Top 5 Paying Schemes in transport business: Should you pay your subcontractor for drinking coffee ?

Posted by Bart Gadeyne on 20/01/2017

We have come across a wide range of paying schemes for subcontractors during our route optimization implementations. And each of these schemes have a significant impact on performance and cost. Therefore, it will come as no suprise that companies are struggling with choosing the most advantageous paying scheme for their type of business.

Below you'll find the most-used paying schemes, together with their pros and cons. These insights allow you to influence your subcontractor cost and performance.

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Paying Scheme 1 : Fixed €/day

Incentive Pay Scheme PRO Fairness:
The subcontractor is happy with his fixed income. No worries about fluctuating turnover.

 

 

Incentive Pay Scheme CON 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.
 

Incentive Pay Scheme CON Performance:
Typically these subcontractors have a fixed region in which they operate. 
This increases the chance on inefficiencies. Daily (regional) demand fluctuates, resulting in fluctuating truck fill rates.

  Incentive Pay Scheme CON Fairness:
The trip distance and duration vary per subco, while everyone is paid the same fee.
 
Incentive Pay Scheme CON Performance:
The subco has no incentive to deliver all orders. Sometimes orders are undelivered, because the subco did not have enough time or had too many coffee stops


 

Paying Scheme 2 : >€/km

   Incentive Pay Scheme PRO Performance:
The subco gets rewarded for higher performance. Drinking coffee at every stop, is not an option.

 

Incentive Pay Scheme CON Fairness:
Some stops are more time intensive than others. The subcontractor is not compensated for stops that require a longer location stop time.
  Incentive Pay Scheme CON 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 3 : €/hour 

Incentive Pay Scheme PRO Performance:
The subco has an incentive to work longer.

 

Incentive Pay Scheme CON Monitoring:
How can a transport company monitor the performed working hours of his subcontractor? Drinking coffee is paid too.


 

Paying Scheme 4 : €/stop

Incentive Pay Scheme PRO 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, through route optimization. So no time for coffee.

Incentive Pay Scheme CON Fairness: 

Some clients demand a longer location stop time than others. 

 

 

Incentive Pay Scheme CON Fairness:

Some clients are located further than others. The subcontractors will prefer routes "close to the distribution center".



Paying Scheme 5 : Starting fee

Variable fixed fee per route. The fee is based on €/km x distance from depot (the farthest point in the route).

Incentive Pay Scheme PRO Fairness:
The trip distance varies per subcontractor. An equal fixed pay for everyone would be unfair
Incentive Pay Scheme CON Performance:
The subcontractor has no benefit to increase his performance. Fill rates can be low. No cost influence for coffee stops  ( only adds time to the route). 


 

5 controlled steps towards transportation excellence 

From our extensive experience in coping with this complexity during route optimization challenges, we distilled these controlled steps towards transportation 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 (user our free trial option) ! 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. Transparency and communication to continuously 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

 

Topics: Partners & Outsourcing

Bart Gadeyne

Written by Bart Gadeyne

Logistic Optimization Expert at Conundra.