An All Inclusive Guide to Comparing In House Costs Against Fulfillment Outsourcing
One of the most common questions that we get from companies that visit our site is, “How much do fulfillment companies charge in general.” The main point is that many companies are trying to find out if using a fulfillment company is a viable option from a pricing perspective. While we’ve created some resources in the past, including our in-depth fulfillment pricing and costs resources page as well as our PDF on How to Select the Best 3PL Fulfillment Company for Your Business(which includes some general ideas on what fulfillment companies charge), we thought it might also be beneficial for some if we actually provided a real life example of a company that crunched the numbers and performed the actual analysis. In addition, we’re including our custom ‘In House Versus Outsourced Fulfillment Price Calculator’ below so you can run the numbers on your own scenario, as well as some general guidelines to use to determine if outsourcing fulfillment is right for your business. Click on any of the links below to jump ahead to the section that interests you most.
- Case Study – Performing a Real Life In-House Versus Outsourced Fulfillment Analysis
- In-House Versus Outsourced Fulfillment Price Calculator
- When is the Right Time to Outsource Your Fulfillment?
Below, we walk you through the steps of an in-house versus outsourced fulfillment analysis, where we helped a new start up determine all of the costs of performing the fulfillment in house and compared that to the costs of using an outsourced fulfillment provider. We’d like to thank Leslie Paradis for contributing to this article and acting as a test case of sorts. She allowed us to compile all of the data from her real-world business so that others might benefit by seeing a live example and also by viewing the methodology used to conduct such an analysis.
Taking a Look at In House Fulfillment
To start the in-house fulfillment analysis, Leslie referenced our In House Versus Outsourced Fulfillment Pricing Calculator below. She used the line items on the calculator in order to understand the grand universe of potential fees that she will encounter if she opens and runs a warehouse internally. In general, a new business that wishes to open up their own warehouse will run into the following costs:
- Labor (This is the cost of any staff that will be used in the warehouse – including receiving orders, inventory management, order fulfillment and shipping. Even if the business owner is going to be performing these functions, it is important to include them in the overall cost analysis in order to get a fair representation of true in-house costs.)
- Rent (This is the cost of actually renting a warehouse space. While in house operations will allow for greater control over the process, one of the main drawbacks is that your company will be hampered by the fixed cost of leasing a space.)
- Utilities (Just like owning or renting a personal living space, running a warehouse space will require certain utilities, such as electric and water.)
- Insurance (If you lease a warehouse space, you’ll be required to obtain insurance for any accidents or catastrophes that occur.)
- Supplies (This is the cost of any materials needed to run the warehouse, such as shrink wrap, cartons, carton fill, etc.)
- Shipping (This is the cost of actually shipping your packages or goods, either by small parcel carriers such as FedEx and UPS, or by LTL or Truckload carriers.)
- Customer Service (Some time will no doubt be needed to answer email and phone calls presented by your customers, and this line item attempts to budget for the expense of managing your customer base.)
- Management Time (Many companies, when conducting this analysis, forget to factor for this “soft” cost. However, there is usually a good amount of time spent by the owner or other managers in consulting with the warehousing division of the company. These costs can add up quickly, but if unaccounted for, will not adequately reflect the true cost of in house fulfillment.
- Software (This is the cost of any software needed to perform inventory control and shipping.)
Real World Examples of In House Costs for a Start Up
Thanks to Leslie, we ‘re able to provide you with some real-world examples of what these costs might be for an actual start-up company. Before we dig into her numbers, however, let’s walk through a couple of assumptions that she used.
First, Leslie was extremely smart to perform an in-depth sales and marketing analysis in order to understand a rough idea of her potential sales. Many companies jump right into business, but this is a sound first step to take. Second, she determined that she needs one warehouse employee in order to run her business. Third, she decided not to factor shipping costs into the equation. Ultimately, by outsourcing with a fulfillment provider, the fulfillment company may be able to save a business from 5-20% on shipping fees depending upon volume, but she assumed that there would be no difference in order to simplify the comparison. Fourth, she decided not to include any management time in the equation. She will, no doubt, be involved in the process, but because she is a start-up business she decided that it would be very difficult to determine the actual hours of management time required. Finally, her sales forecast showed that she will be selling 450 orders per month and that roughly 15% will be returned.
