If you find yourself in need of the services of a 3PL (3rd party logistics) company, you will find yourself in a confusing land of charges, fees, and cost calculations. It can become even worse when special fulfillment services and large inventories are involved. Understanding your options and your exact needs is key to making better choices, and a knowledgeable shipping consulting company can help you sort through these options. Making the best choices as early as you can in the outsourcing of your order fulfillment is the key to saving on your total costs.
The costs will generally fall into 2 categories, activity costs, and monthly costs. The activity costs will cover the acts of receiving, pick/pack, shipping and special projects. The monthly costs will cover the cost of storage and normal inventory control. Each category requires different approaches to control costs. Read on for our top tips on how to save on your fulfillment costs.
Step 1: Receiving
Begin with the act of receiving your goods at the 3PL fulfillment center or warehouse. All 3PL or order fulfillment companies charge for the initial inbound processing of your goods. Why? Because they need your products labeled, verified, and stored appropriately. A mistake here will cause inventory, handling and picking issues. As you get more experience with your provider, they can prepare inventory for quality checks, later picking, and less handling. A more expensive receiving cost may be offset with fewer issues and costs later in the fulfillment process.
Some fulfillment solutions providers will charge you for the entire shipment as one cost. Some may charge you a cost per line (SKU). Some even charge per unit (either case, inner pack or each). Some charge a combination of these. Smaller receipts, more frequent receipts or badly packed receipts can increase your cost to receive per unit, even while the total size does not change.
Step 2: Pick and Pack
Next, consider the pick and pack activities. If you are receiving pallets from your vendors, and shipping the same out to customers, you have limited pick and pack needs. On the other hand, if you are packing and shipping e-commerce orders, you have the need to pick and pack each item, many of them a single-line single-unit order. Again, your order fulfillment provider makes this a little confusing. You can receive a charge per order, per line, and per unit. In addition, you may receive a packaging charge or packing charge, especially if your items are delicate, easily tangled, or not individually packed in their own bag, box or cover. The strategy here is to prepare your items from your vendor in the form you want to ship to your customers. It is much less expensive to have them prepared there than in the hands of your third-party logistics provider.
Step 3: Shipping Costs
Third, consider your shipping costs. Shipping is a hidden cost for order fulfillment, often because the 3PL provider does not pay this directly. Some providers merely pass through the costs, others insist clients have their own accounts with carriers, and even others (Fulfilled by Amazon (FBA) in particular) will have routing guides for their own services. Your costs are only estimates at the time of shipping, finally being seen days or weeks later in the bill for an individual order. If you ship internationally, the lag could be months. To control this, ask for a clear understanding of what your provider can do (or has done before) to control your shipping costs. A company that provides logistics consulting, like Shipware, can help you get visibility into your 3PL costs and the best pricing.
Finally, we reach the area of special projects. This covers fulfillment operations such as kitting, quality inspections, repacking, even seasonal gift wrapping. The issue with this cost area is that unless your third-party logistics provider (and you) knows an activity is upcoming, you end up paying the default 3PL fees. While the actual work is usually per hour, the uncontrolled portion of the work is the coordination, instructions, and reporting. Getting set up, efficient and productive will take time. And that is going to be charged as well.
The other category of cost for order fulfillment is the monthly charges, which are linked to inventory. But even here, the cost you pay has nuances.
By Unit Storage Fees
The most common breakdown for storage is by cubic foot or by “unit”. A unit can be a pallet, a case, a bin, or shelf depending on the type of packaging. The confusion of pallets, cases, and the areas they are stored in created the desire for the cubic foot storage fee. But that has its own issues as well. For instance, bins stored on shelving may take much more space in a warehouse than pallets, due to the amount of air space needed for access. While easier to charge, it becomes much harder to understand why inventory charges increased in a period when receipts were low. The breaking of full pallets and the movement to shelving or bins can explain the increase, but it can be hard to analyze and track.
Archival Inventory Storage Fees
Even more confusing, some 3PL providers charge an archival inventory storage fee when your activity drops below thresholds. For them, this is the “mothballing” and packing of inventory to pallets to stack away from production areas. More high-tech fulfillment operations will also be looking at removing items from high-speed picking areas and condensing the items into more dense forms of storage. When activity picks up, they return the goods to circulation or picking areas. This additional labor to pack and unpack inventory is factored into the deep storage fees they charge.
The other monthly charge is often an administrative fee to cover the work required to maintain records, paperwork like bills of lading, billing, and reporting. In many 3PLs, this is referred to as a customer service fixed fee, an inventory management fee, or some form of inventory control fee. Make sure you know what you get for that fee.
How to Save on The Fees
Now that you have a better handle on the normal pricing structure elements of 3PL and order fulfillment services, let’s dig into how to better control them so your business can minimize costs and increase profit margins.
1. Know your business
This seems like a simple concept. But knowing how your inventory is packed, what the stock on hand per SKU in pallets, cases, or eaches will be, and how your customer orders is key to knowing which fulfillment charges will be seen most often. Focus your attention on the most frequent charges to have the most control.
2. Know how your fulfillment provider would bill each portion of your business with them.
Making sure you know how your billing works, like knowing how your vendors and customers work. Understanding how the billing works allows you to understand the details when you receive them. Should you change how you restock inventory? Perhaps finding ways to increase the lines per order would be more profitable than total orders? And the knowledge to recognize unusual charges will be crucial at some point.
3. Make sure you eliminate as many labor-intensive operations as possible.
The items that really pressure your profit margins on order fulfillment costs are usually labor-related. Whether it’s pick/pack, rework, or quality inspections, labor at your order fulfillment provider is expensive. Anything that can be done upstream in your supply chain will reduce your fulfillment costs and help you achieve cost-effective supply chain management. Customer-facing packaging, removing dunnage (cushioning material) in the cartons, and even ensuring the cartons fully use the area and height of a standard pallet opening all will help control your e-commerce shipping costs.
4. Actively manage your inventory
Product that does not sell has a double penalty to you. One, the capital is tied up in the inventory. But, worse, you are going to see inventory charges month after month. Purge that inventory and you might be able to recover some of the capital outlay. But, if you do, you will definitely reduce your future inventory costs. So, don’t let inventory sit. Getting rid of old inventory before it consumes the margin of your profitable inventory is one of the simplest cost reduction strategies a business can employ.
5. Keep track of inventory
One of the worst periods a customer of a 3PL can have is when the “books” become unsynced. While the finger-pointing and confusion is not fun, the true cost of reconciling your inventory records and your provider’s is not just the labor hours. It is also the lost e-commerce sales for inventory that was missing, and the need to adjust your records both in quantities and in dollars. To avoid this, keep track of what you think should be inbound and outbound. Verify those items and quantities, calling out discrepancies as soon as you feel something is wrong. Ignorance will never make this a reconciliation less painful.
6. If you know certain activities will be needed, negotiate them into your contract at rates you can handle.
Just knowing you will need seasonal wrapping or kitting for a big customer order is useful. Push for better rates for those needs and you have more control over your costs. Remember, any charge or 3PL fee you did not negotiate upfront will be charged at their book rates. So, should you negotiate every rate, just in case? Yes- it might be a waste of time for all of them, but the return on your efforts for services you need is high.
When you outgrow your garage for your fledgling e-commerce business or need someone knowledgeable about the demands of a major retailer, few options beat a 3PL or order fulfillment provider. Just remember to do your homework before you sign that contract with a fulfillment partner. The way to avoid paying too much is to know your business and negotiate ahead of time, not when the bill arrives. If you need help with navigating 3PL providers, reach out to Shipware today!