If you’re searching for sound budgeting advice, look no further than the Rolling Stones who once said:
“You can't always get what you want. But if you try sometime, you find you get what you need.”
Boy is that ever true, because when it comes to calculating order fulfillment costs, there’s often an over-emphasis on what eTailers want (a quick and easy answer) versus what they actually need (the accurate answer, which is usually more work-intensive and complicated).
To help prevent this disconnect, and the resulting sticker shock, from happening to you, we’d like to “shine a light” on what really goes on when 3PLs quote fulfillment prices for new clients.
We hope it will give you everything you need to make smarter, more informed fulfillment outsourcing decisions – and that it will ultimately pave the way for greater “satisfaction” with the 3PL you choose.
Stone One: Make Sure Every Key Pricing Element Is Present and Accounted for
While every 3PL has its own specific formula for calculating a realistic fulfillment price/ budget, most of these formulae tend to have several key common denominators, including:
- Set-up fees – How much will it cost to onboard your company, including integrating your systems and getting your products’ storage and fulfillment properly situated within the DC?
- Receiving fees – What’s the expense associated with accepting your goods into the DC, including counting them, inspecting and labeling them, placing them in the warehouse and entering them into the facility’s inventory system?
- Storage fees – How much space will be needed to store your goods and establish your dedicated order processing area? And what’s the current price per square foot in the designated facility?
- Fulfillment fees – How work-intensive is picking and packing your orders and how much time does that translate into?
- Shipping fees – How much will it cost to ship your goods to end users once carrier discounts have been factored in?
Although most pricing calculations will include these things, some won’t, creating an apples to oranges comparison. Before you start to review competitive proposals, ensure that each of your potential providers has taken all of these factors into account – because all it takes is the absence of one or two small details to seriously skew a fulfillment estimate. You may think one company is the low-cost provider, but if it’s not an “apples to apples” comparison in terms of the pricing elements, the analysis could be misleading.
Stone Two: Make Sure Everyone Is on the Same Page about All of the Details
If most 3PLs’ raw ingredients for cost calculations are essentially the same, why does your business sometimes wind up receiving radically different quotes for fulfillment services?
Part of it comes down to how each 3PL chooses to apply each of the factors mentioned above. For example, when it comes to determining fulfillment fees, some 3PLs may elect to charge your company by the order or SKU, while some, like Amware, are big believers in pricing our services based on the number of touches, because it allows us drill down and really get to the nitty-gritty.
Part of it is also based on whether or not your 3PLs have the equivalent of an asterisk attached to their rates. For instance, it’s not uncommon for some providers to raise their storage rates in November and December simply because those are busy holiday shipping months. It’s also not unusual for providers to agree to charge your company a highly reasonable fulfillment fee as long as you’re able to guarantee certain volumes – but to also have a contractual clause that instantly bumps your charges up to a considerably higher fee if your shipments fall short of those volume levels. You’ll need to pay attention to these contractual details.
Additionally, part of it comes down to the quality of your RFP. If you’ve truly done your homework and ensured that your input about your order fulfillment costs is complete, correct, and clear, the result will usually be an accurate calculation that’s fair and equitable to all. If not, there could be a problem later down the road.
In light of this, don’t be afraid to have a candid discussion with all of your potential providers before you sign on the dotted line. It’s important to ensure that you’re aware of all of the scenarios that could impact your quoted rates – and that you haven’t somehow missed a key detail because it’s hidden somewhere within intentionally vague language or in the fine print. In addition, don’t discourage these providers from asking as many follow-up questions as needed. Better yet, encourage them to do so, because the missing pieces these questions uncover are often the key to preventing unexpected price increases later on.
Stone Three: Assess the Cost-Efficiency of Your In-House Operations Just as Carefully as You Would a 3PL’s
By now, you may be thinking, “Most of this advice doesn’t apply to me, because my company handles its fulfillment in-house.”
As they grow, one of the biggest mistakes eTailers make is forgetting to occasionally do a reality check about how much their in-house fulfillment is actually costing them – a check that should include adding up the expense of each dedicated warehouse employee, each square foot of warehousing space, and each piece of warehouse equipment, plus the cost of inventory systems and upkeep.
The total price tag, with all relevant overhead considered, is often considerably larger than they expect. Just as important, it’s often larger than it might be if they made the switch to outsourced logistics.
Granted, a 3PL will also have a need for space, people and equipment. However, the difference is those order fulfillment costs will be divided across many clients/companies rather than one – and they’ll often include better negotiated rates on everything from space to parcel shipping.
So if you think “wild horses" wouldn’t get you do consider outsourcing fulfillment, first do yourself a favor: Put your internal operations under the same cost microscope you’d put potential 3PLs under to see if being 100% in-house still makes good fiscal sense. You and your accounting department will be glad you did.
Stone Four: Don’t Confuse Cheap for Best
One final thing: Even though this blog has been all about order fulfillment prices and the bottom line, that doesn’t mean that dollars and cents should count more than experience and quality. In fact, sometimes a provider that excels in the latter may wind up being the lowest-cost choice in the long-run (even if it quotes you a slightly higher price) because of the savings it delivers via reduced errors, process efficiencies and higher customer retention rates.
Just as “ Jumping Jack Flash” would sound very different if it were being performed by your teenage son’s garage band instead of Jagger & Co, your customers’ fulfillment experience will be very different depending upon whether you’ve chosen your provider based on price alone or as part of a bigger picture that also includes experience, innovation and overall operational excellence. In the end, your ultimate success barometer will be SATISFACTION, of which cost is just one part.
A provider that has a solid reputation for speed, accuracy and service may not appear to be as economical if you’re simply comparing one set of fees to another. But the competitive edge it provides might just be the “gas, gas, gas” you need to propel your company to the next level of success.