The 4 fears of outsourcing your fulfilment: No 3. Spiralling Costs
The fear of spiralling costs is a common concern in many aspects of business. On the face of it, when presented with the costs of third party fulfilment, the raw cost per shipped package might seem high and it might seem like it’s cheaper to do this in-house but we often find that isn’t the case. 3PL, when one looks at the bigger picture, can actually save you money.
But, how can that be? Surely your 3PL provider needs to make a profit? And of course you want your 3PL provider to be making a profit. Otherwise they’re going to be going out of business soon and that’s going to cause you a load of hassle! So, how can a 3PL provider do a good job cheaper than you doing it in-house and still make a profit?
THERE’S 3 MAIN WAYS THAT THAT THIRD PARTY LOGISTICS COMPANIES WILL CHARGE:
TIME & LABOUR
Firstly, you’re essentially being charged for the time and labour it takes to move the goods around, pack them away, unpack them and get them shipped out. That will normally be fixed per order.
But, with this model, you only pay people for productive work. In the quiet times when there aren’t many orders going out, if you’re doing it in-house, you still have to pay your warehouse staff.
With our 3PL business, The Fulfilment People (TFP), you only pay per order and for the work done. Our team are always kept busy because there’s always stuff going on in our busy warehouse. There is very little downtime for them. In your case, in the quiet times, it may be that your warehouse staff aren’t working particularly well. So the only way you’d actually get them to be working all of the time is if you operated some sort of harsh zero hours contract scheme or were really organised and that’s just not very feasible.
SPACE
The second way that 3PL providers make money is by charging for space. Here at TFP, we charge per metre cubed of warehousing space that you occupy. If you compare it like for like and compare the rent for a warehouse, divide it by the number of metres cubed you can get in there, this is going to be more expensive than a 3PL provider.
But, you can’t buy your warehouse by the metre cubed. You have to buy or rent a warehouse. And if it isn’t full, in the same way that if your warehouse staff aren’t busy picking and packing all of the time, then you’ve still got the rent to make. With 3PL, you only pay for the metre cubage that you’re actually using. And you’ve got to factor in all of the other costs associated with having your own warehouse like heating, power, waste disposal and all the rest of it. When you compare the true cost, it can be cheaper.
In addition to that, we have considerable economies of scale when it comes to warehouse space; by definition, our warehouse is going to be quite a lot bigger than any warehouse that you’d have yourself because we’ve got multiple customers in there. This means that our cost per metre cubed is going to come down because a warehouse of X size will have a rent of, say, £100,000. A warehouse double that size won’t be £200,000 a year, it’ll be, maybe £150,000 or £160,000. So there’s some economies of scale there as well. We can pass some of those on as well to customers.
COURIER/DELIVERY
The third way that 3PL providers make money is with the courier charges and the delivery charges. The simple fact of the matter is, all couriers offer volume discounts. It’s far simpler and more effective for a company like UPS or DHL to send their truck to a 3PL warehouse site and pick up 500 packages with one truck rather than 15 from you. So, the cost per package comes down massively for the couriers and they pass that on to us, and we can pass that on to you. Even when we add our margin in based on our volume discounts from the couriers, it can often work out cheaper than you could buy it for yourself.
CONCLUSIONS
So, in answer to the question: Will 3PL cost a fortune and dent my profits? The answer is a resounding ‘no’! Once you start to factor in the true costs of doing it in-house, it may well be considerably cheaper and so will increase your profits by going with an outsourced 3PL partner.
Want to get an idea of costs, download our price list here.