Hey there, beautiful people!
I hope you have had a great weekend so far! Another blog = more of my thoughts bothering you guys 🙂
In this blog, I wish to talk about the fulfillment cost. But before we dive in, if you have any questions about what order fulfillment is, please visit my previous blog: What is Order Fulfillment? – The Future Ecom
These days, what I have noticed during my work is that DTC brands understand this in a precise way. However, due to the fact that every 3PL offers a different rate card, assuming or using the interpretation method of 3PL A for 3PL B might not work or lead to wrong interpretation and wrong decisions. By wrong decisions, I mean that if you are a DTC brand and, after conducting your own analysis, you decide to go with a vendor that turns out to be high in cost with many hidden expenses.
Here is what I would love to share through my writing:
- What is the basis for fulfillment cost?
- Why does a DTC brand need to understand the fulfillment cost?
- How to compare different 3PL Fulfillment Pricing?
What is the basic fulfillment cost?
Everyone nowadays mentions that logistics is complex. I don't debate this as it is actually true all the time. When you lose money from your pocket, it becomes even more evident.
But let's look at a different perspective, particularly from the cost standpoint. In some way, 3PLs have a standard or basic charge code based on the order fulfillment process. If you have doubts about this, please visit this blog to learn more: "What is Order Fulfillment? – The Future Ecom."
Although the cost may vary slightly across different 3PLs based on their operational models and geographic locations, the following are the basic components of logistics pricing:
Set Up and Onboarding Fee
This cost includes the technology set up, which involves connecting your marketplaces or front stores to their WMS/OMS (Warehouse Management System/Order Management System). This ensures that the process is automated and eliminates the need for manual tasks.
For example, connecting your Shopify store to the 3PL's WMS allows orders to be automatically transmitted from your Shopify store to the 3PL's WMS, enabling their team to begin fulfilling the orders. As a DTC brand, you no longer have to send daily order CSV files every morning when you wake up.
Typically, this cost is charged as a one-off fee and ranges from $100 to $1000.
Inventory Receiving
Some 3PLs may refer to this as an inbound fee, handling in, or inventory in. Whatever they call it doesn't matter. Essentially, it refers to when your stock arrives at the 3PL's warehouse. They unload the stock from the vehicle, open the boxes to count the units against the packing list or Shipping Notice, report any product damage, enter inventory data into their WMS, and label if necessary.
The pricing for inventory receiving in the majority of 3PL fulfillment centers is as follows:
- Per pallet: ranging from $5 to $20
- Hourly basis: ranging between $25 and $80 per hour
- Per unit (piece): ranging from $0.2 to $4 per unit
- Per box: ranging from $1 to $5 per box
The pricing depends on the nature of the product. For example, the cost for a big chair would be different from that of a lipstick.
Storage
Storage typically accounts for about 50% of your billing with the 3PL. It refers to the amount of space your stock occupies in the fulfillment center, and you are charged for storage on a daily, weekly, or monthly basis, depending on the 3PL's methodology. The unit for charging may also vary.
In Canada and the US, most 3PL fulfillment centers charge storage as follows:
- Per pallet per month: ranging from $20 to $30
- Per bin per month: ranging from $2.5 to $6
In the Australian market, charging may be as follows:
- Per pallet per week: ranging from $15 to $20 AUD
- Per CBM (cubic meter) per month: ranging from $15 to $30 AUD
- Per bin per week: ranging from $1.5 to $6 AUD
If your products require special storage conditions, such as temperature-controlled warehouses for chocolate to avoid melting, the cost may be slightly higher than the prices mentioned above.
Pick and Pack Fee
This fee is related to the team picking the products in an order and packing them nicely in a satchel or box, along with affixing the shipping label. The pick and pack fee may or may not include the packing material cost, as some 3PLs prefer to charge it separately due to the high cost of packing materials.
