Keeping DC costs at bay

	Transportation management

Controlling inbound and outbound freight costs can make the difference between profit and loss for your business.

Inbound freight represents 2% to 4% of gross sales for domestic product and 6% to 12% of imported product. Freight consortiums such as DM Transportation have lowered some of our clients' inbound costs by 15% to 24%.

Equally important are the vendor compliance and inbound in transit visibility that shippers can provide so that you can schedule receipts, plan labor, and alert buyers and, ultimately, the customer to product availability. Your company — not the vendor — should control the routing and carriers for inbound receipts.

Outbound freight can represent 6% to 8% of the average order — and customers are sensitive to the cost of shipping in their purchasing decisions. Expedited carrier plans have 90-plus accessorial charges, which continually increase the shipping costs.

How to reduce outbound freight costs? Continually look at renegotiating contracts. Use the U.S. Postal Service and zone skipping where tracking and slower delivery will be acceptable. You might also consider a consultant to help you negotiate contracts.

	Best practices and process improvement

You have to take care of the basics of fulfillment if you want to avoid adding costs to the warehouse operation. A key objective should be to increase current capacity and use that capacity more effectively.

Get as much productivity as possible out of the existing layout, processes and systems first. Keep the processes simple so that new and part-time people can join the company and become productive in shorter times. Do the basics well before you consider more sophisticated systems and methods.

Here are a few more tactics to consider.

	Reduce handling and touches

The fewer touches of product, the less cost incurred to process orders. Streamline the operation and apply industry best practices to reduce handling and costs. Flow chart the receiving process through putaway, and the picking process, including replenishment, through to the shipping function.

	Revamp your replenishment

Effective replenishment is the basis of efficient order fulfillment. Inefficient replenishment will not only be very expensive, it will have a negative impact on customer service. Use a combination of min/max and demand practices to fill forward pick locations. In other words, once a product has reached the predetermined minimum quantity, you order enough replacement product to bring the level up to the predetermined maximum quantity. Make sure replenishments are scheduled and completed prior to the start of the picking process.

	Size up your slotting

Effective slotting — determining the optimal placement of inventory for picking efficiency — can lower your costs for picking, replenishment, and putaway warehouse labor. Try to have seven days of average demand in the primary pick location. This reduces the number of times the picker finds an empty pick slot. Use velocity slotting — locating SKUs in the pick line based on their sales rate — to determine pick locations and reduce travel time.

	Investigate inventory control options

Effective inventory management is the single most important tool to improve customer service and reduce cost of operation. Aisle mapping — verifying product to all locations — is a good way to improve inventory control.

Cycle counting — counting items in all locations for one SKU — insures accuracy and can eliminate annual physical inventory taking.

Using barcodes throughout the inventory process (from inbound cartons and pallets, to putaway, through picking, pack confirmation and shipping) increases accuracy to 99.9% and dramatically increases efficiency.

	Peruse picking and packing options

How can you use best practices to improve picking productivity? Match the method to the pick problem. Batch-pick singles. Consider cart/bin or zone picking for multiline orders.

The key to packing performance is to keep the packer at the station. All materials, inserts and supplies must be within the packer's reach. Are there automated sealers that make sense for your volume and shipping containers? Consider the design of the pack station as a critical factor (e.g. height, work surface size, fatigue mats, supply storage, etc.).

	Revisit receiving practices and cross-docking

Efficient receiving starts with having all purchase orders in the receiving system prior to merchandise arrival. Review your company policies regarding vendor compliance. Cross-docking is an effective practice to reduce handling costs while improving customer service, as in filling back orders. Advanced shipping notices (ASNs) improve efficiency and accuracy, speed dock-to-stock, and allow scheduling of receipts and labor.

	Find the right level of automation

ROI analysis could put automation into your planning for cost improvement. The wrong material handling equipment can be creating hidden lost time and inefficient product flow, impacting cost and customer service.

Review how barcoding is used throughout the warehouse. Conveyance, material handling and warehouse management systems can improve productivity, increase accuracy and service levels, and reduce costs.

And finally, bear in mind that there are practical and cost effective reasons to outsource part or all of your business. It may be to deal with a peak, when adding new product categories, or when fulfillment is not a company core competency.

Outside fulfillment may also help to serve a new market, such as Canada or the opposite coast. One large electronics retailer that we worked with has outsourced Canadian fulfillment to a third-party. This enables the merchant to better serve its Canadian customers at an affordable cost.

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Curt Barry is president of F. Curtis Barry & Co. (www.fcbco.com), a multichannel operations and fulfillment consultancy.

Cost-per-order benchmarks

Company	Product category	Annual orders	Total warehouse costs per order
A	gifts	1,300,000	$9.40
B	gifts	500,000	$8.30
C	hobby	500,000	$7.00
D	apparel	4,800,000	$5.80
E	apparel	800,000	$5.80
F	gifts	700,000	$5.60
G	home	870,000	$5.40
H	apparel	2,400,000	$5.20
I	hobby	200,000	$5.00
J	apparel	700,000	$4.80
K	gifts	250,000	$4.55
L	apparel	6,500,000	$4.30
M	apparel	780,000	$3.45
N	gifts	500,000	$3.20
O	apparel	14,000,000	$2.90
P	hardgoods	1,700,000	$2.80
Q	gifts	5,000,000	$1.90
R	apparel	3,400,000	$1.55
S	gifts	650,000	$1.45
T	apparel	5,200,000	$1.40
U	gifts	3,000,000	$1.10
Source: F. Curtis Barry & Co.		Average:	$4.33

Here's a look at the back-end fulfillment expenses, including direct and indirect labor, occupancy, packing materials, for 20 direct merchants. All companies average between 1.5 and 2.5 items per order. Total warehouse cost per order does not include shipping costs or any offset from shipping and processing revenue, which would distort the cost per order.