// industry insights

Logistics Costs: 5 Cost Drivers during Warehousing, Fulfillment & Shipping

Published on: 11th August 2020, 10 min read.

Overview:

Our guide on Logistics Costs

Merchants nowadays are expected to keep up with customer demands regarding low shipping costs of orders. So, eCommerce, B2B and Retail companies put a strong focus on minimizing the costs involved with handling their logistics operations.

These logistics costs particularly depend on whether a merchant has its own warehouse or whether an external warehousing and fulfillment provider is used. Particularly when facing fast-growing sales, outsourcing fulfillment operations to a third party logistics (3PL) provider helps merchants focus on their core business while at the same time ensuring excellent customer experience regarding order delivery.

In this article, we will be looking at warehousing, fulfillment and overall logistics costs using independent 3PL providers.

Particularly when engaging in logistics processes with external logistics providers, it is important to understand how they price different stages in the fulfillment operations.

The main drivers, which determine logistics costs are time and volume. So, if the stages along the supply chain involve standardized and frequent tasks with high volumes, higher efficiency and economies of scale are achieved – resulting in lower time spent per fulfilled order and thus lower logistics costs.

One main problem, which prevents merchants from having a full understanding of logistics costs, is that the warehousing and fulfillment market is very intransparent. In Germany alone there are over 1,000 specialized external providers and prices vary up to 50% for the same task and Service Level. Differences in operational workflows are one of the main factors that lead to the differing warehousing and fulfillment costs among logistics providers. 

Hence, merchants should be aware of the overall ranges of logistics costs and ensure getting an individual quote from a very well fitted logistics provider that has operational expertise in the respective product category. 

Due to the fact that warehousing, fulfillment and shipping costs highly fluctuate depending on the logistics provider, the volumes of goods, the degree of standardization along the supply chain and many more factors, all costs and price ranges that we refer to in this article are based on averages.

KEY Takeaways:

  • Outsourcing fulfillment to a 3PL provider helps merchants keep up with customer demands regarding low shipping costs of orders 
  • Merchants should have a Know-How about how 3PL providers price different stages in the fulfillment operations
  • Warehousing, fulfillment and shipping costs mainly depend on time spent during different stages along the supply chain and on the volume of goods

Typical Logistics costs involved during warehousing, fulfillment and shipping

Typical logistics costs can be broken down into five main components depending on the stage in which the product finds itself along the supply chain.

Logistics Costs – Incoming goods

The first cost centre involved with a product’s fulfillment incurs when products are sent to and consequently received by a warehousing, distribution or fulfillment center location. Logistics providers refer to this step along the supply chain as incoming goods.

Logistics Costs - Incoming Goods

Logistics Costs – Incoming Goods

Average Cost range parcel3.00-4.50 EUR
Average Cost range pallet3.50-6.00 EUR

Logistics costs arise when incoming products are received, checked and then stored on free space in the warehouse. The service level can range from sample inspection to complete counting and functionality tests. The logistics costs related to incoming goods depend on how extensive the required service level is.

Particularly when making use of premium services, such as 100% completeness checks and functionality tests, the logistics costs increase due to a longer time spent per product. Another logistics cost component during sample inspection are skills that require special training of employees. Here it is important to define the desired Service Level Agreements (SLAs) with the 3PL provider in advance.

Besides the service level, there are two additional logistics cost drivers for incoming goods: the number of Stock-Keeping-Units (SKUs) and the quantity of each type of product.

When using standard service levels for incoming goods, including checks with a visual inspection and exemplary counting, the costs range from 3.50-6.00 EUR per single SKU pallet and from 3.00-4.50 EUR per single SKU parcel. These logistics costs increase for mixed SKU pallets and parcels.

KEY Takeaways:

  • Incoming goods are received, checked and then stored 
  • The main cost drivers are the degree of service level during sample inspection, the number of SKUs and the quantity of each SKU

Warehousing Costs – Storage

After having been checked upon arrival, products are being stored in a warehouse. When working with an external warehousing provider, it is important to only be paying for actual occupied pallet space and shelves within the warehouse.

The warehousing costs involved with occupied space depend on a product’s shape and size – e.g. due to their higher occupied storage space, larger goods incur higher warehousing costs than smaller ones. This occupied space mostly is invoiced on a weekly or monthly basis.

Storage costs can also vary depending on whether temperature control is needed (e.g. for fresh food or cosmetics products) or whether particular security measures need to be taken (e.g. for hazardous materials). Consequently, for example, with products requiring cooling, merchants can expect higher warehousing costs than for non-temperature controlled storage units.