Here is an example of the fees:
- Pick and pack fee: ranging from $0.5 to $2 (excluding the packing fee)
- Packing fee: at cost or ranging from $0.1 to $0.5 for satchels, and from $1 to $3 for cartons
Order Fee
This fee may or may not be applied by the 3PL. Some 3PLs charge this fee as the technology in their WMS allocates it to an order. Others allocate it in the monthly billing. The cost for the order fee ranges from $1 to $2 per order. It's important to note that the unit of measurement (UOM) for this fee is per order. So, if an order consists of 3 SKUs (3 items), you would only be charged 1 x $2 instead of 3 x $2.
Technology Fee
As mentioned above, fulfillment centers may charge you a technology fee ranging from $100 to $500 per month for the use of their technology.
Account Management Fee
You should also consider administrative costs such as customer service, which includes communicating with manufacturers, suppliers, and answering your inventory, order, and shipment inquiries. Some 3PLs even handle shipping and order inquiries from your customers.
The average account management fee ranges from $50 to $1000 per month, or an hourly rate between $30 and $50.
Return Fee (Reverse Logistics)
As a DTC brand, you are aware that sometimes clients are not happy with the products, either because they changed their minds or they are not at home to receive the order.
In such cases, the last mile delivery service needs to return the order back to the sender, which in this case is your 3PL fulfillment center.
The 3PL then needs to perform a quality check (QC) on the returned products and either put them back on the shelf or store them in an isolated location.
Of course, they will charge you a return fee for handling, which typically ranges from $2 to $5 per item.
Why does the DTC brand need to understand the Fulfillment Cost?
Understanding the fulfillment cost is crucial for a DTC brand for several reasons. Firstly, these costs directly impact the profit margin of your business. As we know, profit is calculated by subtracting costs from revenue (Revenue - Cost = Profit). Therefore, it is essential to have a clear understanding of the fulfillment costs to accurately assess and maintain profitability.
Secondly, fulfillment costs have a direct impact on inventory management. It is important to determine the appropriate amount of stock to be stored at the fulfillment center. There are two key considerations here:
- Overstock: If you hold too much inventory, it ties up capital and leads to missed opportunities. The excess inventory becomes a cost in terms of the capital that could have been utilized elsewhere in the business.
- Understock: Conversely, if you have insufficient stock at the warehouse, it may result in backorders and unfulfilled orders. This can lead to dissatisfied customers and potential loss of sales.
How to Compare Different 3PL Fulfillment Pricing?
Yeah, I know this is the main topic you are looking for. I can't guide you exactly on what you should do, but if I were the DTC brand, here are the steps I would normally follow:
Step 1: Get my forecasted stock and outbound volume and put them on my table.
Step 2: Line up all the charges from different 3PLs in an Excel sheet, ensuring they are in the same unit of measurement (UOM).
Step 3: Compare the charges from each 3PL line by line, making sure to compare them based on the same criteria.
Step 4: Analyze the costs based on the volume of stock and outbound volume to determine the total warehouse cost for a month or a year. I have a table here for you, Logistics 101: Fulfillment Cost Sheet Simulation-EXCEL Digital Product - The Future Ecom.
For example:
- 3PL #1 charges $25 per pallet per month for storage.
- 3PL #2 charges $10 per pallet per week for storage.
In this case, an extra step you might need to take is converting either #2 to match #1 or #1 to match #2. Personally, I would convert #2 into #1. So, $10 per pallet per week would be calculated as: $10 x 4 weeks = $40 per pallet per month.
Now, I can create the table as follows:
|
Charge Description |
3PL #1 |
3PL #2 |
|
Storage per pallet per month |
25$ |
40$ |
If you encounter any confusion, it's best to ask the 3PLs for clarification. Making assumptions on your own can be dangerous. Remember!
Final thoughts
Once again, it is crucial for DTC brands to have a proper understanding of fulfillment costs. I hope that the information I've shared is helpful to you. If there's anything else you would like to know, please feel free to share your comments, and I'll be glad to assist you.
By the way, I have also documented practical information in an eBook. Please check it out Master E-commerce Logistics & Fulfillment: Essential Guide for DTC Brands | Ebook – The Future Ecom
See you in the next blog!
Cheers!