What is a Liftgate and How Does it Work?

<img src=“liftgate.jpg” alt=“image liftgate” title=“image liftgate”>

If you are asking about liftgates, then odds are you are expecting a delivery that requires one.

There is no need to worry. They are simple in function, easy to use, and not as rare of service as you might think.

What is a Liftgate

It is a piece of hydraulic (sometimes electric) equipment that installs on the rear of a truck which enables freight to be lifted from the ground to the height of the truck’s tailgate, or from the tailgate to the ground.

How Does it Work

A truck or trailer that has been equipped with a tailgate is not easy to miss. They are large, heavy pieces of equipment that add significant weight to the gross vehicle weight.

The standard liftgate utilizes a hydraulic pressure to force a piston through a cylinder which raises and lowers the gate. They are typically controlled via a switch box with a simple “up” and “down” function.

What Does Liftgate at Delivery Mean

When a shipment has been specified as requiring a liftgate at delivery, it generally means that the consignee (party receiving the shipment) does not have a shipping dock or a forklift to unload the freight.

Do I Need a Liftgate

They are required any time a facility does not have the ability to lift freight to the height of a trailer, or down from the tailgate to the ground.

No Access to Loading Dock- Facilities that do not operate a loading dock or shipping bay do not have the capacity to load a standard 53’ semi-trailer or container unless they operate a forklift.

They are not required for floor loaded shipments so long as the individual freight items do not weigh more than 150 pounds each. If the individual freight items weigh more than 150 pounds each a forklift or liftgate is typically required.

Construction Sites- They are common in construction areas wherein an adequate shipping dock has not been built. They are typically used on construction sites to unload construction materials from shipping container, trailers, and flatbeds.

Residential Service & Home Delivery- Very few homes are properly equipped to unload a shipping trailer or container.

Shipments that are too large for standard shipping (USPS, FedEx, UPS, etc.) and which require residential service will also typically require a liftgate.

Furniture and home building materials are the most common freight items that require a liftgate for residential service and home delivery.

However, if you are expecting the delivery of a large freight item, and you do not have the capacity to unload it is necessary to source a liftgate service.

What Does Liftgate Service Include

With the exception of how the freight is loaded or unloaded from the trailer a liftgate service functions in the same manner as a standard shipment.

The driver or a lumper (paid loading crew) will always be responsible for the operation of the liftgate and unloading the freight.

 

 

Choosing The Right Third-Party Logistics Provider

<img src=“image.jpg” alt=“image description” title=“image 3PL”>

How To Choose The Right Third-Party Logistics Provider

There are a lot of third-party logistics providers out there offering a litany of different services. Those in the know will tell you that not all third-party logistics providers are created equal.

Choosing a third-party logistics provider (3PL) can be one of the best decisions a supply chain can make. Supply chains that utilize third-party logistics providers report increased efficiency, greater capacity, and a lower cost of doing business.

If you are looking to increase the scale of what your supply chain can achieve on a budget, then hiring a third-party logistics provider is how to do it. So how do you choose the right third-party logistics provider?

Consider Your Supply Chain

You wouldn’t buy a car without first considering what features you would like your new car to include. The same principle is applied to choosing the right third-party logistics provider for your supply chain.

Where is your supply chain struggling?

Why do you think a third-party logistics provider can help?

How do you want to interface with the 3PL?

How important is technology to your supply chain?

Answering these questions as specifically as possible will help you determine what services you would like your third-party logistics provider to provide, and therefore which 3PL is right for your supply chain.

Do Your Research

The importance of doing your research before contracting your supply chain to a third-party logistics provider cannot be overstated.

It is critically important that you thoroughly review each candidate, the services they offer, the rates they provide for those services, and how well those services are provided.

Don’t be afraid of asking each candidate the hard questions like;

  • What happens when you can’t cover a load?
  • Do you ever run out of capacity?
  • Do you run out of space during the busier seasons?
  • How long have you been in business?

If a 3PL candidate can’t, or refuses to answer any of these questions, they may not be the best third-party logistics provider for your supply chain.

