The Impact of SKU Count on Fulfillment Center Pricing

Mention the term “SKU” and the word “proliferation” won’t be far behind.

It was a notable industry challenge even before the days of omnichannel sales.  But it’s become even more so now that businesses are trying to attract customers with promises of greater selection, one-stop shopping and endless aisle assortments.

Everyone knows why this phenomenon has taken hold.  However, few outside of the logistics and last-mile field know exactly how it impacts fulfillment center pricing.

That’s why we’re using this week’s blog to address some of the common questions we get about SKUs and their impact on costs.  Hopefully, the information can help you answer questions you get about why average costs-per-order are higher than anticipated.

"Our company used to send our fulfillment centers ten full truckloads per week with 50 SKUs.  Nothing’s changed except for the fact those ten truckloads now contain 500 SKUs instead of 50.  Why are we paying more now?"

Many factors affect order fulfillment services pricing – and not all of them are about inventory quantity.  The more SKUs your company has, the more carefully those SKUs will have to be managed as they move into, through and out of your (or your 3PL’s) fulfillment centers.  And that means dedicating more time and labor to making that happen.   

On the space side, each individual SKU requires its own unique slot or bin in a fulfillment center’s storage and/or picking area and that, too, is an additional expense. (Like it or not, 100 cartons of 10 SKUs will take up more slots and ultimately more space than 100 cartons of 5 SKUs.)

Each time you add or change out an SKU, a strategic decision has to be made about the most efficient location for it – whether that means adding to, rearranging or reconfiguring pick lines and racking. Multiply those decisions by the numerous times they happen each year, and you have a solid recipe for increasing expense, especially if those decisions have to be made manually rather than systematically.  

"We may want to add distribution points to speed delivery times.  Does our SKU count factor into that decision?"

Yes, and in a big way.

Lots of SKUs means you probably want to hold at least some supply of each SKU in all your warehouses. That adds huge inventory carrying expense. So the money you save from reducing parcel freight costs by shipping shorter distances could easily be offset by added inventory costs.

For instance, your product line may include a slow mover for which you keep just one case in inventory. If you expand from 1 warehouse to 3, you effectively triple your inventory for that item.

Sophisticated systems can aid efficient warehouse expansion since good forecasting data can help you decide needed inventory levels for specific SKUs. But, in general, companies with complex SKU profiles could see fulfillment services pricing rise significantly as they add warehouses.

"Can’t our company use better systems to help offset many of these additional expenses?"

Absolutely. 

Warehouse Management Systems (WMS’s) can definitely streamline processes like SKU slotting, inventory tracking and product put-away, which is why large fulfillment centers swear by them.  And, diligent use of technologies like RF devices can take much of the guesswork out of things like whether or not personnel are picking the right items.  If your scale is substantial enough, some form of automation – like conveyor lines – may clearly be in order. 

The catch is that many of these systems and technologies aren’t cheap and it can take years to see a return on your investment.  Thankfully, if you’re working with a 3PL fulfillment specialist that already has these tools, it’s not really an issue. You’ll be able to leverage these tools once you are on-boarded.

"Reducing the number of SKUs we offer isn’t an option.  After all, it’s what our customers want.  Besides employing more technology, what other kinds of things can we do to help keep fulfillment costs under control?"

Plenty. 

To start with, you might want to consider changing your facility’s workflow or traffic flow to help reduce warehouse workers’ travel time.  For example, instead of having your personnel pick items for one order at a time, you can employ wave picking, which allows them to pick multiple orders from the same area of the warehouse at once. Or you can look into the use of task interleaving, which would involve your workers employing a constantly productive circular route as they travel within your facility, instead of going back-and-forth (and frequently traveling empty-handed) between a few points.  

Another option is to consider introducing less expensive forms of warehouse automation like bagging and automatic labeling machines, which can easily double or triple the productivity for those functions.  Such machines can often deliver an ROI within a year.

Your fulfillment provider or engineering team can assist you in exploring these and other strategies to reduce fulfillment costs as your inventory and SKU count grows.   

More Choices Leads to Higher Fulfillment Services Pricing

Consumers crave choices when shopping for just about anything, and brands want to give them exactly what they want. But high SKU counts add to operating expenses.  Brands need to determine if the added revenue from offering lots of choices outweighs the negative impact on fulfillment center pricing.