This guest post was written by Will Schneider, founder of Intelligent Connections Corp, an online matchmaker for fulfillment services that helps companies navigate the challenging waters of the fulfillment industry.
To find success in today’s world of ecommerce, you must manage your inventory in a way that minimizes waste and maximizes profits, while making sure your customers receive their packages quickly.
So, how do you go about achieving this balance? Finding a cost-effective inventory storage solution and a streamlined order fulfillment strategy is a start.
To increase effectiveness in these two areas, both B2C and B2B ecommerce businesses should take a closer look at various outsourcing options. Outsourcing to a fulfillment center has the potential to reduce overhead costs while improving delivery speed and accuracy.
But, how much does outsourcing fulfillment cost?
Naturally, outsourcing costs differ depending on your situation, industry, and inventory size. We’ve created a detailed guide that outlines the costs involved with outsourcing to a fulfillment center. The included average cost ranges for each fee were gathered from this survey on fulfillment costs and pricing compiled by FulfillmentCompanies.net.
Here’s what you need to know about the costs of outsourcing to a fulfillment center.
A guide to breaking down the costs of outsourcing fulfillment:
1) Initial Setup Fees
Every ecommerce business is unique. The type of inventory you sell, along with the process of getting it from a supplier and delivering it to the end customer, is different than any other business. For that reason, most fulfillment centers charge an initial setup fee.
Setup fees are a one-time payment and depend on how complex your business is, or the amount of customization needed.
You can expect to pay between $100 and $1,000, with larger companies reaching the higher end of that range.
2) Receiving and Intake Fees
Since the fulfillment center manages your inventory, they will need to develop processes for intake of any order that comes in from your supplier. This basically means the processes for receiving new inventory and organizing it in the warehouse.
Typically, this fee includes all services related to managing inventory when it first arrives at the warehouse (such as unloading, sorting, counting, entering into their online system, and placement within the warehouse).
Depending on the fulfillment center and the type of inventory you need to store, this receiving and intake fee is charged one of two ways:
- by the hour, at rates between $20 and $50 per hour.
- on a per-unit basis, at around $5 to $15 per pallet. Some companies charge receiving per item, which could cost approximately $.25 per item.
3) Storage Fees
You will pay for the storage space required to keep your inventory safe and secure until it is shipped. Warehouse inventory storage fees are based on the space your products take up, though just like receiving fees, the exact pricing structure may differ based on vendor and your product.
- Storing products by the pallet tends to be the most cost-effective option, at $5 to $15 per pallet per month. A good average is about $10 per pallet per month.
- Storing by the cubic foot makes sense if you need to avoid ‘dead space.’ It costs between $.30 to $.55 per cubic foot every month.
- Finally, small items may require storage in individual bins, which increases accessibility for quick fulfillment. In that case, the cost will range between $1 and $2.50 per storage bin.
4) Order Fulfillment Charges
You may see these charges referred to as pick and pack fees, which is the process of finding individual products and packaging them for shipping. These activities are typically bundled together and labeled as fulfillment charges.
It is common for this fee to cover both the activity itself and the packaging material needed. However, some fulfillment providers charge extra for materials. You might encounter either a straight fee or a base fee plus an individual item cost. The average package price with one-item packaging is just under $3 for B2C and $3.75 for B2B merchants. Some vendors charge an order fee plus an item fee instead of just one flat fee per order (e.g. $2.50 per order plus $.25 per item).
5) Shipping Charges
You can either use your own carrier account or go through the fulfillment center’s carrier account to pay for the shipping costs. Using your own shipping account offers more control and transparency. Using the fulfillment center’s shipping account may come with discounted pricing due to the warehouse’s higher shipment volumes.
Shipping is difficult to estimate as a cost because it depends on your individual product’s size, weight, and specific carrier charges. The only variable to consider is the above-mentioned discount, which typically ranges between 10 percent and 30 percent, depending on service level and order volume per month.
6) Kitting and Return Fees
Most of the above fees are universal. Depending on the specific fulfillment center, you may incur a few fees that are conditional. Kitting and return fees are especially common.
- Kitting and assembly fees refer to any products that require assembly before shipment. This fee is typically based on an hourly rate between $30 and $50. For instance, if it takes 60 seconds to assemble a product at a $50 hourly rate will result in a $1 per-product kitting fee.
- Return fees are the costs associated with taking in defective or unwanted products from customers. They include inspecting the product for defects and either re-assigning it to inventory or disposing of it. Return fees are charged at about the same cost as fulfillment fees or slightly higher if additional inspection is required.
7) Account Management Fees
In addition to all the per-unit charges described above, most fulfillment centers will also add a flat fee to the monthly invoice that covers any management services needed for your individual account. This fee covers any customer service calls on both ends of the supply chain, updates to the inventory and fulfillment process, and other activities that go beyond the day-to-day processes required to fulfill orders.
- When charged as a flat rate, expect to pay between $75 and $250 per month for account management services.
- Some fulfillment centers charge between $40 and $60 an hour for any additional services.
8) Potential Volume Discounts
Order volume is one of the most important variables in determining pricing. More orders lead to volume discounts that can significantly reduce the cost of outsourcing to a fulfillment center.
According to a recent FulfillmentCompanies.net fulfillment costs and pricing survey, more than 50 percent of warehouses offer an average discount of 14 percent for storing more than 250 pallets per month.
Discounts for your pick and pack fees are even more common, especially once there are more than 1,000 orders fulfilled per month. Additionally, having a long-term contract often results in discounted pricing for all the individual fees mentioned above.
Comparing Outsourcing to Current In-House Costs
As you can see, determining costs can be quite cumbersome. There are so many different charges and variables, but it is possible to realistically estimate the overall cost of using a fulfillment center.
One of the best ways to make a true cost comparison to your in-house costs is to request a sample invoice from a fulfillment center using one month’s worth of your own warehouse data. You will need to provide actual data from an average month, including number of receipts and total units received, total number of pallets in inventory (or total cubic feet of your average inventory), and the number of orders processed per month (including the number of items on each order).
For you to get a better estimate of shipping costs, it will require more data – but the insights you’ll be able to uncover will help immensely. For example, if you provide the weight, service level shipped, destination zip code, and general dimensions for the one-month sample data, the fulfillment company can provide a total shipping cost with their discounts from their commercial carrier account.
If you’d rather not contact actual companies to determine outsourced costs, you can perform quick math to get a general idea of any potential cost savings. Most ecommerce businesses generally see the following:
- Order fulfillment costs will hold fairly close to your in-house labor.
- Storage costs in a fulfillment center is generally close to or lower than your own warehouse lease costs, especially if your inventory fluctuates throughout the year.
- Shipping costs can be a huge savings when switching over to a fulfillment center. Ask your UPS or FedEx representative what your discount is for shipping and compare it to the average discounts of a fulfillment center to see if you’ll see any cost savings: 15% for ground, and 25% for express.
- Order volume will add to those discounts. If you are a high-volume seller, it may be a good idea to outsource fulfillment.
There isn’t an easy answer to how much it costs to use a fulfillment center. Inventory and order volume, along with the individual products you plan to store and ship, have a major impact on those costs for your individual needs.
While it might take time to come to a realistic estimate, performing a detailed analysis will help you determine once and for all if it’s worth it for your business to outsource fulfillment.
Thinking about outsourcing your fulfillment operations? Check out our guide to using a 3PL provider.