“If you cannot measure it, you cannot improve it,” said famed British physicist Lord Kelvin about scientific experimentation over 100 years ago. It’s still pertinent today as we seek to improve ecommerce operations, remain competitive and improve our profitability and customer service.
In order to improve operations, we first need to measure key fulfillment metrics such as total cost per order (CPO), shipped cost per carton, cost per line and cost unit. Once we understand what these metrics show, we can then develop options for processes that reduce steps and cost, or improve service levels such as order turnaround time.
What key fulfillment metrics do you monitor and use to improve your performance? Here are 16 we recommend you use as a starting point:
Cost Per Order
The calculation is the total cost for all warehouse functions divided by the number of orders processed in a given timeframe. The initial measurement should be annual or trailing 12 months, followed by monthly. An efficient total cost per order is $5 to $7.
The components (less shipping, employee benefits and payroll taxes) include:
- Payroll expense: management, direct and indirect labor
- Facilities or occupancy costs: lease or depreciation for the space, utilities and depreciation and amortization for MHE systems and automation
- Packing supply costs
These expenses should be available from your company’s profit and loss statement and make up a high percentage of overall fulfillment expenses. The number of orders may come from marketing or better yet your WMS system.
Our recommendation is to measure the total CPO in two ways, with and without including employee benefits, payroll taxes and outbound shipping costs. These expenses vary widely between operations. The benefits and payroll taxes (health care, PTO, payroll taxes, retirement plans, etc.) are not something an operations executive has direct control over generally. However, they may add 15% to 30% to the total cost per order.
Outbound shipping is the single largest cost in order fulfillment, more than all the others combined. It varies based on volumes shipped and carrier negotiation which is why comparisons to other ecommerce companies can be distorted.
Using the total CPO, you can now drive the calculation to a more granular level, dividing it by marketing orders processed.
Cost Per Carton Shipped
This is derived by dividing the total CPO by the number of cartons shipped. This figure may be 10% to 20% higher than the number of marketing orders because all orders can’t be combined into one carton.
Cost Per Order Line
This is calculated by dividing the total CPO by the number of order lines. The majority of B2C ecommerce orders are three order lines (or units) or less. B2B ecommerce will have much larger lines.
Cost Per Unit Shipped
This is arrived at by dividing the total CPO by the number of units shipped. As you develop these comparisons it is helpful to calculate costs for larger orders vs. smaller direct-to-customer orders.
Labor Cost Per Order
In most ecommerce companies labor is more than 50% of the total CPO when you exclude benefits and shipping costs. In terms of giving a metric to supervisors and leads to manage and monitor, the labor cost is the one they can most influence and reduce. The cost per order, carton, line and unit is key.
Fulfillment Costs as a Percentage of Net Sales
CFOs are interested in the fulfillment expense as a percentage of net sales. This is calculated by dividing the total fulfillment center cost by net sales, and then multiplying by 100 to determine the percentage. Efficient companies have a metric of 5% to 8% of net sales. Small- to medium-sized businesses may be between 10% and 15%. This ratio can be misleading because average ecommerce orders can vary widely.
Characteristically, ecommerce fulfillment is largely manual until automation can be justified. We have often seen in manual operations that order volume and company size don’t always mean efficiency on a CPO basis. Reducing the cost still depends on having effective managers, supervisors and leads.
Expand Measurement to Departments, Functions
Don’t try to develop too many metrics at once. Sometimes businesses have dozens of metrics that are meaningless and cumbersome to collect and report. Here are some more to consider (in bold).
To address the magnitude of the cost of shipping and its effects on your business and profitability, what elements of shipping costs should you monitor as metrics? You can find out more in our prior blog post on the topic.
Other important metrics involve returns, including cost per return, cost per returned unit and returns as a percentage of gross demand). Also important are fulfillment service levels such as dock-to-stock turnaround time, order fulfillment turnaround time, return processing time and percentage of orders shipped the same day.
Picking and packing are important because together they often contribute to more than 50% of the labor expenses. Metrics here include labor cost to pick an order, pick a line and pick a unit of product. This is calculated by taking the total picking labor cost and dividing it by the appropriate measure (order, line or units). There is also the labor cost to pack a shipped carton (total packing labor cost divided by number of cartons) and a marketing order(total packing labor cost divided by number of marketing orders).
Data Accuracy and Timeliness
Many order management systems and ERPs used in ecommerce operations were not designed to collect basic fulfillment data, even if strong in other areas. A WMS designed specifically for fulfillment often can gather and report on data for these metrics. Investigate closely how the data available to you is collected and its accuracy and timeliness.
When you decide to collect and report at a lower level of detail such as by department, determine how you can determine its accuracy. For example, as companies do more cross training and use of employees between two departments, collecting transactions and hours worked may not be feasible without a timekeeping system set up to gather at the department level.
How do your ecommerce operations stack up? Remember to define the data that represents a unit of work and a good process measurement. Work with your associates on how to collect the data on a timely basis. Some of it will be operational and from your financial reporting system. Determine how timely and accurate the results need to be. Keep the focus on what these fulfillment metrics tell you about your business and how you can improve your operational performance and efficiency.
Brian Barry is President of F. Curtis Barry & Company