3PLs play an integral part of many ecommerce and wholesale distribution supply chains. But if your company has ever researched costs, you will find that no two vendors have similar models when it comes to storage fees. Understanding how vendors charge for storage can be difficult, especially if you are starved for data.
At a high-level 3PL storage costs follow one of two pricing models, on demand type storage, and dedicated space models which are more fixed cost. To understand which model is more advantageous for your ecommerce business or whole distribution, we need to look at each option further.
On Demand 3PL Storage
This 3PL storage option fluctuates based on how much inventory you are storing. A typical approach is to take a monthly snapshot and invoice based on one or more of the following:
- Per pallet
- Per square foot
- Per cubic foot
- Per bin type (half pallet, large, medium or small bins)
The benefits of 3PLs pricing this model are that it allows smaller companies storage costs to fluctuate with seasonality. As inventory volumes declines, the storage costs will also decrease. It is not uncommon for 3PLs to charge for bulk pallets in inventory and for each bin location for picking purposes. If you had 500 active SKUs, then each active SKU would have a picking bin.
A downside to per pallet position is a pallet that only has two cases on it, is going to still be charged on a per pallet rate. This is why it is important to ensure your 3PL is consolidating pallets or moving low case quantities to a smaller bin location. Additionally, this should reinforce getting rid of older slow moving inventory. Otherwise, your storage costs will remain high.
Less common methods among 3PL vendors include per square foot, or per cubic foot. The downside to these methods is that clients need to have accurate SKU, carton and pallet dimensions. Unfortunately, many businesses do not have accurate dimensions.
Dedicated 3PL Storage Space
This option is generally utilized with larger clients, or those clients that have large bulkier inventory needs. A 3PL will assess the total space need for peak and non-peak times and propose an amount of space for your business.
This proposed square feet will be based on your inventory requirements and how the vendor stores inventory in their distribution center. This could be dedicated space within a multi-tenant facility, or a dedicated distribution center if you are large enough.
In this model, the space is typically invoiced as a fixed cost each month. Meaning, the 3PL costs will not fluctuate as your inventory fluctuates. The space is dedicated to your business specifically. As you grow, you may require additional space, which the vendor will reevaluate with you.
The downside is that as inventory levels decrease, the storage costs will remain fixed. If you had your own internal fulfillment, this would also be the case. You would have excess capacity in off-peak times. It is important to understand that 3PLs need to have sufficient space for each client. If they were to not dedicate space, it could lead to significant issues at peak times.
Important 3PL Storage Considerations
There are many aspects to consider when researching 3PL storage costs, some of which will impact vendors that want to bid on your business. Having very good data will help to present your business accurately to 3PLs.
Inventory Turns - Companies that are not turning inventory will not be as attractive to 3PLs. Profit margin is predominantly driven by 3PL services and touches. This means that order fulfillment fees (receiving, picking, packing, etc.) drive profitability where storage covers their costs. Some vendors may also propose increased storage costs for inventory that doesn’t turn after it is older than 6 to 12 months.
High SKU Counts - Companies that have a high SKU count in relation to order volumes are also a problem area for 3PL vendors. Unfortunately, there is no set ratio that all vendors measure everything by. An example would be having 4,000 SKUs and only shipping 800 orders per week. This creates a large space and inventory management risk with very little revenue being driven from order fulfillment.
Shipping Supplies - One area that isn’t often discussed up front is how shipping supplies are handled. Generally, shipping supplies that are sourced by the 3PL do not incur a storage fee. However, if client sourced, there are typically storage costs that apply.
For some 3PLs this is monthly, or only if supplies have been in inventory over a specified amount of time. This is to keep a client from over ordering supplies. This makes it important to analyze the markup on shipping supplies from the vendor versus the potential storage costs. The 3PL markup may be less that the inbound shipping costs and storage fees. If you use branded supplies, 3PLs can typically source these as well.
Cubic Foot Storage - For vendors that charge by the cubic foot, you need to do some due diligence. Evaluate the following aspects:
- Will you be responsible for establishing product and case dimensions?
- Can the vendor gather and maintain this at the time of receiving?
- What will the cost be for the 3PL to perform this activity?
- How will you monitor the process to ensure the billing is accurate?
- Have you investigated the vendor warehouse management system to understand how they will measure real time, and invoice appropriately?
In this case, the space needed for receiving, picking, packing, etc. is already included in the other logistics services. A site visit will confirm whether the 3PL is efficiently using warehouse space. If not, you could be overpaying for space in their logistic operations.
Max Pallet Height – A critical piece to understand in the proposal process is the max pallet height from each vendor. You may currently be storing pallets at 65” in your own warehouse, or current 3PL. However, it is not uncommon to see a max pallet height of 48” to 60”. This would drive up the number of pallet positions needed. Additionally, this may force you to incur an added service fee to down-stack pallets.
Hazmat/Dangerous Products - When understanding 3pl storage costs, what you are trying to store can play a big role in the pricing and who may be interested. Hazmat and dangerous products can greatly increase rates and are the most common reason for vendors not bidding on your operations.
Some 3PLs are not setup to handle hazmat and dangerous products. It is imperative to have up to date MSDS sheets for your product to give the vendors an accurate understanding of what it is they would be storing.
Climate Controlled Storage - Ambient vs climate-controlled space and the level of climate control is the other determining factor. Frozen space is at a premium and is the most expensive type of storage. Its important to know what range of temperature, and even humidity, your products need or can withstand.
For ambient space, its not uncommon for summer temperatures inside the facility to reach 90 degrees for short periods of time. Your product may not need to be cooled to a particular temperature, but that upper temperature could pose a concern for some.
Its important to know thresholds on both ends of the spectrum for all of your product so that it can accurately be portrayed to the 3pl who can then accurately portray the costs, or inability to conform.
As you and your supply chain management team evaluate options, understand the way they choose to charge for storage. Determine which vendors offer the most cost effective storage solutions based on your needs. The proposed 3PL pricing can be a cost savings if you are up against having to sign a new long term lease. Utilizing a 3PL consultant can help to evaluate the options.