Calculating Your Fulfillment Cost Per Order: 4 Key Suggestions

November 19, 2020 by Amware Fulfillment

A couple of years ago, Internet users were radically divided over the contents of a four-second audio clip and whether the sound it made was “Laurel” or “Yanny.” (Go ahead and try it. We’ll wait.)

So who was right?

As it turns out, they both were – because what people heard depended on a wide variety of factors, including which frequencies their ears picked up more easily. So it is with fulfillment cost per order, which depends on many variables unique to a shipper’s situation.

Fulfillment-cost-per-orderWe discussed many of these variables in our Online Seller’s Guide To Order Fulfillment Pricing, which we encourage you to access for its extensive checklist. But in case you’re challenged for time, allow us to quickly share four suggestions to increase the accuracy of your fulfillment cost per order calculation – organized in this handy C.O.S.T. acronym.

 

Calculate based on time and touches, not a flat rate.

There are many methods that companies can use to arrive at a workable fulfillment cost per order figure. But the number of touches is one of the best because of the precision it affords.  

This approach involves capturing and measuring all of the steps that are required to get your various products received, inventoried, put away, picked, packaged, and out the door (including often underestimated ones like replenishing your pick lines and maintaining inventory accuracy).

Just as important, it accounts for the fact that different SKUs, order sizes, and fulfillment SOPs will ultimately lead to vastly different fulfillment costs, especially when multiplied across thousands of orders.

A time study is a great way to arrive at this calculation. Just make sure you conduct it in context (namely the facility where the work will be performed) and with a cross-section of personnel (due to the fact that some people simply work faster than others) so that it will be truly accurate.

 

Own all of your personnel costs, not just the ones that are represented by the pick line.

Although order picking is usually the largest component of fulfillment costs, it’s just one of many key activities that are required to get your products efficiently fulfilled.  

From DC managers and shift supervisors to IT professionals, there are numerous behind-the-scenes personnel who are also vital to your fulfillment success. And in order to avoid budget overruns, their hourly wages or salaries (plus benefits) must be properly accounted for somewhere in your fulfillment cost per order calculation, even if they’re a shared expense across many company departments or accounts.

Read the Free eBook, How to  Reduce eCommerce Fulfillment Center Costs

The same holds true for expenses like downtime and end-of-shift fatigue. After all, no matter how efficient and hard-working your personnel are, the repetition and rigors of picking products for hours at a time - even with breaks - will result in a 10 to 20% drop in productivity as a shift progresses.

 

Seek out the most facility-specific warehousing rates.

Warehouse storage fees are usually one of the easiest things to plug into a fulfillment cost per order calculation.

But bear in mind that fulfillment center costs can vary significantly from market to market. Just as important, they can fluctuate dramatically within markets, which is why you’ll often see some companies opting to use fulfillment centers that are just outside of popular distribution hubs (e.g., Dallas, Atlanta, LA and Chicago) rather than ones that are in the middle of them. In addition, there can be vast price differences depending on who’s operating a DC. For example, a large 3PL can often provide you with a more reasonable cost per square foot because of the more attractive leasing terms it’s been able to negotiate.

Failing to account for these differences can undoubtedly skew the storage portion of your fulfillment estimate or budget projection, making it seem like the cost per order is significantly higher or lower than it actually is. So make sure you’re drilling as far down into the nuts and bolts of your particular storage situation as possible.

 

Take today’s current COVID-19 environment into account.

Over the past 11 months, the labor market has been in severe disruption. Between government incentives that have incented people to take time off to virtual learning initiatives that have forced warehouse workers to resign in order to be at home with kids, the current supply of qualified fulfillment center personnel isn’t as plentiful as it once was.

Meanwhile the demand for fulfillment center labor has escalated thanks to increased online shopping.

In light of this, expect to pay more for your hourly fulfillment personnel, because when supply is limited, would-be new hires have the leverage. And expect it to impact your fulfillment cost per order accordingly, not just for the time being but going forward. Because, like or not, this tight labor market is probably going to be our new normal.

If you’re a B2C shipper looking to bring down your fulfillment cost per order, we’d love to learn more about your operation to see if we can help. Reach out to an Amware fulfillment specialist to arrange a discussion.

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Filed Under: Fulfillment Operations