you should consider these questions when evaluating your 3PL.
The Cost-Plus Model
Cost-plus commercial models are common within the third-party logistics industry, and among warehouse staffing agencies. This pricing method is useful when there is significant uncertainty about the operating profile for a new piece of business, including a lack of historical data. In warehouse management, the cost-plus model is often used with new, greenfield operations until efficient processes and baseline productivity metrics have been established. In this arrangement, the 3PL provides full transparency to the actual operating costs required to run the building and then applies a pre-negotiated markup to those costs as a fee for their services (hence the name “cost-plus”).
The Problem with a Cost-Plus Mentality
Problems arise when these cost-plus commercial arrangements stretch far beyond periods of operational uncertainty and become the norm for a 3PL. Since the model shifts the risk of fluctuating operating costs onto the customer, the cost-plus 3PL lacks real incentive to make efficiency and cost reduction the cornerstone of their operations. It’s not necessarily the cost-plus commercial model that is a problem, but its long-term impact on the operation’s (and company’s) culture.
Over time, the culture becomes less agile, more bureaucratic, and lacks a sense of urgency and drive for continuous improvement. In a recent Gallup poll, 20 percent of warehouse workers described themselves as "actively disengaged" from their work, and nearly half admitted to doing just enough work to get by. Although most 3PLs have formal continuous improvement programs, these initiatives often fail to produce sustained cost savings and productivity improvements under a cost-plus program. Studies show that nearly 60% of all corporate Lean Six Sigma initiatives fail to yield desired outcomes because enthusiasm wanes over time and employees revert to the old, more costly ways of doing things.
Agile, Performance-Based 3PL Cultures
So what are the alternatives? Instead of a cost-plus model, 3PLs can implement performance-based commercial agreements where the customer pays for the output, not the input, placing the risk of fluctuating variable costs firmly on the 3PL. In this scenario, the 3PL must manage operations as efficiently as possible to avoid losses, carefully monitoring and managing costs at a granular level. This creates an agile culture focused on improvement and productivity every hour, every day—and lowers operating costs for the customer as a result.
As a performance-driven 3PL, Capstone Logistics uses a carefully engineered pay-for-performance model to delivery consistent value. This model remedies employee disengagement by tying wages directly to performance, incentivizing teams to work at consistently high levels while identifying process waste, improving safety, and increasing customer service. As a result, pay-for-performance models deliver cost savings of 10 to 40 percent over cost-plus models.
Ready to optimize your operations with a performance-driven 3PL?
Capstone Logistics offers an advanced alternative to warehouse and industrial staffing, driven by a relentless commitment to efficiency. We offer better service, lower prices, and less risk to our partners. Contact the Capstone team to learn more.