COVID-19 has triggered an increase in online orders. Most are predicting that the increase in B2C fulfillment will sustain, even as retail stores emerge from hibernation. Operationally, it requires far more manpower to pick and pack individual orders than it does to ship out pallets of goods to retailers. As a result, businesses are seeing a marked increase in eCommerce fulfillment center costs – and a profit-driven need to rein in labor costs, already their largest warehouse expense.
Large-scale automation of warehouse processes can certainly help, but that’s not practical or even necessary for the vast majority of B2C shippers. Order volumes would not warrant the 7-figure investment. But there are many other strategies you can employ (including the 10 tips in this article) to reduce fulfillment warehouse costs without breaking the bank.
10 Ideas to Reduce Fulfillment Center Costs
1. Improve association retention
When it comes to cost cutting, this is not the first thing most online sellers would consider, but we believe it’s the most impactful thing you can do to reduce labor costs. Based on our 30+ years of experience running fulfillment warehouses, we estimate the total cost of losing a productive associate to be $7,500. That cost includes recruitment, training, correcting increased errors and, mostly, the reduced productivity of new hires. Constant churn means you’ll always require more workers to achieve the same output as an experienced team.
There is a real financial advantage to improving employee retention in the warehouse. Let’s say you lose 100 warehouse associates a year to attrition. If you reduce that number by 15%, you’ll save $112,500, not including the “soft” benefits of improved morale and a better customer experience.
2. Improve your inventory forecasts
Generally, online sellers do a bad job predicting volumes and sharing accurate demand forecasts, in part because of poor collaboration between merchandising and logistics functions. What they don’t realize is that forecasts guide the labor plan in the fulfillment center. Too many people and these labor costs eat into your margin. Too few people and you’re paying overtime, bringing in temporary workers and, very possibly, missing ship deadlines and disappointing customers.
Better forecasts can dramatically reduce fulfillment center costs by avoiding overtime and expedited shipping, which can run $4–$5 more per shipment than standard ground transport.
3. Establish productivity standards
Online sellers depress productivity when they fail to establish engineered labor standards for various warehouse tasks, like orders processed or kits produced in an hour. Studies have shown that associates, once informed of the goal, want to meet or beat it. But if people operating at 50% of goal are not informed and retrained, that behavior will continue and you’ll literally double your labor costs.
Establishing and monitoring productivity standards can increase productivity by 10–15%, depending on order volumes, and even more for poorly performing operations.
4. Improve Training
Companies that take shortcuts with training are looking at it the wrong way. They see training as a cost, not an investment and want to get workers out on the floor as soon as possible. But poorly trained staff take much longer to become 100% productive. You’ve effectively doubled your labor costs if you have four people operating at 50% productivity in place of two people who are 100% productive.
Ironically, you can train too much at the start. When training new hires, depth is good, but breadth is not. To get associates to maximum productivity as soon as possible, simplify the training to focus on the primary areas in which that associate will be working. Pickers pick and packers pack. When you “functionalize” training, the amount of knowledge the associate needs to learn is small and you minimize the learning curve. Additional training can be layered on in the future.
If you tally the cost of fewer errors, increased labor efficiency through cross training, increased productivity and reduced re-training time, an improved training program can easily reduce fulfillment center costs by tens of thousands of dollars per year.
5. Batch similar orders
Let’s say you ran a flower shop. If you had 100 orders to process, and 50 of those orders were for red roses only and the other 50 were for a mix of many different flowers, you wouldn’t travel out to the greenhouse 50 different times for each order of roses; you’d gather them all at one time and bring them back to a central place to process. So, your total trips to the greenhouse would be 51 instead of 100. Less travel. Less time. The same logic applies in the eCommerce fulfillment center, where the most popular products are often found in most orders. Your warehouse management system should be able to call out similar orders – this is called batch picking – so you can process these separate from your regular, multi-SKU picking process.
For one cleaning product manufacturer, instituting simple batch pick procedures led to a yearly labor savings of $50,000.
6. Improve slotting to reduce travel time
Warehouse slotting is the process of organizing inventory to minimize space requirements and reduce travel time. In a fulfillment center, pickers can spend as much as 70% of their time traveling to and from the work. The lower that percentage, the lower your labor costs. Smart slotting includes:
- Placing fast movers within easy reach
- Locating items that often ship together next to each other
- Balancing picking activity across multiple aisles to avoid congestion
- Adjusting choice locations based on seasonally popular or promoted products
You want around 80% of your orders to be picked in a forward pick area that minimizes travel time. A more efficient pick process that includes batch picking and more intelligent slotting can reduce labor costs in a fulfillment center by 25%, depending on the product mix.
7. Automate the quality control check
At eCommerce fulfillment centers, you’ll often see a person at the end of a pack-out line doing a final check for order accuracy. But for a relatively small capital investment, you can scan bar-coded products as they are placed in a box or bag to ensure the order is 100% accurate, avoiding the need for manual QC.
Most WMS systems have a module that includes scanning. If products are only sold online and don’t have a bar code, you can work with your packaging manufacturer to include a scannable bar code on the actual package.
8. Use Tape Machines
Machines that can automate rote tasks can make sense, but it all depends on the volume of orders being processed. With the right volume, you’ll see a return on the investment within 1-2 years max. Tape machines are a good example. They cost between $2,500–$3,500, but in many cases these machines could replace a $35,000 associate. When you speed up the pack-out process, you need fewer people.
9. Use box erectors
Box erectors that automatically create boxes vary widely in cost – from $20,000 to more than $100,000 depending on the number of box sizes and styles needed. For high-volume operations, the investment can make smart financial sense. For one cleaning products manufacturer, we calculated that switching from manual to automated box construction would increase output from 3 boxes per minute to 15 per minute, taking the labor cost from $0.10 to $0.03 per box – a 70% labor savings. This particular box erector carried a hefty $130,000 price tag, but the predicted ROI was less than 2 years because of the high volume of boxes.
10. Switch from Boxes to Bags
Businesses that once shipped exclusively in boxes have shifted to using polybags for smaller, lighter products because, compared to boxes, bags are:
- Cheaper to purchase
- Require less time to pack
- Are far less expensive to ship
Here is an analysis done for a wellness company comparing use of a bag versus a box for packaging.
Labor to make/pack
Up to 7% reduction with polybags
Applying these numbers to client volumes, the new packaging strategy reduced fulfillment center costs by $240,000 through reduced labor and packaging costs, with additional savings from reduced parcel costs.
You can reduce eCommerce warehouse costs without breaking the bank
Compared to traditional retail distribution, eCommerce fulfillment centers require many more workers to get products out the door. But it’s become harder to build these added labor costs into the price of the product. As online sales continue to grow, online retailers must act boldly to reduce fulfillment center costs to protect margins.
The good news is you don’t have to invest millions to drive 7-figure savings in your operation. We hope our practical tips for streamlining fulfillment operations help. If you’re looking for even more ideas, check out our A–Z guide to reducing eCommerce fulfillment costs.
Cost cutting in the fulfillment warehouse has never been more important. You can chase these savings in your own operation or outsource fulfillment to an experienced logistics partner like Amware Fulfillment, who will capitalize on all the savings opportunities we’ve outlined.