#general-chat

Hello from a 3PL Operator. I made a (now archived) post some time ago about finding a 3PL which got lots of attention.

The 321 changes have people scrambling, so here’s a recap:

How much should you pay at your next 3PL?

First, there’s lots of talk about how much your 3PL’s cost should be as a % of your revenue. This isn’t a good benchmark. The majority of your 3PL bill will be postage, and that is based on weight and dimensions. Weight and dimensions don’t correlate to the price of goods.

If we try and simplify 3PL pricing to be broadly applicable, it becomes not optimizable.

Example: A 3PL offers an all-in price (fulfillment, postage, etc) that makes calculation simple. Now the 3PL wants to use the cheapest delivery carrier, which is often the crappiest, in order to expand their margin.

Or the 3PL has to rate based on the worst case scenario of the carrier package restrictions on weight, dimensions, contents, etc which almost always translates to the customer paying the worst-case scenario rate. Example: USPS and DHL hate big packages, even if they’re lightweight. Big packages will always be cheaper with FedEx and UPS. Your generic postage rate card has to consider that the shipment could end up going with USPS; subsequently a real scenario we encountered was that USPS would charge $90 to deliver the package and UPS would charge $15

How you should be charged? – this is the better question to ask to make sure you’re getting a fair price, a transparent way of being billed, and you’ve got your incentives aligned with your 3PL.
*Never pay as a % of Revenue. Never.

Fulfillment

3PL’s essentially resell labor. If you fulfilled in-house, your labor cost on a per order basis would fluctuate dramatically – slow sales day = high cost per order. You pay a 3PL for the certainty in your unit economics. Often that’s cheaper than doing it yourself.

Fulfillments costs are incurred when the 3PL makes the trip to an aisle to get any item for your order, then makes the trip back to pack it, then packs it (builds the box, prints the label, packs the items). Regardless if you have 1 item in your order or 10, that cost is incurred.

More effort is involved when there are more unique products (sku’s) as they have to visit more locations. Slightly more effort is involved to grab more than one item of the same product (but not much).

A good way to be charged is:

1. A moderate order (or shipment) fee. This should be higher if your products are big, heavy, or fragile.
2. A moderate unique sku fee. Higher if big and heavy.
3. A low additional unit (of the same sku) fee. Higher if fragile.

But my 3PL is offering a flat price for the first 3 units. That’s usually not great. Just have them break it down where you pay for the effort involved.

Inserts and custom packaging should be at a discounted rate.

Returns

Should be 150-200% of the cost of fulfillment, especially if you need some degree of inspection and rehabilitation. Returns are very time consuming.

Postage

3PL’s a notorious for offering super low fulfillment rates that are literally a gimmick. Instead they put an ambiguous markup in postage and keep the difference.

You should pay for the exact carrier charges, plus a nominal % that is equal across all the carriers. You don’t want one carrier being more lucrative for the 3PL than another.

There’s 2-4% of postage costs that a 3PL gets hit with that are impossible to trace back to a tracking number. They also negotiate on your behalf and manage the complexities of the carriers. It’s not uncommon to see 10% on the rates, and that’s fairly reasonable.

Storage

Each unique sku you have will require space in a pickable location. Often, pickable space is only 20% of the total storage space in a warehouse. Once there’s no more pickable space left, the 3PL can’t take more clients. Excess inventory is overstocked.

Your overstocked inventory will need to be put in an overstock location, usually up on a pallet rack.

The best way to align incentives is to pay:
1. A unique sku fee. If it is on hand at the beginning of a week, you pay a small amount that week.
2. By cubic foot for all inventory on hand, by day or week.

You may have seen small, medium, large, XL etc bin fees for your pickable inventory. Often you pay these fees twice, or incorrectly as the sizes aren’t appropriate. A single fee if a sku is on hand means you’ll only pay it once and you don’t have to worry about bin sizing.

You may have seen pallet, case, box etc. This isn’t ideal. Often there are two half-full pallets of the same product being charged two pallet fees. The 3PL has no incentive to consolidate them. Paying by the cubic foot puts the pressure on the 3PL to use their space wisely. It should be noted that charging by the cubic foot is not great for apparel as the dimensions fluctuate so much based on how compressed they are. You might just agree to an average cost per unit per day and pay accordingly.

