In our Amazon business, we used to order products quarterly from the manufacturer, then book a...
Selling on Amazon - Freight & 3PL Costs
In this webinar, we are going deep into freight costs and 3PL's.
- How to calculate the landed unit costs when freight costs are changing all the time
- How to factor in 3PL costs & freight to Amazon
- Are 3PL's just too expensive?
- Which is cheaper - Smaller Shipments (LCL) Direct to Amazon or Full Containers to 3PL?
Welcome. So this week's webinar going to talk about freight costs.
The unit cost is pretty easy to calculate, but how do you calculate freight costs.
Some interesting things came out from it, my perceptions of what freight was cheaper, it became interesting in just terms of looking at what the actual costs were.
Let's get stuck into it.
What's happened over the last two years, there's been inventory restrictions limits from Amazon.
Amazon changed around storage limits, then they put limits on per ASINs, then they put limits on overall units, which is still in play.
People had numerous problems arise. We had freight delays , because the inventory restrictions, you couldn't just send in as much inventory as you needed, you need to get 3PL’s, and this added a level of cost to your business. The supply chain that really blew things out.
We are seeing that a lot this year in terms of people's expectations of their profits. They're suddenly saying, “Oh, I thought I was making x amount of dollars.” And now they're making significantly less because we've had to do these big stock write offs.
3PL costs were much higher than they expected. There was delays sending into Amazon from 3PL’s ,the whole system got jammed up.
We had a number of instances where we had large amounts of stock trying to go into Amazon. And basically, we missed for two years in a row, probably six weeks of the fourth quarter sales.
This is still the case, we can't send a container directly into Amazon. We try and do that even using Amazon global logistics. Amazon will split up a full container and put it into a number of containers.
So let's look at 3PL costs. everyone's had to say “ I need a 3PL somewhere in the states so that we can send it in stock earlier but there was additional costs associated with that.
So lets look at 3PL costs:
• container unpacking fee = $500 to $900 per container.
• loose freight it could be anywhere from $2 to $5 per box.
• if the container took longer to unpack is $45 per man hour over
• a software fee as fixed charge every month
• pallet loading, so when you take your unless your container is packed via pallets, which probably not then there was they would unpack the containers and put it onto pallets. So 15 to $25 per pallet.
• a forwarding fee so from picking it up from their warehouse, the 3PL and sending it off to Amazon at $2.80 to $4.25,
• storage fee from $10 to $40 per month per pallet but some differences in that and
• admin fee
We need a process for calculating freight costs.
We need to analyze the different things because:
• freights referred is terms of weight per Carton in terms of kilograms and in pounds. The freight forwarder is using kilograms. When you get to the states everything's in pounds,
• the volume per Carton in cubic meters and cubic feet. The volume weight is important if you've got something large and light;
• the units per Carton,
• invoices for freight,
• and we need to get the 3PL price lists or invoices.
The next thing you need to do is create a master inventory file now at this point,
Master inventory file.
We use this file for lots of things:
• we use it for budgeting
• we use it for zero and a 2x.
• Upload it FBA shipments orders.
• We're using it all the time.
I'll just take you through the steps
• product name
• unit freight cost with have a calculation over here to do that.
• the size of the carton
• the weight
• the cubic meters per Carton. So that's quite often on your packing slips, you'll find all this information, your, your manufacturer will generally supply all this information.
• the volume weight here, I've calculated at 4000. I don't use volume weights, because our products are heavy enoughBut if you do need a volume weight, it's in there. A
• we've just got a quick conversion into Imperial. So you're going to use this imperial numbers for Amazon things.
• And we've got these other ones here where we can calculate the weight of the freight and duties per Carton.
when I'm doing 52 week cash flow model, you know, that big horrible thing, we can just drop in these SKU’s, or the product names, and we've got all the costs available to it, we rework it, and we put it into zero and a 2x. We use this FBA shipment details to put in here, I'm going to add a couple more things to this file. Yeah, a couple of things on the end, I'm going to put in a link to our Google Drive or drive, so that we can say this is the labels that we've got for each one. Well, this is the carton labels that we're going to put on each one. So we're just and we just use this master inventory file or a time, we just copy it across rework it.
So this is our master that we use all the time. Okay. So that's the first thing you need to do, because we need to find out a couple of things, we need to find out the cubic meters per Carton, and we need to find out the weight let's go to the next thing.
