The last few years have seen a record surge in online commerce which has, since then, maintained its upward trajectory. However, the increased demand has increased the complexity of supply chains. To meet the increased demand and cost pressure, businesses are focusing on third-party logistics providers or 3PL systems for managing logistics and supply chain functions.
Specialized 3PLs provide a wide range of services, including transportation, warehousing and distribution, inventory management, customs and compliance, freight consolidation, and other value-added services. While third-party logistics providers have become essential to the current e-commerce economy, maintaining accuracy and transparency in 3PL billing models can be challenging. Technology and automation can significantly improve the accuracy and timeliness of 3PL systems in comparison to paper-based processes.
How Does 3PL Billing Work?
For businesses familiar with the logistics and supply chain landscape, 3PL systems pose complex challenges that can take on many shapes and forms. Various services and pricing structures can add to the complexity. But before we begin, let’s develop a general understanding of how 3PL billing models work.
- Contract Agreement and Scope of Work: Signing a billing agreement is the first step. The 3PL client and provider have to agree on the service level commitments, services provided, pricing terms, rates, and payment methods.
- Collect Operational and Transactional Data: Consolidate operational and transactional data for the services you’ll have to provide to the 3PL client. This can include transportation reports, work orders, time and labor reports, and more.
- Decide Charges: In any 3PL billing model, there will be variable pricing components and fixed pricing components. Fixed pricing includes basic services such as administrative costs, account management, and technology usage while variable pricing covers the actual services rendered and varies based on the volume of goods handled.
- Periodic Billing: Become familiar with the billing interval and the various costs, services, and charges that will go into the invoice.
- Calculate and Issue Invoice: Invoicing in a 3PL system requires careful data collection of services rendered, charge calculation based on the agreed-upon pricing structure, invoice generation, delivery, and reconciliation.
- Payment and Reconciliation: The final step of the 3PL billing model is the validation and reconciliation of the payables once the 3PL client has cleared the payment.
It's worth noting that the 3PL billing model can be further customized based on the unique needs and preferences of the client and the services provided. Communication, transparency, and a well-defined service agreement are essential to ensuring a smooth and satisfactory billing experience for both parties involved.
Different Types of Charges in 3PL Systems
These are one-time charges incurred when the 3PL client begins their relationship with the provider. Set-up fees cover the initial onboarding costs, system integration, and any other logistical expense in setting up the partnership.
Receiving and Handling Fees
Receiving and handling fees include charges for the services rendered by a third-party logistics provider while receiving, inspecting, and handling the inbound shipments.
- Receiving fees are levied for accepting and processing incoming shipments from suppliers or manufacturers.
- Inspecting fees for quality control checks or inspection of incoming goods, to ensure the products are in the right condition and meet the specified requirements.
- Putaway charges for placing received goods in the warehouse, which may be based on the number of units, boxes, or pallets.
- Person Hours are additional charges that may apply for any extra labor involved in the receiving and handling process.
Storage fees may vary based on the client's requirements and the previously agreed-upon 3PL billing model. Under most circumstances, fees are applied based on:
In a typical multi-client 3PL warehousing operation, outbound fees cover charges for the activities involved in preparing and shipping products from a warehouse to the end customers and retailers.
- Picking charges are for selecting and gathering the items from the warehouse for outgoing orders.
- Packing fees are for preparing and packaging the items for transportation.
- Labeling charges for affixing labels or barcodes on the packages to ensure proper identification and tracking.
- Person hours, as we have mentioned above, are additional labor charges.
Transportation and Shipping Fees
Depending on the 3PL warehousing model, shipping and transportation fees cover the expense of transporting goods via various modes of transportation.
Shipping Carrier's Fee — If the 3PL provider arranges transportation through external carriers, the client may be charged the carrier's fee, which is typically passed on directly. For e-commerce 3PL, this may include charges for additional handling, last-mile delivery, and fulfillment, in addition to transportation.
The carrier charges can vary based on the form factor of the shipment.
- Small Parcel Shipping: These include small and lightweight parcels that can be handled by traditional courier services like DHL, FedEx and UPS. For these packages, the carrier charges are typically based on the package's weight, dimensions, and destination.
- Less-Than-Truckload (LTL) Shipping: As the name suggests, these are larger than the typical parcel but smaller than a full truckload. The carrier charges for LTL shipping are usually based on the shipment's weight, dimensions, and the distance traveled.
