Comparing 3PL Costs
Are you looking for a 3PL partner and feeling overwhelmed while trying to compare the pricing of each? Do you have four different 3PL cost proposals that are charging you four entirely different fee structures for the same exact work being completed? Comparing warehousing and fulfillment costs between 3PLs, Amazon, and other alternatives is difficult when each warehouse provider prices differently and there is no one size fits all solution to calculating 3PL costs.
Prerequisites to Calculating How Much a 3PL Costs
To accurately calculate the cost of 3PLs you must first gather rates from potential 3PL providers in the geographic area(s) of interest. Then begin a detailed review and analysis of the 3PL’s rates, and the costs for each of the 3PLs to complete your operation’s standard work. Use the following 7 step process to compare the costs of multiple 3PLs against each other, and estimate your monthly invoice costs.
This article helps the reader evaluate 3PL warehouse costs or rates against other collected 3PL warehouse rates. There are many steps, not detailed here, that must occur before following the below instructions to complete the described 3PL cost analysis.
The following Prerequisites must be satisfied before continuing to calculate how much the 3PLs cost.
- Select the region(s) you are locating your warehouse facility
- Collect rate proposals from potential warehouse partners
- Forecast Order Volumes
- Know all types of work to be completed by the 3PL partner, such as
- Direct To Consumer (DTC) order fulfillment for single item orders
- FBA Replenishment orders shipping on pallets via LTL
- Include inserts on outbound shipments
- Unload floor loaded containers
- Receive and process customer returns
- Apply Amazon labels (FBA Prep) when shipping product to FBA
- Kit, bundle, or repackage products during outbound processing
7 Steps to Calculate the Cost of 3PLs
Once all above Prerequisites are satisfied, the gathered 3PL costs are evaluated. Follow these steps to create an easy to digest table of estimated 3PL costs per month or any other time period. This article outlines a methodology that compares multiple 3PL cost structures in an understandable format.
Follow these 7 steps to compare 3PL costs for your operation’s needs.
- Define the Standard Work Scenarios of Your Operation
- Customize Provided Excel Sheet Template per Scenarios
- Review Gathered 3PL Rates in Deep Detail
- Populate Excel Sheet for Each Scenario at Each 3PL
- Create Rate Summary of All 3PLs
- Identify Top 1 to 3 Providers Based on 3PL Costs
- Contact Selected 3PL Provider(s)
The first step to evaluating 3PL costs is outlining all standard work scenarios that will be completed regularly by the 3PL on behalf of your operation. Standard work is all types of work regularly completed by the warehouse, and then billed to your business based on agreed payment terms. Standard work is based on your business’s demands, so it is simple to outline all of your billable standard work scenarios if you are familiar with your operations.
The key is that the scenarios are accurately defined to the types of work the 3PL must complete for your operation.
To begin defining the standard work of your operation, it is most effective to think about the lifecycle of your products/inventory from the start of the cycle. First define each standard type of Inbound Warehouse work in your operation, then define standard Warehouse Storage scenarios. Finally, define the standard types of Outbound Warehouse work. That is, how are the products arriving to the warehouse, how much is being stored at the warehouse at a time, and how are the products shipping from the warehouse to your clients?
The key is that the scenarios are accurately defined to the types of work the 3PL must complete for your operation. Additionally the scenarios must be as specific and detailed as possible; the details are necessary to ensure that it is clear exactly what fees are applicable to each scenario.
Questions to Consider While Defining Each Standard Work Scenario
- How many SKUs are in this scenario?
- How many full pallets, cases, or units were handled?
- How did the inventory arrive or leave the facility (container, carton, pallet, etc)?
- What materials (pallet, shrink wrap, cartons, packing materials, etc) were used by the 3PL while processing the scenario?
- Are labels, placards, or inserts being used or applied?
Sample Standard Work Scenarios
- Sample Inbound Scenarios
- Unload 1 of 20′ floor loaded container delivered with 375 cartons of 20 different SKUs that builds to 20 pallets
- Receive and process 20 Cartons from UPS Ground of 2 SKUs (10 cartons each). Each carton includes 1 unit inside. Builds to 3 unmixed pallets for storage.
