In logistics outsourcing, a subject that is often frequently overlooked is that of deciding on the most appropriate pricing method under which the contractor will provide services to the user. In many cases the user simply accepts the charging structure proposed by the contractor or simply fails to recognise the alternative structures that might be available to them.
Contractor Pricing Structure
Typically, users will go into considerable detail to ensure a like for like comparison with alternative contractors, whilst negotiating hard for the best price, but give little thought as to the implications of the charging structure once the operation goes live. The result can be that all the hard work undertaken during the tender process is wasted once the contract is implemented as charges increase above the tender price.
Why is there a problem?
Logistics contracts differ from many other types of commercial agreements because of their particular characteristics:
- They tend to operate over several years
- The services provided can be quite varied and complex
- The activity can vary considerably over time through seasonality and growth
- They can include a mixture of fixed and variable costs
- Some costs vary with time others don’t
What is the answer?
In considering the most appropriate pricing system for a particular operation it is worth reminding ourselves of some key requirements if it is to be acceptable to both the contractor and user of the services:
- It should provide the agreed level of remuneration to the contractor over time
- It should be simple to administer
- It should avoid rewarding the contractor for poor performance and poor productivity
- Ideally it should drive cost reduction and improved productivity
- It should enable change to take place without the user losing financial control