Understanding Fulfillment Storage & Optimizing Your Costs

Fulfillment Storage Costs

You run a product based business and if you outsource it to an order fulfillment company or considering that, it’s important to understand the costs.  Often storage methodology and costs are a mystery and how to optimize your products to increase profitability is commonly misunderstood.
Here’s things that will be covered in this article:
  • Storage methodology
  • Items typically included in the cost of storage
  • Ways to optimize your storage costs
What’s the difference between a pallet and bin storage location?
There are two primary methods for storing items. Bulk and Primary (Single sku picked items).  The terminology and variances may occur between different fulfillment companies. Bulk locations for storing palletized products either in whole pallets for a single sku or a combination in master cartons.  These areas are for picking commercial wholesale orders or replenishing the Primary locations. Pallet locations are 4x4x4 feet.
The Primary locations or quick pick or single sku items are usually for Ecommerce fulfillment orders. These items are typically stored in bins on shelves. There may be anywhere from 4 to 10 bins per shelf. These areas are typically below 6 feet so that picking items are more readily accessible. 
What’s included in the cost of storage?
Often times it’s important to understand what’s included in the cost. Most order fulfillment companies view the cost of storage as a fee to cover the related costs. Here’s some example of costs that go into the storage cost:
  • Rent/Mortgate
  • Real Estate Properties
  • Pallet racketing
  • Energy cost – Lighting/Climate Control
  • Security System – Video/Burglar/Fire*
  • Pest Control*
  • Disposal of trash or pallets
  • Insurance to cover the products against loss*
I would investigate with your prospective or current fulfillment center regarding the items marked with an asterisk.  These are important considerations in terms their value proposition.
How do I reduce my storage costs?
Inventory can directly affect your profitability if you have slow or non moving products.  Extending the time you pay storage monthly on the products while balancing the timing of your supply chain from your contract manufacturer is always a balancing act.  Do you order more inventory now to get a better rate? Is there a long production and transit time?
Establishing a good cycle for turning over your products is vital to your success. Selling slow or non moving at a discount to alternative channels are ideal.  Here’s an illustration of the true cost of keeping the inventory vs selling it a discount to move inventory out:
  • 500 units, stored on 5 pallets @ $15.00=$75.00 per month
  • If kept on hand for 12 months = $900 in storage cost
  • Product cost $4 x 500 units = $2000

Based on this example, every month of keeping the inventory in storage, it costs $0.15 per sku, per month or $1.80 per year. That’s 45% of the value of the product over a 12 month period. Knowing what the storage cost is per unit should help guide what your turnover rate of inventory should be and when to discount the product for quick sale.

For a comprehensive overview of fulfillment costs, visit FulfillmentCompanies.net. There’s a detailed analysis with their annual survey of fulfillment companies.