Let's go to the spreadsheet, it will be easier.
let's look at the 40 foot high cube. So we've got some data in here, you can change this to whatever you want. The last shipment I had had 57.8 CBM in it with generally found that even though our 40HQ contains 65CBM maybe 76CBM.
The cubic feet. just a straight conversion there. So from cubic meters to cubic feet,
the number of cartons in this case we shipped 561 cartons,
the number of units per Carton, I've just said we've got 35 units carton,
the number of pallets this one I just said okay, it's 80 cubic feet to a pallet it's a rough guess. So saying we've got about 26 pallets and we're doing one shipment.
So our last shipment into Amazon cost us $10,000 For the container. But then we had $3,806 in other costs drayage which is shipment to and from the port - other freight costs, entrance fees, etc. that added up to 3800.
The duties were $5,000. And so we ended up with that. So that's just getting it to the door of the 3PL.
Then I had a look at what our 3PL costs were. So they had a container unloading fee of $825. Then there was a pallet fee of $15. There was storage fees for three months. I said storage fee for three, it's $40 per month. But I said okay, we bought three months where the stock was going to last for three months. And therefore I've just divided that by two. So there's $1,500 in storage fees.
The box forwarding cost at 40 cartons at a time was $3.75. So the total costs are almost $5,000 in 3PL costs for one container.
How much did Amazon charge me for picking up for picking up the packages at my 3PL and sending it into Amazon? They varied along the way. The average was $6.74 per carton.
So we found that the total freight costs of getting this into Amazon was $27,000. To get it from the factory all the way into Amazon.
So that was interesting. I haven't sent products via just LCL for a while. I happened to the other day because we ordered more than a container.
So we got to see what the costs. The costs were $225 per cubic meter.
Let's assume but rather than send it the same amount via full container, we're going to send it via six shipments via LCL. Okay. Little bits at a time. So LCL costs to $225 per cubic meter. The freight costs that included for us that included the drayage. So basically getting it from the supplier to the warehouse in China that's fairly cheap to the port, and then the cost to get to Amazon that way wasn't too bad. I think then lots of containers going to Amazon anyway. So ended up cheap. The custom costs about $100 per shipment to end up $5600 their duties the same.
Okay, so the costs of sending it via LCL was about the same as sending a via 40 foot container which was interesting.
Okay, that's interesting. I then wanted to do the comparison of what happens if we send it the same shipment amount but we put it in the Chinese 3PL at quarter of the cost, okay. So this cost there are the same. The three PL costs at the China random a bit cheaper. So we end up with $20,000.,
why don't I just send six shipments into Amazon? Now I can do this. Because one, I've got unlimited storage, because my inventory performance index is over 400. Now, so I've got unlimited storage for next quarter. And I've got enough room in my inventory limits. So we could do it the same way.
Okay, so let's look at the profitability. We'll go back to the spreadsheet. There's another tab in here called profitability.
So should we we sell for $25. Product costs $4. Freight to China, China to USA doesn't really change that much. 3PL costs and Amazon costs inbound FBA cost doesn't change.
Profitability goes from, you know, $10.40. There's 40 cents difference.
So in terms of the savings, if we're selling 100,000 units a year, $2.5 million in sales, we've got a saving there $44,000.
Okay, that's not a lot of money, really, on $2.5 million. We've got a 40 cent savings per unit.
What's all the issue about? And this is where it becomes important.
Let me just well, we'll deal with it. Let's go back a couple of steps.
So why do we order three to six months worth of inventory?
• we get volume discounts from the manufacturer. Okay. Yeah, if we order a container and time, they're generally giving us a bit better prices.
• We've got savings in freight by sending by container. Well, we thought we did. But it's not really the case.
• We've got minimum order quantities, that's an issue. If you've got a minimum order quantity, you've got to do something about it. So that's why people sometimes might may order more than they actually need.
• We might be unsure about our sales limits, okay. Absolutely. Where we're putting in a buffer for uncertainty.
• And the other one is, wait time, we just don't have enough to place orders more regularly. Okay. So it's really simple. That's why we kind of order three to six months.
What we're seeing for a lot of these things, we're not really getting any major savings.
When we did that study, benchmarking on 2021 accounts, we looked at the inventory days.
So on average, for the group that was selling over $700,000 a year in sales, the average inventory days was 240, it's nine months.
where the stock for the seller is between $150K & $700K hey've got 395 days worth of stock. So days where the stock over a year's worth of stock.
They had a lot more stock than they were thinking about that includes us, okay. In that your cash gets stuck in the inventory. Okay, if you're wondering where the money is, it's in inventory.