After researching these in-house costs, Leslie found that it would cost her roughly $2,000 per month for a warehouse worker (taxes included), $2,000 per month for a warehouse lease, $300 per month in utilities, $125 per month in insurances fees, $250 per month in supplies expense, and $289 in monthly warehouse software expenses, for a total of $4,964. The monthly costs are summarized below:
Real World Examples of Outsourcing Fulfillment Costs
The next step was to determine how much it would costs Leslie to outsource fulfillment. Then, she could compare the two and decide which makes the most sense for her new business. In order to determine the outsourced fulfillment costs, we helped her estimate by obtaining these fees from some of our partner warehouses. These costs include:
- Receiving Fees to receive in product in bulk (This only happens periodically.)
- Order Fulfillment Fees (This is the cost of picking and packing the order. Oftentimes, fulfillment companies charge on a per order and per item basis, meaning that there is a cost per order to pick, plus a per item charge to pick each additional item on the order.)
- Storage Fees (The storage fee is the cost per pallet or per cubic foot per month to store your product. The good thing about using fulfillment companies is that you will only be charged for the space you use.)
- Carton Costs (In our example, we assumed that the fulfillment company charged an additional fee for cartons. However, many companies roll the carton fee into the order fulfillment fee. We did this to be conservative on our estimates.)
- Returns Fees (This is the cost for the warehouse to process any returns, including inspecting the product for damage.)
- Customer Service Fee (Sometimes, warehouses charge a flat monthly fee for any customer service they provide you company. This typically covers calls from your staff to the warehouse to ask questions, and it doesn’t include customer service to your end customers.)
- Call Support (This is the cost of having the warehouse answer your customer service calls, per minute.)
- Set Up Fees (Sometimes, fulfillment companies charge a set-up fee to integrate with your shopping cart or order management system. It is a one-time fee.)
After researching these in-house costs, Leslie found that outsourced fulfillment would cost her roughly $675 for receiving, $1,381.25 for order fulfillment per order and per item, $450 for storage, $191.25 for cartons, $239.06 for returns fees, $150 for account management, $325 for inbound call center support, and $500 for a one-time set up fee., for a total of $3,911.56. The monthly costs are summarized below:
|Order Fulfillment Fees Per Order||1,062.50|
|Order Fulfillment Fees Per Item||318.75|
|Set Up Fee – One Time||500.00|
|Total Without Set Up Fee||3,411.56|
The Conclusion of Our Case Study
For Leslie, operating at a level of 450 orders per month, she found that her total monthly savings by using a fulfillment provider would be roughly $1,052. However, if she didn’t include the one-time set up fee, her savings would be $1,552 – which represents a significant cost savings. Leslie’s case study isn’t perfect for every start-up or ongoing business, but it serves as a compelling example of the potential cost savings of using an outsourced fulfillment company. Furthermore, while there are other things to consider, it underlines the importance of conducting an analysis full of all of the details in order to make the best decision for your business.
Now it’s time for you to decide for your company. Outsourcing is a difficult decision – choosing whether you should keep your fulfillment operations in house or free up some of the time it takes to manage fulfillment by outsourcing with a fulfillment provider. Over the years, we’ve spoken with quite a few companies, and so frequently, companies have a difficult time making the best decision. While there are so many factors, financial and otherwise, oftentimes the ultimate decision comes down to cost savings. But what if you don’t use the correct pricing information? If this happens, you’ll end up making the wrong decision – and all too often companies make a decision without factoring for all of the costs! Because of this, we were inspired to create an In House versus Outsourcing tool that would help lead you down the right path. While the tool will require you to look at a lot of different components, by thoroughly investigating both sides of the equation you’ll be able to make a confident decision once and for all. Best of luck with running the numbers for your company and let us know if you have any feedback or questions!