*Per cubic foot pricing will seem higher than pallet pricing, but very often clients are paying for twice as many pallets as their total cubic feet would actually be if the pallets are full.

Payment Terms

Net 7 is common. Net 30 is very rare.

60-80% of an invoice can be postage costs, which is mostly a pass-through for the 3PL. A single unpaid invoice can be devastating to a 3PL – there are very few businesses that take this amount of risk to earn so little revenue on actual services.

Pay your bill for a long time, on time. Then ask for Net 14, or ask that you be billed for postage and fulfillment separately, where fulfillment is on longer terms.

Finding a good 3PL

Google will point you to the big guys – shipbob, shipmonk, etc. These are good for brands that have no nuance to manage whatsoever – a robot could do it and never get it wrong.

References from other operators are a great way to get good, trusted operators. Big companies don’t need big 3PL’s, they just need attention.

Green flags:

• Owner Operated
• Has been on the eComm and retail side before
• Has experience with managing similar client types (and needs, like wholesale)
• Uses a good WMS – we use Shiphero and we love it.
Red flags:

• Offsite account management
• No direct contacts for urgency
• Doesn’t ship on critical sales days
• Has a ton of clients
I’m a fan of ThirdPerson.co – a site that aggregates 3PL’s, asks some questions, and points you to a refined list of qualified operators.

There are other sites out there that do the same.

You could also have a professional run an RFP for you. I must warn that right now, urgency may get in the way of a full RFP process.

Data tells the story, so make sure you have clean order and item data, as well as package level detail to share with your next 3PL. The less guessing and estimating the 3PL has to do, the more likely they are to feel confident in an aggressive price.

Location: Where should you put your 3PL?

Ideally you’re only using one location and the midwest is best (Missouri, Oklahoma, Eastern Kansas, Indiana, Western Tennessee, Western Kentucky).

You’ll pay about $1,000 per container in additional transit to get it to the midwest, but the postage savings will eclipse that very quickly.

Second best is the east coast (Charlotte, Southern Pennsylvania). Postage will be ~5% higher vs the midwest.

In a very distant third place is the west coast. Postage is 15-20% higher than the midwest and 50% of the nation is in the furthest shipping zone (zone 8)

Dual-location or multi location: 99% chance you don’t need it right now and 95% chance you’ll never need it. I’ve done hundreds of zip to zone analysis and have every 3 digit zip origin to every 3 digit zip destination plotted. The average postage savings for any brand with less than 10lb packages never exceeds 4%. In contrast, the amount of inventory you’ll need to support 100% accurate distribution is conservatively 60% more, but often closer to 100% due to the way purchasing minimums work.

If you have more than 25 sku’s, there’s seriously almost never a reason to split locations.

If you’re going to split east and west coast, your east coast facility needs 70% of your inventory.

Time in Transit

If you want an even time-in-transit for all your customers, choose the midwest.

Economy Services like DHL eCommerce will average 4.5 to 5 days in transit

USPS Ground Advantage and UPS Surepost (Ground Saver) is 3.5

UPS Ground will be about 3.2 days

FedEx Ground will be 2.7 to 3.1 days

State of the Postage Network

UPS isn’t doing as much custom rate negotiations with shippers and is instead pointing their customers to standardized corporate rate programs like those seen in Shopify, Shippo, Shipstation, etc. The rates are generally good, but not very transparent and most importantly are subject to change at any time without notice.

FedEx hasn’t been as hungry for business, but their time in transit still beats UPS in most cases. They’ve also opened up Sunday delivery to about 60% of the nation.

Economy carriers: you get what you pay for with DHL eCommerce, UPS Mail Innovations, etc. They’re cheap because they have edge cases of about 0.1 to 0.2 % of customers that get very late deliveries. Expect about 5% of orders to never show a delivery scan.

Right now USPS Ground Advantage is the best price to time in transit offering in the market, but they’re flooded with volume right now and having sortation issues. There’s a small argument to be made that since carriers like DHL do their own pre-sort and then bulk deliver to a closer USPS substation to the final delivery address, there might be fewer issues temporarily.

Long term, USPS is trying to absorb relationships and package volume back in-house. They significantly raised DHL and UPS Mail Innovations prices, and severed their contract with UPS for their Surepost service altogether. This reduces competition which historically means prices will increase.

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Hope this was helpful. If you’ve got questions, drop them in the thread.