Oct 26, 2022 12 Min READ

How to Negotiate 3PL Shipping Contracts

12 Min READ
How to Negotiate 3PL Shipping Contracts

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Negotiating to keep clients happy while securing reliable and affordable carrier rates to grow your 3PL’s bottom line is a precise juggling act. The task takes skill and knowledge-it’s not for novice negotiators.

Third-party logistics (3PL) is one of the fastest growing industries in the United States. Every year since 2019, revenue in the industry has grown substantially. By 2023, the 3PL market is forecast to exceed $297 billion. Competition has become fierce to score the most lucrative shipping contracts and hold onto existing clients.

Competitors, especially newbies, will try to undercut the bigger 3PLs in order to gain a piece of the pie and steal customers. When it’s time for contracts to be re-negotiated, customers/shippers often start shopping around to find a better deal, and carriers might take the opportunity to increase prices.

A 3PL warehouse has to be on their toes when it comes to negotiating shipping contracts with carriers or customers/shippers. If the 3PL does not have a skilled negotiation team, they risk losing their customers to the competition, paying more for carriers, or sacrificing the services of preferred carriers.

Especially with high shipping volumes, many of the carriers won't negotiate directly with 3PLs or brands right now, so many 3PLs choose to work with shipping experts like Buku Ship or Pitney Bowes to secure the best rates for their customers and to expand access to carriers. Using a warehouse management system (WMS) platform with rate shopping and automated shipping like 3PL Warehouse Manager, featuring Small Parcel Suite and Parcel API to connect a multitude of carriers, is another way that 3PLs can maximize their shipping partnerships.

Essentially, a 3PL has become a brokered transportation and supply chain management service for shippers. All negotiations carried out by a 3PL are done not only to increase the 3PL’s profitability but also save the shipper money so they continue to contract with the third-party logistics provider for all warehousing, order fulfillment, shipping and more.

A 3PL must strive to negotiate strong and satisfactory agreements with carriers and shippers while coming out ahead themselves.

Shipping Contracts and 3PLs

The 3PL acts as an intermediary between the customer and carriers, warehousing, etc. They work with multiple businesses to ensure that orders are fulfilled, stored, and shipped. This means that the 3PL has to strive to make not only customers and their consumers happy but also ensure that the best prices are being gained from carriers, warehouses, and others to keep the supply chain functioning at an affordable cost.

A 3PL works in the best interests of the shipper by contracting directly with carriers to draft ironclad contracts that clearly outline liability. Written agreements protect all parties involved.

Shipper and 3PL Agreements

The first step of negotiations that takes place between a customer/shipper and a 3PL involves liability. The courts have been very black and white on certain aspects of the relationship as it pertains to the law. A solidly negotiated contract protects not only the shipper but also the 3PL.

As stated in the following court decision:

"The parties are free to allocate freight charges by contract as they wish, unaffected by 49 USC Section 10743. Re Roll Form Products Inc. 662 F2d ISO (1981); Consolidated Freightways v. Admiral Corp., 442 F2d 56 (1971)."

This means that you can draft a contract that clearly defines the duties and responsibilities including fees and payments to carriers in the contract between the 3PL, shipper, and carrier.

The carrier must agree through negotiations that the 3PL will pay the carrier and waive the carrier's right to collect from the shipper if the 3PL should default. It is standard for the 3PL to agree to have the carrier rely exclusively on them for payment within the contract and avoid seeking any payment from the transport buyer.

Even though such contracts in the U.S. have become commonplace with the growth of 3PLs, don’t be surprised if the buyer requires proof from the owner of the 3PL that you are contracting with the carriers and have agreed to have your 3PL exclusively pay and let the shipper/customer off the hook for any moneys owed. In such circumstances, the contract needed is a bilateral contract between the shipper and the 3PL.

When your 3PL negotiation team sits down with a shipper/customer, they need to have a strong balance sheet to show absolute indemnity protection to the shipper and set their mind at ease. It should clearly state that should the carrier demand reparations, the 3PL will pay in full.

13 Things to Consider When Negotiating 3PL Shipping Contracts

Negotiation processes for shipping contracts carried out by 3PL companies are based on careful analysis of each customer’s individual needs and the benefits of particular carriers. The goal is to always provide the best value while meeting the needs of the customer. The process is a journey of discovery.

