What If You Actually LOVED Your 3PL? (With Chad Carelton) transcript

Chad Carlton is the founder and CEO of The Good Company, a 3PL based in Missouri that will ship three million orders this year, three million shipments for less than 20 clients. So, they're serving larger clients, moving a lot of units. And I brought Chad on for a very specific reason, which is that everybody thinks of their 3PL or even their first party warehouse as the case may be as an unfortunate cost of doing business in e-commerce, not as a partner in generating revenue.

And I want to solve that tactically. I want you to know after you listen to or watch this interview how you can have a better relationship with the way that your product makes it from a warehouse like a 3PL out to a customer and how at each step of that process you can be smarter and more efficient and therefore create better experiences for your customers and make more money for your business. That's the goal of this conversation is to get there.

Chad is a brilliant dude who's been a great follow on X for a long time. So he's my immediate call to bring this on. You're going to like this conversation very, very much. What we're going to actually do is we're going to follow a product from the moment it gets to the 3PL to the moment it gets to your customer. We're going to look at everything that happens in that journey and we're going to say, "What can you do to make money here?" I will not delay it anymore.

Let's get into it with Chad Carlton from Good Company. I've never had a conversation like this one, Chad. Uh, on this show, I've done a lot of episodes of this show. I've done a lot of solo episodes, a lot of interviews. I've never done a 3PL focused conversation before. You are the first one of these. So, thanks for coming and doing this and answering what will inevitably be stupid questions from me about this. So, yeah, I'm I'm grateful, man.

Me, too, man. Thanks for the invite. Yeah, tell people about the good company so they understand uh your what like your background with this and what you're doing and then and then we'll get into it. I don't know anybody who set out in their life to start a 3PL and I've met a lot of 3PL owners. Um this is when you were a little kid and your parents your parents said, "What do you want to do when you grow up?" And you were like, "I want to start a 3PL." That's right.

Um, you know, in hindsight, I'm having a lot of fun. I really, really like what we do here. Um, I came from the retail side. I was the COO at a company called EverythingKitchens.com. We grew that to just short of like 60 million, but we were drop shipping in like 2001. So, we were pre-ecom infrastructure. We had a 50,000 foot facility just down the road and um 15,000 SKs, couple hundred brands, a couple hundred employees and it was challenging to do all of our own fulfillment enough so that some of our manufacturers came to us and asked if we would do their direct to consumer shipping services.

So a business was born. Um and then that was right in the middle of COVID. So we just turned it up to 11 and on hard mode and gave birth to the good company which is based in the Ozarks. Now, we're a 3PL for large brands who are doing some reasonably high volume um in fulfillment. Less is more for us. So, it's kind of fewer deeper relationships. You could say we're a little bit um picky, but I find myself pretty wellworked in the industry.

So, if it's not a fit for us, I probably know who it is. Um and I like playing in the data, so um lots of exposure there. Amazing. You also told me something incredible before this, which is that like you just got your first cold lead ever that every other customer you've ever had has been from a referral. 100%. Yeah, we'll we'll hit 3 million shipments this year and if you find me on X, you'll see that it's not even in my bio.

Like we're um we're kind of the best kept secret secret in e-commerce in my opinion. Um and and our first cold lead came in the other day and I was so excited it was kind of lost on her. Um, and I'm like, that's so funny. She thought you were like literally she was literally the first customer ever because Yeah, that's amazing. I I It's funny you say the best cup sticker because I did not know what you did in e-commerce for a long time when I like just seeing your content on X and like watching you say smart things and I was like, "Oh, he runs a 3PL." Um, so that's awesome.

Okay. Um, let's start from the beginning. uh if I am uh if I am an e-commerce business uh why use A3PL at all, why not set up my own warehouse and ship products out myself as like one of my clients used to do as another brand I worked at used to do uh somebody else's 3PL or I mean excuse me P&L I just looked at they're doing now as far as I can tell at about five million in revenue. uh what what why should they stop doing that and use 3PL instead or should they?

You know, I think a 3PL is a cost center for your business if you look at it pretty narrowly. I think that there's lots of ways that we can talk about how to make it a partnership where their domain and their area of expertise actually ends up being a net positive for your business to create some incremental growth. But if we're just looking at this from a cost sake, well, there's a there's a real financial cost and then there's an opportunity cost.

So the I think the biggest one is to just look at uh let's just look at the numbers. So a 3PL is a refreshingly simple business. Labor, materials, postage, overhead. You're going to pay for all of those things. Labor, materials, and postage running your own facility. And there's certainly some scale economies that we have just due to writing bigger checks with the same vendors that you may not have access to. But if you've ever bought labels through Ship Station or Shopify, I think you've probably seen that you have reasonably good postage rates, more accessible than they've probably ever been um in history.

The last part really just comes to overhead. Well, there's a cost to scaling and the steps from 0 to one, one to to to million, two to 10, 10 to 50. These are huge operational leaps which hurt your bottom line significantly to accommodate this amount of infrastructure that you need to to take care of your overhead. And I think that's where a 3PL will ultimately save you some money. If we're just talking about hard dollars, this is a big operational side quest for anybody.

