Why the 3PL Race to the Bottom is Over

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For decades, many shippers regarded their third-party logistics providers as tactical partners that would be willing to negotiate costs down at the shipper’s behest. This was most clearly reflected in the way in which many shippers would approach transportation bids. Shippers would use their previous year’s rates for services such as ocean freight and domestic trucking as baselines for the next year’s negotiation.

The idea was that to “win” a negotiation, the shipper would need to negotiate rates down from their existing rates. This would essentially force the 3PLs to deal with the expectation of driving down prices year over year, regardless of market conditions. To make matters worse, shippers also felt as though the competition among 3PLs would create a “race to the bottom.” Shippers thought providers would jump at the opportunity to beat their competitors’ rates and win new business regardless of whether or not the new business was initially profitable to the 3PL. This was not and is not beneficial or sustainable for any organization.

However, it seems as though COVID has finally brought an end to this “3PL race to the bottom.” Several clients I’ve spoken with have indicated that this tactical approach to logistics negotiations has not yielded lower rates this year. As a result of highly volatile markets for air freight, ocean freight and trucking, these outdated baselines are now irrelevant. Market conditions are forcing many supply chain leaders to reset their expectations on what kind of pricing to expect from logistics providers in both the short and long term.

Instead of using last year’s rates or rates from even the year before, shippers must use data and market intelligence platforms to understand the various markets. This is now part of normal due diligence for many supply chain leaders at top-performing organizations. There are several benchmarking services and market intelligence platforms that shippers can use to help benchmark costs for transportation currently available. Shippers should be using these types of services to know where the market stands and how pricing compares with that of their peers. Now more than ever, it is important for shippers to understand that market conditions dictate pricing and that benchmarks need to be as close to real-time as possible in order to be relevant. The expectation that a 3PL will ignore the market conditions in their considerations to an RFP response is unrealistic. It’s therefore time we retire this notion of a 3PL race to the bottom. Attempting to drive prices down beyond what the market can bear will not drive long-term value for either organization.

Companies that have a higher logistics maturity tend to focus more on building these types of strategic partnerships with 3PLs. The benefit this can yield with respect to potential cost savings is often much greater than what can be achieved from a tactical approach. A strategic 3PL relationship offers much more opportunity to drive value if it is well managed. The figure below illustrates the potential benefits in terms of cost and service associated with transactional versus more mature and strategic-oriented 3PL engagement models.

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Savvy shippers that are at a higher level of logistics maturity tend to focus on long-term cost optimization initiatives that adequately balance service quality and cost. They don’t make decisions based solely on cost. These shippers have a combination of services and market intelligence that provides them with accurate data that represents what is currently happening in the market. They leverage this information to their benefit to make data-driven decisions on when to approach 3PLs with RFPs. They are able to save time in negotiations by having data to support their rationalization on whether or not they have received fair market pricing in their RFP responses.

It’s time to leverage data and technology to better understand pricing positions for logistics services. Aiming for unrealistic rates doesn’t work. What does work is using data to know where you stand in relation to your peers in the current market. Instead of perpetually chasing down 3PLs to lower rates, set your sights on building up a few strong strategic partnerships to gain the opportunity to drive long-term value.

Farrah Salim
Senior Principal Analyst
Gartner Supply Chain
[email protected]

 

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