Components of fulfillment costs

What are the components of fulfillment costs?

Chris Dunakin Last Updated: November 5th, 2019

Order fulfillment costs are the total costs of storing inventory, processing orders and delivering orders to the end consumer. It also includes fees for processing returns, restocking fees and other costs, such as initial setup fees and account management fees if you’re working with a third-party fulfillment services provider, inbound shipping costs, receiving costs, pick and pack costs, box and packaging fees, custom labeling and order insert fees and kitting costs. Because fulfillment costs include multiple components, the total cost of fulfillment varies by company and product.

Components of fulfillment costs

Managing your own order fulfillment process can be expensive and time-consuming. As a result, many companies focus on minimizing these costs without compromising service. To do so, some companies choose to outsource fulfillment to a fulfillment services provider or 3PL.

Outsourcing fulfillment includes a few additional costs compared to in-house fulfillment, such as initial setup fees and account management costs, but most components of fulfillment costs apply to both in-house and outsourced fulfillment. The difference is that companies handling fulfillment in-house aren’t paying fees based on a unit, order or pallet. Instead, in-house fulfillment costs include the cost of labor, infrastructure and supplies, such as packaging and shipping materials.

For the purposes of this article, we’ll focus on the components of fulfillment costs typically incurred when outsourcing fulfillment to a third-party fulfillment services provider or 3PL.

11 components of fulfillment costs

Let’s take a closer look at each of the 11 components of fulfillment costs.

Initial setup costs

When you first hire an order fulfillment service, you’ll have to pay for the setup. There’s a lot to do in the initial stages. This includes shipping all your inventory to the provider’s warehouse and/or connecting them with your drop shipper.

The 3rd party logistics (3PL) service will set up your account and integrate their systems with yours. This way, they can see orders your customers place and get them delivered on time.

Inbound shipping costs

Components of fulfillment costs: Inbound shipping costs

Then there’s the cost of getting your products shipped from the supplier or manufacturer to their warehouse facility. This will either be by air, sea or freight, which will impact the cost of shipment. Container fees (storage) add to the overall cost of inbound shipping.

Receiving costs

Receiving costs, or intake fees, consist of processing inventory that comes in from product shipments. Some 3PLs will charge an hourly rate with a minimum.

For example, consider a 3PL that charges $25 per hour but has a minimum of $200. If it only takes them three hours ($75), you still pay $200.

Others offer a flat rate, so you’ll know what you’ll pay upfront. In this case, they’ll charge by the unit or item.

Before the 3PL stores your products, they inspect your inventory. This includes ensuring products are in good condition, counting the items and scanning/entering them into their inventory software.

Inventory storage costs

Components of fulfillment costs: Inventory storage costs

One of the biggest components of fulfillment costs is the cost of inventory storage. Warehouses have limited space, which makes every square foot valuable. In other words, you’ll have to pay for the storage space your products take up. The larger your items, the more you’ll have to pay, and vice versa.

You can expect to pay more for inventory storage if it takes additional time or requires special equipment, such as heavy burden carriers, to move it to the appropriate storage location.

Pick and pack costs

Fees for picking and packing orders are another component of fulfillment costs. Once a customer places an order, it’s sent to your 3PL provider. Their associates must then find the items, pick them and pack them for shipment.

There are fees associated with each item that’s picked and prepped for shipping.

Box and packaging fees

Your products will arrive in boxes or other packaging, but inbound inventory is typically packaged in bulk. That means your fulfillment provider repackages items before shipping, such as packaging multiple-item orders into a single, larger box.

The cost will depend on the size and weight of the package and may vary based on whether it requires standard or custom packaging. Most 3PLs charge per item. Bulk rates for multiple-item orders or small order fees can impact total packaging costs.

Custom labeling & order insert fees

There are sometimes documents included in shipments to customers. For instance, if you’re holding a promotion, you may ask the order fulfillment provider to insert a brochure into each package. Receipts and invoices are often included in shipments, as well.

Some 3PLs offer additional services, such as gift wrapping or other customizations. The more customizations you request, the higher the fee for this component of fulfillment costs.

Kitting costs

E-commerce retailers do different things to stand out from competitors, such as bundling products. For instance, you may want to sell a group of products together under one SKU, or you may include a free item as part of a promotion with each order.

Kitting costs also include costs for assembling items before shipment. If one or more of your products require assembly or kitting, then you’ll be charged an additional fee per hour or by the item.

Outbound shipping costs

There’s a price to pay for each shipment the 3PL makes to one of your customers, which makes up one of the largest components of fulfillment costs: outbound shipping. It’s ideal to choose a fulfillment provider that gets a bulk discount from a shipping provider, so they can pass the savings on to you. The cost of outbound shipping varies based on the size and weight of the package as well as the shipping method, such as two-day delivery, freight or air, and other factors.

Returns processing & restocking fees

Each time a customer requests a return, they send it to your fulfillment service provider for processing. Your 3PL spends time inspecting the item for damage, and if it’s resaleable, they’ll restock it. Otherwise, they salvage or dispose of the item.

Returns processing fees may be higher for defective items that must be disposed of to cover disposal costs; otherwise, a standard returns processing and restocking fee applies.

Account management costs

When you hire a 3PL, they’re assisting your business with overall operations and account management. In this case, account management fees are another component of fulfillment costs you might be paying for.

Most 3PLs add an account management fee to your monthly invoice that covers the overall administrative costs of managing your account, including handling customer service calls and other incidentals. This takes a lot off your hands, allowing you to focus on running and growing your business.

Finding a reputable (and affordable) 3PL

Order fulfillment is a necessary part of running an e-commerce or retail business. Knowing the various components of fulfillment costs will help you to get a better idea of everything you’re paying for.

The next step is shopping around for a 3PL provider that offers all the services you need at the best price. Look for a 3PL that leverages smart automation solutions like collaborative mobile robots, such as Chuck by 6 River Systems, to streamline fulfillment. A flexible and scalable warehouse automation solution, 6 River Systems is powered by collaborative robots and artificial intelligence to keep associates on task and boost productivity.

Download our white paper, 7 Reasons Why Warehouse Robots Beat Traditional Automation, to learn more about how collaborative mobile robots can streamline fulfillment operations.