Inflation doesn’t just increase the cost of living; it also increases the cost of doing business.
This isn’t the best news for some ecommerce businesses all over the world, especially with the holidays right around the corner. As expenses continue to rise with inflation, brands are left with two options: bring in more revenue to offset the increase, or find ways to cut costs.
The latter tends to be the easier option (particularly when consumer spending is down) — but where is the best place to start?
If you’re looking for areas of your supply chain to optimize for cost, order fulfilment is almost always a good candidate. By implementing a few best practices and tips in your fulfilment process, you can not only secure cost savings, but ultimately run a more efficient and scalable business that’s poised for growth — even during a recession.
In this article, we’ll break down common fulfilment costs, strategies for reducing them, and when partnering with a 3PL is a cost-effective fulfilment solution.
What are order fulfilment costs?
Order fulfilment costs include all of the costs involved in getting an order to the end customer.
Because getting orders to customers is a multi-stage process, there are many different expenses that you should factor in when calculating your fulfilment costs. These include:
- Warehouse receiving: Labour costs associated with receiving new inventory
- Storing and managing inventory: Costs associated with storing, tracking, and insuring inventory
- Warehouse picking and packing: Labour costs associated with picking and packing items (as well as a 3PL’s pick and pack fees, if applicable)
- Kitting (if applicable): The cost of pre-assembling separate pieces into a single offering or the arrangement of a package a certain way (which is offered as an additional service by most 3PLs)
- Packaging: The cost of plain or customized packaging materials, such as boxes or poly mailers
- Return management and processing: Costs associated with restocking or disposing of returned items
- Shipping costs: Costs associated with transporting orders to end customers, and which can vary based on destination, weight, dimensions, carrier used, shipping speed, etc.
If you’re self-fulfilling, you should also factor in the time and effort you spend on fulfilment as an opportunity cost, as that time and effort could have been spent on other activities that drive more revenue.
By calculating each of these expenses individually, you will be able to identify which functions are the biggest cost centres (and, therefore, the best opportunities for optimization). By adding all these expenses together, you will also achieve a much more comprehensive understanding of your fulfilment costs.
7 tips for reducing fulfilment costs
Each component of the order fulfilment process offers unique opportunities for cost optimization. Here are 7 ways ecommerce businesses can reduce costs across different fulfilment functions.
1. Minimise inventory storage costs
Renting shelf, bin, or pallet space in a warehouse or fulfilment centre is a necessity for growing ecommerce businesses. However, without proper warehouse and inventory management, storage costs can easily get out of hand and result in sunk costs.
Sometimes, storage costs are high because a business is wasting valuable warehousing space without even realizing it. Before investing in more square footage, try reorganizing your warehouse to make better use of the space you already pay for — including the vertical space — to maximize the value you receive for your rent.
Other times, high storage costs are due to a business continuously holding onto inventory it can’t sell. Conduct regular inventory audits to catch deadstock early on, before it starts gathering dust and racking up storage costs). You can offload it using sales, promotions, or even charitable donations to free up space.
The best way to minimize storage costs, however, is to avoid wasting space or inventory to begin with. Improving your demand forecasts with more accurate data will help you avoid accidentally overstocking, while investing in an inventory management system (IMS) that allows you to track inventory as it moves through the supply chain allows you to maintain inventory visibility, and mitigate potential cost-drivers as they arise.
2. Optimise warehouse operations for efficiency
Time is money, especially when it comes to ecommerce operations. The more efficiently a business is able to pick, pack, and ship orders out to customers, the more orders it can send out using the same amount of labor.
One of the best ways to improve operational efficiency is to speed up the picking process. To do this, experiment with picking strategies such as batch picking or zone picking, which reduce the number of trips a picker must make to a storage location and back to their picking station. Additionally, keep optimizing your warehouse layout to create more efficient picking routes and easily-accessible storage locations.
Beyond picking, implementing a warehouse management system (WMS) helps to streamline warehouse operations for speed and efficiency, as well as gain new visibility into performance and areas of improvement.
3. Automate manual tasks
Automating simple activities involved in fulfilment enables a business to allocate labour hours to tasks that need a human touch (which reduces labour costs), and even achieve higher operational accuracy by reducing costly mistakes.
Some warehouse automation solutions involve goods-to-person (GTP), where machines and robots are used to assist human workers in the warehouse picking process. Pick-to-light (PLT) systems, which involve barcodes and LED lights, can also be used to improve the speed at which workers locate the right items to pick.
Automatic reorder point notifications when you hit a threshold amount for a particular SKU help you time replenishment perfectly, and prevent costly stockouts and backorders. Some merchants choose to automate the restocking entirely, and set up their system to automatically reorder stock when a SKU hits its threshold to save time and trouble.
4. Reduce package weight and dimensions
How an order is packaged has a huge impact on the final shipping cost. Tweaking your package design can lower your average shipping cost, and even reduce your business’s carbon footprint.
Start by removing any excess packaging (such as packing peanuts, cardboard, bubblewrap, tissue paper, etc.) to make your package lighter, and therefore cheaper to ship. If possible, shipping a product in its own container (also called SIOC packaging) eliminates the need for an outer box to further reduce the weight.
Once you have adjusted your packaging, be sure to determine its billable weight for different carriers. Different carriers may use different methods for calculating billable weight, so evaluate various options to secure the most cost-savings.
5. Distribute inventory to reduce shipping costs
It is almost always less expensive to ship an order 30 miles than 3,000 miles — so depending on your order volume, it may be more economical to store inventory closer to your customers.
