In this post we look at 5 opportunities for cost reduction at your 3rd Party Logistics (3PL) warehouse.
When looking for ways to reduce costs at your 3PL first make sure you totally understand the way in which the costs are calculated and what actually drives the cost.
After that take a look at each section of the cost schedule (typically receiving and put away , storage, order fulfillment and transportation) and see if there is anything that you, or your 3PL service provider could being doing to change the way you are currently operating.
Some low hanging fruit might include the following opportunities:
- Minimize the number of inbound cartons with mixed SKU to reduce receiving and put away costs
- Develop a disposition plan to deal with obsolete or slow moving stock to reduce storage costs
- Optimize the dimensions of the packaging being used in the order fulfillment process to reduce freight costs
- Monitor transportation service levels to reduce freight costs
- Improve communication with your service provider
1. Minimize the number of mixed SKU cartons
Products stored in warehouses are held in either in a pick face or in a bulk storage location before being picked and packed as part of the order fulfillment process
Pick faces are typically set up to hold one SKU per location and only one SKU per carton is normally held in bulk locations.
With this being the case when a 3PL receives an inbound carton with mixed SKUs the first thing they will do is to separate the SKUs into single cartons before putting the products away to the pick face or the bulk location.
Quite often the 3PL cost schedule will include an additional cost for sorting and repackaging mixed SKU cartons.
To eliminate or minimize this cost it is as simple as instructing your suppliers not pack your orders in mixed SKU cartons.
2. Dispose of obsolete and slow moving stock
3PL storage costs are calculated based on the number units on storage or the amount of space the units take up in the warehouse.
Whilst not the main revenue driver, the longer your stock sits in the warehouse the more storage revenue the 3PL will earn. As a result the service provider has no real incentive to suggest ways to reduce your inventory holding.
In addition to gathering dust the value of slow moving and obsolete stock will also continue to diminish in direct relation to the actual cost associated with storing each SKU for the period that they are on storage.
Every business should have a disposition plan for this this type of stock. Selling at a discounted prices or in the worst case scenario destroying the stock on hand are options quite commonly used.
For relatively low value products there will come a time when the ongoing storage costs, not to mention what has already been incurred, will be greater that actual realization value of the stock on hand.
A proactive logistics or supply chain manager will ensure that this scenario is communicated the relevant stakeholders within his or her organisation and will drive some action in order to reduce storage costs.
3. Optimise dimensions of outbound order packaging
Transport costs are based on the greater of the gross or cubic weight of the package that the order is shipped in.
An order with a gross weight of 8 kg shipped in 3/4 full carton with a cubic weight of 12 kg will be charged at the 12 kg rate.
Having a variety of cartons or satchels with different dimensions will increase the ability to pack an order into the optimal packaging size and hence reduce the shipping costs.
Whilst standardizing shipping cartons may reduce overall packaging costs it can also lead to an increase is freight costs and therefor an increase to the total logistics cost .
To download a FREE Chargeable Weight Calculator for Road Express Transport shipments – CLICK HERE
4. Monitor transportation service levels
In most cases the 3PL service provider will on-charge the freight costs associated with shipping your orders to your customers.
Whilst the service provider may be able to offer better rates as a result of the volume discounts they have negotiated with their preferred carriers any saving is negated if your orders are being shipped at a service level that is not in line with what you would normally expect.
In some cases the reason for using an expedited freight service levels will be valid but regardless of the reason it will have a significant impact on your overall freight cost.
The use of an expedited service level will probably occur as result of needing to satisfy customer expectations but the key will be to understand what has caused the need to use the service in the first place.
Most likely it will be as result of poor planning within your organisation but may also be a result of an error made by the 3PL service provider.
By reviewing freight costs at the service level on a regular basis you will quickly notice exceptions to the use of the default service level and will be able to take the appropriate action to minimize the re-occurrence and reduce the ongoing freight costs.
5. Improve communication
Obviously not a line item on any 3PL cost but improved levels of communication with your service provider you can can lead to a significant reductions in logistics costs.
Letting them know that they you are expecting spike in order volume as a result of a marketing campaign allows the 3PL to ensure the proper level of resources are on hand during normal work hours and therefore reduce or eliminate any overtime charges that may be required to meet normal service levels.
Sharing information in relation to the timing and sell through expectations of new product releases allows them to better plan the location and pick face configuration for these products which will improve order fulfillment efficiency and the overall cost per order shipped.
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Number 5 is so important. Your 3PL provider needs to be viewed as a partner and it’s necessary to be transparent with them in regards to any business decision that impacts their services. A positive relationship with open lines of communication ensures that the process matches needs and expectations.
Hi Jason – thanks for your comment , 3PL management is all about relationships and communication , providing an acceptable level of service at a reasonable cost is expected – true partnerships come from sharing information and developing mutually beneficial outcomes – Regards Scott