Every business incurs some costs when the business provides services to the customers. The costs can be divided into fixed costs and variable costs.
- Fixed cost refers to the cost which does not change with a change level of productivity. Fixed cost includes- the cost of machinery, salaries of the employees, etc. These costs even occur at 0 levels of production.
- Variable cost refers to the cost which changes with the level of production. Variable cost includes the cost of shipping/delivery, sales commission, etc.
Similarly, a third party logistic business has its costs. One of the major costs is the fulfillment cost in the warehouse. Fulfillment fees are the costs associated with receiving and storing products along with processing orders from handling to shipping.
These costs may vary per order based on the products involved, order processing speed, and other factors. It is important to calculate the total cost in which business will occur so that proper plans could be made executed to ensure that the cost does not exceed the revenue generated by the business or else it will face loss. There are different types of cost which occurs in a 3pl business. Here is an analysis of the major costs.
Hourly Labor Cost or the handling Cost
- Hourly labor cost refers to the cost per hour that the company has to pay for the service provided by the laborers. Labor cost constitutes about 60% of the total warehouse fulfillment cost, therefore the need for controlling these costs is very essential for the business.
- This cost can be identified and reduced at the initial stages of hiring the laborers. laborers can be selected based on their on-field knowledge or they can be provided with on-site training or setting quality standards for their work or by simply providing laborers with general feedback and correcting their mistakes and errors.
- This will lead to optimization in the processes of the warehouse, therefore, saving the overall cost.
Insurance Costs
- All third party logistics businesses are responsible for the security of the goods at their warehouse and if any damage is caused then they are accountable to its customer. To avoid any unnecessary cost the business, such as compensation or damage claims, the business generally takes some kind of insurances.
- Insurances cover the risks on the behalf of the warehouse for a general principle amount. There different types of insurance cost like-
- Property and Liability insurance
- Legal Liability Coverage for a warehouse
- Warehouse Legal Liability Insurance
- Commercial Auto Insurance.
The business may take one or more insurances. A General Insurance for a warehouse can cost about $75 to $120 per month which may vary according to the size, location, payroll, etc.
Lease Costs or Storage Costs
- Warehouse costs include the cost of lease or rent. A lease is a fixed cost.
- The basic way the lease is charged from the owners in the united states is the landlords quote an average base rental price and the operating expenses are estimated and after that, a lease price is decided based on the area of the warehouse.
- For eg, the average base rental price is $1 per square foot and the operating expenses are estimated at around $1.50 per square foot. The area of the warehouse is 500 square feet.
Then the lease cost will be( $1 + $1.5 ) * 500 = $12,500 .
- The lease cost can be charged per month or annum according to the lease agreement.
Cost of Equipment
- Every equipment in the warehouse, like — Machinery, forklifts, pallets jack, etc. has its cost. This cost is important for the firm as this equipment makes the operations more cost-effective.
- The cost of some equipment may fall as the depreciation is charged on them each year.
General Administrative expense and Salaries of Employees.
- Other expenses like the cost of electricity, stationery expense, and other miscellaneous expenses. These expenses might seem irrelevant to the operating costs but this cost affects the day to day workings of any business.
- Another cost that business bears are the salary of employees. Every warehouse business has its employees apart from the laborers. Floor Managers, supervisors, quality check inspectors, and many other people who play a very important role in ensuring smooth management of the business.
- Sometimes the employees are even given different incentives like employee insurance or company paid leaves. These costs are covered by the surplus that the company earns therefore it is very important to carefully analyze these costs.
- In the end, it is very important to consider all the costs before making any investment in the business.
‘No business can escape the cost occurred in the day to day business activities’, but still can manage the cost and reduce them to at least the scenario where the revenue earned by the business can meet the cost incurred by the business.