- Full Truckload (FTL) Shipping: Full truckload shipments usually take up the entire capacity of a truck. Therefore, carrier charges are typically structured as a flat rate per mile or a fixed price for the entire trip.
3PL's Own Fleet — Some 3PL systems have their own transportation fleet, and they may charge the client for the transportation services provided using their vehicles. Typically, the charges include predetermined rates for trucking, freight, ocean freight, and more. You can choose to structure it in various way, such as per mile, per shipment, or per hour of service.
The rate may also depend on the delivery service level of choice, such as standard shipping, expedited delivery, or same-day delivery.
Overall, the 3PL provider’s transportation and shipping fees can vary depending on the existing fleet capabilities, predetermined carrier contracts, shipment form factors, and the level of service required by their clients. In both cases, the bottom line is to optimize shipping costs for the 3PL clients while maintaining profitability for their services.
Returns are always a possibility in the supply chain and logistics business and it pays to be prepared. Reverse logistics fees cover the cost of handling the returned items and managing the reverse logistics process.
- Flat Fee or Surcharges: A fixed fee or additional charges are applied when handling returned goods.
- Receiving and Quality Control: Charges for receiving and inspecting returned items to ensure they are suitable for restocking.
- Repackaging and Restocking: Fees for repackaging or refurbishing returned items and returning them to inventory.
Value-added services include miscellaneous charges for any unique requirements the 3PL clients may have. Some of these include, but are not limited to:
- Kitting: Charges for assembling customized product kits or bundles from individual items.
- Branding: Fees for adding the client's branding or labeling to the products or packaging.
The exact nature of the charges and pricing structure varies based on the 3PL billing models and the agreement between the 3PL client and the provider. Most clients have unique needs and the fixed pricing and variable pricing components are adjusted based on the volume of services required.
3PL Billing Models Explained
Depending on the individual needs of the 3PL clients, multiple elements can influence the 3PL system. This includes charges for picking and packing, receiving, storage, packaging, returns, special projects, warehouse labeling, and other miscellaneous fees. Some of the most popular 3PL billing models used in multi-client 3PL warehousing are:
Activity-Based Pricing Model
In the activity-based pricing model, the 3PL system charges based on specific activities or tasks performed. Each service or activity is assigned a predetermined rate, and the client is billed accordingly for the quantity or volume of each activity completed. This model provides transparency as clients can see the breakdown of charges for individual tasks.
In this 3PL billing model, the transactional data is tied to individual units. The client is billed based on the number of units handled or the time spent on each activity. The cost directly correlates to the order volume for the 3PL provider. For example, the provider may charge separate rates for receiving, 3PL warehousing, order picking, packing, and transportation.
Flat Rate Pricing Model
In the flat rate pricing model, the 3PL system charges the client a fixed, pre-negotiated fee for a defined set of services over a specific period. This model offers predictability in billing, as the client knows the exact amount they will be charged regardless of the actual volume of services utilized.
For example, the provider may charge a fixed monthly fee for 3PL warehousing, order fulfillment, and transportation services, regardless of the number of orders processed or items shipped.
Cost-Plus Pricing Model
In the cost-plus pricing model, the 3PL provider charges the client for the actual costs incurred in providing the services, along with an additional agreed-upon markup or profit margin. This model ensures that the client pays the exact costs involved in the logistics operations, plus a predetermined fee for the 3PL provider’s services.
For example, if the 3PL system incurs $10,000 in transportation, warehousing, and labor costs, and the agreed markup is 15%, the client will be billed $11,500 (i.e., $10,000 + $10,000 * 0.15). The cost-plus pricing model is more relevant for 3PL providers who lack the historical and transactional data to establish a fixed-variable or flat rate pricing model.
Fixed-Variable Pricing Model
The fixed-variable pricing model combines elements of both fixed and variable charges. It involves a baseline fixed fee for essential services and additional variable charges for any extra services or resources used beyond the agreed-upon baseline. It’s a hybrid approach to 3PL billing that predetermines the correlation between order volume and the fixed pricing and variable pricing components.
For example, the 3PL system may charge a fixed monthly fee covering a specific level of warehousing space and basic order fulfillment services. If the client exceeds the agreed-upon storage space or order volume, they will be billed extra based on variable charges.
