There comes a time in any online retailer’s life when the costs and complexity of fulfilling ecommerce orders becomes overwhelming and you look to outsourcing…only to be frustrated by the complexity of fulfillment center pricing.
It’s not you.
Understanding fulfillment center pricing isn’t easy, but it’s actually based on some pretty basic principles. It’s worth it for shippers to understand those principles and the details behind them. Knowing how a fulfillment 3PL charges enables you to gain the greatest value from outsourcing.
In this article, we’ll outline the types of fees 3PLs assess and the details a 3PL needs to know to provide you with the best, most accurate pricing. You’ll also learn what you can do, as a 3PL customer, to keep costs as low as possible.
Every fulfillment provider has its own way of pricing its services, but the types of pick and pack warehouse fees they charge can be grouped into these standard categories.
1. Setup Charges: These are one-time charges for the initial integration of your company’s systems with the 3PL’s computer systems and warehouse space. They cover setting up your company’s business rules and requirements in the 3PL’s software.
2. Receiving Charges: These inbound handling fees are incurred when the 3PL accepts your products into its warehouse. The costs cover the labor required for counting, inspecting, and labeling goods, placing those goods in the warehouse and entering them into the inventory management system.
3. Storage Charges: These fees are usually monthly and cover the cost of storing your goods. They often include the space needed to process your orders – order checking, packing, QA and outbound manifesting – after they are retrieved from the storage area.
4. Fulfillment Charges: These are incurred when a worker touches your product and physically picks and packs your orders for shipment. Typically, these costs are calculated on a fulfillment cost per order basis and include a base order charge and picking fees.
A base order charge is independent of the number of items in the order. It covers the time to process an order, make a box, add packing material, perform QA, seal the box, add a shipping label, and load onto a parcel carrier.
Picking fees are typically charged by the number of actual sellable items in an order. Sometimes these picking fees can be tied to the number of different SKUs on an order, as well. In ecommerce order fulfillment, base order charges and picking fees drive the majority of your warehouse-related cost, and are second only to your freight/shipping costs.
5. Shipping Charges: These are the fees for actually shipping your goods from the door of the 3PL’s warehouse to the customer. Some brands have their own contracts with parcel carriers and ship under their own account. Others ship under the 3PL provider’s parcel contract, capitalizing on the 3PL’s ability to negotiate lower shipping rates based on its aggregate volume across all customers.
Given these five basic categories of charges, you might think it should be easy to compare fulfillment costs across competing 3PL providers.
It’s not that easy because there is no standard way that fulfillment companies calculate pricing.
There are many factors that influence fulfillment costs – product volume, dimensions, turn rates, order volume, order size, storage method, etc. Unless the provider digs into these details before submitting a quote, it’s unlikely that the first quote they provide will stick. Most often, the details they miss will end up inflating the price later on – after the work begins.
A good fulfillment company will grill you for details at the outset. Then they’ll follow up to this verify this data. Be wary of providers that lack this exacting pricing approach at the start. While that may make them seem like easygoing partners, it could also signal that they’re more interested in winning your business than providing a rate they can guarantee. An “easygoing” approach may be the precursor to a hefty price increase after the start-up phase when they find that actual pick and pack operations are very different than their initial assumptions.
If you’re evaluating multiple fulfillment 3PLs, you might expect that providing the exact same data to each provider would yield an apples-to-apples fulfillment cost comparison. Most times it won’t. Different fulfillment companies calculate their base rate in different ways.
The way accessorial charges are handled provides a good example. Accessorials are tasks performed outside the standard scope. Let’s say you require box filler materials for each order and stretch wrapping for certain orders. One provider may build these costs into its base rate, while another may not.
Comparing fulfillment costs across providers is a little like choosing a tax accountant. Those “taxes done in one hour” ads seem attractive, but what you really want is a tax accountant who is plodding and meticulous in her efforts to uncover every possible deduction available.
Look for a fulfillment company that takes a similar approach. The better the provider understands your account characteristics, the more likely you are to get an accurate rate at the start without any budget-busting changes later on.
Here is a list of some of the data a 3PL needs to provide accurate order fulfillment services pricing. Fulfillment is a detail business. Understanding these details can help you and your provider contain costs.
A full description of the products. Provide the total quantity, dimensions and SKUs per case. Describe the products. Your 3PL’s engineers will need this data to determine how much storage and picking space will be needed, whether or not your inventory can be stored vertically as well as horizontally, how strong your racking needs to be, and how large a pick front is required.
Are any of your SKUs fragile or hazardous? Some products are more work- and storage-intensive than others. Fragile or hazmat goods have complex storage and handling requirements that impact order fulfillment services pricing.
What’s the ratio of palletized vs. floor-loaded shipments? The receiving phase of fulfillment can get bottlenecked by surprises during delivery. To accurately forecast the labor, time and space required to receive shipments, a 3PL needs to know as much as possible about how goods were packed and staged by suppliers and vendors farther upstream in the supply chain.
What is the SKU makeup of your inbound shipments? A 3PL needs to know the average number of SKUs per shipment as well as the number of pallets or cases, on average, created from each inbound shipment. They also need to know the percentage of cartons or pallets that contain mixed SKUs vs. a single SKU. Detailed data in these areas will help prevent unexpected dock delays and unexpected charges later.
Does your inbound receiving process require more than a basic general inspection? If your product needs to be bar coded and labeled or if a quality audit or photo evidence needs to be collected, it matters. These tasks can increase everything from dock-to-stock time to product touches – as well as expenses.