Determine Your Technology Requirements

Technology in the logistics sphere is always changing. Transportation management systems, inventory management software, artificial intelligence, freight market monitoring programs, and advanced load tracking systems are expensive, intricate, complicated and absolutely necessary to run a profitable supply chain.

The best third-party logistics providers will not only utilize advanced logistics technology they will also be compatible with the technology used by your supply chain.

The more compatible your systems, the easier it will be to operate as a seamless, efficient supply chain.

Consider Omnichannel Expertise

Different third-party logistics providers will specialize in different aspects of the supply chain When choosing the best third-party logistics provider for your supply chain consider omnichannel experience thoroughly.

A third-party logistics provider that is versed in the various aspects of the supply chain and whom can operate seamlessly between them is going to be the better candidate.

Furthermore, it is important to consider your omnichannel expertise. How well does your supply chain function regarding warehousing, freight transportation, inventory control, etc.?

If you find that your supply chain lacks in any of these areas, then a third-party logistics provider may be able to lend their expertise and improve those areas.

Network Configuration and Scalability

Supply chains are not static. They are always changing with the market and growing as fast as consumers consume, which is why it is critical when choosing a third-party logistics provider, that you choose a candidate that can grow on the scale of your supply chain.

As supply chains grow in scale to meet consumer demand, they change to accommodate the new and ever-increasing demands of the consumer.

A third-party logistics provider that is too rigid in their configuration and ability to operate may not be able to provide you with the service your supply chain network needs when it inevitably changes.

Avoid Utilizing Too Many 3PL’s

Every 3PL provider is in competition with every other 3PL provider. Hiring too many to your supply chain can actually drive up your 3PL costs by removing valuable capacity from the market.

For example, if you consider that at any one time there are 1000 trucks in your area bidding on freight. Hiring four 3PL’s to secure transportation in that area does not increase the number of available trucks, it simply increases the amount demand for those trucks.

Simple supply and demand indicates that the price of those available trucks is going to go up.

Understanding what services and qualities that are shared by high-quality third-party logistics providers is only half of the selection process.

By far the most important aspect of choosing the right third-party logistics provider for your supply chain is understanding your logistics, knowing where your supply chain can improve, and setting tangible goals for your 3PL to achieve.

Flowspace inspects and approves each of our warehouses to ensure they meet security and quality standards. Our warehouses are staffed with workers who are available to receive your inventory, palletize your goods, and perform custom services like kitting or over labeling. We will always choose the right 3PL for you!

 

 

 

 

 

What is a Floor Loaded Container?

<img src="container.png" alt="container" />

What is a Floor Loaded Container?

A floor loaded container is a shipping container stacked with freight that has been loaded from the floor up without utilizing a shipping pallet.

In other words, a floor loaded container is a shipping container wherein all of the freight has been stacked onto the floor, instead of on to a wooden pallet.

Just about every article of freight larger than an Amazon package is loaded utilizing a shipping pallet. Shipping pallets enable loading and unloading crews to utilize forklifts and pallet jacks to easily move, load, and organize freight.

However, shipping pallets are heavy. They add weight and volume to the freight which in turn costs more money to ship.

Floor Load vs. Palletized

Most shippers are restricted to either floor loading or pallet loading due to the specific shipping restrictions placed on their freight. A company that ships freight that consists of glass components would not be advised to floor load their shippingcontainers due to the likelihood of it breaking.

A more durable freight class such as used tires, however, requires no such precaution and can be floor loaded from floor to ceiling in nearly any shipping container.

Floor loading is less common, and more difficult than other loading methods. Freight that is floor loaded must be carefully sorted and loaded on to the container by hand.

Shippers are advised to consult the National Motor Freight Classification to confirm their shipments freight class and to determine whether floor loading is an option for their shipment.

Otherwise, a shipper runs the risk of securing a carrier that is not adequately equipped to carry a floor loaded shipment.

In fact, most shippers, and many carriers refuse to ship, carry or load floor loaded freight due to the added layer of liability that comes with a shipment that consists of multiple floor loaded items and components.

Types of Floor Loaded Freight

Most of the freight that is shipped today is palletized because palletizing adds a layer of protection and accountability to the freight.

