How Much Does it Cost to Outsource Managed Transportation Services?
November 16, 2018 •Rick LaGore
People connect with us every day on our managed transportation services to ask various questions about how the solution can help them. While the questions vary, the one question on everyone's list is how much it costs to bring a managed TM solution to their organization.
With as important as this question, is we will address it with as much detail as possible. As you read through this article, please keep in mind there are several variables that drive pricing.
Managed Freight Processes
To begin to answer the question, we need to outline all the services provided within a managed transportation service (MTS) program. The reason for doing so is managed transportation can be many things to many people because managed TM (MTS) can be all-encompassing or the services can be selected on an a la carte basis.
The below chart outlines the full suite of MTS where the five functions are described in detail. The entire process is firmly planted on the bedrock of connectivity, reporting, visibility, BI and KPI's that drive strategic direction on continuous improvement.
Keep in mind that pricing is based on the entire program of services, and if only select services are needed within your organization, the cost will be less.
Key Data Points for a Buyer of Managed Transportation Services
For the most productive conversation, there are key areas a buyer of an MTS needs to think through before reaching out to the various logistics service providers (LSP's), which are listed below:
- Integration and connectivity requirements with shipper's order management system (OMS) and the TMS. Will there be a single touchpoint point for the customer where the OMS connects in with the TMS to communicate with all its internal and external stakeholders or will the TMS be the center of the connectivity for all the buyer's stakeholders.
- Additional options on connectivity include: automated emails, web portals and other connections points desired between the LSP, shipper and its stakeholder.
- How much real-time data does the buyer want to have with the freight carriers and therefore with its stakeholders? The quicker the information is desired and the volume of the business will dictate the number of EDI / XML connections with the carriers and the OMS.
- Volume of the operation by the various modes of freight, meaning how many truckloads, LTL, etc. shipments per day. This number should be reviewed on a low, average and peak basis.
- Total number of carriers required to effectively run the operation within the desired KPI and cost savings expectations.
- Will LTL volumes be large enough where it would make sense to utilize the freight optimization module for consolidation and pooling savings opportunities.
Our general rule is the total number of LTLS shipments should be 100 or more a day.
Each one of the points listed above has an impact on pricing and timeline to implementation. As you will find as you read, MTS solutions have a number of options, and this one is no different. In relation to the timeline and cost spectrum, a buyer can either go all in or slow up the integration costs to allow for savings to catch up to investment if the buyer is looking to self-fund the project as much as possible.
Pricing Specifics of a Managed TM Solution
With the price drivers outlined, let us take a dive into the pricing itself.
Pricing is typically broken down into one-time implementation costs and on-going operations costs.
One-Time Implementation Cost for Shipment File:
The one-time implementation costs include: file integration, general system set-up, training and possibly travel.
Assuming a managed TM buyer wants to go with some type of electronic connectivity option, the connection between itself and the LSP's TMS begins with an order file that will be passed from the shipper to the LSP. The components of the order file are:
- Origin and Destination Addresses
- Available to Pick-Up Time
- Required Deliver Day or Window
- Total Weight & Cube
- Special Instructions (if any)
There is always the option for a buyer of MTS to utilize the LSP's web portals to enter their order shipment information directly into the TMS or send emails to the LSP to input themselves. We see this as an option for only for smaller shippers to keep the initial start-up costs down, although if the buyer is asking the LSP to enter the data the transactional cost will increase to cover the additional labor.
File Integration: One-Time Cost
There are three ways to accomplish the OMS file exchange. Each impacts pricing and real-time updates.
- Listed below are the options in order of cost and complexity. (The lower the cost, typically the lower in real-time updates.)
- Spreadsheet ($5,000 to $10,000)
- File are exchanged via an Excel or .CSV file.
- Shipper order file.
- Return file from LSP that includes cost and BOL information for tracking.
- The shipper would either need to continue the tracking of the shipment via a portal provided by the LSP or LSP would provide a status summary email, as required by the shipper. In many cases, this status file can be an Excel spreadsheet which is loaded back into the buyer's system for direct semi real-time data updates.
- File are exchanged via an Excel or .CSV file.
- FTP Flat File ($15,000, plus or minus $2,500)
- Same as the above file, but instead of portal or email updates an additional electronic file would be brought into the equation that would feed the shipment activity with updates until delivered.
- Full EDI / XML interchange of acknowledgment of all shipment information ($35,000, plus or minus $5,000)
- Number of EDI / XML connections with company systems.
- Number of EDI carrier connections.
- Number of FTP flat file connections.
- Number of portals for query and input by carriers, internal departments and external sources.
- Number of manual entries via the service provider.
The connectivity option a shipper chooses is typically based on the volume of shipments, complexity and the level of real-time visibility the shipper wants within their own system.
A word of warning for shippers on the integration costs is we have seen where the costs have been as high as $250,000 for a simple one order file interchange.
There are two reasons for this excessive cost:
- The LSP makes the integration and start-up sound harder than it is to prop up pricing.
- The upfront work is weak, meaning the file exchange and the data required to go into and then come back out of each system is not well defined, which causes code to be written and through testing multiple times.
- Another aspect of weak is there is not enough research done up front to discover and vet a single file that can accomplish the desired results, which then drives the connection work to be multiple files and therefore multiple integration points.
In addition to the one-time file OMS interchange costs, there can also be one-time freight carrier interchanged costs also for tender and acceptance, along with tracking information.