So we can, what happens if we can speed things up? Okay. So the issue was, we looked back to those economies of scale, okay, we've got some orders in in. supplier may give us cheaper rates if we order more. Okay, so a couple of things. We could do we want to order more, more, often more on a monthly basis. Okay.
So we just go, Okay, we're going to order each month. So what we might do is order three months worth of inventory, pay the deposit on that. But we want the delivery done monthly, over three months, and we're going to ship that directly into Amazon. Okay, and we pay the final payment for whatever they've made for that month. that may work for some people. it's not going to work for everybody.
But that's one way around it is depending on depends partly on the production line. Okay. It might be that your production line production is, it might take them quite a while to produce it anyway. And if they just can produce some and then let's let that amount go and just basically let them go as they're ready, it can end up cheaper.
The option two is you agree on a price for the year, okay, we're going to order this match in stock. We paid a deposit monthly. And the final when it's complete. The first of each month, you place it, you place the other order. And one way you can do this is last month's sales times a factor. Okay.
So let's assume we've got well, so we had a 10% sales increase 10% on the month before. Okay, so the next month, we might go, Okay, we're going to place 10% more, let's assume our sales going up by 10% a month. Fantastic if they are, but let's assume that, okay, we're going to place an order for 120% of sales. Because it's going to take a month or a bit to get there. We might say, Okay, we've got Christmas coming up, we've got some more in there, and we shipped it directly into Amazon. Okay, in both cases, they're going directly into Amazon. We're not all we're doing is ordering the same amount, but just shipping it more often. And paying for it more often.
Let's look at a simple cash flow on this - a really simple cash flow.
we've got three numbers, these numbers should be easy to find.
We've got a sales $500,000, the last 12 months, we've got profit, we made $85,000. So the ratio of profit to sales is 17%. Okay, that's kind of about average for $500,000 worth of sales. And we've got inventory at cost at $120,000. So these are numbers you can do now, because you've got in for June, basically. So we've got that ratio is 24% 120,000 over 500,000.
Let's see what happens if we grow. Okay. Let's say next year, we're going to do $2 million sales. Okay, we've got, it's all flying through the roof, and we're going to do 2 million. So our profit is going to stay the same. So we're not changing anything in terms of the operations. So our profit at 17% is $340,000. We've still got the same supply chain. So instead of needing $120,000 worth of stock, we're going to need $480,000.
Okay, so if we want to do the cash flow, we've got $340,000 profits. So we're going to say that, yeah, that's the cash from operations. But tax on last year on this figure 25% less the increase in inventory $480,000 minus $120,000. We don't have enough money. Now this is a really simple cashflow. Reality is that would be far worse on that strong growth.
So let's say we fix the supply chain. Okay. And we order monthly. And as a result, we have our inventory ratio. Okay. So rather than hold, on average 240 days, we're now holding 120 days worth of inventory.
Because we're shipping it in as quick all the time from our supplier. There's some positives to that, by shipping it all the time when we're not stuck. We're not have we don't have problems with one container getting stuck on one ship. We've got multiple shipments coming in on multiple different ships in multiple different containers. So we've diversified our risk there.
But so rather than need $480,000 worth of stock, we only need $240,000 In terms of the numbers. Now, we got 340,000 from cash flow from operations, but the profit less the tax, but the increase is only $120,000. So we've got an additional $240,000 with cash available just by changing our inventory. Now if you remember on this by taking out the 3PL’s, in terms of a per unit cost, it was only 40 cents. Now we're not looking at if we looked at the savings, over a similar type of sales, it was $40,0000. But by changing the inventory, buying more often, we've increased our cash flow by $240,000.
Okay, ordering monthly, it works when you've got enough buffer inventory in Amazon, to allow for volatility and events. Okay, so you might have six to eight weeks of stock in there, okay. You've got to have enough stock in there, you can't, it's not something with Amazon at the moment, I wouldn't want to be doing just in time inventory.
You don't want to get too low on Amazon. Because you're the amount of stock in each fulfillment center reduce reduces and therefore people aren't going to get the next day delivery little bit next couple of days.
The other thing is we need to have no inventory restrictions, okay, you in terms of storage that needs to be unlimited, and the units needs to be sufficiently big. Now, the risk is, of course, that Amazon changed the rules on you and you get caught. But you still know it hasn't happened yet.
I haven't heard of any issues they're talking about this year. And the other one is the sales have stabilized. It makes it much easier to order on a monthly basis.