- Receive and process 1 Customer Return delivered via 1 Carton with 2 units of 1 SKU inside that needs inspected then put back into stock.
- Sample Storage Scenarios
- Start the period with 80 pallets in the warehouse, then the warehouse receives 15 pallets, then the warehouse ships 12 pallets, & there is an ending balance of 83 pallets
- Start the period with 10,000 Cubic Meters in the warehouse, then the warehouse ships 2,000 Cubic Meters of inventory, and there is an ending balance of 8,000 Cubic Meters of Inventory at the warehouse.
- Start the period with 1,000 cartons in the warehouse, then the warehouse received 210 cartons, then ships 150 cartons, then received 112 cartons, and then ships 400 cartons. The end balance at the warehouse is 772 cartons
- Sample Outbound Scenarios
- Process 1 FBA replenishment order for 60 cases of 8 different SKUs (all are full cases picked). Ships Will Call via LTL carrier as 3 pallets with 4 provided labels applied to each pallet. Each case has 1 label applied also. The pallets must be built for outbound shipping.
- Process 1 FBA order for 8 cases of 2 different SKUs (all are full cases picked). Ships as 8 cartons with 8 shipping labels provided to the warehouse to apply to each carton. Each case also has 1 additional barcoded label applied during outbound processing.
- Process 1 DTC (direct to consumer) order for 1 unit picked from an inner carton that must be repackaged into its own shipping carton. The order ships via FedEx Ground and the label is generate at warehouse for the 1 carton. Each DTC order has 3 additional company “inserts” included with each outbound carton.
- Process 1 DTC (direct to consumer) order for 3 units picked from inner cartons that must be repackaged into 2 different shipping cartons. The order ships via FedEx Ground and the label is provided to the warehouse for the 2 cartons. Each DTC order has 3 additional company “inserts” included with each outbound carton.
After defining the operation’s standard work scenarios, the scenarios are used to build an excel sheet that will compare the costs of many 3PL providers against each other. The first step is to format an Excel Sheet that you will later populate all of the 3PLs’ costs into per defined standard work scenario. Rather than building a new sheet from nothing, start with this Warehousing Etc Custom Template for 3PL Cost Comparison.
Download The Custom Excel Template To Calculate Your Future Invoices
During this step, do not worry about populating any 3PL rates into the sheet. We are only formatting the sheet to match the standard work scenarios earlier defined in Step 1. Within the “Inbound”, “Outbound”. and “Storage” tabs of the sheet, update the “Scenario Description” column to match your operation’s defined standard work scenarios from Step 1.
If you have more or less scenarios than the current sheet contains, then adjust the Scenario numbering and rows accordingly within the sheet. Once all of your operation’s standard work scenarios are contained within the sheet it is time to move to Step 3.
After the standard work scenarios of your operation are defined and populated in the excel template, it is time to review and study the 3PL rate agreements you received from potential 3PL partners. It is ideal to review 3PL rates promptly after defining the scenarios. While reviewing the 3PL rate agreements it is important to identify all rates, terms, and notes that may impact your operation’s costs. It is imperative all applicable rates and terms are identified during review so that you are properly calculating 3PL costs in later steps.
Be curious as you review each charge line, and assume you do not understand each purposed charge…
Reviewing purposed 3PL costs requires the utmost attention to detail. It is most effective to take notes, highlight, and markup the 3PL rates during review. Most 3PL rates use unclear terminology, and the 3PLs often provide rate fees for every service you can imagine. This results in complex multipage pricing structures with hidden terms and fees. These complex pricing agreements reduce the trust between the 3PL and client, because the client often feels that the 3PL is presenting overly complex rates to sneak additional fees onto the client’s bill. In fact, the primary problem is that the 3PL and eCommerce client do not communicate in the same terms so both parties struggle to find lasting long term partnerships.