Freight that includes multiple small items can be secured to one pallet and shipped as one shipment, instead of numerous items that must be sorted and accounted for by hand.

However, there are a number of different types of freight that are typically floor loaded due to their manufacture, perceived durability, and individual shipping requirements.

  • Tires
  • Parcels
  • Rolled Carpets
  • Metal Coils
  • Industrial Rolls of Paper
  • Logs
  • Concrete Pipe Section

Intermodal and sea shipment containers that arrive from overseas are often floor loaded as well, especially containers from China.

How to Properly Floor Load a Container

Because the individual freight items of a floor loaded shipment are not bound together on a pallet, they are more susceptible to load shifts and potential damage.

Floor loaded shipments require load bars and straps to be strategically placed throughout the load to prevent it from shifting. Floor loaded shipments may also require added heat, cold and weather insulation due to the lack of protection.

Most importantly a floor loaded shipment has to be properly distributed throughout the container to prevent a load shift and excessive fees associated with an overweight container.

Companies like Amazon, who frequently utilize floor loaded containers also utilize “Vehicle Sizing Software” which enables their Shipment Coordinators to “build” evenly distributed, profitable floor loaded shipments that utilize every available inch of the container, and rake in the most possible revenue per floor loaded shipment.

Some shippers have a choice when it comes to floor loading freight; they can choose to save money and sacrifice efficiency by floor loading, or they can increase efficiency by pallet loading their freight, at a higher shipping cost.

How a shipper decides to load their freight will ultimately be determined by the type of freight they ship, their shipping budget and how efficiently they can load and unload a floor loaded container.

 

What is a Bill of Lading?

Bill of Lading image

Every package larger than an envelope that has ever been shipped has included a bill of lading, however, if shipping freight isn’t a part of your daily life then you are perhaps unfamiliar with a bill of lading, what it does and why they are so important.

A bill of lading is a simple piece of paper, but it is a very important simple piece of paper that ensures every package you order arrives at your door.

What is a Bill of Lading?

A bill of lading (BOL) is a required shipping document that must be included in every shipment larger than a letter envelope.

The bill of lading acts as a shipment manifest as well as a receipt for delivered goods between the freight carrier, the shipper, and the consignee (person, address or business to which the freight is delivered.)

A bill of lading is also a legally binding contract that provides the freight carrier and the driver with all of the shipping and special freight details that ensure the freight is delivered to the right address, at the right time and includes all of the undamaged individual freight pieces.

Who is Responsible for the Bill of Lading?

The shipper is generally the party that is responsible for creating a bill of lading for each shipment that leaves their freight dock, in fact, ensuring that a bill of lading is created for every shipment is a critical job for all shipping operations.

Without a signed bill of lading, there is nothing to confirm the contents of the freight, how much of it there is and whether it arrived in whole.

Freight carriers will outright refuse to move any freight without the appropriate bill of lading because the bill of lading, besides acting as a receipt, also ensures the correct order of liability should anything happen to the freight during the shipping process.

Once the freight is loaded, and the BOL signed by the dock manager and driver, the freight is legally in the custody of the freight carrier until it has been offloaded and the BOL signed by the receiving dock manager.

What Does A Freight Bill of Lading Include?

A bill of lading is a useless piece of paper if it doesn’t include the specific information that ensures the shipments successful delivery, or at least which party is liable should anything other than a successful delivery occurs.

Shipper & Consignee Name & Address- It’s simple and obvious but also important.

Every BOL needs to include the name of the individual or business shipping the freight as well as the individual or business who is to receive it.

The ship-from and delivery addresses needed to be clearly labeled, correct and verified before signing the BOL and turning over liability of the freight to the driver.

Should an address be incorrect, it is the shipper who is liable for the missed delivery, not the carrier or the consignee.

Contacts & Contact Phone Numbers- A bill of lading should also include the shipping and delivery contacts as well as their phone numbers so the carrier can confirm addresses, call for directions, and make a shipping or delivery appointment.

The BOL should also include emergency, and after-hours contacts, so the carrier knows whom to contact should an issue arise.