This is because logistics providers need to own or invest in specific cooling units to keep the temperature within a set range, which involves higher energy consumption and consequently higher warehousing costs.

Warehousing Costs - Storage

Warehousing Costs – Storage

Average Cost range parcel0.80-3.50 EUR per month
Average Cost range pallet6.00-9.00 EUR per month (CCG1 EURO pallet)

The relevant Key Performance Indicator (KPI) in the determination of incurred costs during storage are pallet or shelf spaces. Shelf spaces are an important factor regarding the storage of smaller quantities. The way shelf space is used influences the picking efficiency.

Picking efficiency is determined by different factors, such as the type of shelves used for storage (e.g. high racking shelves) or by picking distances – e.g. higher picking distances lead to lower picking efficiency and this in turn to higher fulfillment costs. The warehousing costs for shelf spaces range from 0.80-3.50 EUR per month depending on the size of the respective products.

The warehousing costs for pallet spaces are more comparable than the costs for used shelf space, as pallet space is a standard measure. Nevertheless, there is a price differentiation between CCG1 and CCG2 pallets depending on their height and weight.

CCG1 pallets are pallets with a maximum loading height of 105cm (including 15cm pallet timber) and CCG2 pallets have a maximum loading height of 160-195cm (including 15cm pallet timber). For a standard CCG1 EURO pallet the price per month lies between 6.00-9.00 EUR

KEY Takeaways:

  • For storage of goods in the warehouse merchants should be invoiced in terms of occupied pallet and shelf space
  • The costs for used shelf space depend on a product’s shape and size whereas the costs for pallet space are more comparable as pallet space is a standard measure

Fulfillment Costs – Picking & Packing

Picking and packing products is the most variable and most important part of the fulfillment invoice because it is directly linked to the number of orders. Individual orders are picked from their storage location and then prepared for shipping. Hence, these fulfillment costs directly depend on the merchant’s number of Stock Keeping Units (SKUs), the size of the product, the number of units per order, and the level of customization of the packaging.

Pick and pack costs can also be influenced by the degree of automation of machinery used – a high level of automation helps achieve greater productivity and efficiency within the warehouse. 

Getting a reliable benchmark for Picking & Packing is the most difficult but also most important. For standard eCommerce products, which typically weigh less than 1KG, the common range for pick and pack costs of an order with one item in it is 1.20-1.70 EUR.

Fulfillment costs associated with additional picks for orders with multiple items can range from 0.10-0.50 EUR. These fulfillment costs depend on whether the order includes multiple items of the same SKU or multiple SKUs of one item.

Fulfillment Costs – Picking & Packing

Average Cost range parcelOne item order: 1.20-1.70 EUR*

Additional item: 0.10-0.50 EUR*

Packaging material: 0.20-0.50 EUR per cardbox*
*for large merchants (w/ 10,000+ orders per month) lower costs can be negotiated

Regarding the packaging material, standard material can be supplied by the 3PL provider, which usually costs 0.20-0.50 EUR per box. The packing process is highly customizable and so contributes to a company’s brand identity. Special packing requirements, such as specific wrapping paper or stickers, are reflected in fulfillment costs. This is because particularly with regards to packaging, the more standardized the process is the more time-efficient it is and the less costs are involved.

Although customization of a product’s packaging involves additional costs, merchants need to keep in mind that customers pay increasing attention to quality and sustainability of cardboard boxes, insulation material and marketing flyers. So, it makes perfect sense to opt for a tradeoff between packaging costs and brand experience.

KEY Takeaways:

  • Pick and pack costs directly depend on the merchant’s number of SKUs, the size of the product, the number of units per order, and the level of customization of the packaging
  • The packaging is customizable and contributes to the customer’s brand experience

Shipping Costs – Delivery

Shipping Costs - Deliveries

Shipping Costs

Average Cost range parcelLess than 2kg: 3.00-3.30 EUR

Up to 31.5kg: 3.50-4.00 EUR

For the shipping of orders to end-customers, packages are handed over to the shipping providers. Merchants can either use CEP (courier, express and parcel) service providers, freight forwarding agencies or carriers. The most common shipping providers in Germany are: DHL, DPD, UPS, GLS and Hermes. Working with freight forwarding agencies and carriers usually implies shipping of larger and heavier products, leading to higher shipping costs than with CEP service providers.

Essentially, the different CEP service providers provide similar services, but differ in prices, standard measures of parcels, pickup points and brand image. Particularly DHL offers a high number of premium services, such as high transportation insurances, 2-Man-Handling of orders and a high number of points of delivery, which are reflected in higher prices.