When negotiating with a carrier on behalf of a shipper, a 3PL will examine shipping data, trends, supply chain lanes, weights, classification and more, and then categorize related data to create a robust and competitive bid package that benefits the shipper, the carrier, and the 3PL.

When it’s time to sit down at the negotiation table, the pressure is intense for everyone involved. A 3PL wants to keep their current customers and expand their business with new contracts. They also want to make the best deal possible with carriers to ensure ongoing, quality service for everyone involved. Everything is a balancing act with a bit of give and take on both sides of the table.

When a 3PL puts together a bid package to present to a customer, it is imperative that they follow certain specific steps to effectively determine the best rate. The 3PL team doesn’t want to undercut their potential profit, but they also don’t want the bid package to be so high that the customer selects the competition.

Successful negotiations with carriers involve a good rapport to gain the best rates. Negotiating the best shipping rates is an arduous task that takes skill. As a 3PL, you want to make an affordable deal, but the carrier also wants to make a profit, so it’s going to take arbitration and time. The deal you reach with the carrier will impact the contract you finalize with your shipper/customer.

Here are some things to consider when negotiating a 3PL shipping contract with your customers.

1. Data Collection and Negotiations

Everything in the modern world is based on big data. Every business runs its own 3PL warehouse management software and has their customer base and particular shipping services and needs. An experienced 3PL team gathers data from multiple vendors, carriers, and sources to provide an accurate and robust estimate based on careful analysis.

Most customers/shippers want to know that your 3PL company uses a reliable warehouse management platform to streamline all processes, ensure visibility, stay current with communications, provide analysis, and avoid downtime. Ideally, the WMS should be cloud-based and secure, so the shipper and the 3PL can readily share information when needed and work across borders with ease without being pinned to one geographical location.

Also, a cloud-based WMS provides protection in the event of an infrastructure failure and can store a limitless amount of data to provide the customer with peace of mind.

When entering into contracts with a shipper, a 3PL must ensure that they are ready to meet future and growing demands without faltering by handling big data.

2. Shipping Contracts and Insurance

It is becoming an increasingly common occurrence for shippers to try to negotiate being added to a 3PL’s insurance policy. As a 3PL owner, you must think long and hard about such a request.

Adding a shipper as an ‘additional insured’ on your insurance policy gives the shipper the right to file a claim against your policy. Basically, you are sharing your insurance limits with your shipper both for judgments/settlements and legal defense cots. Some shippers will also try to negotiate to be added as additional insureds on cargo policies, too.

If a shipper should try to negotiate to be added to your 3PL insurance policy, you’ll need to discuss the situation with your insurance underwriter to decide about what is best for your logistics company.

3. Personalized Relationships and Bidding

Not all 3PLs are created equal. The best 3PLs maintain personalized relationships with their customers and carriers. When it's time to contact carriers, they don’t send out bulk emails to a variety of random carriers. Instead, they take the time to contact regional and national carriers personally. They go over all bidding requirements and ensure that the bids are highly competitive. The personalized service during negotiations is appreciated and is why a handful of 3PLs stay on top and ahead of the competition.

Never underestimate the human touch even if your 3PL is huge, lucrative, and booming. In the modern world, human relationships often take a backseat to big tech, but at the negotiation table, customer relationships matter and are the foundation of good, sound business deals.

The goal of 3PL negotiations is not always about just providing the most affordable bid package. Negotiating shipping contracts are also about discovering innovative ways to meet demands.

4. Carrier Relationships and Portfolios

The relationship between a carrier and a 3PL is a win/win for both parties. The 3PL often brings the carrier millions of dollars in profits each year. Leading 3PLs maintain a collection of qualified and skilled carriers that offer various specialized shipping services.

A 3PL will maintain a carrier portfolio with carriers that meet certain criteria such as cost, shipping services, and more, which they can use to match to various shippers/customers and consumers.

The carriers of a 3PL should be based both regionally and nationally. Each one should have outstanding safety and service records that show they are leaders in the industry.

In addition, a 3PL will ensure they have redundant carriers that they place on standby in an effort to expand the competition pool. The prices of the various carriers will vary. The goal is to meet the shipping needs of customers while offering the maximum savings when drafting new shipping contracts.

5. Staying Up to Date in a Competitive Market

A successful 3PL knows that the market is ever changing. In order to remain competitive during negotiations, they have to stay up to date. Shipping discounts, shipping costs, and other account factors all matter.

