3PL Cost Breakdown Series: Part 1 of 3

One of the most difficult challenges to overcome when working with a 3pl or considering running a private warehouse is the cost analysis. There’s more to warehousing than just having space to fill with inventory, so that means estimating costs is not a simple task. That’s why we are introducing a series of cost breakdown blog postings (from the 3pl standpoint) to help you learn the basics. Stay tuned to learn about the functions of handling, outbound order processing, warehouse labor and more in relation to 3pl warehouse pricing.

1. Storage Charges: Understanding Price Determination and the Difference Between Receiving and Recurring Storage

The warehouse storage function can be viewed much like monthly rent, and that’s essentially what it is. When you move into a new place, the standard is to pay for the initial move-in period, as well as the upcoming month’s rent. So the easy way to remember storage is just to think about how you pay the landlord (or how you used to pay the landlord in the college days).

In 3PL warehousing, there are two times when storage charges are incurred- when product is received (Receiving Storage) and when product is calculated at the end of the month for the upcoming month’s storage period (Recurring Storage). When a product first comes into the warehouse, it incurs an initial storage cost, Receiving Storage. This cost is reflective of the “move-in” charge. Most 3pls will only charge half of the standard storage rate if inventory arrives in the second half of the month. This is something you will want to verify when negotiating rates with a potential partner.

When a new month hits, the landlord expects the rent for the upcoming month. This is the equivalent of the Monthly Recurring Storage charge. At the end of each month, total inventory must be covered in storage for the upcoming month. If product is to remain in inventory on an ongoing basis, the cost of space utilization during these time lapses are captured via the Recurring Storage charge.

An important factor to consider is determining the correct storage pricing, because the velocity of product turnover and storage method will affect costs. Inventory turnover relates to how often product is coming in and going out. If a new pallet is going into a single storage location multiple times in a month, the storage price should be reduced due to multiple receiving storage charges. And vice versa if a pallet remains in the same location for a long period of time.

The storage method will be the main determinant of pricing. Will product be stored in racks, shelves or in bulk? What is the right rack type due to pallet dimensions or how many pallets can be stacked on one another? We will get into how storage methods work in the future, but it is important to know how your product will be stored in order to understand the pricing.

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