Pricing from a 4PL perspective

Abstract

Title Pricing from a 4PL perspective<br>

Authors Louise Kjellberg and Maria Björholt, master students at
Industrial Engineering and Management, Lund university<br>

Supervisors Jenny Sjöholm, Logistics Developer, Schenker Dedicated
Services AB<br>

Dr. Andreas Norrman, Professor in Engineering Logistics,
Department of Industrial Management and Logistics, the
Faculty of Engineering at Lund University<br>

Problem discussion and purpose<br>

The interest for outsourcing of logistics services has grown in the last decades, and
therefore the fourth‐party logistics market (4PL) is expected to grow significantly.<br>

However, although the market is expanding, the 4PL provider faces competition, not
only from other third‐ or fourth‐party logistics providers, but also from companies that
provide substitutes to some extent, e.g. IT, supply chain consulting, freight‐bill auditing
and freight procurement. In order to stay competitive, it is therefore important to know
how these companies price their services.<br>

The purpose of this study is to create knowledge about different pricing methods for the
4PL industry, and to discuss potential pricing methods for the 4PL provider that is the
client of this thesis, Schenker Dedicated Services AB (SDS).<br>

Methodology<br>

The research started with a literature review. Then, six case studies were conducted
with the aim of finding convergent patterns of how different industries price their
services. All of the cases included in the study offer services that are substitute to SDS.
Finally, the findings were applied on SDS’s fourth‐party logistics context, in order to see
if there is any indication that SDS should use other pricing methods than the one
currently used.<br>

Frame of reference<br>

The frame of reference introduces three main fields. The first field is the most common
pricing methods used within either the logistics services industry or by companies that
offer services that are substitutes to SDS’s services. The second area of interest is service
classification. This part introduces a number of service characteristics that will be used
in the cross‐case analysis. The third part investigates the third‐ and fourth‐party
logistics market. The intersection of the three fields respectively is discussed in pricing
of services and pricing of logistics services.<br>

Conclusion<br>

The findings of how different substitutes to SDS price their services are presented
below. In general, cost‐plus contracts transfer the risk to the customer while a fixedprice
or an outcome‐based agreement transfers the risk to the provider. The provider’s
motivation to perform is high for outcome‐based contracts, whereas no such incentives
are created for a fixed price or cost‐plus.<br>

Supply Chain Consulting<br>

Cost‐based pricing or customer perceived value pricing is used within consulting,
however, the latter is believed to be the ideal pricing method. Cost‐plus pricing is,
nevertheless, industry standard. Both companies charge for consulting either with a
fixed price or with a running cost per hour.<br>

Information & Technology<br>

One of the case companies prices its services based on the customer perceived value,
whereas the other company uses a market‐based pricing method. The difference can be
explained by the cross‐case analysis that shows that services that are more customized
and complex tend to favour customer‐perceived value pricing, whereas services that are
more standardized and simple are more likely to be priced according to the market. The
pricing method that is industry standard seems to vary depending on how complex and
customized the service is. A transaction‐based payment principle is preferred, since it is
more profitable than a yearly fixed price.<br>

Freight‐Bill Auditing<br>

The freight‐bill auditing company that participated in the case study uses cost‐plus to
price its services. For low volume customers or standardized services, however, the
price level is partly influenced by the market. The customers are charged based on the
number of transactions that they execute per month. Overall, the pricing within the
industry is ad‐hoc.<br>

Tendering and Freight Procurement<br>

The service is very straightforward and the savings can easily be measured, which
allows for gain‐sharing contracts. According to the freight procurement company that
participated in the case study, gain‐sharing is thus considered to be industry standard
for freight procurement projects.<br>

General patterns across industries<br>

The cross‐case analysis shows that services that have a high degree of complexity and
customization either use a customer perceived value pricing, increasingly want to do so
or indicated that it would be the ideal pricing method.<br>

Indications for SDS<br>

Based on the cross‐case analysis, and the fact that SDS offers services that are complex
and customized in nature, we suggest that SDS should investigate whether customer
perceived value pricing could be used for SDS’s services.<br>

We also suggest that SDS must be better at communicating the value that they create as
a 4PL provider. One way of doing so is through the pricing method used. We believe that
customer perceived value pricing would fulfil that purpose. However, if SDS finds that
customer perceived value is a difficult approach to pursue since it often is difficult to
estimate and quantify, we suggest that SDS should consider other value‐based pricing
methods that are more established within the logistics industry, such as gain‐sharing or
performance‐based pricing. We believe that the incorporation of such pricing methods
in the all‐in price would allow for SDS to better communicate the value that is created
and, hence, would distinguish SDS from the 3PL providers on the market.

• author: Björholt, Maria and Kjellberg, Louise
• supervisor: Andreas Norrman
• organization: Engineering Logistics
• course: MTT820
• year: 2011
• type: M1 - University Diploma
• subject: Technology and Engineering
• report number: ISRN LUTMDN/MTP--5721--SE
• language: English
• additional info: ISRN LUTMDN/MTP--5721--SE
• id: 1982042
• date added to LUP: 2011-06-22 16:26:18
• date last changed: 2011-06-22 16:26:18