An experienced 3PL is an extension of the supply chain. They are tasked with handling all administrative work such as customer service, storing, shopping, 3PL billing, auditing, and more. As a jack of all trades, they have to also be skilled negotiators to make the best deals with carriers and customers.

6. Work With Several Carriers to Gain the Best Price and Services

There are a myriad of carriers available. The sheer volume might seem overwhelming for a 3PL, but the abundance is actually a good thing because the volume creates a competitive rate environment.

The big 3PLs can usually negotiate better rates due to the sheer volume that they ship for their customers to consumers. It’s all about volume because volume is leverage in negotiations.

Carriers are extremely competitive, and with a large influx of carriers, the prices go down. Also, the more you plan on shipping, the lower your rates per mile. Once a carrier gets wind that you are collaborating with their competitors, then they will meet the rates, or if you are lucky, then you’ll get a slightly lower rate as they strive to stay competitive and score or keep your business.

When negotiating rates, always reach out to multiple carriers. Let them know that you are gathering rates from various carriers and that they need to consider beating the competition’s prices. The added pressure will make the carriers step up their game and provide optimum leverage in the negotiation process.

Shipping costs are significant in any supply chain expense account. Clearly, you’ll want to negotiate lower rates while still maintaining the same level of service to your shippers, so your bottom line grows. Locking in better rates is a part of the negotiation process and helps you form stronger shipping contracts with your shippers/customers.

7. Shipping Rate Negotiations

One of the hardest aspects of 3PL negotiations is always negotiating with shippers. Even after years of having good relationships with each other, it all boils down to business, which is an ever-changing process. Yes, you might gain more leeway with a carrier whom you have consistently worked with over the years, but they might also take advantage of the relationship, and at the end of the day, you still have to make a profit.

The process of negotiating rates is often intimidating and frustrating but above all time-consuming.

8. Receive Estimates from Regional Carriers When Negotiating

In the United States, regional carriers are expanding and pushing into logistics. Carriers have historically offered either local or regional services but not both. Regional carriers are usually defined as shippers who move freight within the same state, or less than 500 miles as opposed to a local carrier who stays close to home such as within a metropolitan area or specific small geographic pattern.

The regional carriers usually offer lower rates due to their network of drivers who are not long-haul and stay close to home. A 3PL is wise to use the services of both regional carriers and local carriers to expand their network, save money, and have more negotiation power.

When negotiating shipping rates, you can gain estimates from local and regional carriers to add to your network of go-to carriers, especially if the larger companies that you have been working with are less flexible with their availability or rates.

9. What the Carrier Brings to the Table

When it's time to renew shipping contracts or sign on a new customer, then it's also time to shop for carriers to meet the demand. Probably several carriers have responded to your proposals, so you’re going to need to examine exactly how your 3PL’s freight works into the carrier’s operation patterns. This is a part of the vetting process.

Carriers are notorious for advertising their strengths and looking like they can tackle any hardship they might face. However, carriers also have weaknesses. The vulnerabilities of the carrier carry throughout the supply chain and impact your 3PL’s performance and the consumer experience, which then hits the shipper/customer. It’s like a ripple effect. It is imperative that you know your carrier's weaknesses when negotiating so you know how they will impact your business operations.

When negotiating, be blunt; ask the carrier about problems they might have faced in the past and how they resolved the issues. Take the time to conduct a little detective work for each carrier to see if there are any significant problems reported and, if so, how the carrier dealt with the issues. Then compare the facts that you have uncovered with the story the carrier tells you. Follow your gut instincts when making a determination.

10. Supply and Demand Drives Negotiations

Shipping rates vary depending on supply and demand. Peak months and slower seasons also impact prices. In Asia, the upsurge typically takes place from mid-January to early February as the country pushes to stock up before the start of the Chinese New Year. During such times, there is far less available cargo space, which pushes the market prices higher.

A 3PL should have a firm understanding of market rates for their particular shipping so they can decide to go with a guaranteed contract or to try the spot market.

A guaranteed contract is a hedge during the high season. The contract gives a set price along with capacity agreement which is high during some times of the year and low during the high season when everyone requires more capacity. Spot rates fluctuate and are dependent on market conditions. Typically, they are suitable for small 3PLs who have a sufficient amount of volume and do not have to negotiate large contract rates.