Purchase/Reference Numbers- There are a lot of numbers and reference numbers involved in shipping anything.

The shipper will have their own referencing system for the freight they ship. In most cases so will the consignee. The carrier will also most likely issue their own BOL number for their reference, which means there are a lot of references, PO, and shipping numbers that need to be included in the BOL if it is to be shipped and received successfully.

When generating a BOL, it is always a good idea to include more information than you might need rather than omit important information. If there is a product or reference number, include it in the BOL.

Special Shipping & Handling Instructions– Unless the freight you are shipping is indestructible it probably includes special shipping and handling instructions.

All special instructions regarding freight handling, delivery, and scheduling should be included in the bill of lading.

Date Shipped- The bill of lading must also include the date the shipment left the freight dock. This is to ensure that the freight carrier heads directly to the consignee and takes only the required amount of time to deliver.

The majority of freight shipped over the road is refrigerated with a shelf life. The ship date on the BOL ensures that the consignee is aware of how long the freight was on the truck, and how much shelf life it still has.

Packaging Type- The bill of lading must also include the manner in which the freight is packaged.

This ensures proper handling during the shipping process and that the freight is not loaded in a manner that can damage its packaging or the packaging of other shipments.

Shipment Method/Mode- This is where you specify to all involved parties the method in which the freight is to be shipped, often referred to as the shipment mode. Shipment modes include:

  • Air
  • Less than Truckload (LTL)
  • Full Truckload (FTL)
  • Sea Freight
  • Intermodal (Train)
  • Standard Mail
  • Expedited Delivery
  • etc.

Department of Transportation Hazardous Material Designation– The bill of lading is also where the shipper is to designate whether the shipment includes hazardous material.

Authorizing Signatures– Arguably the most important aspect of the BOL is the authorizing signatures that transfer freight liability from the shipper to driver, then the driver to the consignee.

A BOL is not valid unless signed, verifying that the shipment is undamaged and in one piece when it is loaded on the truck, in transit, and at final delivery. Freight carriers will outright refuse to move any freight without the appropriate bill of lading.

E-Commerce and On-Demand Warehousing

<img src=“image.jpg” alt=“image description” title=“image box"

E-commerce and online marketplaces have entirely upended the way people shop and receive the goods they purchase.

In terms of customer expectations, e-commerce creates significant challenges when compared to a brick and mortar retail location.

Prior to the days of e-commerce, a retail distribution network could get by on a relatively low number of distribution centers in regions where they expected to sell the most product.

However, e-commerce shipments are typically comprised of small quantity products that are shipped directly to the customer, wherever they may be.

According to Annual State of Logistics Report, compiled by the Council of Supply Chain Management Professionals, of the $1.45 trillion spent on warehousing and shipping in the United States, $900 billion was spent on shipping and transportation costs.

The substantial cost in transportation comes from the increase of e-commerce shipments to customers who do not live nearby the warehouse that stores and distributes the product.

The obvious answer to this dilemma is to redistribute the product to a warehouse in close proximity to the customer, therefore reducing how far the shipment needs to travel to reach its final destination.

Need for On-Demand Warehousing

For many small to medium size businesses, restructuring an entire distribution network to service a small number of far-flung customers is rarely a feasible business strategy.

Warehouses and third party logistics providers typically lease out warehousing space by the square foot. Which is generally only profitable when leased in large sections over several years.

Businesses who utilize an e-commerce marketplace have little need for massive, sprawling warehouses to store and distribute gross amounts of inventory, let alone the need to lease one year after year.

This creates a gap between businesses who wish to distribute limited amounts of inventory and warehouses which have too much space to be filled by any one business.

On-Demand Warehousing & E-Commerce

On-demand warehousing is the innovative new warehousing and distribution model. It connects available warehouse space with businesses who only need a small amount of space, for a short amount of time.

It enables retailers to dynamically deploy different inventory volumes to different warehouses across the country in little to no time. It expands the retailer’s previous distribution network into a comprehensive and responsive supply chain that is ideally suited to the ever-changing e-commerce marketplace.

