Blog Posts How are Warehousing and Fulfillment Prices Calculated?
Warehousing and fulfillment costs are on the rise. Fifty-one percent of ecommerce companies report an increase in fulfillment costs over the past year. In order to control these costs, it helps to understand the factors that third-party providers take into account when pricing warehousing and fulfillment services.
Factors to Consider When Determining Warehousing and Fulfillment Costs
Warehousing and fulfillment solutions can vary widely depending on the scope and complexity of operational requirements. A number of factors impact the need for space, labor, equipment and technology. Following are several key variables 3PLs usually consider when calculating costs.
- Number of Facilities
One of the first considerations when pricing a warehousing and fulfillment solution is the number of distribution centers required. A single, centrally located facility is sufficient for some companies, but a growing number of companies are opting to utilize multiple DCs. This allows them to move products closer to the customer and save on transit time and cost. While economies may be achieved, each facility requires its own space, staff, equipment and technology.
The location of distribution centers can have a significant impact on real estate, freight and labor costs. When selecting DC locations, it’s important to conduct a cost-benefit analysis – taking all of these variables into account.
Some companies need to be in a specific location, of course, but others can be more flexible and find the optimal location(s) to service their customers efficiently and cost-effectively. Industrial warehouse space on the East Coast is typically less expensive than on the West Coast. Central locations on the outskirts of metropolitan areas can be more affordable than urban locations in major markets where demand is high for space and labor. Moving closer to the end customer can help to reduce transit time and cost.
- Order profile
The requirements of certain sales channels also a play a key role in the pricing of warehousing and fulfillment solutions.
Traditional brick-and-mortar retail operations generally handle orders consisting of hundreds of pieces, and products are usually moved at the pallet or case level. Forklifts and other material handling equipment are likely necessary. When products are housed in multiple locations, including stores and distribution centers, a robust order management system (OMS) may be required to ensure visibility and optimize inventory.
Ecommerce operations tend to be even more complex. Since direct-to-consumer orders usually consist of just a few items, they require more labor-intensive unit picking, making ecommerce orders more expensive to process at the unit level.
The type of products being handled is another factor to consider. Large furniture, for example, requires more space per unit, so storage costs are higher. It also may be necessary to use material handling equipment to move products in the warehouse.
Health and beauty products, on the other hand, fit in a smaller footprint with different racking and picking needs. With a greater need for picking labor instead of forklifts, more touches result in higher order costs.
- Value-added needs
Often, companies require additional services to configure products to meet the needs of their customers. Examples include reconfiguring palletized products into multi-packs, adding retail compliant labeling, personalizing products with embroidery or engraving, and more. Services like these can optimize inventory and increase responsiveness to consumer demand, but they can be more labor intensive.
5 Strategies to Help Control Pricing for Warehousing and Fulfillment Services
When designing warehousing and fulfillment solutions, experienced third-party providers continually look for ways to keep costs in check. Five of the most effective strategies include:
- Optimizing network configuration
Identifying the optimal location for distribution facilities often enables companies to achieve desired service levels while utilizing more cost-effective transportation options.
- Co-locating a solution
A shared-space environment allows multiple companies to share resources such as equipment, staffing and technology for greater efficiency and reduced cost.
- Leveraging information systems
While warehouse management systems (WMS), order management systems (OMS) and the like can often add costs, they can also create efficiencies that help to streamline operations and add value in the long run. Integrating with legacy ERP systems also can be an effective option.
- Improving processes
Even minor adjustments to warehousing and fulfillment processes can help to increase productivity and control costs. Lean Six Sigma methodologies can help to reduce waste and prevent defects, often resulting in significant cost savings.
- Incorporating automation
Sometimes, simply adding a small section of conveyor can help to move product with greater efficiency. Other operations may require a more sophisticated solution such as robotics, sortation, pick to light or automated packaging systems.
A reputable third-party provider will conduct a careful analysis, thoroughly evaluate a variety of variables and take a strategic approach to ensure cost-effective pricing for warehousing and fulfillment solutions.