Be curious as you review each charge line, and assume you do not understand each purposed charge until you have read the entire rate description in the proposal. When we review contracts with assumption that we already understand the pricing structure we often make mistakes, and we may miscalculate expected 3PL costs. Since this 3PL one time cost analysis impacts all future 3PL spend, it is imperative to review the pricing and terms with great curiousity.
Consider these Questions during 3PL Rate Agreement Reviews
- What rates DO apply to me?
- What rates do NOT apply to me?
- What restrictions, rates, or terms are included in the 3PL rates that I am unsure of their meaning or when they apply?
- Does the noted restiction(s) on how this fee applies based size, volume, or other specification impact the way my work will be billed? Ie. If the max height of pallet storage is 55″ and my pallets deliver to the warehouse at 72″, how will I be billed and what are possible ways to avoid this fee?
- What do I like about these rates, and what do I not like about these rates?
- Does this fee seem high or low compared to other 3PL rates?
After you review the provided 3PL rates in detail and feel confident in your level of understanding, it is time to populate the excel sheet scenarios with rates for a detailed analysis. When populating the excel scenarios with rates, we find it best to work through one entire 3PL’s costing at a time. That is, review all Inbound Scenarios, and then all Outbound Scenarios, and then all Storage Scenarios for 3PL #1 before populating any of the rates for 3PL #2.
It is extremely important that ACCURATE rates are populated per scenario. Accurate data entry is the only way to ensure accurate cost comparison.
Inbound, Outbound, and Storage Tabs
Within the “Inbound”, “Outbound”, and “Storage” tabs, populate the Rate and Fee Description columns according to what 3PL fees apply to each scenario. If you need to add more rows between scenarios to add more fees, simply add new rows to the Excel. Each scenario in the Excel must be populated with all applicable fees for each 3PL, otherwise the calculated costs for comparison are not accurate.
To best complete this exercise, it is most effective to think about yourself at the warehouse physically completing the work for each Scenario. Think about how the items are handled, packaged, labelled, and stored. What materials may the warehouse use to complete the work in the scenario? What standard or flat fees does the 3PL apply to this type of warehouse work?
Recurring Fee tab and One Time Fee tab
Within the “Recurring Fees” and “One Time (Setup) Fees” tabs, populate the Scenario Description column according to what fees apply to each 3PL. A Recurring Fee is any standard fee that you will be charged on some re-occurring schedule. One Time Fees are often associated with new customer setup or custom technology costs, but any 3PL fee that applies on a One Time basis is populated here.
Sample Fees per Type of Work the 3PL will complete:
- Inbound Fees
- Container Unload
- Carton In
- Pallet In
- Sort and Segregation
- Pallet Used
- Shrink Wrap Applied
- Label(s) Applied
- Receipt Processing Fee
- Outbound Fees
- Container Loading
- Carton Out
- Pallet Out
- Picking Fee
- Order Processing Fee
- Pallet Used
- Shrink Wrap Applied
- Label(s) Applied
- Order Processing Fee
- Storage Fees
- Per Pallet (Standard/Stackable, Nonstackable, Oversized)
- Per Square Foot
- Per Cubic Foot or Cubic Meter
- Per “Bin”
- Recurring Monthly Fees
- Customer Support Fee
- WMS Fee
- One-Time (Setup) Fees
- New Client Onboarding Fee
- Custom Order Channel Integration Fee
After rates are populated in the Excel for all of the standard work scenarios for each 3PL, it is time to create a concise table that will compare all 3PL costs against each other in one place in a meaningful way. To review the costs with meaning, we must know how often each scenario is happening and thus how often we are charged for each scenario during a given period. Populate your company’s known forecasts in the Anticipated Monthly Volumes column of each scenario in the “Inbound”, “Outbound”, and “Storage” tabs.