Hence, shipping costs highly depend on the effort involved with transporting and handling products; more about this in our article about handling logistics of bulky goods.

In addition, for business customers, shipping costs vary depending on the amount that is shipped per year, whether they are determined individually for each client or by means of fixed framework agreements. DHL, for example, uses shipping costs tailored to the respective merchant whereas Hermes, DPD, and UPS mainly set shipping costs via framework agreements.

Typical shipping costs for national German delivery of a parcel weighing less than 2KG are in a range between 3.00-3.30 EUR and larger parcels weighing up to 31.5KG range between 3.50-4.00 EUR. International rates can vary much more, depending on countries, weights and shipping provider.

KEY Takeaways:

  • Merchants can either use CEP service providers for smaller goods or carriers and freight forwarding agencies for larger and heavier products when shipping deliveries
  • CEP service providers differ in prices, standard measures of parcels, pickup points and brand image
  • Shipping costs vary for business customers depending on whether they are determined individually for each client or via fixed framework agreements

Logistics Costs – Returns

In the case that customers receive their order and are not satisfied with it, they almost always have the option to return products. Depending on the business, return rates vary greatly and so does the relevance of their costs.

There are three main logistics costs incurred by returned products:

01: Shipping costs

Firstly, merchants mostly need to cover the shipping costs of delivery back to the warehouse because customers increasingly expect free shipping and returns. Within Germany these shipping costs amount to about 4.00 EUR per parcel.

02: Return handling – General costs

One needs to highlight that merchants should always try to reduce return rates of their sold products as much as possible to keep their environmental footprint low. Besides this, the possibility to return a purchased product is part of Consumer Protection laws in many European countries, so merchants need to be aware of the potential costs involved during return handling.

In this context, we’re referring to the logistics costs involved when orders are sent back to a warehousing location.

These return handling costs normally consist of operational processing costs to restock the items. Besides the actual restocking process, there are often operational costs involved when goods need to be inspected for damage and completeness after being returned, especially for items that are made of many parts, such as lamps, closets and other types of furniture.

Return processing costs usually range from 2.00-4.00 EUR per returned order, depending on the products and additional services required.

Logistics Costs – Return handling

Average Cost range parcel2.00-4.00 EUR

03: Return handling – additional costs

Additional costs during return handling and logistics operations may also arise when an item infers a loss of value. This is because returned products cannot be resold at the same price or need to be disposed of due to damage during transportation, when best before dates have expired or when cooling chains have been interrupted. Typically returns of non-fresh food and fresh food are affected by these costs.

What’s more, in some cases the return handling costs would exceed the actual value of a product and would mean an overall loss for merchants. Executing return handling steps, such as quality checks, restocking, repicking and repacking, would be more costly than choosing an alternative way of handling the returned products.

This is particularly the case with clothing and Fashion items, which customers often order in different sizes, not knowing which one will fit them best.

In these cases, merchants can set up an alternative agreement with their logistics providers that returned goods are either disposed of, donated to charities or directly resold at a cheaper price to discounters, to avoid time and logistics costs involved with handling returns.

KEY Takeaways:

  • Merchants usually need to cover shipping costs of returned goods
  • Return handling after delivery includes several steps, such as inspection of the goods, restocking, repicking and repacking them
  • Returned goods might lose value for several reasons (e.g. expired best before dates); merchants and logistics providers sometimes define alternatives to restocking them, such as reselling goods to discounters

What hidden costs come with traditional logistics providers?

When B2B, Retail and eCommerce companies work together with conventional logistics providers, it is often the case that hidden manual efforts occur in the fulfillment processes of their goods. Common examples are manual data transfer via email, lack of transparency about stock levels and order status, manual tracking of service levels and remaining stock range in Excel lists.

These are caused by inefficiencies in the automation of data exchange and the unusability of real-time data.

What do we mean with data exchange? Think of it that way: when customers place an order on a merchant’s Webshop or ERP-system the information needs to be transferred to the logistics provider. Once having received the information from the merchant, the 3PL provider starts the fulfillment operations of an order. From this stage onwards the logistics provider can send data to the merchant about important fulfillment KPIs, such as the fulfillment status of the order and stock levels within the warehouse.

When merchants and 3PL providers operate this data exchange manually, it involves a higher effort, time and consequent costs than when – for example – working with a data-driven software or platform that does this automatically. What could happen if merchants choose a logistics partner that doesn’t work with data-driven automation?