And it's also got some fixed overhead. So, let's say that you're in a reasonably affluent area and your first warehouse is going to cost you $5,000 a month. Well, you're at 5,000 orders a month. Well, then you're at a dollar per order. If you single human Yeah. Right. If you dip down to 4,000, well, you're at a buck 20. or if you're riding out some slow months, well then, you know, you kind of have to build the church for Easter in e-commerce and Black Friday is going to test your infrastructure.

So, I think that ultimately comes down to predictable costs. Do you can you count on your contribution margin equation remaining consistent to make scalable decisions for your business where that fixed cost that doesn't fluctuate up and down on the on the slow months may overcome the premium that you're paying for a 3PL to do it at a slightly higher labor cost? How come how come that's not a huge problem for your business? uh cuz like I don't know it's like BF like essentially like how is that problem not just amplified for you scale so you know when we were first starting out we were fortunate to be writing on the back of our own existing infrastructure but even then for a client to go from 250 orders a day to a big sale at 2500 was a th000% increase and then that's a th000% increase in labor that we need.

But here we're shipping 10 to 15,000 orders a day and for somebody to go from 250 to 2500 is only a 20% increase in in our overall labor. We just overstaff for that reason and find find reasons to do evergreen work and just remain on the safe side um working ahead. So it allows us to meet those expectations without any one client punishing our ability to perform. Do you um do you think then some of the advantage also is just the like the reality of the regional advantage?

Like I live in LA. Uh the whatever warehouse space the good company has in the Ozarks is just drastically cheaper than what it is for me in LA. And the implication of that would be that if I am in the Ozarks also that maybe it is less necessary for me to have a 3PL. Do you think that's a reasonable second uh step from there? You know what? I um I love the Ozarks and where we live. This is 90 miles from the dead center of the US.

There's really no better place to ship from. And if if anybody wants to challenge me, I've got the data to support that. But I could say, um, look, um, somebody has to live in Missouri to do this. Um, and you you guys get to live in California, um, while I live out here to to be in the logistics hub of um, of the US. Now, you're right. Labor and um warehouse space are are warehouse probably 25% of what it is um in California, but that ignores the opportunity cost, which I think is the bit more nebulous part of this.

What are you absolutely best at where the things for you as as a brand, what are the things that only you can do for your business? And I assure you, it's not fulfillment. This is a big operational side quest for a lot of people. It's not unlike rolling out an ERP. It's a big skill set that doesn't add a lot of value that you might only need to learn one time for comparatively little gain. I think people feel like they need to bring things inhouse when there's a level of complexity or nuance that they don't feel confident um can be managed.

It certainly can and we can talk about the ways that um that different 3PL's go about uh approaching those things. But more than that, it's just like um I don't trust the people that I work with to care enough about the customers um that I do. And I think that's probably a reasonable segue to say if you have a great working relationship with your 3PL, it's because their north star is a happy recipient. It's not a happy client.

It's are your customers customers happy? And if if you can align your incentives on delivering joy um to your recipients, then you're you're always going to be fairly compensated as a 3PL and you as a as a client of the 3PL is going to feel confident that they've got your back when it comes to, you know, executing on on the 80% of the physical operations of your business. Yeah. you've hit you've now hit a couple things really fast that I think are relevant to this conversation on the pure cost side of things and I uh I would actually love to chase down the conversation about delivering joy because you've you've now come to one of my very favorite topics in all of business which is that joy is the point of life and that that ought to be um something we think about a little bit more explicitly in business but I'm going to leave that aside for a second and talk more about the cold hard realities of capitalism.

Um so we've hit a couple things. One of them is uh your location allows you to have cheap rent. um uh or cheap building space uh you know uh it also has uh reduced labor costs because of of where you are. Um it also is in the middle of the country which has um which means that you can ship to anywhere in the country including to the places where the most people live which are in uh order now uh New York, Los Angeles, Chicago and Houston with Houston making a run at Chicago.

That is literally the four different corners. Um, so that just like where the most customers are. That's before you talk about uh anywhere in Florida or Seattle or anything like that, which now gets you to some more folks um and the other places in Texas. Like, so you are able to ship now to do that. And of course, anybody who's ever shipped a product knows something about zones and shipping zones and the fact the further you're shipping something, the more expensive it is.

So you have this now cost advantage there because of just like the pure location of where you guys are. Um, you also talked about opportunity cost, which is um, which is a significant thing as well. And I think in some ways the most overlooked which is like this that running a warehouse is actually a hard job. Um to say nothing of the scaling up and down of uh of warehouse costs seasonally especially for extremely seasonal brands right which there definitely are some in e-commerce.

There are many in fact um and so um so all of those represent the pure like cost side of things. When I put all those things together, do you think it is fair to say that on average, generally speaking, going from a 1PL to a 3PL is very likely to save most brands money? Yes, absolutely. There's probably, you know, look, there's probably a sweet spot. Um, and and in fact, if you are sub 500 or a,000 orders a month, I would encourage you to do it yourself.

Not just because of the cost savings, but you're forming a certain emotional relationship with your fulfillment and understanding firsthand what you should be expecting out of your 3PL. Then I don't know, there's probably somewhere close to nine figures where the economics of it start to uh make sense for you to bring it in house. But we work with several nine figure companies who still think it's worth using a 3PL. So, and they feel confident that they're saving money by not having to endure this big distraction.

