In my last blog post, I mentioned that we typically see that efficient, conventional warehouses with minimal automation have total warehouse costs per order (TWC) between $3 and $4.50 for direct-to-customer companies. You might say, “For what sized company?”
To show how results can vary, I have selected 16 companies from our proprietary database of operations costs and productivity. They had 27 million orders annually with TWC of $114 million. The fully loaded weighted average for TWC was $4.24 per order. Nine of these businesses had annual orders less than 1 million and the largest had 7.2 million.
By fully loaded costs I mean management salaries, direct and indirect labor wages, total occupancy (heat, light, space, depreciation and amortization for conveyance and MHE) and packing costs.
We excluded the outbound order shipping as it distorts comparisons between companies, because dimensional weight and negotiated carrier costs vary widely. We also didn’t include the cost of employee benefits, payroll taxes and vacation.
Lowest Warehouse Cost Per Order
In our fulfillment consulting, we believe a fully loaded cost per order (CPO) of $4.24 is efficient compared to hundreds of companies we have worked with. In the selected sample of 16 companies, the four companies with the lowest CPO are:
|
Orders |
CPO |
Orders per square foot |
|
5,200,000 |
$1.89 |
5.8 |
|
1,600,000 |
$2.73 |
10.6 |
|
415,000 |
$3.17 |
5.9 |
|
1,450,000 |
$4.04 |
7.5 |
| Source: F. Curtis Barry & Co. | ||
The remaining 12 companies’ CPO ranged from $4.28 to $9.37. Their annual orders ranged from 191,000 orders (@ $4.90 each) to 7.3 million orders (@ $4.28 each). Company size and warehouse size don’t always translate to efficiency. Three factors we see in low CPO are:
- How well the warehouse is managed
- The level of automation with an ROI
- The best practices implemented
Space Productivity
Now let’s look at the four lowest TCO businesses using a space productivity metric: Orders processed per square foot. The company with the $2.73 CPO has twice the space productivity of the other two. When companies first start using this metric, they can’t believe how low it is. In benchmarking businesses we see better performing businesses with orders per square foot of 10 and above.
Digging into space productivity results, you will see how low inventory turnover, the amount of bulk stock and the average cubic dimensions of products, among other factors, affect space productivity.
Total Warehouse Costs as Percent to Net Sales
From a financial perspective, efficiency is sometimes measured using the total warehouse costs as a percent of net sales. It’s common for P&L statements to show the calculation for each expense line and category as a percent to the company’s net sales.
|
Orders |
Cost/Order |
% of Net Sales |
Orders/square foot |
|
902,000 |
$5.36 |
1.94% |
4.3 |
|
200,000 |
$6.44 |
2.58% |
4.0 |
|
408,000 |
$5.50 |
2.71% |
2.0 |
|
900,000 |
$5.58 |
2.01% |
2.5 |
| Source: F. Curtis Barry & Co. | |||
With this metric, you have to be sure that you’re comparing yourself to similar businesses in terms of average order value (AOV). From this sample, we selected the four companies with the lowest percent to net sales. Typically we find the most efficient companies have total warehouse costs as a percent of net sales between and 3% and 5%. In the table above, the lowest four on a percent to net sales basis were below 3%. However, they also had an AOV between $200 and $275, which is high. Additionally, their space productivity wasn’t that good compared to the benchmark of 10 or higher.
Compare Your Performance to Yourself
The above are just a few ways we measure warehouse productivity. As you can see, no one measure tells the whole story. My advice: Dig deeper and calculate cost per order, cost per unit processed, cost per line and cost per box shipped using actual labor costs and hours worked for each department. This is where you’ll see the most value in setting goals, developing productivity reporting for management and showing improvement.
Benchmarking with other companies is an important way to understand the value of various metrics and to exchange best practices. However, the single most important principle is to benchmark your operation against yourself – by week, month, season and year. Only in this way can you show relative improvement in DTC fulfillment as the business grows and changes.
Curt Barry is president of F. Curtis Barry & Company