Even as retail stores emerge from their pandemic-induced hibernation, online shopping has held onto much of the market share it gained since the early days of COVID-19. Operationally, it requires far more labor to pick and pack individual orders than to ship out pallets of goods to retailers. Thanks to skyrocketing labor costs for warehouse workers, eTailers have experienced a marked increase in eCommerce fulfillment center costs – already their biggest warehouse expense.
Large-scale automation of warehouse processes can certainly help, but it may not be necessary or even practical for many B2C shippers whose order volumes don’t yet warrant large-scale capital investment. But you can employ many other cost-savings strategies (including the 20 tips in this article) to reduce fulfillment warehouse costs without breaking the bank.
Ideas to Reduce Fulfillment Center Costs
1. Improve warehouse associate retention
This is our first tip for a reason. Lowering turnover among warehouse workers is a real challenge in the fulfillment industry. If you can outperform others in this area, you give your company a real advantage. Many online sellers don’t immediately recognize the impact of high turnover on overall fulfillment costs, but retaining employees is the most impactful thing you can do to reduce labor expenses. Based on our 30+ years of experience running fulfillment warehouses, we estimate the total cost of losing a productive associate to be at least $7,500. That cost includes recruitment, training and error mitigation costs, plus the lower productivity of the replacement hire. In addition, constant churn in the associate pool requires more workers to achieve the same output as a stable, more experienced team.
Improving employee retention in the warehouse offers a significant financial advantage. For example, say you lose 100 warehouse associates annually to attrition. Reducing that figure by 15% saves $112,500, not including the “soft” benefits of improved morale and a better customer experience.
2. Establish productivity standards
Creating clearly defined productivity standards for warehouse associates will ensure consistent performance on the warehouse floor. An efficient fulfillment operation must implement these standards for every process, from inventory intake at the loading dock to final shipping to the end customer. For example, many warehouses set a minimum acceptable limit for order lines picked and packed hourly or a maximum time limit for assembling a kit.
Establishing and enforcing productivity standards on the fulfillment center floor can help reduce fulfillment costs, improve communication between employees, and identify gaps in staffing or technology. Developing a working set of standards will require a combination of feedback from warehouse employees and managers, time studies on existing processes, and data from the warehouse management system.
Studies have shown that associates want to meet or beat established productivity goals. However, if associates operating at 50% of established standards are not informed and retrained, that behavior will continue, and you’ll double your labor costs. Overall, establishing and monitoring productivity standards can increase productivity by 10–15%, depending on order volumes, and even more for poorly performing operations.
3. Improve inventory forecasts
Online sellers struggle to accurately predict volumes and share accurate demand forecasts, partly because of poor collaboration between merchandising and logistics functions. They don’t realize that forecasts guide the labor plan in the fulfillment center. With too many people, labor costs eat into your margin. Too few will result in overtime, bringing in temporary workers, potentially missing ship deadlines, and disappointing customers.
If you outsource fulfillment to a third-party fulfillment partner, remember that they base their labor plans on the information you provide. Providing regular and accurate forecasts can allow them to significantly reduce their labor charges to you. How? Better forecasts reduce fulfillment center costs by avoiding unexpected overtime. Improved planning also helps avoid expedited shipping, which costs significantly more per shipment than standard ground transport and drives up costs.
4. Automate pack-out processes
Every online seller reaches a tipping point where having too many workers on the floor starts to become impractical, expensive, and inefficient. High-volume eCommerce operations can reduce fulfillment costs by automating pack-out processes. This type of automation works best in scenarios with highly repeatable processes.
For example, Amware automated one customer’s fulfillment process with inline scales that automatically weigh totes as they pass on the conveyor belt. We also incorporated automated pack-slip printers that print pack slips and add them into the totes as they move. By automating these two simple steps, we saved 12 seconds per order, potentially generating six-figure labor savings annually for a high-volume customer.
5. Improve training
Companies that take shortcuts with training look at it the wrong way. They see training as a cost rather than an investment. As such, they push to get associates on the floor as soon as possible. But poorly trained staff take much longer to become 100% productive. With this training philosophy, you’ll effectively double 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 associate only needs to quickly learn a minimal amount of information, reducing the learning curve. Then managers can layer on additional training later as the employee’s skills grow.
If you tally the cost of fewer errors, increased labor efficiency through cross-training, increased productivity, and reduced retraining time, an improved training program can reduce fulfillment center costs by tens of thousands of dollars per year.
