The Current, delivered daily.
This post originally appeared on the blog of Bainbridge Growth. It is being republished by The Current with permission.
It is hard to miss the sea of warehouses springing up seemingly overnight in cities all over the US. These facilities are providing the support for ecommerce to grow its proportion of total retail sales to 13% over the last couple of years. The convenience of two-day shipping, wide selection, and product availability are all based on the nearness of the facilities to metropolitan areas. Selecting a fulfillment partner (3PL) with the value add services, scalability, and pricing structure is imperative to your direct-to-consumer business.
Ecommerce as a percentage of retail sales (Image by Bainbridge Growth)
Fulfillment is a broad term, so let’s define that within inbound and outbound fulfillment. Inbound is the receipt of bulk shipments to the warehouse and the subsequent storing and tracking of this inventory using a warehouse management system. Outbound services monitor your order management system for a daily batch of orders and then packs (“packout”) these orders for shipping via your shipping provider that arrives; usually daily, to dock and pick up these orders for processing. An independent non-Amazon DTC business will typically pay a 3PL fulfillment operation explicitly for the square footage in the warehouse(s), per pick variable fees, and management fees.
Let’s look into how to compare these operations based on their pricing structure. Once a DTC operation surpasses a monthly order run rate that requires a certain level of spending on fulfillment services, it will at that point make sense to seek out a third party. Monitoring this intersection of forecasted order counts, AOV and costs should help keep you within a comfortable range of fulfillment costs to revenue on an aggregate and per order basis. Let’s run a quick sketch of that:
*COGs is a flat 50% of AOV (Chart by Bainbridge Growth)
When it comes to driving margin leverage against shipping and fulfillment, the key understanding is the split of fixed versus variable costs. When shipping small parcels, there is a certain cost sensitivity to weight that should allow a business to forecast shipping costs per order within a range. The costs of the 3PL partner for fulfillment-specific services will consist of fixed costs for space charges and management fees. Both of these are related to the amount of space your solution requires, let's say 10K square feet. Variable costs come in when measuring inbound deliveries and cost per pick of SKUs & items per order.
Management fees are typically paid monthly, and serve as a general cost for the 3PL’s basic services, sales support, and warehouse management system reporting. This monthly amount will vary based on the core services selected. Space charges are the other (semi) fixed cost that is based on your forecasted monthly order rate. A fulfillment partner will scope out the amount of space they think is a good fit for your solution and charge you based on a per square foot rate. It is very important to get a good feel for what the right amount of space for your business is because if you forecast orders accurately it will minimize storage costs and help avoid signing on for too much space.
Variable costs are what most are already familiar with, as a warehouse associate moves down an aisle picking 20+ orders at a time, each item pick action is priced and charged to the customer. Assuming a cost of fifteen cents per pick, with duplicates of an SKU done for ten cents the initial rate that cost would look like the following:
(Charts by Bainbridge Growth)
Add the variable cost of 75 cents to $13.00 in fixed costs at 5K monthly orders to reach the all-in total of $13.75. If this number looks relatively high in comparison to AOV, then the business is probably not in need of the full 10K sq feet.
With this price structure, there is clearly moderate leverage gain in getting customers to order in bulk, especially if you sell mostly lightweight items. Large parcels have significantly more dispersion of pick (and shipping) costs, so expect higher per-item costs if your item is large or heavy. On fixed costs there are significant advantages to pushing more orders through the allotted 10k square feet, work with your 3PL to optimize it for the right use of flow and storage.
Value added services are the other primary variable cost, this consists of how many labor hours you purchase for things like high touch pack service, labeling adjustments, or changing the configuration of items in the package. You’d likely end up paying a flat rate of say $40 an hour for these types of services that are performed just before or during the packout process.
Once we understand how to think about a single location, you can apply the same to multiple FCs with some potential for combined management fees across your multi-facility solution. Most companies have facilities strategically located across the US, offering both B2B and B2C capabilities. Be aware that many 3PLs will outline typical ramp up times of roughly 3 - 6 months and charge service start up and integration costs.
As you work through your pricing quote and select a partner, it is best to know your customer and their needs. Make a smart strategic decision on your location, so the product is in close enough proximity to where most of your customers are. Start your process with an accurate orders outlook so that you will scope the right sized solution and carry less risk of price changes based on weaker/strong order flow. The goal should be to efficiently drive volume through your optimized space layout while carrying a rational amount in storage.
Trending in Operations
LadderUp is aiming for 50% LGBTQ+ and BIPOC participation. Shopify will provide access to its platform.
Shipt is launching a new accelerator program designed to provide ecommerce tools for local retailers.Called LadderUp, the program is centered on equity. Target-owned delivery owned Shipt said conversations with business owners have revealed that local entrepreneurs face “gaps” in technology, but they also want to participate in ecommerce platforms. The COVID-19 pandemic was especially difficult for Black business owners, who saw earnings drop between 11-28% in 2019-2020, as compared to the earnings decrease of 5-17% for the rest of the population.
With the new program, the company’s goal is to reach at least 50% LGBTQ+ and BIPOC participation in the program.
Shipt is aiming to serve businesses in Atlanta, Birmingham, Alabama, Detroit, Houston and Washington, D.C.
Target categories include: grocery/beverage, health, beauty, and floral/gifts retailers.
“Working with small businesses to build up their capabilities is a key part of our commitment to help create healthier, more resilient and equitable communities,” said CEO Kamau Witherspoon. “We recognize the unique role that we can play in both combating hunger in under-resourced communities and boosting small, local retailers that are so vital to communities across our country.”
What will entrepreneurs receive?
Education: Business owners who are selected will receive an 8-week course with industry leaders that covers business-building topics including finances, efficiency, marketing, ecommerce 101, the basics of using Shipt, and legal knowledge.
Funding: Upon completion, retailers will provide $5,000 for businesses to invest in ecommerce.
Shopify access: Shopify, which is partnering with Shipt, is also providing to its access for a limited amount of time to help business owners build an online storefront and manage inventory. The program will also provide technical assistance.Applications are open Feb. 6- March 6.