Understanding Third Party Logistics (3PL) Warehouse Services and Costs – Part 1

Overview

Unless you are willing to own ships, aircraft and a fleet of vehicles there is effectively no choice but to engage a third party logistics (3PL) service provider to provide international shipping or domestic transportation services.

The warehousing function however can be a different proposition. Warehousing activities are often performed in-house but it is also quite common for them to be managed by a third party logistics (3PL) service provider. The overall debate as to the merits of outsourcing verses insourcing will be addressed in another post. This post will focus on understanding the basics of third party logistics (3PL) warehouse services.

The basic functions of a warehouse operation can be summarized as follows:

• Receiving and put away of inbound inventory
• Storage of inventory pending order fulfilment
• Order fulfilment – Pick, Pack and Dispatch of inventory to fulfil customer orders

3^rd Party Logistics (3PL) warehouse service providers are used as alternative to a company setting up and managing the activities required for it to distribute the products that it sells to its customers. A 3^rd Party Logistics (3PL) warehouse service provider will assume the risks associated with operating a warehouse in return for being able to charge its clients a fee for providing order fulfilment services.

Interestingly enough, the most common billing method employed by 3^rd Party Logistics (3PL) Service Providers is based on a rate schedule that charges for each of the above three activities on a usage basis. This method of billing is referred to as transaction based cost.

Other methods of charging include:

• Outbound transaction cost – whereby the service provider will charge the client based on the outbound activity (order fulfilment) with charges for the other activities built in to the outbound transaction cost
• Cost plus basis – whereby the service provider will charge the client for actual cost of delivering the service plus an agreed profit margin
• Fixed cost basis – whereby the service provider will charge the client a fixed periodic amount for delivering the service regardless of the activity for the period
• A combination of fixed and variable costs – whereby the service provider will recover the fixed costs associated with servicing the client (storage and dedicated labour for example ) but then charge a transaction based fee for other activities such as receiving, put away and order fulfilment

Regardless of the charging methods the third party logistics (3PL) service provider will obviously be endeavoring to make a profit make from the services that it provides to its client. In order to be profitable the third party logistics (3PL) service provider must have a thorough understanding of its fixed costs but more importantly be able to accurately forecast the mix and volume of activities that it expects to perform for the period so it can set its rates at the appropriate levels.

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