When price is king

by Tracy Clayson

FROM THE MM&D JULY/AUGUST 2011 PRINT EDITION: There’s no doubt shippers can save money when they use third-party logistics (3PL) providers. But to make sure the relationship with the 3PL is healthy and beneficial, shippers should communicate their expectations so the service provider understands the shipper’s needs and key performance objectives.

In this relationship, there’s a lot at stake for the 3PL. Often, achieving the shipper’s performance objectives means doing everything right while, at the same time, mitigating risks and anticipating problems. Behind the push for supply chain success is an underlying and constant concern for both sides: a shipper’s objective is to save money, while a 3PL is looking to make money.

But it’s worth asking, how much of “doing it right” is open to interpretation? When shopping for 3PL services, almost all shippers will base their buying decisions on price; the company with the lowest quote will most likely win the business.

But when price is king, attempts to get it right can go incredibly wrong. Attempts at cost saving sometimes involve poor decision making. In the worst situations, it can lead to unethical practices.

These unethical practices stem from attempts by businesses to save money, and some organizations will go to great lengths to do so. But they may not be willing to acknowledge how the low price they paid for a service got so low.

For example, to meet consumer demand for the lowest possible price for goods, a manufacturer may outsource production of that good to a distant country with unbeatably low labour costs. While the cost saving advantages are clear, the health and safety laws protecting workers, communities and the environment in that country may not even come close to what Canadians would accept.

Closer to home, shippers sometimes contract carriers and 3PLs with labour and HR tasks. But it’s a daunting and time-consuming task to set up and run a pool of staff that includes full-, part-time, seasonal and casual personnel. To handle these fluctuating workforce demands, 3PLs sometimes look to outsourced HR specialists.

Here’s where the ethical and legal waters can get murky. One of the potential appeals of outsourced labour is the reduced exposure to employment regulation and the legal obligations that come with it. Simply put, not all suppliers follow the rules.

For example, one potential concern comes when workers get paid as if they were independent contractors. That happens when the worker forms a corporation and is then paid by the corporation without contributing to the Canada Pension Plan, employer health tax, employment insurance or statutory holiday pay. These payments are known as “burden”. Generally, the burden portion of payroll ranges up to almost 25 percent of wage cost for the employer. Burden is just one cost associated with payroll, which can also include a group health plan, pension plan, severance packages and other fees.

Sometimes, workers will agree to the misclassification of their services because the independent contractor designation lets them pocket more income in the short-term. But the arrangement also means these employees can’t access employment insurance and other coverage. They may not fully understand the long-term consequences to such an arrangement.

If you hire a service provider who uses independent contractors, or labour that gets paid under an independent contractor payment scheme, bear in mind the risks can stretch beyond insufficient or a complete lack of coverage for workplace safety insurance. Your 3PL-carrier partnership may be at stake if financial penalties result when staffing providers fail to meet payroll contribution obligations and the claim defaults to your business.

Some staffing suppliers offer outsourced labour at prices lower than an employer’s payroll costs could ever be. Shippers be warned, carriers and 3PLs with untouchable rates might be partnered with staffing providers that are using the independent contractor payment model mentioned above. The difference in price offered by a staffing provider that uses an above-the-board payment model and one using the independent contractor model is big. The price advantage exists, but so do attendant risks.

In the long run, it pays to check your sources and make sure your provider has solid employment practices whether it’s on the dock, in the warehouse or on the road.

Tracy Clayson (tracy@in-transit.com) is managing partner, business development, of Mississauga, Ontario-based In Transit Personnel.