The Solution to E-Commerce Fluctuations

In this way, an e-commerce retailer can adjust their distribution network according to the variable demand conditions without having to lease more than the required amount of space.

By doing so, a business insures their revenue stream against variables other than a simple change in volume or demand, such as:

Regional Demand Fluctuations- The demand for a product in a certain region can swing drastically, especially for e-commerce products that are often subject to social media trends and buying patterns.

On-demand warehousing enables a business to quickly increase their warehousing and distribution capacity in regions expecting a drastic increase in demand, or the opposite should they be expecting a drastic drop in demand.

Price Fluctuation- The general cost of operation can cause fluctuation from month to month, and region to region. On-demand warehousing is uniquely suited to enable businesses to scale back inventory levels in accordance with the variable cost of doing business.

Inventory Supply Fluctuation- Suppliers can come and go causing inventory levels to fluctuate drastically.

On-demand warehousing enables businesses to easily scale back inventory levels with one supplier and switch to another without the exorbitant price of changing warehouses to accommodate variable inventory supply caused by flaky supplies.

On-Demand Warehousing Here To Stay

If the warehousing and distribution industry has learned anything over the last decade, it’s that they are going to have to be flexible to meet the needs of their customers.

On-demand warehousing fills a desperate need for e-commerce businesses, but more importantly, it enables businesses to readily respond to demand without exerting the extra cost, time and effort of securing a warehouse for their inventory that was never intended to suit their specific needs.

The need for on-demand warehousing will continue to grow exponentially as more businesses sell products online, and as the need for geographically dispersed products increases

 

 

What is On-Demand Warehousing?

What is On-Demand Warehousing?

On-demand warehousing, as provided by Flowspace, is an online marketplace that allows customers to access shared warehousing and logistics services on a pay-per-use basis. By matching owners of excess warehouse space with users (generally e-commerce companies, retailers, or shippers), Flowspace boosts the utilization of its warehouse partners’ facilities while allowing end-users flexibility in an industry where demand can be uncertain, and budgets are constrained.

Let’s say you run a small e-commerce company that sells widgets. You launched a Kickstarter a year ago that did so well that you built a website to continue selling your product. Over the past year, you’ve seen incredible growth. Until now, you’ve been able to produce your product in your garage using manual techniques, and then package the goods right there on the assembly line before taking batches of outbound orders to a carrier for shipment to customers.

Today, you finally have enough orders that you are working with a manufacturer to produce your product at scale. You’ve ramped up your marketing efforts to help drive business, and are excited to start selling higher volumes. You’re receiving the first wave of inventory from your manufacturer at the end of this month, only one question: where are you going to put it all? Well, you have a few options:

1)  You can choose to work with a 3PL, or third party logistics provider. The lead time to work with a 3PL can be weeks or even months. A 3PL will want to know exactly how much space you will need, and exactly when your products will be moving out again. If you intend to be there for a longer period, they will want demand-projections and predictions on how much inventory you will be storing in six months, nine months, or one year. These questions can be hard to answer. And if your need is immediate, or short term, it often doesn’t make sense for a 3PL to work with you at all. Short term engagements are not as lucrative for 3PLs who often require 1 year minimum commitments.

2)  An alternative is to use a third party fulfillment company. Amazon FBA or “Fulfilled By Amazon” is the dominant player in this niche. This option is available on a more immediate basis, and for a less well-defined requirement, but it can be a high-cost solution. And many retailers are hesitant about handing over their critical supply chain to what is often their number one competitor in Amazon.

3)  A third option would be to lease or purchase your own warehouse and build out in-house distribution capabilities. While this path boasts an attractive layer of control and autonomy, it will involve a high, up front start-up cost and likely result in a new fixed-cost line item (either rent or building maintenance) on the company’s income statement. This is to make no mention of variable costs such as labor, warehouse equipment, and packaging supplies. This option also limits the retailer or seller to just one location, which can limit shipping speed and cost optimization.

4) The fourth, and possibly most feasible, option is using on-demand warehouse services from Flowspace. Apart from being the only cost-effective option for immediate needs, and the only variable-cost long-term option, on-demand warehousing enjoys several more advantages against traditional warehousing solutions.

