Keeping DC costs at bay

Apr 01, 2008 9:30 PM  By

Need to cut costs? Who doesn’t these days.

While there’s not much you can do about postage or paper prices, your DC is a prime area for reducing costs. Better still, you don’t have to make major capital purchases to institute measures that lower expenses and boost productivity.

Based on our consulting work and our industry share groups, we’ve come up with several ways to reduce your cost per order, increase capacity without expansion, and improve service levels.

Know where you stand Where to start? An operational audit will help you identify your needs and recognize potential improvements to process, layout and use of space, staff productivity, systems and freight analysis. The objectives are to lower the cost per order, increase storage capacity within the center, reduce inbound and outbound freight costs, and improve service levels and turnaround times.

Where are merchants spending the bulk of their budgets? Direct labor; indirect labor; outbound freight; inbound freight; occupancy; and packing materials represent the largest expenditures — and the greatest potential savings.

An internal benchmarking program will help reduce your cost per order or hold the cost in line as volumes increase. While external benchmarking will give you valuable insight into the productivity and practices of other companies, it’s always best to develop work standards that apply to your business type, product type, level of warehouse automation, labor rates, etc.

Our company looks at industry wide benchmarking numbers that represent an extensive range of business types, sizes, productivity levels, and pay rates. The overall average cost per order ranges from $3 to $5, and comprises direct labor, indirect labor, occupancy and packing costs.

The chart “Cost-per-order benchmarks” on pages 44 and 45 shows the back-end fulfillment expenses — including direct and indirect labor, occupancy and packing materials — for 20 merchants. All these businesses average between 1.5 and 2.5 items per order.

Keep in mind that the cost per order column does not include shipping costs; nor does it include any offset for shipping and processing revenue. Why not? These metrics distort comparisons because of average package weight and distance.

The companies in the chart with the cost per order at the low end of the table ($1.10 to $2.90) have a high degree of automation in their DC. Other merchants with a higher cost per order may also have automation, but they are not as productive.

What’s more, order volume doesn’t always translate to lower cost per order. Direct labor costs range from $10 to $14 — plus anywhere from 15% to 30% for benefits, depending on the company.

The facilities themselves are another variable affecting costs. Keep in mind that some are modern, air-conditioned, highly automated facilities; others are more basic.

Management often wants to compare companies based on percent to net sales. Though this can be dangerous because of the wide range of average order values in this industry, the average company is in the range of 3% to 5% of net sales. Using this range of values and determining where you fit in can pinpoint areas where you might want to focus attention.

In addition to exchanging benchmarks with other merchants, it’s also a good idea to tour the facilities of other companies. This will teach you a great deal about how others gain efficiency, provide customer service, and apply best practices.

Managing the work force

The chart “Breakdown of total fulfillment costs” (below) shows the direct labor, indirect labor, occupancy and packing costs as a percentage of the total warehouse cost per order for the average company. Note that nearly half (48%) of the cost goes to direct labor.

Because labor is the largest controllable expense item in your DC, you should capture regular and premium hours and labor dollars. Set these daily against volumes (such as orders and lines); include history as a cumulative report by month, week and day, and measure your continual improvement internally against yourself. This history helps with your budgeting next season.

Have a labor budget by season, month, and week based on order forecasts and planned productivity. This is the tool to use to determine your detailed staffing plan, hiring and training plan, and seasonal hiring plan.

Take a good look at your current staffing ratio. Full-time help, if not kept productive, may be costly, so you may need to change the mix of full-time, part-time and flex-time staff. Consider different shift structures and schedules to match regular labor to the volume. For instance, you might try three 12-hour or four 10-hour shifts, or split weeks.

If you have high turnover, you need to discover why attrition is so high and work to close the gap. Review your hiring, retention, and training practices. How well are you able to staff for the peaks?

Consider some type of incentive for keeping good people. Spend more time in the hiring process explaining the job and your expectations. Don’t underestimate the need for adequate training; consider cross-training in jobs where it makes sense. Use your staff to provide leads for new hires. Stay in touch with past seasonal help and offer them incentives to return.

If you constantly have problems staffing for the peak, you may need to seek out a good temporary agency. This can bring more flexibility to your operation; the trade-offs can be overstaffing or overtime.

Look for ways to improve picking and packing, as about 50% of the labor dollars are in these two areas. For example, take advantage of off-shift functions such as primary pick slot replenishment, staggering start times by functions (picking and packing), multiple shifts, and doing your inventory slot moves at night. Better use of space means less congestion, and it improves labor efficiency and materials handling equipment utilization.

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.


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.