Manual efforts for checking stock levels and the fulfillment status of orders can amount up to double the actual warehousing or fulfillment costs. So, when choosing a logistics provider, merchants need to make sure that data-driven systems are in place in order to avoid these hidden costs. What’s more, working with seamless real-time data flows between merchants’ shop systems (e.g. Shopify, Magento) and 3PL providers’ WMS leads to full operational transparency and thereby helping merchants analyze business operations with more reliable data.

Overall, merchants benefit from more time-efficient logistics operations and consequently lower warehousing and fulfillment costs. Therefore, merchants should ensure working with a logistics provider whose WMS is pre-integrated with a data-driven tech solution, providing operational transparency and automated data exchange, e.g. like our API-driven everstox platform

KEY Takeaways:

  • Often there are hidden manual work flows during fulfillment stages with conventional logistics providers; this leads to extra costs and inefficiencies in the automation of data exchange
  • Those manual efforts can amount up to double the actual warehousing or fulfillment costs
  • Merchants should ensure working with a 3PL provider whose WMS is pre-integrated with a data-driven tech solution, to obtain seamless real-time data flows to the merchant’s shop system

What do merchants need to watch out for when choosing Logistics, Warehousing and Fulfillment providers?

Merchants need to find logistics providers with a matching product focus to their operational needs, in order to avoid resorting to one-solution-fits-all offers composed of standard prices. If offers are in different forms and aren’t comparable, it is crucial to calculate and compare typical “reference orders.”

What is meant here with reference orders, is that merchants need to request prices for the fulfillment of the typical order volume of their products with each one of the logistics providers and then compare the pricings – for example, a non-fresh food merchant might ask different logistics providers how much the fulfillment of his/her typical B2B order consisting of 100 protein bars (weight: 65g each) and 200 chocolate bars (weight: 100g each) per month would cost.

Asking reference orders at each logistics provider in scope will help merchants understand and compare these pricings.

Merchants should also pay attention to hidden manual effort and missing IT competencies on the side of the logistics provider, in order to avoid unexpected additional costs. In this context, it is important to note that even though logistics providers might claim to be IT-integrated, they most likely have their core competencies on logistics operations and not on IT topics.

And frankly, how can merchants verify during their selection process that logistics providers have proper IT systems in place that are tried and tested and seamlessly work with their respective shop and ERP systems? Surely, there can be product demos, but this will not tell how well the so claimed IT-integrated solution will work with a merchant’s specific operating shop system environment.

So, what does this imply for merchants?

We recommend choosing a 3PL provider who’s focused on operational logistics excellence and has a pre-integrated set up with an independent tech provider who’s focussing on his/her part of the deal: solving IT complexities and connecting systems. Our independent 3PL providers from our logistics network are already connected to our platform, enabling automatic transfer of data from their WMS to any merchant systems in real-time. 

KEY Takeaways:

  • In case offers from logistics providers are not comparable merchants should calculate and compare typical reference orders
  • Merchants can avoid additional costs by paying attention to hidden manual effort and missing IT competencies on the side of the logistics provider
  • By choosing a 3PL provider who is focused on operational excellence and whose WMS is pre-integrated with a tech provider merchants can avoid hidden costs

How does everstox support companies in finding the most cost-efficient offer?

We receive competitive quotes from our Europe-wide logistics network on a daily basis. As a result, we screen over 250 quotes from logistics providers per month and support B2B, Retail and eCommerce companies in finding the most suitable and cost-efficient provider for their operations. We are familiar with a lot of different use cases, product categories and tailored logistics offers.

So, we know how much warehousing, fulfillment and shipping should cost and based on what criteria to decide which fulfillment offer suits a B2B, Retail and eCommerce company’s needs the best. This is particularly beneficial for merchants because when working directly with traditional logistics providers, it is common for merchants to always pay a certain amount on top of standard prices.

Besides that, by providing merchants with our Logistics-as-a-Service platform, we help them automate all logistics processes to achieve full operational transparency. Thereby merchants no longer face hidden costs due to manual efforts in fulfillment and missing IT integration.

Check also our Resources section and our LinkedIn page to keep up-to-date with our recent news, posts and achievements.

Any questions about the article?
Feel free to contact us!

About the Authors

Maximilian Nenning | everstox

Author:
Maximilian Nenning
Marketing Manager
everstox

About everstox

everstox is a technology and Logistics-as-a-Service (LaaS) platform enabling scalable and data-driven fulfilment for eCommerce, B2B and Retail businesses through a European network of independent logistics providers.

We enable transparent, efficient and ecological logistics solutions by forming Europes first tech-driven network of trusted warehousing & fulfilment partners.

Further information about everstox can be found under: www.everstox.com.

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