Steve Schlecht
April 21, 2023
E-commerce store owners, makers of a product like Nike or Cuts Clothing, or even large manufacturers like Pepsi often rely on third-party logistics providers (3PLs) or fulfillment providers to handle their fulfillment, transportation, warehousing, and distribution needs.
Choosing the right fulfillment provider can be confusing as it involves evaluating multiple factors to ensure the best fit for your business. In this blog post, we will discuss how to choose a fulfillment provider like a consultant to mitigate costs and quicken delivery time for the e-commerce owner or shipper.
Location is the most critical factor affecting the total landed cost to deliver a package. It’s estimated that 50-60% of a product’s landed delivery costs can be attributed to shipping, which is inclusive of both the shipment to the fulfillment provider and the shipment from the fulfillment provider to the end customer. By considering geography when evaluating fulfillment providers, you can mitigate shipping and other costs like storage fees.
The most important factor to reduce total shipping costs is to avoid the parcel carriers like UPS and FedEx, which are prohibitively more expensive on a cost-per-mile basis.
This is done by utilizing cheaper modes of transportation on the inbound leg to your fulfillment provider, like LTL or truckload, for a proportion of a package’s journey.
To maximize this cheaper mode of transportation when choosing a fulfillment provider, you will want your fulfillment provider to be located close enough to your customer to avoid extra miles with the parcel carriers.
To understand why parcel shipping is more expensive than truckload, it’s important to understand the market dynamics of each.
Parcel Carriers
For parcel shipping, there are 3 major parcel carriers (UPS, USPS, and FedEx). Parcel carriers are much more centralized and the barriers to entry are much higher, so they can charge a premium for every mile a package travels. Also, the space available to ship packages in one of their vehicles is much smaller than the large bulk carriers.
Truckload and LTL Carriers
It’s estimated 1.2 million trucking companies are in the U.S. The truckload market has plenty of options to choose from, which drives down prices because of increased competition.
To demonstrate an example mathematically, shipping a package using UPS Ground cost $18.89 vs. only $2.12 for shipping that same package in a bulk shipment from Los Angeles to Chicago. In other words, the same package traveling the same distance is 89% cheaper using a bulk carrier vs. a parcel carrier.
Details of the shipment:
With this understanding that Truckload and LTL are much cheaper than Parcel, the approach to maximize this advantage is to place your fulfillment provider where goods can travel using the cheaper modes of transportation.
To demonstrate this using 2 shipments from a client of ours at Outbound Fulfillment, their product is imported at the Port of Los Angeles. Their customers are equally distributed across the U.S.
Shipment #1: Los Angeles, CA to Charlotte, NC:
Shipment #2: Los Angeles, CA to Dallas, TX
Total network impact:
Note: Truckload and parcel quotes were calculated as of April 2023 with a package that weighs 12 lbs. and is 1 cubic foot.
Performing a network analysis is important because it can help you first identify the best area to find a 3PL as a baseline for your specific brand. This can help you again to identify the best location to mitigate those hefty parcel fees. Typically, if your network is evenly distributed across both coasts, your 3PL should be located somewhere in the middle of the United States.
Fulfillment companies that want the best for your brand should do this automatically for you. If you’re interested in performing this for your own network, contact Outbound Fulfillment which can do it for free.
You will need to gather a full year’s worth of shipments to your end customers or a month’s worth of shipments that represents what a typical month looks like. The data inputs and the fields in each file you need include:
Outbound shipments from a fulfillment company: Required fields in your data set
Using a tool like Coupa can visually plot where your fulfillment company should be located. The main fields that the model will want are the origin and destination zip codes, total weight, volume, and revenue per shipment.
Two examples of what the output should look like are below, but the variables this model doesn’t include are access to a sizable labor pool, transportation market, and warehousing space.
Example 1: E-commerce owner
In this example, a client has a manufacturing facility in Minnesota and the model suggests that eastern Iowa is the the most optimal location for a fulfillment provider.
Example 2: CPG producer
For a e-commerce owner of a CPG product, this model shows that western Chicago is the most optimal place for their fulfillment provider.
Using the network analysis as a guide, create a short list of 3-5 fulfillment companies in your network’s output within a 100-250 mile radius. From there, create a request for proposal (RFP). It's important to structure it in a way that provides potential fulfillment providers with the information they need to provide a detailed proposal and easy enough for you to compare quotes.
The RFP should have an introductory page detailing important aspects about your business.
When requesting pricing information from potential fulfillment companies, it's important to include all of the relevant components of costs associated with using one. The main components of cost you will want to evaluate include:
If you want a true comparison, you can create a standard accessorial table with additional fees like stickering, intake fees, and request that these are standard and cannot change so fulfillment companies cannot hide any of their margin somewhere else.
Calculating shipping and fulfillment fees
Using your company’s outbound shipment details for a year or a representative month, you will want fulfillment companies to quote on the shipping fees for each shipment, packaging, and the fulfillment fee. Do not include your current shipping fee as this could be used against you.
Calculating storage and account management fees
On another tab, detail how many pallets and SKUs with their dimensions you plan to store on a monthly basis. Have fulfillment companies quote on the cost per cubic foot for a bin for each SKU and pallet.
You will want to give fulfillment companies an adequate amount of time to calculate their costs and margin to service your business. Typically, 2 to 3 weeks is enough time to process this task.
A master file should be created for each shipment to compare all quotes. This can be done in a pivot table, PowerBI, and similar applications.
Once you've received proposals, it's important to conduct a side-by-side analysis to compare all fulfillment companies. This analysis involves evaluating each proposal and comparing the costs and services offered. It's important to look beyond just the costs and evaluate the services offered by each company.
While cost is an important factor to consider when choosing a fulfillment provider, it's not the only factor. Other factors to consider include:
Choosing the right fulfillment provider is critical to the success of your business. By performing a network analysis, sending out an RFP, and conducting a side-by-side analysis of potential fulfillment providers, you can identify the most cost-effective logistics solutions for your business. However, it's important to look beyond just the costs and evaluate the services, expertise, and technology offered by each company. By following these steps, you can choose a fulfillment provider like a consultant and mitigate costs and improve your bottom line
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