Many ecommerce businesses today – from small “mom-and-pop” shops to large global enterprises – rely on third-party logistics (3PL) firms to manage their order fulfillment operations.
According to a recent report, around 60% of all ecommerce shipments are handled by 3PL providers, and this percentage is expected to rise in the coming years as demand for 3PL order fulfillment services increases.
Outsourcing the fulfillment of your ecommerce orders to a 3PL can bring many benefits – such as improved on-time delivery performance and customer satisfaction – but it can cost a pretty penny. And if your business doesn’t monitor and manage your 3PL order fulfillment costs, they can really add up and eat away at your bottom line.
The problem is that, while some 3PL pricing may look simple, understanding how these rates translate to total fulfillment costs for your company can be challenging.
In this blog, I will discuss the three keys to understanding the true cost of 3PL order fulfillment.
#1: Understanding your 3PL’s pricing structure
In order to accurately assess how much you are paying your 3PL for order fulfillment, you must first develop an understanding of your 3PL’s pricing structure.
Generally speaking, there are two types of 3PL pricing models for order fulfillment:
This is the traditional (and most common) method that 3PL providers use to calculate the price of order fulfillment, where charges are imposed by the 3PL for separate services including picking, packing, and shipping.
Most 3PLs charge a flat fee for the picking each item in an order from storage in the warehouse and packing that item in packaging for shipment. These picking and packing fees will often vary, depending on how many units are in a given order, the size and weight of the products, the type of packaging required, and other factors.
On top of fees for picking and packing, 3PLs using this per-service pricing model will usually charge:
- A fee for shipping, which varies depending on:
- The shipping speed of the order – with faster delivery speeds almost always translating into higher shipping costs.
- The size and weight of the products being shipped. Typically, the heavier the weight and bigger the size of the shipment, the higher the price.
- The distance of the delivery. Many 3PLs utilize zonal-based pricing, where they charge based on the distance a shipment needs to travel to reach its destination. Typically, the longer the distance, the higher the price.
- A slew of surcharges including fuel surcharges, residential surcharges, international surcharges, remote area surcharges, hazardous goods surcharges, oversize item surcharges, and even software licensing fee surcharges.
- Fees for other services including storing inventory, kitting, providing customer support, and handling the returns of customer orders.
A growing number of 3PLs – like Amazon Multi-Channel Fulfillment (MCF) – have started using a unit-based pricing model.
The way this pricing system works is simple: You only have to pay one bundled fee (inclusive of pick, pack, and ship) per unit for order fulfillment. However, this all-in fee may vary depending on various factors.
With MCF, for example, the per-unit fulfillment fee will fluctuate depending on:
- The shipping speed – Standard (3 days), Expedited (2 days), and Priority (1 day) – with faster delivery speeds usually equating to higher shipping costs.
- The dimensions of the items in the order. MCF uses “product size tiers” – which are measurement categories based on the unit weight, product dimensions, and dimensional weight of a packaged item – to help determine the cost of fulfilling each item.
Unlike most other 3PLs, MCF does not charge based on the distance of the delivery. This is because – with Amazon’s network of over 200 fulfillment centers globally – products can be strategically distributed so they are as close as possible to your customer base. This minimizes the distance and time it takes to deliver your orders.
Typically, 3PL providers that use per-unit pricing for order fulfillment do not levy as many surcharges as 3PL’s that use the traditional, service-based pricing model do. MCF, for example, only has a few surcharges for things like shipping to certain locations and shipping during the end-of-the-year peak holiday shopping periods.
Many ecommerce companies prefer this per-unit pricing system for 3PL order fulfillment, as this simple, all-in, bundled fee approach (rather than charging separately for picking, packing, shipping, and other services) can makes it easier for you to assess your order fulfillment costs.
Whether the 3PL provider you are using (or are considering using) employs a service-based, unit-based, or other pricing system, make sure you take the time to study their rate card and understand all the charges and surcharges that your business will have to bear for order fulfillment and other services.
#2: Understanding your shipment mix
In addition to getting a firm grasp of your 3PL’s pricing system for order fulfillment, you should also develop a holistic understanding of your company’s shipment mix.
What this means is that you need to dig into your historical order data and your demand forecasts and use these to generate insights on:
What you ship:
- Which products are you shipping?
- What are the characteristics (size, weight, etc.) of these products? Are you shipping any products that are oversized or contain hazardous goods?
- In what volumes and combinations are you shipping these products?
- At which times of the year are you shipping these products?
Where you ship to:
- Which locations (countries, regions, states, cities, etc.) around the world are you shipping to?
How you ship:
- What speeds (such as 1 day, 2 day, and 3 day shipping) are you using?
- What modes of transport (air, road, rail, marine, intermodal, etc.) do you use?
You should work with your in-house team or 3PL partner to analyze your data and develop a complete picture of your shipment mix.
#3: Understanding how your 3PL’s pricing system is applied to your business
Once you have gained a solid understanding of your 3PL’s pricing system as well as your company’s shipment mix, you can begin to asses the true cost of your 3PL provider’s order fulfillment services.
This will require you to look closely at your 3PL’s invoices and:
- Analyze how your 3PL’s order fulfillment charges (for each unit shipped or for various services such as picking, packing, and shipping) are being applied to your business.
- Identify which surcharges are being imposed on your orders. For example, you may be shipping to certain remote locations, sending items that contain hazardous materials such as lithium batteries, or shipping oversized items – and your 3PL may be tacking on a hefty surcharge due to these or other factors.
- Pinpoint which charges, surcharges, and other fees are the main drivers of higher fulfillment costs for your business – given your shipment mix.
Conducting this type of analysis is not easy (and may require you to collaborate with your 3PL provider and utilize specialized software tools), but it’s well worth the effort.
By doing this, you will be able to calculate your true cost for order fulfillment, and determine if your 3PL provider – given their pricing system, service offering, and past performance – is able to offer your business the best services at the lowest possible cost.
Whether you are evaluating your current 3PL provider or looking for a new 3PL partner, it’s imperative that you gain an understanding how that 3PL’s rate card translates or would translate into your order fulfillment costs.
By following the steps outlined in this article, you can assess the true costs of 3PL order fulfillment – and this will enable you to figure out which 3PLs to use to fulfill your customer orders, how much you should budget for fulfillment services, and how much to charge customers for shipping and delivery.
Finding the right 3PL partner that can help you maximize on-time delivery performance for customers while minimizing order fulfillment costs is critical to the long-term success of your ecommerce business.