With Anticipated Monthly Volumes populated for each scenario, update the “Monthly 3PL Invoice Projection” tab to reflect the total costs of each 3PL over the month. To calculate the Total Inbound Cost at Warehouse 1, multiple the Antipicated Volume by the Cost per Scenario for each Inbound Scenario. Then add the totals of each Inbound scenario together. Complete this for each Warehouse. Complete the same steps to calculate the Outbound Fees Total per 3PL.
= (Antipicated Volume * Total Cost of Scenario A) + (Antipicated Volume * Total Cost of Scenario B) + ….
Update the Storage Fee, Recurring Monthly Fee, and One-Time Fee Totals per Warehouse based on how the 3PLs’ rates correspond with your operations needs. Once all Total Fees are updated for all 3PL Warehouses considered, continue to Step 6.
With all 3PL costs reflected per scenario, and all scenario costs for the month summed in the “Monthly 3PL Invoice Projection” tab it is time to review the costs of each 3PL against one another in the table. First compare the “2nd and Onward Month Total” of each 3PL to get a sense for the recurring monthly fee; this column is the expected regular monthly invoice amount. Additionally the “1st Month Total” can be considered, as it reflects the expected total 1st month invoice by also summing the One-Time Fees.
The cheapest provider never provides the best service; likewise the best service is never provided by the cheapest provider.
Beyond simply comparing the Total Monthly Spend between 3PLs it is useful to compare the Inbound Fee Totals between the 3PLs, and Outbound Fee Totals between the 3PLs, and so on for each category of 3PL costs. This identifies where certain 3PL pricing models excel for your needs compared to others. You can also use this comparison between pricing models to identify potential negotiation points if your preferred provider (based on non-montary factors) is not the cheapest option.
Based on the review of the costing within the “Monthly 3PL Invoice Projection” tab, top 3PL providers must be selected. It is easiest to identify which 3PL(s) is not going to work based on their rates; perhaps 1 provider has extremely high order processing costs for DTC orders that simply isn’t affordable. Eliminate as many 3PL providers as possible from your consideration based on pricing and terms that are too costly for your operation; it is best to have minimal options to consider as a final list.
Once only reasonable 3PL options remain for consideration, dig into the rate projections with more detail. Consider how your operation will grow, and what the future costs will look like for your operation then compared to now. If you prefer one 3PL provider that is less affordable, consider negotiating with them and being transparent in the pricing required to win the business. While pricing is important in the decision, it is more important to remember: The cheapest provider never provides the best service; likewise the best service is never provided by the cheapest provider.
With the top 1 to 3 providers selected, it is time to reach out to each for questions and confirmations.
After completing such a detailed 3PL pricing analysis there are often many questions or uncertainties. With the top 1 to 3 providers selected, send an email to your Point of Contact at each 3PL noting the specific questions regarding their rates. Include any other questions you have that are not related to pricing also.
In addition to sending questions in the email, we recommend sending each of the top selected 3PL’s the excel sheet scenarios with only that 3PL’s rates populated. Ask the 3PL to review the costs per scenario, and advise any inaccuracies. This ensures that the pricing you have used for this comparison is accurate, and that you understand what the 3PL is charging you.
Once you have all of your questions answered, it is time to make a final decision based on many factors beyond simply cost.
Potential Non-financial 3PL Selection Considerations
- Availability and responsiveness of staff.
- Technology use in warehouse – real time inventory tracking and client facing portal or reporting.
- Competence of company. Do they sound knowledgable or have good client reviews?
- Flexibility of the company to face and complete anomoly non-standard work.
- Culture fit of 3PL with the Brand/Retailer. We recommend having a couple of phone calls with the 3PL throughout the process to try feeling this out.
Bringing it all together
Selecting a 3PL warehouse provider is a daunting task, made more difficult by the complexity and lack of standardization of multipage 3PL cost proposals. Once 3PL rate proposals are collected from potential partners, use the described 7 steps to turn the complex 3PL rates into a simple table comparing the costs of each 3PL against one another over a time period. The end result is a clear simple way to compare the costs of many 3PLs against one another, making it obvious which 3PL has the best or worst rates for your operation. If you need help selecting or comparing 3PL providers Contact Us today!