Introduction
Cutting logistics costs – which, according to a recent report by Bloomberg, have risen 16% over the past year in the US – is a top priority for companies in today’s business environment. And many companies turn to third-party logistics (3PL) providers to help them do exactly that.
Indeed, one of the primary reasons that ecommerce businesses and other companies outsource their warehousing, inventory management, and order fulfillment to 3PLs is to reduce logistics costs. A 3PL can help you decrease inventory, storage, shipping, and other costs across your end-to-end supply chain by improving the efficiency of your logistics operations.
But 3PL services, of course, come at a cost – and if you want to achieve cost savings across your logistics operations, it’s imperative that you choose a cost-effective 3PL.
The problem is that – with all the different 3PL charges and fees – it can be hard to get a handle on the true cost of partnering with a 3PL. In fact, many companies that are evaluating prospective 3PLs or engaging with 3PLs do not have a good grasp of 3PL pricing.
In this guide, we’ll give you a breakdown of five of the most common 3PL costs that you need to know – so that you can get a firm understanding of 3PL pricing.
The first type of 3PL costs that we will cover is inbound shipping and receiving costs. As the name suggests, these costs relate to:
Shipping
The shipping of your inventory from your warehouse or manufacturing facility to your 3PL’s warehouses or fulfillment centers. The customer is responsible for bearing the cost of inbound shipping of goods, and partnering with a 3PL provider that has a global network of fulfillment centers – like Amazon Multi-Channel Fulfillment (MCF) – can help minimize the distance and costs of your inbound shipping.
Receiving
The process of receiving of your inventory at the 3PL’s warehouse or fulfillment center. Most 3PLs charge a fee – either a flat rate or an hourly rate – for the labor required to unload your goods.3PLs charge customers to store their goods at the 3PL’s fulfillment centers or warehouses, and the storage and warehousing fees you have to pay are typically based on the volume of space (cubic feet or meters) that your inventory occupies.
That sounds simple, but when it comes to calculating 3PL storage and warehousing costs, there are a few important nuances to consider:
Another important type of 3PL costs is handling costs, which encompasses charges for:
Picking
Picking products from your available inventory in various storage locations throughout the 3PL’s fulfillment center or warehouse once an order has been placed. Typically, 3PLs charge an hourly or per item rate based how many items they have to pick and the amount of labor involved, although some 3PLs – like MCF – bundle picking fees together with other fulfillment fees or charge a flat rate.
Packing
Packing your orders for shipment in boxes or packaging. The cost of packing – which can be charged separately or bundled together with other fulfillment fees – can vary widely based on:
The types of materials used in packing such as shrink wrapping, corrugated cardboard boxes, and Tyvek bags.
The value-added services provided including kitting, labeling, using branded or eco-friendly packaging, inserting marketing materials, and quality control and assurance.
- Whether any order consolidation – when different orders, that are all going to the same address, are packed together on one pallet – is required. 3PLs often charge extra for order consolidation, and this can end up being quite an expensive process.
The next type of 3PL costs that we will discuss is shipping costs, which can vary depending on a number of different factors including:
- The rates offered by the 3PL’s carriers.
- The rates offered by the 3PL itself (if it is a carrier).
- The rates you negotiated directly with carriers, which – especially if you are a large enterprise – may be better than the other types of rates listed above.
As aforementioned, partnering with a 3PL provider like MCF that has a global network of fulfillment centers can dramatically reduce the distance, times, and costs of your shipments by enabling you to proactively place your inventory as close as possible to your customer base.
Also, if you want to ship your goods internationally, you will need to make sure that your 3PL has a fulfillment center footprint in those countries you want to ship to or offers international export and shipping services. The latter option will be much more expensive as it often involves substantial export charges.
Dimensional weight (a pricing technique that takes into account a package’s dimensions – and not only its weight) can be calculated using this formula: (length × width × height) / dimensional factor. Your shipping fee will be based on the dimensional weight or the actual weight of your package, whichever is greater.
Each carrier or 3PL may have their own dimensional factor that they use to calculate dimensional weight, and in some instances it’s possible to negotiate with 3PLs and carriers to get them to adjust their dimensional factor in a way that advantageous for you as the customer.
If you plan on offering expedited shipping (1 or 2-day) to your customers, you should check to confirm that the 3PLs you are considering can actually provide that service and evaluate how much they charge for it. Also, you should determine if the 3PLs you are evaluating would sometimes “hold” your packages to consolidate them with a carrier or take extra time to prepare your shipments – which could have an impact on shipping speeds.
The last type of 3PL costs that you need to know about is aftercare costs, which relate to post-delivery support services that end customers receive.
Some 3PLs will handle reverse logistics, which involves processing product returns or exchanges by customers. These 3PLs can manage the end-to-end returns process, from communicating with customers, to shipping and receiving unwanted products at the fulfillment center or warehouse, to sorting and evaluating the returned items to determine if they should be restocked, recycled, or disposed of.
If you want your 3PL to oversee your reverse logistics operations, you will have to pay a variety of shipping and processing fees, which can really add up.
Of course, the best way to minimize these aftercare costs is to partner with a 3PL provider – like MCF – that has a track record of delivering on-time and avoiding delivery mistakes such as product damage or mix-ups.
Cost is a critical factor for you to consider when evaluating prospective 3PLs or assessing your business relationship with your current 3PL. Ideally, you want to partner with the 3PL that provides the highest quality services at the lowest possible price – so that you can capitalize on opportunities for cost optimization and improved efficiency across your logistics operations.
In this guide, we’ve highlighted the five most common types of 3PL costs that you need to be aware of, but it’s important to note that there are other costs – such as account management and software costs – that may come into play.
It’s imperative for you, as the customer, to have a firm grasp of your 3PL’s pricing scheme, the various costs you are incurring, and – most importantly – your total cost of ownership for 3PL services.
Developing this holistic understanding of 3PL pricing and costs is the key to ensuring that your 3PL partnership is a source of competitive advantage and long-term growth for your business.
