Dean Maciuba

You would think that rising fuel costs and runaway inflation would be crushing profitability for 3PLs that support ecommerce-related order fulfillment.  However, that may not necessarily be the case. So then, why are ecommerce order fulfillment service providers managing rising fuel costs and inflation better than expected?

1. Fuel Surcharge is a variable, pass thru expense: For providers that resell transportation rates, they are already passing-on invoiced fuel surcharges to their fulfillment clients. This is a variable cost, and the merchants realize they are subject to this condition as it is usually stated in their terms and conditions.

   Note that reputable order fulfillment service providers are not up-charging their clients on the fuel surcharge, as it is public knowledge and posted on the carrier’s web sites. Merchants would still be paying the fuel surcharge if they were having transportation billed through their own carrier account number.

2. Scale absorbs inflation: High volume order fulfillment 3PLs can more easily absorb higher, inflation driven expense as increased expense is spread out across high volume item transactions.
3. Robust sales pipeline: Another way to drive savings is to close new business. It is during these difficult economic times that the best order fulfillment 3PLs can lean on their sales team to close new business. This of course gets us back to scale and how improved scale can reduce overall operating expense, which goes directly to mitigating the overall impact of inflation.
4. New technology reduces costs: Progressively managed 3PLs are constantly introducing new technologies that reduce operating cost and that can also help to off-set inflation related cost increases.
5. Parcel Carrier Exclusivity: Both UPS and FedEx are structuring their pricing agreements to reward carrier exclusivity with deeper discounts.  Superior transportation discounts can also help to offset higher, inflation-related expenses.
6. Lower Cost Shipping Options: To better manage expense in this inflation driven business climate, order fulfillment 3PLs are also looking to use lower cost, deferred parcel transportation solutions.

A management team can’t directly control what they are paying for the cost of goods and services, being driven higher by increased fuel charges and inflation.  That same management team can double down on reducing controllable expense, that will off-set inflation related higher costs, and help to protect profit margin.

However, even with the best cost reduction strategies and perfect managerial execution, increasing customer pricing is an unavoidable condition with 8% plus inflation.  Customers should be sensitively notified, measures taken to reduce costs should be explained, and if possible, limiting the rate increase to under that of the inflation rate should be considered. Handling a rate increase in this fashion might also open the door to taking business away from competitors, which is a wonderful thing in a slowing economy.

Until recently, the 3PL business model has been to contract with 3^rd parties to provide transportation services for parcel, LTL, expedited, and truckload service providers. The 3PL could negotiate aggressive rates with service providers, driven by the aggregation of business from all their customers, and add on a modest profit margin. This model worked, and generally resulted in most folks in the 3PL supply chain being happy.

However, like all legacy business models, times they are-a changing.

3PLs are now pursuing direct control of some transportation and delivery services to offer faster and an overall superior service experience for their clients. Newegg Express is one example of this in action.

Types of last-mile services

Truckload Services – To drive savings for their clients and profit for their pockets, large 3PL’s have been expanding their own truckload capability in specific lanes to directly serve their clients truckload needs.  Taking truckload services in-house permits the 3PL to provide more control over the solution and can result in faster transit times and an overall superior service experience.

Expedited Freight Services – For clients that have regularly scheduled freight moves that require an expedited delivery solution, savings can be significant by taking these services in-house as these contracted services are costly.

Residential Large and Bulky Last Mile Delivery – As more ecommerce merchants turn to distributed fulfilment solutions for large items, the opportunity for 3PLs to offer local, last-mile, large & bulky, residential delivery services is rapidly growing. These types of deliveries require added value services that can drive significant additional revenue per delivery for services such as over-the-threshold inside delivery, unpacking, debris removal and assembly.

Market conditions spark interest in last-mile service offerings

Five years ago, it would be nonsense to suggest that a parcel-focused, ecommerce order fulfillment service provider could support local, last mile residential delivery. However, with the rapid growth of ecommerce distributed fulfillment and micro-fulfillment distribution models, the opportunity now exists for some 3PL order fulfillment service providers to support local, last mile residential delivery.

Today, there is a tremendous focus on moving ecommerce fulfillment centers closer to the customer, usually adjacent to large urban markets, and sourcing last mile delivery products directly from these forward stocking order fulfillment centers. Many of these micro-fulfillment centers are managed by 3PLs that can provide bundled, local last mile delivery across multiple merchants and contract with either local delivery contractors or crowd sourced delivery platforms, to make the last mile delivery.  For 3PLs, the challenge is to create the necessary stop density to drive affordable last mile delivery cost for the merchant.