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Get after it with your supply chain. Get lower price cogs, get lowerQS, get better terms, get faster lead times, and get a more efficient, more profitable business. Yeah. Okay. Um, that's good on that subject. Thank you. I think that's totally right. I think um it's it's a real issue for a lot of brands and that as you grow, you should be thinking about that. Now, let's do let's play the game that we talked about playing in the beginning of this conversation and uh and that is let's follow let's follow a product from the moment it gets to this is your idea so you get the credit for it and I love this way of framing this conversation from the moment it gets to the good company's warehouse to the moment it gets to the the door of the customer and one thing I want to say in framing this conversation is that that is fundamental to e-commerce and it's actually in some ways it's so obvious to e-commerce that I think it's it's pretty overlooked by a lot of people that the that part of the thing that e-commerce is is shipping individual products to individual people's doors.

And so understanding the details of how you go from a pallet to individuals is really really uh significant in terms of thinking through the whole dynamic of the business and the and the whole thing that makes good e-commerce businesses good. In fact, I think in some ways um so uh so start from where where the product gets to uh your warehouse. All right. Um, what do we want to say? Because what I really want to do is think about how brands can work with 3PLs to be as efficient as possible, make it a great experience, save money where they can, all those things.

What what is the starting place for that for how companies think about get like getting a product to the warehouse? Is there anything the brand should be thinking about even at that stage of things um that are going to make life easier on you and cheaper for them? before a product arrives at a warehouse. The question that everybody's got to answer is where is the nuance going to be managed? And what I mean by that is we've had a huge client here internally that um is kissing nine figures and up until this year they didn't have barcodes on and this is on thousands of this is on thousands of products.

Now that that makes for a deep relationship with with us where we have dedicated people who are doing the same job every day accumulating a lot of wisdom in order to be able to execute. But if that nuance was managed up the stream quite a ways, it would dramatically simplify our role in the process. It would definitely make it more efficient and it would certainly open themselves up to a greater degree of of um opportunity to roll out a traditional competitive process when when you're considering it um a new 3PL.

The nuance being managed upstream sometimes is is is entirely possible to where you've taken all of the guesswork out to where by the time that it arrives at the 3PL. Let's say it's just dead simple. All the 3PL needs to do is put a postage label on it and send it out to your customers. There's no picking, packing, any degree of inference or or deduction required. Well, I would say that you should command a pretty aggressive price from your 3PL.

This reaches the point where this is nearly a commoditized service. And if you compare, well, who is a able to offer the most commoditized services out there? Well, let's just look at um Amazon. And if any of you have ever shipped into FBA, the number of labeling requirements and restrictions that they have for you to put on them is almost as complicated as it is to ship to Target, which we which we know firsthand how to do both of those.

But the reason is they don't they need a a system that removes the necessity of a human to manage any degree of nuance out of the process um entirely. So I think the the answer is um the greater degree of communication and visibility and familiarity that your 3PL can um develop with your inbound supply chain all the way from the point of origin to providing incremental updates as it arrives to the facility to making and and setting a a doc appointment so that they have the resources available to quickly ingest your product and then overlabeling it to the to the point where um just here here's some decent examples.

It's great to have all of the all of the information that you can possibly get on the outside of the box. But if we're creating some some trail of breadcrumbs, well, I need to know what's on the entire shipment. It'd be great to know what's on each individual pallet. It would be great to know what's in each box. It would be great to on the interior of the box for those things to be already segregated if there's more than one product inside it. it would be even better for there to be a label on all four sides of the box.

And the the point of that is not to um dumb it down to where um you you think that you just have dummies working at your 3PL. The point is if what we want to do is align incentives. It takes time to offload to count and to put things um on the shelf. And if the in the aggregate the majority of of of clients are not adhering to these strict standards, then 3PL's have to build in a a margin of error in their estimations for when they're pricing clients to say, you know what, it may not always be this predictable.

Well, the more predictable it is, the more aggressive we can be. And if there's any degree of um savings and efficiency from us being able to ingest and stock product even faster, that should easily be pushed right back downhill to the client. And so it's good for both of us, it's good for everybody's pocketbooks. Such a good point. Like the I mean what I immediately hear is essentially that like the the more somebody needs to think about it, the more it's going to cost is uh is is kind of that simple.

And so the more that a a brand can in advance think about everything that they do in a way that makes it easier on the 3PL, they're going to save cost there. And that what that suggests to me is that this is like one of those things where I've seen brands at times like think about where something gets filled, for example. Uh, and I've seen them do um or or or like uh pre-kitting or something like that, you know, something like where a manufacturer is kitting um you know, uh pre-kitting certain bundles or products or whatever it is versus having to have your 3PL go pick individual bundles um you know where each pick is another cost. um and the trade-off of those things which is like okay well now you create forecasting risk if you're pre-kitting um because you know it's a little bit harder uh you're a little more flexible to the so and so then there's a question of like cost and you know if you're if you're working with someone where the labor cost isn't too high the 3PL side so yeah it's it's a really interesting trade-off to think about of course the more customization you need obviously that's going to be it's sort of a separate line item cost on for 3PL's um yeah just sort of thinking in those terms ahead of time is the more we can make this standardized the the easier easier it can be for us to get a great price with our 3PL um strikes me as as a really helpful guiding principle for this that I think probably people haven't considered enough you know um yeah I think it's a collaborative conversation you know and because we've had a lot of brands kitting is a great example we've had a lot of brands who are having us manage that degree of nuance so that they can have the maximum flexibility in their in their go to market where they're changing bundles constantly well um you may reach a threshold that pre-kitting some of these products to just have things ready to to be able to work ahead is the right idea.

