At some point, every online retailer needs to consider the idea of outsourcing order fulfillment. Keeping up with the daily grind of packing and shipping boxes as sales increase is a challenge. While scaling up fulfillment operations in-house may be an options for some, most companies find it better to partner with a 3rd party warehouse (3PL) that has specific expertise and technology to manage this process.
If you are facing a similar decision with your business and considering the outsource option, here is primer on the 6 main categories of costs you will see in proposals from third party warehouses.
SKU’s and Storage
It’s no surprise that storing products is a big part of what 3PLs do. So, the amount of product you keep in inventory will affect your storage costs. Costs are typically billed at a monthly per pallet, or per sq. foot rate for on-shelf storage.
Another factor is the number of products, or SKUs you keep in inventory. Having more SKUs adds to the complexity of inventory management for the 3PL. To cover these costs, warehouses will charge a monthly per SKU fee.
Pick and Pack
Typically, each order processed by the warehouse will have a fixed and variable part to it. First, there will be a flat per order fee meant to cover the basic costs of processing the order and picking the first item. The variable part of the equation comes in for orders containing 2 or more pieces which incur an additional per piece charge for each item on the order after the first one.
Additional services can include labeling, wrapping, and other types of personalization – these costs are quoted based on the specific requirements of the task.
Warehouses will charge for boxes and packing materials. The cost will depend on the size and type of box. Some facilities will require you to use their boxes, others will allow you to provide your own. In general, the fewer box sizes you need to use helps save money by enabling you to buy in greater volume and pay a lower per box rate.
A potentially big advantage to working with a 3PL is saving money using their shipping contracts – many 3PLs will pass on some or all of their negotiated volume discounts. Reputable warehouses will also help you optimize how you are shipping customer orders in a way that reduces your overall costs. In the end, however, it the size, weight, and destination of your products that has the largest impact on your shipping costs.
3PLs will charge for the time (usually as a per hour rate) to inspect and receive your products. This is important to maintain accurate inventory counts. When you work with a 3PL, its common that you never see the actual product you are selling because it will being coming directly from your suppliers. This means having a trusted partner to inspect product before it is sold is important.
Another variable cost, customer support, is usually charged as an hourly rate to cover the cost of customer inquiries and other support issues. Most order fulfillment warehouses can provide some level of support to your customers but it is important to define the exact expectations and provide proper training.
Outsourcing is a tough decision for any business function and order fulfillment is no different. Having a clear understanding of the types of costs involved with outsourcing is an important first step.