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Consumer Trends 2023: Managing logistics risk in the digital market

16 January 2023

Omnichannel is the biggest trend in retail. We explore how retailers can manage the key risks and push the right commercial levers when negotiating with third party logistic providers to leverage the best outcome for its customers.

Online retailing had already been performing strongly in recent years across Europe. This has been accelerated by COVID-19, with online sales soaring, new consumers being encouraged to shop online for the first time, and existing online shoppers extending the range of products they’re prepared to buy online. We anticipate that this trend will continue through 2023 and beyond. 

To respond to this need, retailers usually need to consider their logsitcs networks. Appointing and managing a logistic partner, whether primary (shipping goods to warehouses) or e-comm (shipping goods to consumers) is key to a successful online sales strategy.

Many businesses enter into long-term arrangements with third party logistic providers (3PLs) without fully understanding the key risks and financial consequences of the deal.   

We have provided an useful guide to the key commercial terms to focus on to ensure that the optimum result is achieved. We have not covered (i) the key legal risks (such as liability caps/exclusions, indemnities and TUPE); or (ii) cross border logistics (where standard industry terms often apply).

Negotiating pricing

The single most important factor impacting price is volume. Charges are based on number of products handled, and 3PLs will usually require a minimum volume per week/month. Following COVID-19, some 3PLs now seek to include a ceiling on the number of products handled. Failure to hit volume thresholds may mean 3PLs can increase their charges or trigger a demand for payment of any shortfall.   

In doing this, data is key – the greater the ability of a business to predict its future volumes the greater the certainty on pricing. If it is not possible to forecast future volumes, it may be prudent to (i) enter into a shorter term arrangement; or (ii) agree higher rates with a rebate if certain volumes are achieved.

Price changes

2022 has seen supply chains face considerable cost inflation. 3PLs often include mechanisms to increase pricing during the relationship. Examples include:
  • fuel surcharge (e.g. changes in the price of diesel);
  • area (e.g. London) surcharge; and
  • increases in minimum/living wage.

The above are market standard - it's unlikely that 3PLs would agree to any significant negotiation (though 3PLs may absorb a portion of the cost or agree caps on price changes).

Some 3PLs, however, seek to pass on any increase in cost of running its business caused by macro-economic events or government policy. Beware of provisions that allow 3PLs to increase the price due to "unforeseen circumstances", "change in tax policy" or "any cost of labour" as while in the past these may not have given rise to concern, in today's turbulent times if you do not pay close attention to this area it can result in a considerable change in cost.  

Managing performance

Businesses often enter into long-term arrangements with 3PLs (three years plus). Without a right to terminate for convenience, it may be difficult to exit an agreement where a 3PL is underperforming (unless such performance is so bad it constitutes a material breach). 

Service levels are a useful lever to manage performance and ensure that 3PLS do not provide an "under-average" service. 3PLs can be measured against a variety of service levels, including:
  • on time delivery;
  • loss and damaged stock; and
  • number of customer complaints (for e-comm providers).

It is typical to be able to (i) claim service credits (a credit to be applied to a monthly invoice) for service level failure; and (ii) terminate for persistent or significant service level failure. 

Monthly management of service levels/credit regime may be an administrative burden. If it is, consider negotiating a price chip in exchange for waiving service credits. However, it is important to retain rights to terminate if there are persistent or significant service level failures - this should be in addition to any general right to terminate for material breach.

If a 3PL is unwilling to agree meaningful service levels (with appropriate remedies), ensure that the agreement allows for termination for convenience.      

Spreading risk

Many businesses appoint one 3PL in relation to primary logistics and e-comm. As a result, there is a single point of failure. It may be prudent to appoint multiple 3PLs (particularly in relation to e-comm carriers) to spread the risk.

The downside of this approach is that it's likely to increase logistics costs as product volumes will be split across multiple 3PLs. However, this may be a price worth paying to ensure that products are delivered quickly and consumer trust is built and your eggs are not all in one basket

 If you have any questions or would like to discuss any of these topics and what they mean for you and your business, please get in touch with our consumer sector experts. 

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