Or maybe the business evolves and you say up the chain, hey, look, um I think that you should look at your cost origins and save the money on this portion of the product and have us do it on on the rest of it. But the point is we if it's easier for us, the margin should improve for us. And as as long as um you know I think that this industry we I learned by jumping into the industry that it has a bit of a PR problem.

Um I think that there's some inherent distrust in the um in the way that clients and 3PL's interact. And I think most of that is born from a lack of transparency or a misalignment of of of incentives. If you can have a candid, fluid conversation with your clients about, hey, here is what is good for us and here's where it generally aligns with what's um good for you. You're saving us money, we can save you money. What easier way to get the sort of collaboration that you need ahead of the supply chain.

Um yeah, I I like I think you're right about about that PR problem. Uh which is interesting is um what about after that? So, you've got something, you've got a product in the warehouse. Anything else that we need to hit sort of before the product ever gets there that does that before we go to what comes next? No. Okay. Um, so what next? Uh, what's the actual next part of that process from your guys' side of things? And how do we Let's just follow it through.

Yeah, it arrives. It's well organized. We've counted it and checked it in and communicated that back and we've resolved any discrepancies and now it's going to go find its way um to a shelf. The next time it's going to get interacted with is probably when it's either replenished into some pickable inventory or the case is popped open and we've picked it for an order. What another critically important thing, make sure that the interior contents are are the right quantities.

It may seem like having us break open cases and count every individual unit is a huge waste of time, but you're talking about some we're talking about disappointed recipients when we find out that the product is out of stock or it's been um mislabeled. That's pressure that you can put on your um suppliers to get things accurate and not make any sort of estimation. The next time it might be interacted with is when we're cycle counting it.

If you are going to a 3PL and they're saying, "Hey, we want to charge you for an annual or a bianual inventory count." And you're like, "No, I'll just save the money." Well, you're not going to save the money. You're going to create disappointment when your inventory is inevitably inaccurate. And why is that? Well, you know, I looked at um the number of inventory touches that we had over like a one month period in this facility and it was something like 7 million units touched.

That is an ino. Okay. So, what if a human or a piece of software or whatever makes a mistake just one in 10,000 times? That's 99.99% accuracy. Well, that's still an enormous number of problems that need to be resolved. And the answer to that is routinely counting inventory. It's the pro. It's the solution and it's the problem because people make mistakes when they count inventory. The point is to just constantly check your work.

If you're working with the 3PL, spend the money to make sure that they are counting inventory. This is a mutual accountability um exercise that's going to head off problems before they show themselves at the worst times, which is generally during peak sales periods. Then when's the next time that inventory is going to get interacted with is when it's picked and it's ultimately um ultimately shipped. If you are trying to operate a business efficiently, you should be doing it with my friends at Intelliggeems.

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Um I heard somebody recently tell me that that um one thing you can work with um some 3PL's with at least is um essentially like how you stack pallets in a warehouse and essentially like how high you stack and maybe some of that is related to actually your ordering strategy, how much how much um product you keep on hand. um you know this is sort of before any product gets picked and packed it it has to be stored in the warehouse and um and so I'm just curious if you could talk a little bit about that um before before we talk about being picked.

I know sometimes there's storage fees for things being there for too long. There's there's I'm as we're talking I'm having a very like u uh there's no solutions only tradeoffs thing going through my head because all of these things have trade-offs at the level of manufacturing and forecasting and all that kind of stuff. But but talk about sort of uh storage and and um stacking and some of those kinds of saw that play.

I think it's a great segue the um you know so the there's a sweet spot when you think about the trade-offs but if we're just starting of where incentives are generally um aligned. I don't think that um you having stale inventory is a problem that you and your 3PL aren't both incentivized to solve. We we're not in the storage business. We're in the fulfillment business. And you don't want to sit on product. You want it to to sell.

So, I think everybody knows um that uh long-term storage fees are really just meant there to be um the necessary shove that um that we that we both want to to say, "Hey, um let's get this overstock inventory um addressed." I don't generally like the negative um sanctions rather that we look towards things that are positive um on the the stackable pallets or the way that goods are um stored inside a facility. I think really that's just some backwards communication. the the for us, we've chosen a pricing model that we feel like Alliance Incentive is the best rather than um it's notoriously hard to compare pricing between 3PL's.

But when you're when you're talking to a new client, a pretty common question is, well, how many pallets do you have at your existing 3PL or how many do you anticipate storing here? Well, is it a 4ft pallet? Is it an 8ft pallet? How heavy is a pallet? Can I put it on the racking? Well, these are questions that that brand owners probably don't even know. The the better way to do this is to say uh we bill by the cubic foot by the day.

So, we are the what you don't want to be doing is um all right. So, it's uh uh it's 20 bucks a pallet. Well, that sounds like a good rate. Well, I've got two half full pallets of the exact same thing that I'm getting paid for twice. Why would why where's the incentive for the 3PL to consolidate these things? I think the point is for the 3PL to use their space the most efficiently as they possibly can. Being paid by the cubic foot ensures that I'm incentivized to consolidate pallets when it's going to liberate the space for me to put something else there.

