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Share-in-savings contract - shipping costs

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Posted Wed, 09/01/2010 - 8:41am by John Webb (Controller/Director of F)

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 Have been approached by a company doing shipping analysis -- will do so on a share-in-the-savings basis.  Obviously sounds good to know its not going to cost, etc.  but not sure how to benchmark terms. Seems to me the two keys are % of savings shared and duration of the contract.  Anyone got any 'norms' I can apply in negotiating?

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% of Savings

by Thomas Testa (CFO) - 09/02/2010 - 6:19am

Try to negotiate a very specific schedule outlining savings by route and associated future payment due. Include as much detail as possible. Many of these vendors will seek to renogotiate your current rates and develop a high level % of savings delivered requiring you to pay their shared "savings" as a simple % of your future shipping spend. Your actual savings may be very different depending on your mix of routes, etc.

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% of savings - shipping

by John Webb (Controller/Director of F) - 09/02/2010 - 8:35am

Thx, Tom. To their credit they've made it a % of actual results -- i.e. post-billing analysis. They're talking 40% -- which at least they want us to keep more than half, but still seems high. They want 3 years, which sounds crazy to me.

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% of saving - shipping

by Dabney Wellford (CFO) - 09/02/2010 - 6:45pm

40% for 3 years is ridiculous. If you think that it is the way to go, tell them 30% for 1 year. Otherwise, you may not be able to justify the effort since you will have to dedicate a resource to pulling documentation for them. (You may only break even the firat year.) Depending on the type of product that you ship and receive, you should give the statistics to UPS and FEDEX and let them go at it. You would be amazed at the savings. We had a exclusive arrangement with them for both incoming and outgoing freight. I was really surprised that UPS won the battle - mainly because the FEDEX salesman was a bit arrogant.

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Steps to take in controlling logistics costs.

by Steve Gordon (Senior Consultant) - 09/05/2010 - 6:41pm

Having served on both sides of the fence - VP of procurement, outside cost-saving consultant, I can give you a perspective that will create a win-win for you and your company. Before you sign up with a third party service, I would do a little housekeeping first starting with rebidding your transportation providers. Depending on your company size, you might want to implement a rate shopping system (transportation management system). Next, I would then require your suppliers to ship using your shipping account (thus eliminating their markup). Finally, there is an additional step if you are importing significant product into the US - you need to rebid your customs clearing services. This is a quick overview - for best results create a flow chart of your inbound and outbound logistics; oftentimes this will reveal additional opportunities.

Once you have tightened up your cost structure, I would bid out to a third party consulting service. Most offer two tier service - either hourly consulting or a multi-year percentage based on total savings. If you have done your homework, their fees truly represent lost money and the larger percentage goes directly to your bottom line.

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Share in Savings Contract

by Michael Kline (President) - 09/13/2010 - 5:24am

I agree with all of the points above and suggest that another way to make a reality check of such a contract is to estimate the cost of finding the efficiencies through another form of relationship. For example, straight consulting hours required for the project with a success premium. This can be done with a second bidder or to a degree by indirect questioning as to data required, time scheduled, etc.

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