After analysing order histories to determine the most common order destinations for your business, splitting inventory between several strategically-placed fulfilment centres allows you to shorten the average shipping distance, and subsequently reduce shipping costs.
This is particularly helpful for businesses that frequently ship to international locations, as storing inventory at a facility within the country you’re shipping to greatly minimizes the customs, duties, tariffs, and other fees associated with cross-border shipping.
While this distribution strategy may require greater initial investment (to purchase more inventory or ship units to more locations than you would with only one fulfilment centre), lowering your average shipping cost can be more cost-effective in the long run.
6. Use analytics to continuously optimize fulfilment operations
To achieve cost savings in the long-term, ecommerce businesses should treat cost optimization as an ongoing process, rather than an occasional housekeeping measure. By tracking a variety of fulfilment KPIs at every fulfilment centre you utilize, you will gain real-time visibility into how different fulfilment operations are performing, which may reveal more areas for improvements and cost-savings.
Some of the best fulfilment KPIs to track for cost optimization include:
- Inventory turnover rate
- Order cycle time
- Perfect order rate
- Average storage cost per unit
- Average fulfilment cost per order
- Average shipping cost per shipping method
7. Outsource to a 3PL
Rather than fulfilling orders themselves, some businesses choose to let a third party logistics service (or 3PL) handle fulfilment activities like receiving, storage, picking, and packing.
3PLs will typically charge a flat rate or per-item fee for each activity, but the precise prices vary from provider to provider. Depending on the 3PL’s specific cost structure, it may very well be less expensive to send your inventory to one of the 3PL’s fulfilment centres, store it there, and have them fulfil your ecommerce orders than to invest in warehouse rent, utilities, insurance, and other costs that you would incur fulfilling orders yourself.
Self-fulfilment vs. outsourcing: which is more cost effective?
What is a cost-effective fulfilment solution at one stage in a business’s growth may not be at a different stage. As a result, it’s important to carefully evaluate what fulfilment strategy is the best fit for your business’s current order volume, customer base, and plans for scaling.
Self-fulfilment is a cost-effective solution for businesses at either end of the growth journey — that is, very small and very large (enterprise-level) businesses.
Small businesses that have just started or that are only receiving a few orders per month can usually spare the time and effort to fulfil those orders themselves, without sacrificing other important business functions. Because these businesses have only a few SKUs and receive very few orders a month, it doesn’t make sense to invest in a 3PL partnership yet.
On the other end of the growth spectrum, enterprise-level businesses have the capital to invest in warehouses, equipment, and other resources required to effectively fulfil massive order volumes themselves across retail channels and popular marketplaces. This helps them become more self-sufficient, which can improve their profitability in the future.
The growth journey from being a new business to becoming an enterprise company is enormous — and for businesses anywhere on that journey, it is almost always more cost-effective to outsource fulfilment to a 3PL. While it may seem counterintuitive at first, the right 3PL partnership offers businesses value beyond fulfilment services in the form of resources, expertise, and support.
Here are just some of the additional benefits that come with a 3PL, which help brands save money and scale efficiently.
By delegating physical activities like inventory receiving, stowing, picking, and packing to a third party, you have more time to focus on other, more important business functions such as product development, strategic planning, or marketing initiatives. This enables your business to be more productive and efficient, which in turn helps lower operating costs.
A network of fulfilment centres
Unlike enterprise-level businesses, scaling ecommerce brands usually don’t have the capital to build their own warehouses or purchase their own equipment. 3PLs allow these brands access to a network of fulfilment centres already equipped with the necessary tools and personnel, meaning that a brand can realize the cost-savings of distributed inventory without paying to maintain each location themselves.
International fulfilment expertise
With complex rules and regulations to follow, having a partner that’s equipped to help you navigate international shipping is a huge advantage for ecommerce businesses. A 3PL should be able to help you store inventory in the countries you do business in to avoid hefty customs and taxes, and help you navigate cross-border requirements cost-effectively.
The right 3PL will enable you to manage inventory, orders, and fulfilment across all of your sales channels from one platform. This lets you avoid paying multiple service providers to handle different channels, and helps you reduce costly errors such as overselling or stocking out on a channel.
The best 3PLs also provide ecommerce brands with inventory, order, and warehouse management technology that can easily integrate with their pre-existing tech stack, which eliminates hassle while streamlining operations across fulfilment.
By gaining this technology through a 3PL partnership, an ecommerce business avoids the cost of purchasing or implementing such software themselves, while still cutting costs through the optimization such technology provides.
At the end of the day, the best way to keep your fulfilment costs down is to invest in the right partnerships. Trusted fulfilment experts can help you implement best practices and vetted strategies throughout your supply chain to save you money, and ultimately improve your bottom line.
However, not all partners are created equal. It’s important to find the right partners for your business — partners that are equipped with all of the capabilities your business needs to fulfil orders now, and scale affordably over time.
A global omnifulfilment platform like ShipBob, for example, is a great choice for international brands looking to grow their business while inflation is on the rise, as ShipBob optimizes order fulfilment at each of its 30+ locations throughout the US, EU, UK, Canada, and Australia to deliver cost-savings to its customers. Similarly, with a partner like SimplyVAT, your business can achieve the VAT registration and compliance required to hold goods in those countries, and subsequently save on shipping costs.
By partnering with industry leaders like these, you can position your ecommerce business for a successful — and affordable — Q4.