Last-mile delivery models

Now, let’s look at three last mile delivery models sourced from a forward stocking, 3PL order fulfillment center:

Crowd Sourced Delivery Models

Numerous crowd sourced service providers support this last mile delivery model in major markets, and that is the problem. Due to intense competition, it has been difficult for the app driven, crowd sourced delivery solution to scale the residential delivery, so delivery charges are high, and can wreck merchant profitability requirements.

Local Delivery Companies

These types of delivery solution providers can easily comingle/bundle last mile delivery across numerous clients to drive scale, possibly resulting in an affordable last mile delivery experience for the ecommerce merchant.

3PL Driven Last Mile Delivery

Here-in lies the opportunity for a 3PL to drive more income/margin and offer a superior delivery experience to their clients.  However, like any other distribution solution, a certain level of delivery stop density is a requirement to make this last mile delivery solution profitable for the 3PL and affordable for the ecommerce merchant.

The conflict in Ukraine is driving economic destabilization not only in Ukraine and for Russia, but also, around the world.  An already soft global economy will likely be driven into a full-blown recession resulting from unmanageable inflation being led by record fuel prices, and potential, war driven, food shortages.

The war taking place across the ocean will impact supply chains and ecommerce here in the United States. However, I also want to take a reality-check and acknowledge that an economic downturn here in the US is inconsequential to the casualties, human suffering and disruption being experienced by the people of Ukraine.

Current Supply Chain Impact (US)

The offshore supply chains feeding ecommerce here in the US are still relatively stable.

In Europe, this is not the case. Russian forces are reportedly shutting off shipping routes, causing logistics firms to suspend services, and leading to skyrocketing freight and tanker rates.

However, Asian supply chains are not feeling the same level of disruption as in Europe, so ecommerce consumer goods are still moving to the US, although US-bound ocean shipping rates are not stable.

Future Supply Chain Impact (US)

The expected global recession, being advanced more quickly by the Ukraine conflict, will slow down US consumer spending and result in either flat or down ecommerce sales.  In turn, this should free up capacity on US bound cargo ships and result in lower container ship transport rates. Finally, there has been much speculation on how the war and resulting supply chain disruption could permanently change global supply chains and impact the flow of ecommerce goods to the US.

US Ecommerce Merchant Product Availability

Assuming the war in Ukraine does not expand, and does not directly involve NATO members, European consumer product availability to the US should be mostly unaffected.  However, there has been a strong effort by US based ecommerce merchants to expand cross border sales to Europe, and this initiative will be negatively impacted by an extended conflict, that would drive a deep recession across Europe.

Ecommerce Merchant/Logistics Service Provider Profitability

A war-enhanced US recession, coupled with out-of-control inflation, could cripple the US consumer, which will obviously drive down online purchasing and merchant profitability.  Parcel carriers, ecommerce tech platforms and fulfillment service providers will also feel the pain resulting from lower ecommerce merchant sales.  The profitability of ecommerce related businesses feeds on higher volume and improved scale—which will be compromised in a war-driven, global recession.

US Port Delays

Albeit for reasons we should not celebrate, geopolitical instability in Europe compounded by a global economic downturn spells relief for congestion and delays at our US west coast ports.

In Conclusion

US-based ecommerce and everything related to it has been on a roll for over 15 years. It is due for a slowdown, and we were already headed in that direction. The war in Ukraine could potentially trigger a temporary economic meltdown, and the recovery for US based ecommerce and our economy could be slow and painful.  Ecommerce is not bulletproof and will be negatively impacted by the war in Ukraine, but the legacy ecommerce-related service providers will emerge stronger because of it.

We know that technology is making the world a smaller place.  Today, any e-commerce merchant in virtually any country can sell their products in other countries across the globe, without possessing a physical presence in those countries.

Formerly domestic-only merchants can now directly offer their products for sale in numerous other countries via the support of e-commerce platforms like Shopify Plus, which can localize the customer’s online buying experience for the country of the merchant’s choice. Domestic online marketplaces like Newegg also offer support to international merchants to provide a near-seamless buying experience for the international consumer. While borders are not disappearing, they are getting easier to navigate for both the international merchant and consumer.

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