Then there's very commonly bin fees. Small, medium, large, um, extra large bin fees. I think that with the exception of products just generally being really really big which might take up some of that pickable real estate the premium stuff that once it runs out you're generally not able to take on a new customer. We like a price per unique skew per week which we which we pro you know we take a snapshot of the inventory and we and we send it on to the client which is great for posterity too.

Again I'll worry about how big the bent needs to be. you don't need to worry about whether we're using the wrong size or whether you have duplicate bins or whatever. It's on us to make sure that we're setting the space up to flow correctly and to to work efficiently. And so for our clients, all you need to be concerned about is generally minimizing your cost of transit into us, which probably means stacking the tallest pallets that you can, getting these containers as jam-packed as you possibly can, and then we'll put it on pallets and figure out the which you know where it needs to go into um the facility.

With a handful of exception, there's probably some practical cases where we we suggest to a client, hey, um your pallets aren't very stable. Let's add a layer of cardboard or a pallet pad or something to increase some stability. But again, that probably reduces breakage. That probably helps us use our space more efficiently. If we can count on that, there's joint savings that we can pass on. Um, okay. So, so if that's where the savings are, I mean, yeah, I I like the the notion that actually neither of you has an incentive to have stuff sitting around in the warehouse and that um and that you're in the fulfillment business and not the storage business.

I actually have never heard somebody frame it quite like that. Um yeah, it's it's a clever way to do it. You said something in there though that uh that you don't like using negative incentives so much. You want to use positive ones more uh more likely. Can you talk more about that? I'm I'm just curious what you have in mind there. Um, okay. So, this comes from, um, maybe you're familiar with what chargebacks are. So, you're going to ship to Target.

They've got a pretty robust routing guide. You got to adhere to it. They got the box has got to be uniform. The label's got to be in the in the upper corner. If you miss it, they're going to hit you with um a chargeback fee. Now, we're squeezed in the center right here as the 3PL. The chargeback is coming to our client and sometimes it's 5% of the purchase order. Sometimes it like with Cabela, it was $1,000 per violation.

That is an enormously high chargeback. But worse over you have uh you have a department which um is not a revenue generating department at Target or at Cabela or whoever it is, but suddenly they can generate revenue or they can start charging people fees like excuses for why they're running behind. Well, these chargebacks get pretty ownorous pretty fast. And then what happens is the the sales side of the relationship comes in to try to rescue it.

And then you've got um like this good cop bad cop coming from the from the vendors. And we're at an equally equal risk. We have a receiving department. We need you to maintain your doc appointments. Why? So that we can meet your expectations. We need you to label these things properly so that we can get it in stock and and sellable faster and we don't accidentally receive the um the wrong product. But what's what's challenging to do is to go back and say, "Well, that'll be a $500 fee um that we're that we're going to have to charge you for receiving." So, what we do generally instead is we just set things to the side.

Let's use you missed your doc appointment or or things were really inaccurate. Well, we're um I got to stop counting with my thumb. Um we what we would rather do is say um look, we're going to get it done as fast as we possibly can, but if you would like to get it done faster, we we can charge a rush fee um to get through this problem um a little bit quicker. But you may decide, you know what, that's not that important to me for this shipment.

I can afford to to wait the two days. Then all of a sudden, it's not it's not a terrible sanction. Or maybe we charge it and then it's it's kind of as a service provider, maybe you've seen that you get a really good relationship with a client and you start doing them lots of favors and then some over time those favors become expectations and they don't feel much like favors anymore. But then you reach some intersection and you're like, do you know how often I do things for you that I don't charge you for?

Well, um, we like to go ahead and put those on an invoice, but then discount them to zero. just as a reminder to everybody um scratching your best. Yeah, this is a great practice. And I think I think more vendors should do this sort of thing just to say this is what it is. And I Yeah, I think part of this is like a cultural expectation where it's like we're all friends here. Come on, we're helping each other out. You know, it's like if people are not trying to take advantage of each other really, it's just Yeah.

It's just a hard they just don't understand how service provider businesses work. And so they Yeah, makes perfect sense. I like that a lot. That's a good way of doing it. just that's that's a perfect example of that positive versus negative incentive where you're going like, "Hey, just so you see what's happening here, like this is something we did for you, you know." Um um okay, so let's talk about um let's talk about picking and packing and and that sort of thing.

So um so that's what's the next thing that happens and how can brands think carefully about how they um interact with 3PL in a way to make the picking and packing of products into a better experience and more efficient experience. pick, pack, and postage. These are the biggest cost centers on um an an invoice. On the practical side, look, well doumented, well organized product that um doesn't require a lot of manipulation or um difficulty in deciphering what it is that you're looking at is is a good idea. legible barcodes.

If they're not legible, paying the 3PL to redo the barcodes, that's ultimately going to prevent them packing the wrong thing. And then you got a frustrated customer and you've paid postage twice and you've got inventory inaccurate. It's re it's a really low lift. Even if it's 20 cents a label to just go ahead and do it the right way to make sure that you have that degree of posterity. But then I think what's what's more important is to look at the pricing structure of the way that a lot of 3PL's do things.

