This is the third of a five-part series. Read Part 1 here and Part 2 here.
After figuring out how a prospective 3PL partner prices small parcel shipping, and what they are specialized in, you need to understand how the fulfillment center makes money, how their pricing works, and how it will apply specifically to your business.
The order fulfillment industry has no standardization for pricing. Ultimately, every company is trying to operate based on a certain target profit margin. Each labor hour, square foot and material that is utilized to service your account costs the 3PL money. That said, their costs, as well as how they cover those costs, can come in very different forms.
Often you will see 3PLs not explicitly charge for certain labor tasks – inbound or receiving labor is a common exclusion. Additionally, they may not charge for setup, monthly administration, technology, or certain square footage utilized. Rest assured, they have to find a place to bill you for these elements of cost. Often, the margin is made up for in shipping rates.
Pricing for particular elements can vary dramatically and this facet is either indicative of a 3PL’s focus or of high overall pricing. Let’s take storage rates, for example. In a recent 3PL Search run on behalf of a client, one 3PL charged $30 per pallet for storage, another $7.50 per pallet, with eight other 3PLs somewhere in between. It is unlikely that the high-priced storage option is located in a market with 4x the cost of real estate. In fact, both options were located in costly California markets. Instead, here are a few options for what the high storage rates indicate a 3PL that:
has capacity constraints and can only take on customers that take up less real estate.
wants faster moving, faster inventory turns – they could have more cost effective labor facets because of this focus on space efficiency.
looks for (and incentivizes) lower SKU count customers as usually lower SKU clients have less overall storage.
focuses on smaller customers who have smaller storage needs, but perhaps have had trouble getting other 3PLs to consider them as a clients because of their size and are therefore willing to pay some higher per-item costs in order to have a 3PL option at all.
There are obviously several other potential reasons, most obvious of which is they are just a higher priced 3PL. The best way to understand the impact of one outlier cost like this is to apply it to your baseline situation and volume as well as what your business is projected to look like in 12 months and 24 months. It may turn out that $30 per pallet is a better overall option for your company than $7.50 when you look at the whole picture.
Be careful when considering a 3PL that bills with open-ended (by the hour only) pricing. Consider providing them the detail they need to provide firm prices upfront – whether that is a video of a certain task being performed or a sample so that firm pricing can be produced. If a firm price is not possible, monitor these costs closely, ask for a firm price at a later date where possible or at a minimum for something like a kitting project – a “not to exceed” price.
During negotiation, walk through real scenarios with the 3PL and have them apply the proposed pricing accordingly. It helps to provide the same scenarios to the various candidates that you are considering as a means for developing an “apples to apples” view. One benefit you will find is that often when the pricing is applied to these scenarios, 3PLs will realize certain pricing is too high and will, without you asking for it, lower reduce costs on their quote proactively.
Once you are with a 3PL, make sure that the pricing you understood theoretically is occurring in reality. Quite often, expectations and reality on pricing do not match up. Auditing your 3PL bills, although tedious, is extremely important, particularly in those first few months with a new provider. (If you don’t have the bandwidth to audit your 3PL invoices, or aren’t sure how, contact us about a consultation.)
If you are billed hourly for something like kitting or receiving, make sure that you track these costs ongoing. Develop a baseline price for similar tasks and be sure to bring it up with the 3PL when these variable costs fall outside of a slim allowable tolerance. For example, if you are billed for 5.5 receiving hours for a shipping container with 800 cartons and you later receive a container with 750 cartons, you should expect to still be billed 5 to 5.5 receiving hours for this second container. If not, question the charge with your 3PL.
Lastly, selecting a fulfillment center that provides transaction-by-transaction level charge details is essential. Visibility of how charges are applied to your account will provide for not only the ability to audit the 3PL but also how you can start to run a more efficient and cost-effective operation. Ask how the full data set will be sent to you if you request it; ask for a specific example of invoice data, perhaps from another customer (with data anonymized, of course).
Here are some red flags on data from 3PLs that should make you hesitate to sign on with them: if the information is only available to you in PDF format (instead of a spreadsheet or something that makes data easy to analyze); if important data fields are removed from the invoices/exports; or if they won’t break down certain top-level charges to see how the number was arrived at. For example, if you are shipping using the 3PL’s shipping carrier accounts, they may only show you the total shipping charge per order that you are being charged on a regular invoice. However, you should be able to request a breakdown of each shipping charge that shows the base rate, any accessorial charges, fuel surcharges, and the markup. You should audit these periodically to make sure the base rate and the surcharges match the rate card you were provided during the quotation process. Some surcharges, such as the fuel surcharge, are published by the shipping carriers, so you should be able to make sure they are just passing that through and not marking it up. (If they are marking up surcharges that are public, they should tell you that during the quotation process.)
Fulfillment is a difficult business and a good 3PL partner has to make enough margin to run a profitable business and absorb the ups and downs of the industry. But they should be transparent about where they are making money. And if something seems too good to be true -- the pick and pack charges are incredibly low, or some other fee is very low -- know that that 3PL will make its money off your account somewhere, and it’s better for you to know where that is before you move your inventory to their warehouse. In the end, you can then determine whether you made the right choice in partner for both their specialization and how they operate as a partner to your business.