Outcome-Based Pricing Model
Outcome-based pricing models are a departure from traditional pricing structures to pursue mutually beneficial opportunities with greater ROI. In this pricing model, the 3PL provider’s fees are tied to specific performance metrics or outcomes achieved. The pricing is often linked to key performance indicators (KPIs) such as on-time delivery, inventory accuracy, or cost savings.
For example, the 3PL may agree to a reduced rate if they achieve a certain percentage of on-time deliveries, and the fee may increase if the agreed-upon KPI targets are not met. Modern supply chain and logistics operations require a flexible approach to 3PL billing to navigate growing complexities and challenges.
How Can Technology Help in the 3PL Billing Process?
3PL providers worldwide are facing various challenges in meeting the increased demand while maintaining profitability. Managing billing accuracy and efficiency is only one of the many aspects.
A 3PL WMS plays a crucial role in efficiently managing the 3PL system for multi-client warehousing operations and streamlining the billing process. It goes beyond just tracking inventory; its capabilities include recording every activity within the warehouse to enable accuracy and transparency via automated billing systems.
Create Custom Billing Profiles
A 3PL WMS allows the service provider to create custom billing profiles based on varying customer agreements, contract terms, billing rates, and schedules. This allows 3PL providers to tailor the billing structure to align client profiles with pricing agreements and apply the relevant billing rules.
For example, the WMS can support different rates for various services, whether it's receiving, storage, picking, or transportation, ensuring accurate and transparent invoicing.
Track Activity and Transactional Data in Real-Time
A 3PL WMS has features like real-time data capture and tracking to record every activity within the warehouse as it happens. For activity-based pricing models that levy charges based on inventory movements, order processing, picking and packing, shipping, and returns, the added visibility and automation simplify the invoicing process.
An automated billing system with visibility into these activities ensures accurate billing based on the actual services rendered, reducing the chances of discrepancies or errors.
Create Periodic Proforma Invoices
The 3PL WMS can generate periodic proforma invoices for each client based on the recorded activities and billing profiles. These proforma invoices provide clients with a detailed breakdown of the services used and the coarresponding charges.
Rejected invoices are quickly becoming a huge problem in the supply chain world with one in every four invoices getting rejected. While the exact number is difficult to pinpoint, industry experts estimate 15-66% of shipping invoices require additional remediation to ensure accuracy or clarity.
You can customize the periodic billing cycle in the automated billing system to align with the client's preferred billing frequency, such as daily, weekly, or monthly invoices.
Integrate with Internal and External Software
In comparison to working under silos, a 3PL WMS streamlines integration between internal and external software for a seamless exchange of information. In a multi-client warehousing setup, communication is essential between various modules like accounting, billing, inventorying, and other functions.
For example, a 3PL WMS help implement an automated billing system where you can set up integrations to track and record warehouse activities and invoice directly for services rendered. You can even integrate seamlessly with accounting software, streamlining the billing process and automating invoice generation. This integration ensures that all billing data flows accurately from the WMS to the accounting system, reducing manual data entry errors and enhancing overall efficiency in financial operations.
3PL clients need constant visibility into the fulfillment pipeline. With a WMS, you can offer a client-facing portal that allows clients to access real-time data, track their inventory, and view all activity and billing details.
The 3PL system allows clients to log in to the portal and see up-to-date information on a daily, weekly, or monthly basis. They can generate reports, set up email notifications, track transactions, and view inventory levels and movements on demand. This transparency fosters a stronger client-provider relationship and empowers clients to stay informed about their logistics operations and costs.
According to a study by NTT Data, 64% of 3PL users and 86% of 3PL providers agree that the use of 3PLs has reduced overall logistics costs. With the global economy showing symptoms of a slowdown, reducing costs and improving efficiency have become a priority in the supply chain and logistics sphere. The right technology allows businesses to implement automation and improve efficiency while diluting reliance on manual processes.
Trust is a crucial factor in supply chain and logistics, and 3PL billing goes a long way in building and cultivating the trust factor. Providing third-party logistics, especially in a multi-client warehousing setup is a tough ask in today’s macroeconomic condition. The right technology can go a long way in implementing flexible 3PL billing models for greater client satisfaction and retention.
With a 3PL WMS like Hopstack, you can create custom and granular billing profiles, capture and reconcile transnational data from operations, and generate proforma invoices on the fly. With access to advanced reporting and analytics capabilities, you’ll always have a beat on the financial and operational health of your business. Having real-time access to relevant information in your 3PL system is the key to making data-driven decisions and setting yourself apart from the competition.