Strengthening your supply chain one link at a time.

3PL – Fixed / Variable Components

When companies seek to outsource distribution or warehousing to a third-party logistics provider (3PL), they often wonder what items are included in fixed costs vs. variable.  Each operation can be very different, but the these are the typical components to fixed and variable pricing from a 3PL:

FIXED:

Indirect Labor.  These employees do not actually handle any material.  The volume does not dictate the amount of labor required for these employees.

• This could include a Vice President or Director for large, multi-location operations.  The general manager, operations manager, other managers and supervisors would be included within the fixed management bucket.  These positions are typically salaried employees with direct supervision responsibilities.
• Receiving, shipping, payroll, quality, etc. clerical functions.  These are typically hourly employees.
• Fixed Warehouse. Cycle counters, quality control technicians, security.  These are typically hourly employees.

Facility.  The building lease cannot flex once signed, so these costs are locked in.

• Items included in this bucket would be the base rent, triple net (NNN) charges, building improvements, utilities, and security equipment.

Capital Investments.  These initial costs will be amortized over the life of the contract, or life of the asset.

• Items included in this bucket would be racking, mezzanine, conveyor or automation equipment.

Technology.  These initial costs will be amortized over the life of the contract, or life of the asset.

• WMS Hardware, WMS software, office equipment, PC’s, Phones, data communication costs, and timekeeping systems are included.

Miscellaneous Operating Costs.  These are costs that will happen independently of volumes, and will be classified as Fixed.

• Supervisory Visits, Office Cleaning, Recycling, Pest Control, Professional Fees, Insurance, Interior / Exterior Maintenance are included.

VARIABLE:

Direct Labor.  Material Handlers.  These employees actually handle the material.  The volume and the complexion of the volume (pallet picks, case pick, piece pick, etc.) dictates the amount of labor required for these employees.

• Working Leads. Paid more than the typical material handler, and can be responsible for problem solving to setting up pick carts.
• Forklift operator. This person uses a piece of material handling equipment (MHE) to putaway and retrieve items from inventory.  Other types of MHE included would be order pickers, electric pallet jacks, reach trucks, etc.
• Kitting worker. This person works on specific orders.  This could include putting inserts into boxes to consolidating multiple SKUs into a new single SKU.  There are many other functions that could fall in this category.

Variable Material Handling Equipment.  A good deal of MHE is usually classified under Variable (forklifts, reach trucks, order pickers, electric pallet jacks, etc.).  This is due to many 3PL’s leasing equipment.  When leased, the piece of MHE can typically be turned in for another piece of equipment, or sometimes turned back in when not needed.  While conveyor, sorters and AS/RS equipment is indeed material handling equipment as well, it cannot be returned to a leasing organization when demand is lower.  The variable designation also applies to instances when the 3PL needs temporary additional equipment.  Since this tends to flex with the labor force, it’s considered variable.  Exception.  If the 3PL decided to purchase the mobile equipment, these costs will typically be fixed in the pricing as they can not be turned in or switched for different equipment.

Typical Variable Pricing Buckets:

• Inbound per Pallet (includes putaway)
• Inbound per Case (includes putaway)
• Full Pallet Pick (includes picking, staging and loading)
• Case Pick (includes picking, staging and loading)
• Each Pick (includes picking, staging and loading)
• Packout (this may be an additional charge to case or each pick). Typically includes building an outbound carton, placing the cases or eaches into the carton, add dunnage, inserts, seal, manifest (if required) and placed onto an outbound pallet.

While there some vacillation in fixed or variable cost designation for certain equipment based on how the 3PL procured that equipment, most expenses fall into one bucket or the other consistently, and understanding this can help a perspective 3PL customer understand how their pricing is developed, and more importantly how much value the 3PL provider may be providing.
 
—Chanse Jackson, St. Onge Company
 
 

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