It takes a deliberate strategy to reduce fulfillment costs without sacrificing customer satisfaction or quality. If you're looking for ideas that help you balance these seemingly conflicting goals, then this article will help.
The key is to target and improve inefficiencies in the system in a way that makes the process run smoothly from all angles. Once you get to that point, your fiscal policies tend to be aligned with the things that keep your customers coming back to you.
Let's start by going through the costs associated with fulfillment and how to reduce them.
Costs Associated with Fulfillment
Before you look at ways to reduce fulfillment costs, it's important to know the different classifications. Total expenses are made up of fixed and variable costs.
Variable costs change over time and from period to period. They are the easiest costs for you to influence since fixed costs are typically recurring expenses over which you have little control.
Fixed costs remain the same even if you increase or decrease in the number of goods produced and sold. They include expenses independent of day-to-day operations.
Example of Variable Costs:
- Packaging:
- boxes
- wrapping (bubble wrap, etc)
- customized materials
- packing slips
- Shipping costs vary per carrier and are determined by the package weight, size and volume.
Some expenses may be justified because it increases brand awareness and value. However, make sure you aren't spending money on packaging that could be better invested elsewhere in the business.
Shipping costs are controllable to an extent. By creating standards for shipping, and making those clear to potential buyers, you can reduce the variability of these costs.
Based on weights and speeds, choosing different carriers can have an impact on overall costs as well.
Examples of Fixed Costs:
Once you incur fixed costs they typically only go up or stay level.
For example: say you hire five warehouse workers to pick and pack orders. They make the same amount of money every week unless they get overtime, then costs are higher. The only way to reduce fixed costs is to introduce innovation, such as new technology and automation, that reduces or eliminates the line item you want to reduce.
Here are other examples of fixed costs:
- Labor (usually the highest cost)
- Overhead costs:
- insurance
- rent
- utilities
- Order fulfillment software
Measuring Fulfillment Costs
Measure the efficiency of your inventory management and fulfillment processes by calculating the fulfillment cost per order.
Once you get this down, you can start tracking the cost per unit, cost per unit, cost per square foot and other metrics that help you measure your efficiency. To calculate the cost per order:
- Determine the total storage fee. (number of pallets x storage fee per pallet).
- Calculate the total pick/pack fee. (number of orders per month x the pick/pack fee per order) + (number of units per month x pick/pack fee per unit).
- Determine the total receiving fee. (number of units received each month x receiving fee per unit).
- Find the total monthly fee. (total storage fee + total receiving fee + total pick/pack fee).
- Finally, to yield the total fulfillment costs per order, calculate the total fee per order. (total monthly fee / number of orders per month).
Reducing Fulfillment Costs
First, understand your costs by auditing your fulfillment process, and calculating your cost per order for fulfillment.
Strategies to Reduce Costs
Use the following strategies to keep fulfillment costs down.
- Negotiate with multiple carriers. The more you ship, the lower your rate.
- Ask suppliers to use your account number. This increases their shipping volume, contributing to cheaper rates and helps prevent suppliers from padding the costs.
- Use packaging provided by your carrier. Avoid using your own packaging, so you don't incur additional fees related to an unusual box size.
- Consider a regional carrier. They often have the same services as FedEx or UPS but charge less.
- Use online shipping. This lets you save U.S. Postal Service costs.
- Invest in prepaid shipping. This provides a discount of up to 20 percent
- Factor in all shipping fees before billing customers.
Labor and Automation
Ideally, all of this is done through an automated process, based on rules you establish in the best interest of your customers and business.
The cost of labor is fixed, but the output isn't, so the more you can get automated, the more efficient your fulfillment process becomes. Instead of reducing wages, increase efficiency for an all-around win.
Here are some tasks you can easily automate:
- Printing shipping labels. These can be batch printed before employees come in, or pre-printed so employees don’t have to click print themselves - they are just printed already.
- Get the right order fulfillment software. This helps you automate the decision-making for shipping carriers. You simply choose the box sizes and packing materials on each order. This should be standardized, so your team doesn't have to select it with every order.
- Optimize the warehouse layout. This makes a huge difference in developing an efficient pick and pack process.
Overhead
Overhead changes can take years to evaluate, track and revise for efficiency. Here are some examples to consider for your organization.
- Move into the right size warehouse
- Negotiate lower rent or utilities
As you grow, the scope of fixed costs become a smaller percentage of total expenses than variable expenses and your attention has to focus on reducing the costs that affect your business the most.
Keep in mind, these costs will be more difficult to reduce, and their impact is spread across all orders.
Reducing your costs isn't necessarily going to stunt the quality of your fulfillment process.
Managing these expenses in conjunction with improving customer satisfaction and loyalty is a challenge but it helps you stand out from the competition. An improved order management system, along with the tips you've picked up here, helps you optimize your fulfillment process and grow your customer base.