11. Group Shipper Negotiations

Merchants who opt to contract with a 3PL to transport cargo often negotiate group buying. Small scale merchants typically don’t have the leverage needed to negotiate the best terms, so they will group together to reach acceptable terms with a 3PL for shipping as a group.

12. Logistics Data Matters

Often a carrier offers what appears to be fantastic discounts, but the low prices are for areas that you rarely ship to. In some cases, the waivers and discount rates do not apply during peak season. Using logistics data, you can avoid such shady dealings.

A 3PL should have a grasp of global peak seasons and frequently used shipping routes. Often a carrier provides a 3PL with discount rates, but they won’t actually save any money. A 3PL negotiating shipping contracts has to be aware of such smoke a mirror moves. Logistics data provides them with the edge they need to stay on top of shady business dealings.

13. Reliability Matters with a Carrier

The reliability of carriers matters for any 3PL. However, in some situations, even the best carrier might decline negotiations. If you are happy with the reliability and flexibility of your carrier, then you might not mind if they charge higher rates.

It remains in your best interest to work with a quality carrier that has proven themselves over the long haul versus a carrier you are unsure about just because they are offering a lower price. A long-term, lasting relationship will usually provide you with comparable savings in other ways as the years pass. Reliable carriers also do not dramatically shift their price, so they provide a great deal of reliability for the 3PL and shippers.

Tips for Comparing Offers

You can access directories via the internet to get an idea of what other carriers are charging. Before sitting down at the negotiating table with a carrier, you’ll want to carry out careful analysis of prices and the competition.

Factors to consider include:

  • Various rates being offered
  • Price of insurance
  • Weight and dimensions
  • Fuel costs
  • Transit requirements
  • Origin and destination zip codes

Take the Time to Read the Fine Print

A skilled negotiator does not sit down at the negotiation table before taking the time to read the fine print in any offer or before reaching an agreement. They have to look for hidden costs and identify charges. Many of the added dollars can be skillfully eliminated or used as tools during the negotiation process. Warehouse management system software remains a valuable tool for analysis and data comparisons. Having ready access to all company data and information is crucial during negotiations.

Look to see if you are being charged for deliveries on holidays or weekends. Do you need to negotiate on accessorial charges such as unpacking fees or cargo packing? What about cash on delivery? These are all hidden fees that are often overlooked because they are outlined in the fine print of the contract. Ideally, you’ll know what you need to pay for and what you can forego so you can negotiate the best freight rates for your 3PL and your shipper/customer.

As far as taking the time to read the fine print, you should also conduct the same precise read-through on any changes you are negotiating with your shipping customers.

Once all questions have been answered and you are finalizing your discussions, it's time to draft a master carrier agreement, which is a contract between the 3PL and the carrier. It will outline everything you have agreed to in writing. The terms of the contract cannot be changed without your approval.

Build a Capable 3PL Negotiation Team

It should be noted that third party logistics contracts are extremely complicated agreements. Ideally, the negotiations team for the 3PL will negotiate with shippers and carriers.

Once all agreements are reached, then an attorney will draft the contract to protect the profits of the 3PL, shippers, and carriers. Also, the contract will exclude liability for damages or any unforeseen additional costs. All negotiating parties will benefit from the ironclad contract. Usually, the party who has drawn up the contract (typically always the 3PL) has the greatest negotiating power and edge.

As your 3PL grows, you’ll spend a considerable amount of time negotiating with shippers/customers, carriers, and others. It is not unusual for a third-party logistics provider to negotiate scores of contracts each year, which puts them in a strong negotiating position. Any 3PL should have a team of skilled negotiators who regularly manage the task and have managed to streamline the process so everyone is satisfied with the outcome.

The Perfect 3PL Contract

The perfect 3PL contract negotiating with either shippers/customers or carriers focuses not only on price and performance but also factors in key components if things should turn sour with the contractual parties.

A 3PL must have the ability to end the contract or cancel if necessary. Think about the right to indemnification if some unforeseen calamity should occur such as a warehouse flood. What if food products are mislabeled causing problems or leading to lawsuits? Protections must always be in place in the contract with force majeure and indemnification clauses alongside disclaimers, limitations of liability, and exclusions.

Any 3PL shipping contract or carrier contract is complex and must always be negotiated and drafted correctly to ensure future protection. Shipping contracts are a part of 3PL business. Each one is unique and takes expertise to successfully negotiate.

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