Fulfillment Costs Explained: Everything You Should Know in 2022

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fulfillment costs explained

When you decide to outsource fulfillment to a 3PL or other fulfillment supplier, the first thing you should get a handle on is what they charge.

Fulfillment costs typically include receiving, storing, picking, value-added services, and shipping the goods.

It is critical to understand what is involved in fulfillment pricing. This way, you can accurately calculate your fulfillment costs for each order.

In this guide, we’ll cover all the individual costs and some of the hidden costs that together create your total fulfillment costs.

What Are the Fulfillment Costs?

Fulfillment costs are the total costs and expenses calculated to receive inventory, store products, process orders, pick, pack, and ship all orders and inventory.

It also includes the cost of processing returns, restocking costs, and other expenses. Because fulfillment costs include multiple components, the total cost varies by company and product.

You may learn more on our blog for Order Fulfillment for details below:
What Is Order Fulfillment? Processes and 6 Key Steps in 2022

Why Understanding the Fulfillment Costs Important?

understand the fulfillment costs

As an e-commerce business, you must know the total fulfillment cost in advance so that you can plan your profitability and ROI accordingly.

Generally speaking, retail prices need to include all the costs you incur to get each order to your customers.

Shipping costs are the most important part of your total fulfillment costs. If you have free shipping, you need to add it to your product pricing.

It is also important to break down other fulfillment costs such as receiving, storing, picking, and packing costs. Even though most of your orders will not be returned, you need to factor the cost of returns into your pricing.

Finally, there are some hidden fulfillment costs. These costs may include order minimums and account management fees. Including them in your total fulfillment costs and the average cost per order is critical.

What Do the Fulfillment Costs Depend on?

Fulfillment refers to the execution of all activities that involve customer orders and are related to the processing of orders.

Therefore, fulfillment costs include receiving, storing, picking, servicing, and transporting goods. The more complex the supply chain, the higher the cost.

Fulfillment costs vary greatly from one fulfillment supplier to another. This will depend on many factors, including:

  • Pricing model
  • Order quantity
  • Quantity discounts
  • Fee structure

What Factors Affect the Fulfillment Costs?

what factors affect the fulfillment costs

When developing fulfillment costs, fulfillment suppliers will take into account the following factors:

1. Set-up

The fulfillment supplier will charge an initial fee to set up the service for you. This price may be higher, depending on the size and complexity of your business.

2. Receiving, warehousing, and storage

Logistics suppliers will charge a fee for receiving and handling new shipments. Depending on the time the goods are stored, they will also charge for storage, which may increase.

3. Order fulfillment, picking, and returns

These fees include packing or picking each order and the fees paid for each return that needs to be processed. Either sent back to inventory or returned to the manufacturer.

4. Shipping

The cost for shipping goods to customers, your total shipping costs may be lower or higher than you are currently facing.

Sometimes fulfillment suppliers will ship large quantities of goods at a time and pass the discount on to the customer.

5. Size, weight, and volume

The shipping cost will vary depending on size and weight, with larger and heavier packages costing more than smaller and lighter ones. You can get further discounts if you ship large quantities of goods.

6. Account Management

The fulfillment supplier will charge a fee for managing your account. These will cover any customer service issues you need to deal with and any other services that are not related to the shipping process but are necessary for your account.

You may learn more on our blog for Fulfillment Services for details below:
Complete List 2022: Top 20 Best Fulfillment Services

How Much Are the Fulfillment Costs?

Because each fulfillment supplier calculates the price of their services differently, no industry standard allows you to predict exactly the fulfillment cost. However, some popular models can be used to calculate your own prices.

Models based on individual items:

  • By the cubic foot (for inventory storage)
  • By order (pickup and packing costs)
  • By shipment (receiving costs)
  • Flat rate for customer support costs

Models based on units:

  • By pallet
  • By unit
  • By hour

For example, cubic foot-based inventory storage costs might be $0.30 per cubic foot per month, while unit-based pricing by pallet might be $20 per pallet per month.

The fulfillment supplier’s pricing model significantly impacts the total cost, so you must clearly understand which fees apply to which fulfillment service pricing models to estimate their fulfillment costs accurately.

How to Calculate the Fulfillment Costs?

calculate the fulfillment costs

Calculating fulfillment costs is not easy because there is no formula that works for all companies. Instead, you must add up each cost to get an exact amount.

Before calculating the total fulfillment cost, you must determine:

  • Fulfillment supplier rates (per unit, product, or time frame).
  • The number of pallets, orders, and product units for the accounting period.

After all the values have been determined, add them to determine the total fulfillment cost for that accounting period. However, this number is only an estimate.