6. Reduce the percentage of temporary workers
Temporary workers play an essential role in the logistics industry by allowing fulfillment centers and warehouses to scale up quickly in the face of demand spikes. Though hiring temp labor to avoid overhead benefits costs might seem ideal, the advantages of hiring temp labor can be misleading. Unfortunately, temporary workers tend to operate at a lower productivity level than full-time warehouse associates, driving up cost labor costs. As such, it’s vital to minimize the use of temporary workers when possible to reduce pick and pack fulfillment costs.
Maintaining an 80/20 full-time to temp-worker ratio provides a solid baseline for labor planning. However, a good flexible fulfillment model can accommodate a shift to 70/30 or even 60/40 during peak volume periods. Using a consistently high percentage of temporary workers might make more sense if the business is seasonal, tasks are simple and repetitive, or demand spikes prove too difficult to predict.
7. Use the ideal picking method
Let’s say you ran a flower shop. If you had 50 orders for red roses only and another 50 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 since you’d make a single trip to gather all needed red roses. Less travel. Less time. The same logic applies in the eCommerce fulfillment center, where more orders contain the most popular products.
Your warehouse management system should be able to call out similar orders using a process called batch picking so that you can process these separate from your regular, multi-SKU picking process. For one cleaning product manufacturer we worked with, instituting simple batch pick procedures led to a yearly labor savings of $50,000.
Batch picking doesn’t work for every online seller, however. For eCommerce businesses with a broad range of products, zone picking may help to reduce fulfillment costs. In a zone picking model, pickers will pick any product in their designated zone. While the order itself may pass through multiple zones, pickers can optimize travel time by performing assigned work within a smaller area.
8. Implement continuous improvement programs
Highly successful fulfillment centers never stop trying to improve their processes based on a defined set of order fulfillment metrics. This dedication to continuous improvement ensures that new technologies and best practices will never catch the fulfillment operation unaware.
Some fulfillment centers have turned to continuous improvement models such as Lean Six Sigma to reduce fulfillment costs and cut waste out of processes. Ultimately, when you operate more efficiently and reduce errors, you create:
- Happier customers who see fewer errors
- Happier associates aligned around shared improvement objectives
- Happier stakeholders who see greater profit
9. Improve slotting to reduce travel time
Warehouse slotting organizes inventory to minimize space requirements and reduce travel time. In a fulfillment center, pickers can spend as much as 70% of their time traveling between the various points where they conduct 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 picked in a forward pick area that minimizes travel time. A more efficient pick process includes intelligent slotting that can reduce labor costs in a fulfillment center by 25%, depending on the product mix.
Slotting is obviously a tried-and-true warehouse efficiency process. The mistake many brands make is establishing a slotting strategy based on an initial read of volumes and velocity by SKU, but then not revisiting that strategy regularly. Seasons and buyer preferences are constantly changing, and that impacts which items are your fastest movers.
10. Find ways to reduce total transportation spend
Fulfillment centers get so focused on parcel shipping costs that total transportation spend sometimes gets neglected. Shipping costs make up a significant percentage of overall transportation costs, but other areas exist where you can reduce fulfillment costs. Some of these other areas include:
- Become a shipper of choice. Develop close relationships with a few quality carriers. Becoming a shipper of choice with premier carriers will generate cost efficiencies and ensure you still have shipping capacity whenever it becomes scarce on the broader market.
- Optimize your routes. Using a high-quality transportation management system (TMS) can help you manage inbound traffic, optimize routes for inventory shipments, and avoid unexpected accessorial fees.
- Mitigate extra fees. Pick up your containers from ports and rail yards on time to avoid demurrage fees from those facilities.
11. 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 get placed in a box or bag to ensure the order is 100% accurate, avoiding the need for manual quality control.
Most WM 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.
12. Lower shipping costs
Shipping orders to eCommerce customers can account for up to 75% of total fulfillment spend. That fact alone makes parcel shipping a prime target for any online seller looking to reduce fulfillment costs. Some ways to lower shipping costs include:
- Use the USPS for home delivery. With programs like SurePost (UPS) and SmartPost (FedEx), you can get a parcel close to its final destination and use the U.S. Postal Service to get it to the customer’s home. This method can generate savings up to 30-40%.
- Place inventory closer to customers. Use multiple fulfillment centers to shorten shipping distances to large markets. If multiple fulfillment centers aren’t an option, use a centralized location to avoid shipping long-distance from one coast to the other.