There's definitely a spectrum of of of complexity on the what you don't want to do is be so unbelievably complex in your pricing structure that you feel like you're getting nickel and dimed for um every little thing. That makes it notoriously hard to estimate what your cost would be going to um a new provider. And it kind of makes it seem like they were dishonest about where the cost centers really were. and here's all of this extra value stuff that they claim was was critical that they started charging you.

But then on the other side, there's a way oversimplification and at the worst practice that I see is an all-in pick pack and postage fee. Here's why this doesn't align incentives um very well. Well, or um even if we just look at at let's let's just look at fulfillment first. They're like, um, the first five picks free. Well, that's not similar economics between anything. If it's it's it's still refreshingly simple to say, okay, well, they have to go to an aisle to get the product.

How many unique products bins do they have to visit? And then the the least time consuming is probably grabbing more than one of the same thing that resides um right in front of it. So, what I like to see is an order fee to cover the round trip, a unique skew fee to cover the unique bin that they have to go to, decipher that they're grabbing the correct thing, and then go and visit your next bin, and then a considerably reduced additional unit fee.

This is the way that lets your um go to market change without your 3PL suddenly ending up in a loss and saying you know what well this was the composition of your business. It was two unique SKUs and four units on average but now it's four unique SKs and and four units and we're half as efficient on on part of this journey. Um because once you start losing money for your provider, you're gonna be naturally deprioritized and sometimes that stuff is just not as obvious as um it needed to be.

And I so instead of an oversimplified rate card like all-in pickpack pricing or even worse all-in pickpack and postage pricing, I recommend a slightly more optimized model. you should expect to see on your invoice of charge for the labor. That's the fulfillment fee. Materials, if you're using them, this should not be a significant revenue center or profit center for your for your 3PL. A standard cost plus model and anything that you would be able to go get yourselves.

Postage, which we'll get to um in just a second, and then storage. Outside of that, if there's cons what I what we see a lot is a is an hourly charge a lot from from like a value added services for all of this different nuance management. If you're getting charged for a value added service, what that is is an indication that you have some systemic problem that you should go ahead and get addressed or you have something that requires a degree of of accountability because it it should have been a surprise.

If it's not a surprise, then get a price per unit. If if this is something that your 3PL is doing on a routine basis, they should do it hourly for a few times until they've got some sort of predictable model and then give you something predictable that you can build in um to your margins. Other than that, you should have all four of the major cost centers. Now, why do I say that you should not have an all-inclusive postage option, too?

I Before we go there, before we go there, let me let me pause on something. So, I've seen Plenty of 3PL's price with the sort of um you know, the first two, three picks are free or whatever it is. Um and that seems really appealing at first, but I think what you're saying, you've focused on this conversation on aligning incentives. And what you're what you're saying here makes sense to me, which is that like, you know, there's a there's sort of a baseline labor cost the moment that somebody has to fulfill an order that just is applied to every order.

That seems reasonable to me. Um but that then the the most expensive thing next I mean what a 3PL is fundamentally is a building and people where the costs go up the more stuff there is to do right so if you can sort of Yes. So if you can make the cost on the 3PL's bill reflect that then it seems to me that that would align incentives really really nicely. um you know and so yeah yeah like your distinction between basically uh picking one skew twice versus picking two SKs is actually a real difference in time somebody has to go find each skew and whatever you know um and and so that that makes sense to me a lot do do you think there's any savings here like I like I can think of a brand that I work with that will have like 10 SKs per order or something or or excuse me uh yeah 10 SKs 10 units both uh you know high skew high unit count per order.

Is there some point at which that flips a little bit to where like if each order like are picks uh 8, nine, and 10 cheaper than picks two, three, and four for you guys? You know, should there be like a declining cost center for each pick or or is that just like too detailed like No, I don't think that it's that it's necessarily too detailed. the t the time savings that's going to come from um reaching the upper end of of additional picks is well how condensed can you store that in that that inventory.

It's it we're talking about the steps between each individual unit is really what we're what we're measuring. If the if there's a high density then I think that you should that you should pass that on. But if you're a shoe brand um and no matter what you do, it is spread out really really far. The Okay, so the best thing that we did in this case, HighQ apparel brand, we analyzed all of their data and we found that 87% of orders were in within one size of each other.

So, we put all the extra smalls, all the smalls, all the mediums, all the largest for that exact reason because it was the highest likelihood that we could pick a complete order within the shortest period rather than just distributing everything organizing all the same colorway and style by all of the different sizes um adjacent to each other. That's a practical question that you need to ask your 3PL is like, hey, how bespoke are you willing to set this um fulfillment um operation up?

And it here's a most people don't have eight to 10 um unique units per order. A lot of times we see especially in soft goods. Like here's a really practical example. Um here is one unique skew socks that we sell pretty consistently in a three or a six-pack. Well, why don't you have your manufacturer start packing them in sets of three? Um so is that that's one visit? That's one thing to grab. There's there we're talking about, hey man, I want my 3PL to charge me um a dollar per order.

Well, it costs like 40 cents a minute for a human to do anything. So, at this point, we're talking about seconds at a time. It those tiny little incremental things really do add up. And as long as you can have a a a transparent back and forth conversation about where that opportunity is, um then you should you should be expected to see some savings there. Okay, let's go over to postage. Uh, so that side of things next.