**Please note: Page 1 is where you’ll enter your in-house costs, Page 2 is where you’ll estimate outsourced costs, and Page 3 is where you’ll find the results!
Taking the plunge into outsourced fulfillment can be quite intimidating. Obviously, costs are on the mind of most companies, but there are more factors to consider than running the numbers. Outsourcing your fulfillment brings other special benefits. There are risks – Especially if you’ve performed the fulfillment operations for quite some time, allowing a third-party company to handle your storage and distribution is similar to many new parents having a baby sitter watch their child for the first time. Having complete control over the process can be comforting – but it can also be very limiting. Knowing that there are experienced professionals that have been performing similar services for other customers can provide a certain degree of relief. It’s also helpful to understand all of major benefits of outsourcing so that the best decision can be made. Below are four of the top reasons to consider outsourcing fulfillment for your business.
Make Costs Variable Instead of Fixed
When you run your warehouse, you are responsible for the warehouse space, all warehouse staff, equipment, software, and supplies, among other items. Many of these costs are considered fixed costs, since they are costs incurred regardless of the amount of sales or space needed during a particular time period. For example, warehouse space requires a warehouse lease – usually for a period of a year or couple of years. It doesn’t matter whether you have a holiday ramp up in warehouse usage or a summer slow-down – you still incur the same monthly fee for the lease. Similarly, equipment such as forklifts and scales, warehouse management software, and even non-temporary warehouse staff and personnel can become fixed costs, limiting cash flow and strapping growing businesses. On the other side of the coin, when you outsource with a warehousing and fulfillment company, you don’t have to manage a warehouse lease or warehouse staff. Rather, they take on these responsibilities, allowing you to use as much or as little space and service as needed throughout the year. This is particularly helpful with seasonal businesses that experience spikes and downturns in order volume and storage space requirements. And one last side benefit with regard to warehouse staff costs – the warehouse has to manage the varying needs, ongoing training and management, as well as taxes associated with personnel – taking a serious and time-consuming burden off of your shoulder.
Focus on Growing Your Business
Don’t get me wrong, logistics is important. However, storage and shipping are more commonly outsourced functions that can be handled quite well by a third party. Of course, you’ll need to make sure that you partner with a company that cares as much as you do about your product and customers, so that a high-quality service is guaranteed for your business. But with a competent fulfillment provider handling your logistics, there might be better things that you and your staff can spend time on that will propel your business to greater success, such as product development, sales and marketing. Furthermore, it’s important to consider the concept of “opportunity costs” when analyzing the potential benefits of outsourcing. Simply put, outsourcing will allow key management and staff focus efforts on other value producing activities, the result of which might even generate more sales or profit at the end of the day. In other words, the opportunity cost of keeping the warehousing function in-house may be additional sales and profit that you’re leaving on the table since more time will be spent on the logistics function.
Enter New Markets – Especially International and Retail
Oftentimes, growing companies opt to enter new international markets in order to grow sales. In doing so, there are operational challenges related to shipping and distribution within these new areas. A high quality international fulfillment provider has proven experience with all of the rules and regulations necessary to successfully operate distribution on an international level. They can take the learning curve out of the expansion, helping you minimize any potential challenges.
Capitalize on Specialization
At the heart of any discussion on outsourcing is the theory of “specialization.” The thought is that a company can become more productive and thus provider a better service and/or decrease costs by specializing. In the case of outsourcing fulfillment, specialization can help in two ways. First, fulfillment firms should be more proficient at performing storage and shipping related services, since they provide this service to a multitude of clients. Second, your business can become more proficient at your core competencies, since your team won’t be doing fulfillment related tasks. This should help the business operate at a higher level, with all areas of the business being given appropriate attention by specialists.
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