- Leverage your fulfillment 3PL’s parcel rates. When you work with a 3PL that manages parcel shipping for many other customers, chances are their negotiated rates with parcel carriers are significantly better than what you can negotiate on your own. This rate difference can equate to 7-figure savings for high-volume shippers.
13. Use Tape Machines
Finding ways to accomplish more with fewer staff members on-site has become essential. Machines that can automate rote tasks make sense, but it depends on the volume of orders you process. With high enough volume, you’ll see a return on investment within one or two years max.
Tape machines offer a prime example of affordable automation solutions for repetitive tasks. A tape machine costs between $2,500–$3,500, but these machines could allow you to replace or reassign a $35,000 associate in many cases. In addition, when you speed up the pack-out process, you need fewer people, allowing fulfillment centers to optimize labor amid a labor shortage.
14. 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. However, for high-volume operations, the investment can make financial sense.
For example, we calculated for a cleaning products manufacturer that switching from manual to automated box construction would increase output from 3 boxes per minute to 15 boxes 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 two years because of the high volume of boxes.
15. Manage your loading dock properly
When trucks have to wait for hours to load or unload something at your facility, they will charge detention fees, often at rates of $100 or more for every hour that the driver must wait. Avoiding long lines of trucks at your loading dock helps you avoid these fees on your invoices, which can add up to savings of six figures annually at a warehouse with poor dock management practices.
Implementing and enforcing appointment scheduling with carriers will also help you optimize loading dock labor. Knowing how many team members you need on the dock makes it easier to avoid unexpected overtime.
16. Avoid overpackaging
Whether you use general packaging or a custom packaging solution, make sure you don’t use too much of it. Overpackaging drives up the dimensions and weights of your parcels, both of which will negatively impact your shipping costs.
Train your packing teams to determine correctly sized packaging and the least possible dunnage to maximize the cost benefits of your packaging. Better still, use cartonization software to mange picking of orders directly into the correct size packaging to save touches and increase throughput. The right carton guarantees the lowest parcel cost as well. When working with tens of thousands of packages each month, even small savings on each parcel can add up to hundreds of thousands of dollars a year.
17. Switch from Boxes to Bags
Businesses that once shipped exclusively in boxes have shifted to using polybags for smaller, lighter products. Compared to boxes, bags:
- Are cheaper to purchase
- Require less labor (ship-to addresses print directly on the bag vs printing and applying a label)
- Require less time to pack
- Are far less expensive to ship
Here is an analysis we performed for a wellness company comparing bags versus boxes for packaging:
Labor to make/pack
Up to 7% reduction with polybags
Applying these numbers to this particular client’s volumes showed that the new packaging strategy reduced fulfillment center costs by $240,000 through lower labor and packaging costs, with additional savings from reduced parcel costs.
18. Ship from a warehouse in a cheaper secondary market
Your fulfillment center doesn’t need to be within the city limits of New York City or Los Angeles to serve those markets. A warehouse in a cheaper secondary market can drastically reduce fulfillment costs without sacrificing delivery time. For example, operating a fulfillment warehouse in Phoenix is more than 30% cheaper than running a Los Angeles facility but can still reach Southern California within a day.
19. Get rid of unused inventory
Online retailers need to monitor sales and inventory data to avoid carrying too much product that they can’t move. Unsold inventory drives up carrying costs, so eCommerce sellers must know when it’s time to purge poor-performing products from the warehouse. But, of course, that doesn’t mean that inventory should get thrown in the dumpster. To recoup some of the cost of unsold products and free up space in your warehouse, try one of the following methods:
- Donate the inventory to a reputable charity and write it off come tax time
- Sell the inventory to a discount retailer or liquidation specialist
- Bundle/kit the products with more popular related items
20. Take control of returns management
We’ll end our list with what is often the final step in the fulfillment process: returns management. Many fulfillment operations spent years ignoring the high return volumes associated with online sales, and they’e still playing catch up. As a result, product returns represent one of the greatest cost challenges for online retailers. Online shoppers return up to 30% of eCommerce purchases, and that number increased an additional 70% during the pandemic.
Invest in a dedicated returns area to improve efficiency and use technology to analyze the cause of returns. You’ll also want to establish processes to ensure returns don’t sit unattended. Doing so will allow you to monetize as many returned items as possible, minimize return-related product loss, and identify trends that create returns in the first place.
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 product’s price. As online sales continue to grow, online retailers must act boldly to reduce fulfillment center costs and protect margins.
The good news is you don’t have to invest millions to generate six- or seven-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 critical. 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.