I think that's where you were going next. What What can we say about that? Um, that a lot of 3PL's make their mistake of of packing their margin into postage. We've watched pickp pack fees become a gimmick. Look, it costs 40 cents a minute for a human to do anything. Go out and pick and ship your own your own product. Do five of them in a row with a stopwatch next to you. it will take you much longer than you thought that it would take to do um to do your fulfillment.

And all everything that we do is based off of pace um and efficiency, hitting um hitting a baseline of a reasonable degree of of efficiency. When 3PL's are making the majority of their margin in in postage, it definitely misaligns. Even worse so if they are giving you like a generic this is the price of economy 4 to 8 day service this is the price of a slightly more expedited 2 to four here is the next day air service.

Why does this not work? Because the the less transparent that it is, the more incentivized the 3PL is to use the absolute cheapest translate crappiest option to get your product from um A to A to B. Just as in the 3PL service, the faster um that the the product needs to go there, the less optimized that they're going to be able to be in the route that it um gets there. So when you dramatically um oversimplify the 3PL is just going to choose an option that does not reflect meeting the best expectations um to your customer.

So my recommendation would be a cost plus model um on postage that you're not afraid to pay a reasonable margin margin to your 3PL. for cheaper services that should be a little bit higher maybe maybe even more than um 10%. The reason is um you know you can have fast, good and cheap, but you can only pick two. And that definitely applies to um postage. And if it's going to be reasonably fast and and cheap, then the reliability of delivery, the accuracy of your invoices is probably going to have the highest margin of error.

And they have a and they have something to cover there. And finally, there's a lot of risk as a 3PL in in postage. I mean when it when it could be 70 or 80% of an invoice and it's essentially a pass through cost for the 3PL, they are carrying a a heavy amount of cash flow to support something that you theoretically collected in the cart already when you when you charge postage. I think that there's um as long as it's pretty transparent that the markup is pretty close to consistent across all of the carriers and they're going to let you choose what's the relationship between fast, good, and and and cheap that you prefer to send to.

Then we will rate shop amongst these carriers and choose the option that meets those expectations for you with some degree of ambivalence between which one that you've chosen. when you actually do get to the point of um postage options and that sort of thing, do you um do you I mean is there any ways that 3PL's can use their scale to negotiate shipping costs, negotiate postage costs? 100%. 100%. And that feels like a slam dunk for me is that like that this is like one of the advantages of 3PL is that just like they should be able to get a better price with, you know, FedEx or whatever, right?

Like and they do. I mean, the I think that the bar has been lowered more than ever thanks to USPS offering some pretty generous pricing with their with their ground advantage program, but it's notoriously losing money. So, I wouldn't say that the the there's a reason that they're not subject to capitalist um restrictions just like FedEx and and UPS, but sure, our scale affords us a slightly better price, which should be passed on to you.

Yeah. Um yeah, that that's sort of another advantage there. Do uh brands uh pursue that any differently with their 3PLs like or is that do you think that's just sort of table stakes for 3PL to be offering that? I would say with just a handful of exceptions, you should be getting a price from your 3PL as good as you're able to get yourself. Yeah. that they already manage these carrier relationships and if you're getting as good of a price as you could um acquire that you shouldn't be too fussy um about what it is that you're that you're paying.

The foremost there should just be some transparency there. Yeah. Um what about uh savings by going uh I don't know if you guys have multiple warehouses but by going towards just like adding warehouses where what's the trade-off there with essentially by coastal fulfillment or tri coastal or you know is there sort of like spreading your product out between multiple warehouses and and saving on how many zones you get to versus shipping from Missouri and just saying we're just not going to ship further in zone four or whatever.

You know what's what's the trade-off there? Our average zone distribution is just under five, 4.97 or something like that. That's about the best that you can get in the country. Only a half a percent of the whole nation is in a zone 8 for us. There's an advertisement for shipping um out of Missouri. And I've got a pretty strong um sometimes seen as contrarian opinion uh about this. Don't let it don't let it be um overly overly biased that we are based in in the Midwest, but if you are going to choose almost nobody needs dual distribution and there is exceptions which we which we which we will get into.

If you're going to have one warehouse, don't put it on the West Coast. That's the worst place to be. You're going to pay about 15% more in postage just for the zone cost. I've got the data if anybody wants to tweet at me about this. If you're going to have um the second best would be the east coast. It's much better for time in transit, but it still isolates a meaningful portion of the country. About 22% of recipients that are on the West Coast that are now getting your economy shipment in five or six days.

The Midwest, we're 2.7 days coast to coast, and that's almost dead equal on on both sides. The average zone distribution for us is better than Memphis, which is where FedEx is headquartered. It's better than Heavern, Kentucky, which is where UPS is um headquartered. The postage savings for you as a brand of going by Coastal versus um just in the Midwest is going to be sub4% until you crest 10 pounds um per shipment. And even at that point, you're talking about the most I've ever seen it. it seen it save and we were just doing this with a with a client who has on average 27 pound shipments.

The most I ever saw was going to be um 10%. And that means that you have to have perfect inventory distribution greater than 90% of the time otherwise you are just eliminating your savings um alto together. One one really telling last little anecdote that I'll add to this. I look up to a a great 3PL which I won't mention their name because I'm telling something um is some insider baseball for for them. Um they had a they've got more than a million square feet um under their operation.