To start, on-demand warehousing does not have minimum volume requirements, and yet by aggregating volume from multiple customers Flowspace can negotiate volume discounts with its partners and pass on these advantages to its end-users. No minimums and competitive pricing yields the ability to economically store goods in multiple geographies so that retailers can service stores more efficiently and ecommerce players can reduce shipping times and costs.

Finally, by eliminating fixed costs, the on-demand warehouse model reduces the risk of expanding a supply chain network. The last thing a scaling retailer or ecommerce company needs is the added stress of a rent payment or minimum payment requirement to a 3PL. We started Flowspace to enable companies of all sizes to start optimizing their supply chain today, without dependency on competitors or taking on the added risk of a long-term commitment to a lease or 3PL.

The Problem Operations Managers Don’t Talk About

The metric most important to Operations Managers is per unit cost.  This is the cost for the company to pick and pack one unit destined to an end customer.  For instance, when you order a t-shirt from a website, this cost represents the amount the company pays to grab it off the shelf, scan it, and put it into a box.

To simplify, the main drivers of unit costs are the amount of labor you use to fulfill an order and the amount of fixed costs required to operate.  There are smaller line items such as forklift leases, software licenses, and supplies, but labor and rent are really the areas most managers should focus to move the needle.

(Labor Costs + Rent Costs )/ # of Units Shipped = cost per unit

This is not a unique observation.  Operations managers are already obsessed with labor spend.  A good distribution center will have numerous concurrent projects going on focused on how to produce more shipments with less labor. These projects include time studies, trying to smooth out order peaks, and reorganizing where items are stored to minimize walking times.

Rent costs, however, rarely creep into the conversation of driving costs down.  This is mainly because Operations managers (I’m speaking from experience here) view the monthly rent payment as something that can’t be moved or changed.  It is perceived as being fixed.

The amount spent on warehouse rents is not trivial.  Warehouses can range in size from 5K sq ft to 1M sq ft.  Companies in Southern California are paying 60 cents to $1 per sq ft per month for warehouse space and rates will continue to rise.   Compounding the problem is that the amount of space required to run an ecommerce business will also grow.  In fact, one recent article suggests that warehouses are now 143% bigger than before due to the unique requirements of ecommerce fulfillment.

The problem is that as a business you are often not utilizing all of the space you have leased.  Warehouse leases are long (5 – 20 years) and companies lease the space they will grow into over time; they do not lease space for their business today.  This means there is often empty space at the beginning of these leases.  Similarly, sales forecasts are seasonal or volatile, which means warehouses operate at max capacity for a few months but have idle space throughout the year.  A traditional sublease does not work in these situations.

In the face of rising rents on larger amounts of space, not considering rent as something to be optimized is the equivalent of leaving money on the table.

Simply put, it’s time to start talking about this and there are tools, such as Flowspace, now to help businesses turn warehouse space into a variable cost and monetize empty space in their buildings.

How a Paper Company Turned Empty Space into $8K Per Month

A leading paper company based in Long Beach, CA manufactures corrugate boxes for ecommerce brands.  They are growing quickly and decided to move into a bigger warehouse to support their future growth.  They signed a multi-year lease on a 20,000 sq ft warehouse just minutes from the port of Long Beach.

When signing the lease, they knew that they only needed 10,000 sq ft for the next year.  This is common as in the beginning of a lease, there is often a significant amount of empty warehouse space.  The rent payments for this empty space negatively impact operating margin.

Solution

The paper company’s Operations Manager contacted Flowspace and listed their empty space on the Flowspace website.  Shortly thereafter, Flowspace found two customers who needed a warehouse to store excess, slow-moving inventory for several months.

The paper company started receiving inventory within a day of approving the customers’ requests.  They managed the entire transaction on the Flowspace system, which means they didn’t need to do any technical work or worry about invoicing.

The paper company needed to provide the labor and space to unload and store the pallets;  Flowspace handled the rest.

Results

The customer with the inventory is happy because they did not have to sign a lease and are only paying for the space they are using, which is saving them thousands of dollars.

