5 Ways to Cut Your Order Fulfillment Costs

Feb 03, 2014 2:23 PM  By

piggy_bank_300It’s no secret. Online shoppers are bargain hunters. So whether they’re looking for low-priced items, free shipping or free returns, as a seller, it means you need to keep your costs low.

Order fulfillment can be a huge margin eater, so in this post we’ll talk about 5 relatively simple ways to cut your order fulfillment costs, ones that don’t involve big hardware or software investments, starting with……

Receiving Inventory
Receiving and stocking new inventory can be a big time suck, and thus, a big expense. While it’s inevitable, what often makes it unnecessarily time consuming and expensive is when stock arrives as a disorganized mess.

Sellers can save time and money by working with suppliers to ensure inventory shipments arrive on time, are well organized and include accurate, easily-readable packing slips. Make sure that items are properly labeled, and that packaging details align with what’s in your WMS. Identify bin and overflow warehouse locations prior to new inventory arriving. And make sure to hold your suppliers accountable. Merchants are often overly accepting of recurring inventory errors, slow production times and late shipments, which ultimately cost you, the merchant.

Inventory Management
For sellers that handle their own order fulfillment, the warehouse can be a big overhead expense. The more inventory, the more space required to house that inventory.

Shorter lead times and faster inventory turnover means that sellers need less space, less capital, and experience a faster return on their investment. Achieving this requires smaller and more frequent inventory shipments. This not only means that suppliers need to be fast and dependable, it also requires negotiation on the seller’s part to try to maintain the same or very similar per unit cost when ordering in smaller quantities. It is also a good idea have annual or bi-annual meetings with suppliers to discuss past performance and future product demands.

Optimizing inventory management does take time and requires continuous improvement. And while there will ultimately be the slow-moving items that tie up cash and warehouse space, the right data combined with standardized processes and flexible suppliers can make a big difference.

Kitting
Kitting is the process of bundling individual items together. Once built, kits may then be put into another package for shipping, or the kit itself may be the shipping package and would simply need a label before going out.

Whether order fulfillment is handled in-house or outsourced, kitting saves money through economies of scale. When several orders with like items are expected and predictable, building kits prior to receiving orders allows for greater speed and efficiency, reducing a seller’s per unit cost. Check with your suppliers to see if they can kit items and what the cost will be. In general, the more prep work that can be done before receiving orders, the better.

Packaging
Online sellers often struggle with trying to find the right mix of packaging, those that can accommodate a wide variety of items while also eliminating empty space and excess dunnage.

At least once a year, sellers should do a careful analysis to identify any packaging that should be discontinued, as well as any new sizes that could be introduced in order to minimize waste and cut back on dimensional weight and expensive oversize fees, which may even involve building custom boxes.

Ordering in large quantities generally allows for packaging discounts. This means that, by ordering a larger assortment of boxes in smaller quantities, it is important that the cost savings realized through less dunnage and fewer oversize fees outweighs the higher cost you may pay for packaging on a per unit basis.

Outsourcing
When order fulfillment is handled in house, fixed costs like warehouse rent can eat away at margin, especially during slower months.

By outsourcing order fulfillment to a company that doesn’t charge high fixed rates or impose big minimums, a seller’s business becomes more flexible and scalable, and is less affected by seasonality, typically resulting in a lower and more consistent, predictable cost per order.

Steve Bulger is sales & marketing manager at eFulfillment Service.

 

 

 

  • http://www.infifthgear.com/ Katie Guyer

    Great points, Steve. As a fellow outsourced provider, I would like to point out that outsourcing fulfillment doesn’t necessarily protect retailers from seasonality in operational costs, especially if they experience significant spikes during certain times of the year.

    Although it’s true that slower months expose overhead for in-house operations, with most outsourced fulfillment providers a retailer will pay a per-order cost for picking/packing/shipping. This will be a smaller total per-month charge in the off-peak months, but will be significantly higher during peak times. Does it level itself out? Sure. But retailers should still be aware that they will essentially ‘pay more’ during the peak months, which sometimes isn’t as visible when operations are in-house. I think that fact sometimes gets lost on a company who is going out-of-house for their first high-volume season.

    The nice thing about outsourcing is that the peaks and valleys in labor needs are managed by the provider and not the retailer. That’s one serious headache that they won’t experience! :)

    • SteveBulger

      Thanks, Katie! That’s a good point….retails will of course pay more in total during peak months.

      My point about seasonality is relative to the per order cost that the retailer pays, which should factor in both fixed and variable expenses. When handled in-house, that per order cost can go way up during lull periods as fixed costs remain and even some variable costs, such as warehouse labor, can cost more on a per order basis if not managed properly. When outsourcing fulfillment, there are typically fewer fixed costs, so assuming the provider doesn’t have big monthly fixed retainers, the per order cost can still go up and down throughout the year, but typically there is less variance. This of course also means it’s helpful if the provider doesn’t “reset” their pick/pack fees each month, meaning retailers are charged more per order during slower months. So in large part, it comes down to the provider and how they charge.

      And you’re absolutely right about the headaches! Beyond the actual costs, retailers should also be factoring in the less tangible opportunity costs of handling fulfillment in house.

  • andrew boon

    Interesting article !