The decision of how many carrier electronic exchanges will be determined by the LSP and MTS buyer. The reason for both to be a part of the decision is because the complexity and / or real-time updates required will be a part of the service level agreement (SLA) and monthly ongoing cost. Assume the cost of each carrier EDI / XML connection will be between $2,000 to $5,000 per carrier.
General Set-Up, Training & Travel: One-Time Cost
Outside of the file interchange costs, a buyer of managed transportation services will typically see set-up charges and travel expenses (if required) within the pricing proposal.
There are several standard functionality, reports, user set-ups that are already included in a managed TM program. Various LSP's have variations on how they look at this cost, so on the low end expect $5,000 and the top end may approach $25,000. Again, complexity of the program will drive this cost. Many of the small to medium size shippers incur $5,000, so do not let this number scare you away from the solution. Travel would be invoiced as a pass through.
A note to add under the section of one-time costs is they are typically charged on an hourly basis, which can be as low as $100 an hour to as high as $185 an hour. Sometimes these costs cover the full range between $100 and $185 and are charged out based on the level of skill required to perform the task. The whole point here is to plan well and vet the work fully before jumping in on the actual program efforts.
Operational Management Cost: Monthly
The method by which various managed freight services companies differ, but essentially there are two components of this cost: a minimum charge and variable cost charge.
Some LSP's will charge their managed transportation services via a fixed management fee per month based off a range of shipments processed during said month.
The long and short of it all is a shipper can expect the all-in monthly management fee cost (inclusive of the minimum charge) to fall in the range of $15 to $25 a shipment for a full managed transportation services solution. As mentioned earlier, the cost will be decreased, if a shipper decides to ala carte the services required for their operation.
The last point on the management fee front is the LSP providers know where it makes sense to be for the program. Do not let them complicate it with multiple tiers on multiple items. This smoke and mirror method make it difficult to manage and understand the monthly billings. It also leaves quite a bit of room for interpretation where some LSP's add in additional variable costs.
Freight Carrier Pricing Strategy within the Managed Transportation Service Solution
The biggest area to consider and ponder is the strategy and direction of how to best manage the freight carriers and spend within a managed transportation program.
The methodologies include:
- The carrier relationship is between the shipper and the carrier, which means the LSP does not take a margin on the freight costs. What the LSP helps and brings to the table in the RFP process they manage is a direct savings for the shipper.
- The carrier relationship is with the LSP, which does have a margin on the freight spend.
- The margin is usually an agreed upon lift ranging between 5% to 15% of the LSP's cost.
- The lift depends on volumes, but at times there are some LSP's that give everything on the one-time and monthly management away for free and make their money through the lift on their spend, which is something to be wary of because nothing is free in this world and makes for a more opaque relationship on the actual freight spend.
- The margin is usually an agreed upon lift ranging between 5% to 15% of the LSP's cost.
- A hybrid situation where the main freight spend is between the shipper and the carrier. In those instances that occur when the carriers set up direct with the shipper cannot cover the lane, the LSP's brokerage group comes in and covers at their cost. The LSP's cost is either a fixed fee per shipment or a percentage lift on its costs. If the LSP and the shipper did their work to develop a strong routing guide on each lane for price and capacity, the shipper can expect to see where the LSP would have to cover a lane in the broker market between 1% to 2% of the shipments.
- The fixed fee is typically between $100 to $250 on a truckload shipment.
- A fixed lift on the LSP's cost can range between 5% to 15%.
The strategy that is determined for the freight carrier costs is negotiable. Be aware that there could be some conflict of interests with lesser options, so make sure there are checks and balances set in place if the majority of the spend is a lift on the LSP's costs. Also, make sure the LSP you are considering truly has a vast carrier pool that they can bring to the table.
Additional Thoughts to Consider
There are differences in pricing and the services included within the pricing, so make sure you understand what you are buying. As an example, some managed TM providers price differently based on how they tender, track and recover shipments that have issues. There is a huge difference in the service KPI's in the different models and can be in an LSP's pricing schedule.
Summary - Total Cost Expectation
The long and short of it all is we typically see the cost of manage transportation services solution to price out as follows for a mid-size shipper moving 800 to 1,000 loads a month:
- A monthly fee of $15 to $20 per shipment moved.
- One-time implementation costs of range on the low side of $10,000 to $45,000 for more complex programs that require an EDI / XML OMS file exchange, with some carrier EDI work and training.
- The carrier relationships are direct with the shipper and there is a fixed lift of price for shipments that need to be covered under the LSP's brokerage division.
While we discussed cost of managed transportation services throughout this article it is important to not forget the savings an MTS strategy brings in freight spend, human capital, system capital and improved service, while allowing the shipper to focus its energy and money on what drives its competitive advantage.
The savings brought through these services will more than pay for the costs and then some. Value, ROI and reasons to consider a managed TM program are discussed in Reasons Why Shippers Select Managed Transportation Services.
Another article to consider reading to help you along your buying journey is from Inbound Logistics magazine entitled "Is Transportation Management Your Core Competency" dives deeper into the managed transportation services walking through the decision making process and selecting the right partner.
And for more on complete look at freight management service solutions we recommend the following comprehensive articles:
- The Complete Guide to Managed Transportation Service Solutions
- The Complete Guide to Freight Management Service Solutions
- Freight & Shipping Costs
- Freight Broker
- Freight Forwarder
- Intermodal Transportation
- International & Cross Border Logistics
- Logistics & Supply Chain
- Logistics Service Provider
- Managed TMS
- Supply Chain Sustainability
- Transportation Management System
- Warehousing & Distribution