They only have like 40 customers which tells you that they are also dealing with really really big um clients. They had five warehouses perfectly distributed around the US and another one in Canada and only three of their clients used more than one warehouse. That just tells you the cost of capital, the cost of inventory redistribution, the added complexity rarely equates to the postage savings. The only exceptions to that is if you have a very time-sensitive product where customers are looking for really really quick turnaround.

And my argument to that would be sudday rates with FedEx right now are really really aggressive. You probably fit in the one of their if it fits it ships programs to get things there in two days anyway. I would weigh the cost of capital of for a second location you're going to be increasing your inventory position by at least at 180%. For three it's it's going to be even more um than that. Vast majority of clients it's just not worth it.

That's extremely helpful because it's such a tantalizing idea to me. It seems so obvious. You look at the zone uh zones on the rate card and you're like, "Oh, well, like what if we could just ship to closer zones." Uh so it's right there. Save save money. But that's a compelling case you just made. Uh Chad, we're just about out of time, but I want to make sure that we hit anything else in the journey of the product uh still.

So we did postage. Um anything else on sort of uh after we've done postage to getting the product getting to the customer? Yeah. Oh, nice. Um returns. All right. Um, returns should not be a loss leader for a 3PL. You should pay handsomely for returns. And the math is really easy there. What the difference maker is. Okay. First, it's less efficient than fulfillment. You've got to pop it open and figure out where this thing.

It's the exact opposite of everything you just said. It's incredibly human intensive. And yes, and a human has to open up and and look at everyone. And I've seen how customers pack returns. There it's taped in all kinds of weird ways and it takes forever and Yeah. Right. It makes perfect. It fits the narrative you've you've you've shared here so far so perfectly. Most of it, look, what we're really focusing on here is what's the ratio of returns that your 3PL can get back into sellable inventory.

The more you're willing to pay them, the more TLC that they can give these these products. Share your SOPs as much as you possibly can. But the difference between like a 30% um rehabilitation rate and an 80% rehabilitation rate will probably dwarf all of your return costs in in a month. And I know that's the case for us. We go way into detail as much as we possibly can. And that includes like um polishing rags and microfiber and vacuums and steamers and everything just to get product back into sellable status because that's where the real cost center is.

That is awesome. Okay. Um, very last question. Is there anything else that we did not talk about in this conversation that you think is like something big that both 3PL and uh and operator ought to be thinking about that's just like just want to make sure we don't miss anything. Basically, what I'm asking is I probably didn't ask the best questions. What did I not ask about that would help help people? You know, um, the best 3PL's in, in my observation, have been the ones who are willing to say no.

Say no to requests that you make that will ultimately sacrifice you meeting your expectations. Say no to taking on too many clients where they are dividing their attention and they can't give any one client enough um, enough TLC that they actually need. I think that that is a call for more competent operators to open up boutique 3PLs. There is so much business out there for every one of us um to take that the best ones are fewer deeper relationships where you're able to interact with owner operators and you're not just a number or a cog um in a wheel.

And then finally, it's no sweat for me to take a look at your numbers. This is my favorite thing to do. I don't know if you can see it over here, but I've got a 60-inch monitor with 10 spreadsheets open simultaneously that that's running the models. Uh, it's my favorite thing to do. So, tweet me and we'll look at your data. Do that now. Follow Chad onx at Chad Carlton. There's an E in there. Don't miss the E. C A R L E T O N.

Uh, and and give him a follow. I this conversation behind has been um a helpful voice in the industry for a long time and obviously just a good dude. you can just tell he cares about it a lot and he's passionate about it. Um, even if it if it wasn't his life dream as a child to start a 3PL. Uh, uh, and and of course you should look into working with Chad and his business at goodcomp.com um, as the place to go find Chad.

Uh, reach out there to to do that. Um, and uh, yeah, Chad, thanks so much for your time. I appreciate it so much. And this is a great Thanks for watching or listening to that episode. You should subscribe wherever you are doing that so you don't miss out on other conversations like this designed to help you build a profitable growing e-commerce business. Thanks to Chad again for coming. Dude is smart. You can just feel it when he talks.

He really speaks with the kind of um intelligence level and expertise that just kind of comes through the screen. Really loved that conversation a lot. Go follow up with him on X like I said and with um his company to go to get a great 3PL experience if that is something that you are looking for. Uh, you should also do what? You should email me podcastfgrowth.com. I'd love to hear from you. You could also hit me up on XPublicly andJ Ferris.

And you should sign up for my newsletter at afgrowth.com. Just drop your email address in the popup or in the footer there. You'll get my newsletter, which we're getting to once a week. It's close to once a week. Occasionally there's a week off. But the point is, I'm not going to spam you. It's going to be good. It's going to be tactical. It's going to be actionable. Uh, and you should go do that there. You'll also get my four free essential e-commerce resources if you do that, which is a bunch of documents that I actually use with my clients and I'm sending them to you so that you can use them as well in your business.

I think they'll help you. Forecasting, unit economics, performance monitors, all kinds of stuff like that. Thanks again for watching or listening. Subscribe wherever you're doing that. I'll see you next time. [Music]