With sudden and dramatic changes in global tariff policy, Brands will naturally turn to their Supply Chain Partners to help navigate through choppy waters. How can a Fulfillment Company support the Brand in the face of such dramatic change?
The connection between the Brand and the Fulfillment Company should be one of mutual respect where both parties see it as a symbiotic relationship. If one or the other isn’t healthy, the relationship ultimately will not be successful for either party.
I’ve had the pleasure of working with so many brands that think along these lines… working to make changes within their supply chain practices, carton markings, SOPs or systemic enhancements that enhance operational efficiencies and effectiveness. As I see it, we are not just a 3rd party fulfillment company, we are serving as the in-house operational arm of the business… and as would be the case if we were truly an in-house operation, when efficiencies are brought to bear, we have lowered costs to our client brands or held steady with labor-related transactional pricing despite the rising cost of labor.
It’s important even in a steady state setting that both parties routinely work together to review all facets of existing operations, up close and first-hand, to make continuous improvements that bolster efficiency and accuracy. Together you’ll find easy wins and with some creative thinking, you’ll find more. “Routine” is a keyword here… plug reviews in as a standard, calendar-driven operating practice and set goals together to find wins each and every year.
Change is a constant in business and in life… we all know this. Even when conditions are somewhat “steady state”, businesses evolve, push forward and pro-active fulfillment partners must stay engaged with the brands they serve to ensure operations do not skip a beat. Sometimes change can be dramatic and hugely impactful, like we’re feeling here in early 2025 with changes to US global trade policy, the rise of tariffs and the volatility in US/China + US/Canada/Mexico trade relations. As a symbiotic partner to the brands they serve, fulfillment companies must consider how they can contribute towards the health and success of their clients who face the headwinds of these unanticipated impacts to their cost of goods sold (COGS).
For brands that are bracing for impact and must react to a sudden shock to their COGS from the rise in tariffs, it’s natural to look at everything that contributes to COGS, including warehousing, shipping and fulfillment. 3rd party fulfillment (3PF) and shipping services invariably represent a significant cost of doing business for brands, and it is fair at times like these to pursue rate reductions. Assuming fulfillment operations are mature, embedded and performance is solid-to-strong, going through the distraction and expense of uprooting to another 3PF organization in hopes of reducing rates may not be the best choice for the brand. That said, hopefully your 3PF Partner is one that respects the challenges related to rising COGS and is ready and willing to engage and pursue opportunities to reduce costs to the brand.
Rate reductions from your 3PF may come from straight cuts to pricing which in turn reduces profitability for the 3PF. In fairness, this approach can work to some degree when 3PF margins are healthy… this is a good time for the 3PF to step up and help their client in the face of these difficult headwinds, and a gesture like this should go a long way towards sustaining a long-term relationship (including perhaps a term extension in exchange for rate reductions). Straight cuts to pricing can also be quite painful, damaging and/or simply won’t occur when your 3PF’s margins are thin. In this write-up, I’m considering how both parties can earn their way towards cost reductions (when margins are thin) through efficiency gains, ingenuity and cooperation.
As mentioned earlier, hopefully the routine is already in place to continually evaluate and identify opportunities to drive efficiency gains.
If this is something that hasn’t been pursued in some time, there would be no time like the present to go full force in pursuit of wins! Whether it’s easy “low hanging fruit” or outside the box thinking, the best and brightest within the 3PF should examine all facets of operations and administration… all things related to labor at all levels, and deliver ideas back to the brand that will help to reduce labor without impacting accuracy, throughput or overall operational effectiveness. Let’s start here, find wins, and in turn present lower rates to the brand to help alleviate the impact of higher COGS!
Shipping is another major expense item to evaluate. Like fulfillment operations, shipping efficiency is an area that should be continuously reviewed as a part of the routine. Here in crisis mode, brands may consider introducing new lower cost carriers into the mix that may or may not cost a day in transit, but will certainly offer savings! In addition, between the 3PF and the brand, it would be a great time to dive deep into packaging to ensure dimensional weight is not unnecessarily driving up expense, or physical weight for that matter. Often times 1 ounce can make all the difference when you’re trying to get the package to ship under 1 lb. (as rates increase dramatically once you crest 16 oz). If we can find a way to 15 oz or less, and convert packages that were once over 1 lb. to under 1 lb., the impact will be material for the brand. Again… now is the time for a deep dive into carrier data, dimensional impacts, packaging review, weights, carrier mix, order splits (if you’re shipping from multiple sites), inventory levels by facility (if you’re shipping from multiple sites)… all of it! A good fulfillment partner, one that respects the health of the brand, should step up and deliver opportunities for savings in shipping.
Warehousing/storage is another area for collaboration. It’s not easy for 3PFs to properly calculate out space requirements in isolation, and often times you’ll find SKUs taking up valuable floor space or forward pick locations that hardly move. In my history, there have even been occasions where a SKU resides in a prime pick location that is not actively being sold by the brand! In the overall pursuit of reducing space costs, brands may also look at officially closing out soon-to-be discontinued SKUs through sales/discounting, bulk take-all orders to retailers, donation channels… etc. The effort to consolidate and reduce storage requires communication and collaboration… and with the right eyes and minds examining what’s on hand, what’s being delivered over the next 3-12 months, sales forecasts and SKU velocity, both parties may find that a reset/consolidation may be in order that cuts down on the fixed expense of storage.
After careful review of all opportunities for efficiency gains and cost savings in order processing, shipping and storage, the brand and the 3PF partner may push harder with some outside the box pursuits… examples may include:
- Finished Goods Assembly where components arrive (requiring assembly) versus finished goods, which in some cases can help reduce the impacts of tariffs. If the brand determines this to be an effective approach to reducing tariffs, this is a perfect time for the 3PF to take on the challenge, invest and execute on behalf of the brand.
- Other complex services, such as engraving, embroidery, intricate refurbishment and QC (e.g. electronics), print on demand…etc. could potentially move to the 3PF to reduce expense related to inventory transfers.
- Fulfillment Automation has up front expense that can be depreciated over time and provide efficiency gains in the short-term. If your 3PF has been contemplating some moves in automation, this could be a good time to pull the trigger. Recognize that the 3PF can’t give away all of the gains (needing to cover the capex investment and support costs), but some positive impacts should make their way to the brand in the short-term.
The relationship between 3PFs and the brands they serve should be just that… a real Relationship. The parties are connected and dependent on each other for success in business. In 3rd party fulfillment operations, mutual financial success fully depends on an efficient and effective operational set-up, solid and integrated WMS/systems technology, strong shipping solutions and carrier relationships, and engaged, pro-active and pertinent communication between the parties relating to all facets of warehousing and fulfillment. Honesty and integrity are vital as well… keeping it real between the parties in terms of their circumstances, especially when times are tough. We all want our businesses to thrive… it’s engrained in us to pursue success for the company we serve, but when success between two parties is symbiotic… knowing both parties need to succeed and thrive, we should of course have empathy for one another and vigorously pursue mutual success.