On the other hand, the paper company is generating $8K per month from their empty space, boosting their operating margin.

About Flowspace

Flowspace (www.flow.space) provides on-demand warehousing for business.  Backed by leading investors in Silicon Valley, Flowspace helps companies who need extra warehouse space and capacity find and manage it on a month-to-month basis.

Download the Flowspace Case Study

Shipping Costs are a Warehousing Problem

I read a great article on the cost of free shipping and how it is destroying margins for retailers and ecommerce companies.  Shipping costs are often blamed for the poor margins at ecommerce companies, but what these articles miss is that high shipping costs are a result of an insufficient warehousing strategy.  

Where you store your products has a direct and outsized impact on a company’s shipping costs (and margin).  Too often warehousing is seen as solely an execution function (eg, get the product into the building and ship it out), but your warehousing strategy will determine whether you can profitably grow an ecommerce business.

Most ecommerce companies are reliant on the shipping rates provided by Fedex and UPS or the postal aggregators for the outbound shipments to customers. When negotiating with these carriers, the only ways to effectively drive down your shipping costs are to increase your volume so you can achieve a higher discount tier, use a discounted, slower service, or to shrink the distance your products have to travel to reach the end customer.

Assuming that you are doing the best you can to increase your sales and assuming that slower isn’t option, you are left with distance as the variable that you can optimize.  In order to optimize for distance, you need more distribution points.

Amazon gets great shipping rates not only because of its massive volume and clever zone-skipping strategies but also because its expansive warehouse network enables it to ship most orders within 1 shipping zone.  A company with 1 West Coast distribution center is shipping their packages across 5-6 zones on average.  Not only is the transit time unacceptable to the end customer, this decision is eroding margin.

A McKinsey study argues that you need 20 distribution centers to compete with Amazon.

These are not easy decisions and cannot be done in isolation from other supply chain functions.  There are inventory carrying cost ramifications associated with duplicating inventory, and very few companies can sign up for the lease-obligations associated with 20 distribution centers.  That means these companies will likely need to rely on a 3rd party for fulfillment.  But even integrating with a national 3PL for that many nodes is a multi-year effort that requires long-term contracts and significant developer resources for integrations.

And it’s not as simple as just moving your product to a distribution center.  Before a company even embarks on this project, it needs a robust order routing and inventory planning system to ensure that the products are in the right distribution center and that orders are sent to the best distribution node.

In short, driving shipping costs down will not come overnight (no pun intended).  It will require a full-scale reevaluation of fulfillment networks, and any meaningful conversation about shipping costs needs to involve a discussion about warehousing too.

What is a 3PL?

 

A 3PL, also known as a third party logistics provider, is a company that will manage your transportation spend, provide warehouse space, and fulfill customer orders on your behalf.  This is a broad category, but to keep things simple we will focus on the warehousing and fulfillment component of a 3PL.

When a 3PL ships your company’s order, the package looks like it comes directly from your company, as your company name is often listed as the return address.  But the people who prepare the package for shipment are employees of the 3PL.  

When fulfilling your orders, a 3PL typically charges you every time they touch something meaning that they are charging you every time they go to a shelf and grab a product to put into a box (often called a cost per unit).  Some 3PL’s will also offer “cost plus” or “open book” pricing, which means that they take their costs and add a margin to the amount you pay.  They often do this when the scope of work is unclear and it’s hard to gauge what their costs will be.

On the surface, it seems like a 3PL would be more expensive than fulfilling your own orders.  After all, a 3PL is hiring people on your behalf and then charging a mark-up on top of what it costs them.  When you are operating at massive scale, internal fulfillment will be cheaper than 3PL because you will have the volume to drive down your costs.  

But when you are a young company, the main advantage of a good 3PL is that they are able to pool their teams across multiple accounts.  For instance, the Operations Manager on your account may be working on several accounts so you only pay for a portion of their salary; similarly, the cost of a forklift lease or software might also be shared across multiple accounts.

So even if they are charging a mark-up on their costs, at an early stage, they may be able to generate a cheaper cost per unit than you can on our own.