For example, a retailer selling assembled cabinets is charged the following fees by their fulfillment center:

  • $3 per piece for storing fee
  • $2 per piece for the picking and packing fee
  • $5 per piece for the shipping fee
  • $2 per piece for receiving fee
  • $30 per month for managing fee
  • $9 per unit for returning fee
  • $40 for a one-time set-up fee

In the first quarter, the company sold 200 cabinets and had 5 customer returns, which means their total fulfillment cost for the first 3 months was $2,605.

  • 200 cabinets x $3 = $600 in storage costs
  • 200 cabinets x $2 = $400 for picking and packing
  • 200 cabinets x $5 = $1,000 for shipping
  • 200 cabinets x $2 = $400 for receiving
  • 4 months x $30 = $120 for management
  • 5 returns x $9 = $45 for returns

$600 + $400 + $1000 + $400 + $120 + $45 + $40 = $2,605

Tips: As long as the company reduces customer returns and maintains its sales, its fulfillment costs will be reduced because the set-up fee is not recurring.

How to Reduce the Fulfillment Costs?

reduce the fulfillment costs

Here are the top ways to reduce fulfillment costs, both internally and when outsourcing:

1. Start with an audit

An audit helps better determine your business needs so you can see where to reduce if you’re spending more money than necessary.

2. Your receiving costs

Receiving and verifying your inventory is a typical warehousing process. You should review your fulfillment suppliers and compare their receiving costs before you start working with them.

3. Use shared space

Some fulfillment suppliers offer shared space warehouses to accommodate more than one customer. Shared space services greatly reduce costs because you are sharing costs with others.

4. More advanced technology

Not all advanced technology is expensive. Many outsourced warehouses give you a fixed rate while you still enjoy the latest technology to ensure your customers get an earlier delivery.

5. Use what you have in a more effective way

By getting as much productivity as possible from what you already have. Such as effective product replenishment, time slotting practices for picking, effective inventory management, quality assurance, and automated systems.

What Are the Hidden Fulfillment Costs?

hidden fulfillment costs

At the beginning of the article, we talked simply about the hidden fulfillment costs, and it is crucial to include them in your total fulfillment costs. What exactly are these? Let’s find out.

1. Minimum order quantity

You probably won’t be shipping many monthly orders if you’re just starting your eCommerce business. The monthly order minimum is the minimum you must pay, regardless of how many orders you ship.

2. Human error

No matter what the most advanced workflow automation software is used, human error is always possible. For example, the customer’s details are incorrect, and you have not cross-verified them.

Some fulfillment suppliers will charge expensive fees to fix these errors. If you refuse to pay these fees, they will continue to charge you until you do.

3. Storage costs

Inventory storage in fulfillment centers is always expensive. This is because fulfillment centers are not designed for long-term storage; they are temporary solutions for quick inventory cleanup and turnaround time.

Some fulfillment suppliers will charge you for storage based on pallets; your product may only account for 10-20% of the pallets. If you do the calculation, you are paying every day for storage space that is not being used.

4. Disposal fees

Suppose you cannot sell the ordered inventory well, and a lot of dead inventory is piling up. In that case, the fulfillment supplier will charge an additional fee to dispose of that inventory.

Once there is unsold inventory, you are already starting a loss. And to add insult to injury, you must pay for inventory disposal.

Fulfillment Costs FAQ

1. What are fulfillment costs?

When outsourcing fulfillment, you will have to pay fulfillment costs. Fulfillment costs include receiving, storing, picking, packing, and shipping. Other costs may consist of set-up and return management.

2. What are fulfillment costs composed for?

Fulfillment costs include storage, picking and packing, and shipping costs. In addition, the cost of value-added services (VAS), such as return management, may be added on.

3. How much does the fulfillment supplier charge?

Different fulfillment suppliers price their services differently, including total fulfillment costs, pick and pack, etc. Some fulfillment suppliers charge an overall monthly price, while others charge per order.

4. How to optimize fulfillment costs?

It is important to compare quotes from different fulfillment suppliers to optimize the cost of outsourced fulfillment. In this regard, costs should always be weighed against the quality of service.

Fulfillment Costs Conclusion

The fulfillment cost is one of the main factors that will impact your decision on which supplier to outsource. Once you know what to expect in terms of cost, you can look around wisely for a fulfillment supplier.

Hopefully, this article will help you get a general idea of what to expect and spot excessive charges.

Want to learn more? Get in touch with our team today to find out how Yansourcing can help your business achieve faster, better quality fulfillment.

We are a leading sourcing agent in China. If you are looking for international trade but do not have any experience importing or customizing products from China, please do not hesitate to contact us!

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