What is the best incentive pay scheme for your subcontractors in the transport business?
Posted by Bart Gadeyne on 12/02/2016
Complexity can be controlled. Many transport companies are having issues developing an effective incentive pay scheme for their subcontractors. We have come across many types of paying schemes during route optimization software implementations. We experienced that these incentives have a significant impact on the performance and cost. In this article the most-popular paying schemes are listed, together with their PRO's and CON's.
These insights allow you to influence your subcontractor cost and performance
The Top 5 Paying Schemes in the Transport Business:
Paying Scheme Nr1 = Fixed €/day
Fairness: The subcontractor is happy with his fixed income. No worries about fluctuating turnover.
Performance: The subco has no incentive to increase his performance. Typically we see that the duration of trips with a fixed €/day are far shorter than trips with a variable incentive like €/km or €/stop.
Performance: Typically these subcontractors have a fixed region in which they operate. This increases the chance on inefficiences. Daily (regional) demand fluctuates, resulting in fluctuating truck fill rates.
Fairness: The trip distance and duration vary per subco, while everyone is paid the same fee.
Performance: The subco has no incentive to deliver all orders. Sometimes orders are undelivered, because the subco did not have enough time.
Paying Scheme Nr2 = >€/km
Performance: The subco gets rewarded for higher performance. Drinking coffee at every stop, is not an option.
Fairness: Some stops are more time intensive than others. The subcontractor is not compensated for stops that require a longer location stop time.
Monitoring: How can a transport company monitor the travelled distance of his subco (without track and trace)? Inefficient route planning by the subco results in a higher bill for the transport company.
Paying Scheme Nr3 = €/hour
Performance: The subco has an incentive to work longer.
Monitoring: How can a transport company monitor the performed working hours of his subcontractor? Drinking coffee is paid too.
Paying Scheme Nr4 = €/stop
Performance: Strong incentive to perform. Trips with a €/km are far most time extensive than trips with a fixed €/trip. The subco understands that he is able to increase his turnover, also by route optimization.
Fairness: Some clients demand a longer location stop time than others.
Fairness: Some clients are located further than others. The subcontractors will prefer routes "close to the distribution center".
Paying Scheme Nr 5 = Starting fee
Variable fixed fee per route. The fee is based on €/km * distance from depot (the farthest point in the route).
Fairness: The trip distance varies per subcontractor. An equal fixed pay for everyone would be unfair.
Performance: The subcontractor has no benefit to increase his performance. Fill rates can be low.
Controlled steps towards optimizing your paying scheme
Every pay scheme has its pro's and con's, but which one should you choose? From our extensive experience in coping with this complexity during route optimization challenges, we distilled these controlled steps towards operational excellence.
1. Enhance fairness by using a combination of fixed & variable incentives.
2. Monitor trip data of your subcontractors
a. Reconstruct every route and its cost
b. Compare these reconstruction details to the data of your subcontractors
c. Highlight the largest deviations and ask your subcontractor for an explanation
3. Optimize your route planning! Route optimization assures that the subcontractor avoids inefficiencies.
4. Change towards a system of pre-invoicing
a. Invoice the cost of the optimized routes to the subcontractor
b. Accompany the invoice with a full detail list (distance, time, stops,...)
5. Transparancy and communication to continously work on a win-win relationship between you and your subcontractor towards the common goal, satisfied customers.
These steps will help you achieve more efficiency and save costs. We are passionate about optimization and reducing logistic costs, so if you have any questions - let us know.