Do you have any products that require special storage, stock rotation or handling? If your product needs temperature-controlled space or you need your provider to ship FIFO or FEFO, it could impact everything from where a 3PL stores your product and how much that storage costs to what kinds of technology purchases and other capital improvements will be needed before a go-live date.
What is the average weight of your standard pallet or carton? Knowing whether your pallets can be stacked – and if so, how many of them can be stacked – helps a 3PL find the most-effective configuration and racking choice.
How many unique SKUs will be in storage? SKU count will affect fulfillment center pricing. Unless it’s going straight from the dock to your pick line, each SKU you sell must have its own unique slot or bin in a fulfillment center. More SKUs equal more space requirements and expense. Precise data here will ensure accurate order fulfillment pricing.
What’s the ratio of B2C vs. B2B orders? Before a 3PL can calculate a realistic cost per order – a major component of order fulfillment services pricing – it must clearly define what a typical order means to your company. The good news is that your existing service level agreements may contain many details about things like the number of B2C orders you ship per year, how many lines and units there are per B2C order, and how many B2B orders you pick and ship as cases, pallets or units. Be sure to share this with any prospective 3PL if you require a multi-channel fulfillment operation.
Are there any special or value-added services your orders require? One of the most common scenarios that can alter the accuracy of a 3PL’s quoted fulfillment price is failing to account for the work needed before an order is ready for shipping, especially work that is considered above-and-beyond the scope of standard order picking. Kitting, kits built on the fly, and unit or carton labeling all impact the scope of work. A 3PL needs to know these details to ensure the work is accurately defined.
Does your company have any special release days or promotional spikes? The more information your 3PL has about your sales trends and projections, the better it can protect you from major delivery delays and extra expenses like expedited shipping, last-minute temporary staffing, or overtime.
What’s your packout process for orders? The packout stage is usually when the most product touches and fulfillment expenses occur. If the input you provide here is complete, the result will be accurate pick and pack pricing that’s fair and equitable. But if it isn’t, pricing accuracy can diminish considerably.
What types of packaging and dunnage materials do you use? A little added emphasis on this area can save big money in long run, and not just in the warehouse. Your fulfillment packaging and dunnage materials can impact everything from how long it takes to complete a packout to the cost of weight-based parcel shipping.
Do you have standards for processing returns? What are they? Your 3PL needs to ensure that it has properly estimated the space and staffing required to process returns, which are typically far more work and systems-intensive than order fulfillment. Share information about your percent of orders returned each week, the number of items in a typical return, whether an RMA number is required and what the processing time needs to be.
What is the monthly velocity of each SKU? As your 3PL’s engineers work to design the most efficient configuration for your pick line, it’s critical for them to understand which items are fast-movers and when they move. This information will enable an optimal warehouse layout and the most cost-efficient picking.
How will your order flow integrate with a 3PL’s systems? Seamless order flow is critical to a successful onboarding process. Be sure to communicate how orders will be placed and if they’ll be placed via an order feed. Work out whether customers will receive confirmations and what kinds. Also, tell your 3PL how you typically handle back orders. You don’t want to give short shrift to systems integration and how data will flow between your systems and your 3PL’s systems because these requirements may impact order fulfillment pricing.
Much of what we have outlined so far about fulfillment center pricing has involved how 3PLs calculate rates and the process of comparing 3PL pricing. If you’re running your own fulfillment warehouse, it’s also important to know the answer to the question “How much does fulfillment cost?” when doing it yourself.
If you do an honest, accurate assessment of the cost of insourcing fulfillment, you may find that outsourcing to an outside expert can not only improve service, but improve your bottom line, as well.
Here are some areas where profit might be leaking out of your fulfillment operation.
You’re likely paying too much for labor if your order volumes rise and fall throughout the year. 3PLs are expert at managing volumes spikes through cross-training and strategic use of temporary labor.
Your warehouse team is probably not as productive as it could be. 3PLs are more likely to have fulfillment warehouse productivity standards in place that increase productivity on the warehouse floor as much as 15%, so less workers are required to handle the same volumes.
If you’re shipping under your own parcel carrier agreements, you’re likely paying more than you should. Shipping costs represent the largest percentage of your overall fulfillment costs. By leveraging a 3PL for both warehousing and shipping, you leverage its volume-based parcel discounts and can significantly reduce your parcel shipping costs.
You may be carrying too much inventory. Warehousing storage costs account for another sizeable portion of fulfillment costs. An inventory management system provided by a 3PL can help you stay in control of inventory levels and liquidate slow moving stock. Excessively high levels of safety stock or general inventory will quickly drive up the cost of eCommerce order fulfillment services.
You may be relying on old software. Outdated legacy systems that rely on manual picking processes drive up labor costs – your biggest warehouse expense. All eCommerce order fulfillment services should be supported by a robust warehouse management system (WMS) that examines orders and directs picking activities to minimize picking time.
Your DIY operation may be missing out on the benefits of automation. Even lower-cost warehouse automation like cartoners and tape machines can boost the productivity of existing associates without breaking the bank.
When it comes to fulfillment center pricing, the savings are in the details. The more you know, the more you can help drive down costs.
It’s like our earlier tax accountant example. The more information you can provide tax accountants on your expenses, the more likely they are to find deductions that increase your refund.
With an understanding of how a fulfillment 3PL prices its services, you can give that partner exactly what it needs to price the business accurately and to design an operation that meets your needs for the lowest possible cost.