What if we told you that growing your online business has more to do with order fulfillment than your product or price?
Gartner’s Customer Experience Survey found that 81% of brand marketers feel they compete mostly or completely based on customer experience.
What’s at the heart of the customer experience for online buyers?
Order fulfillment. All those things that happen after the click – accurately picked and carefully packaged orders, on-time delivery, customer service, returns processing.
But many growth-oriented brands still don’t recognize customer experience, and fulfillment along with it, as the growth driver that it is. They sink most of their energy and capital into getting the click and not into fulfilling that order in the best, fastest and most efficient way possible.
As a result, one of two things happen. The sales engine outpaces the ability of the fulfillment operation to keep up. Or, profits shrink as warehouse and shipping costs eat up too big a slice of operating expenses.
You need to fix fulfillment. Because building a sophisticated pick/pack/ship operation can become your most powerful competitive weapon.
In this guide, we’ll explore how to make that happen by examining the 9 strategic questions we’ve heard most often in our 30+ years running eCommerce order fulfillment operations for fast-growing brands.
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It’s possible to fulfill orders to a national customer base from one US warehouse. A single site keeps operations simple and reduces rent, equipment, labor and inventory costs. But there’s a downside. Your parcel shipping costs will be higher and you won’t achieve 2-day delivery to all US customers.
What’s the right answer for your business? Here are 5 questions that will help you determine if you need a multi-DC strategy.
1. How much do your customers care about fast delivery? People who think your shipping takes too long will tell you with their wallets. If that’s not happening, your current model is likely working.
2. Is your product unique, or is it a commodity? If your product is as common as white tube socks, you’ll likely need to match your competitors for delivery speed. But if it’s somewhat unique or your brand carries a certain cachet, customers will likely wait 2-3 days extra for fulfillment from your single DC.
3. Can your business withstand an interruption to fulfillment operations? A single-DC distribution strategy puts your business at risk if you can’t ship orders due to a pandemic, natural disaster, systems hack or other event impacting that location. Only you can say whether your business could withstand a service interruption of a week or more.
4. What’s your SKU count? High SKU counts raise complexity. If you add a DC, do you double the inventory or split existing inventory across DCs? If you split it, how much of each item should you keep in each location? You’ll need good data and strong forecasting to balance inventory. Even when other factors suggest a multi-DC strategy, inventory costs may push you in a different direction.
5. Will parcel savings from adding fulfillment locations offset expansion costs? More fulfillment warehouses means more costs for buildings, equipment, labor, and inventory. But as expansion puts products closer to customers, you reduce parcel shipping costs – your largest fulfillment expense. Most times your parcel savings more than outweigh expansion costs, delivering significant net savings.
There’s no “right” number of US warehouses required to serve a national customer base for online sales. Your responses to these questions should make this decision clearer.
If you are struggling to decide the optimal size of your eCommerce order fulfillment network and how to prepare for future growth, the right fulfillment services partner can work with you to conduct a network analysis and provide the if/then cost implications of different options.
If your business is characterized by frequent ebbs and flows in demand, you’ll go broke if your eCommerce order fulfillment operations can’t flex. Try these proven strategies to economically manage fluctuating order patterns.
Online sellers struggle to accurately predict order volumes, partly because of poor collaboration between merchandising and logistics functions. These forecasts guide the labor plan in the fulfillment center, and labor is your largest warehouse expense. Overstaffing shrinks your margins. Understaffing does the same since you’ll spend more for overtime and temporary workers to get orders out the door.
Our advice: get as granular as you can with forecasting. Historical order patterns tell you a lot about what to expect in a given month, week or weekend. Also, get closer to the sales and marketing teams to learn about upcoming promotions. Apparel marketer 32 Degrees does just that and, as a result, has greatly improved labor efficiency.
Temporary warehouse workers allow you to efficiently manage demand fluctuations by paying only for the labor you need. The hourly rate you pay will reflect a premium from a temp agency, but you avoid the FTE-related benefits costs. Temporary workers are ideal for short-term projects involving repeatable tasks that require little training. For more complex tasks, temps will likely have higher error rates that erase the cost benefits.
An 80/20 mix of full-time to temporary staff is a good baseline that gives you the ability to flex. That mix should shift to a heavier proportion of temporary warehouse labor if you have seasonality, frequent new product launches and other events that result in regular volume fluctuations. In these cases, a 70/30 or 60/40 mix makes more sense.
Managing order surges is business as usual at D2C-focused fulfillment 3PLs, where high volume is not an excuse for late or inaccurate deliveries. If your brand has up and down order patterns, a 3PL can help reduce your labor costs by pulling trained staff from other accounts during peak periods. If you have a seasonal business, a 3PL may be able to balance your changing space requirements with other clients whose volumes may be up when yours are down.
If your online business is characterized by frequent sales spikes and lulls, fixed costs are your enemy. Your goal should be to minimize these fixed costs while continuing to process orders efficiently and accurately.
When rapid business growth runs up against rising costs for warehouse labor and a shrinking labor pool, it makes sense to think about warehouse process automation. But rather than what to automate and how, the toughest question for fast-growing eTailers is when.
Large, one-time capital outlays are not popular boardroom conversations. That’s why, most often, a modular approach to warehouse automation makes sense.
In the early stages, as your brand gains traction, you’re learning about order patterns and SKU velocity and all those business details that will inform future technology deployment. At this stage, a manual pick and pack model could be the way to go.
As order volumes increase, you can incorporate low-level automation solutions, such as box erectors, auto-tape machines and even poly-bagging machines to significantly increase throughput without major capital investments.
Finally, as your business matures and requires high-volume, high-velocity picking and shipping, a move to automated/smart conveyors and more advanced picking strategies like voice picking and pick-to-light makes sense.
Lower-level automation, such as bagging and auto-labeling technology, are less expensive and will see an ROI in 1 year or less, making it an easier decision. The ROI for more significant investments should be looked at over a 3-year period. Beyond that timeframe, technologies will have advanced significantly and another solution might make more sense. An upgrade that can’t pay for itself in 3 years could become an operational albatross.
Most companies pursue eCommerce order fulfillment automation to increase picking speed or capacity, but other advantages should be included in an ROI analysis. For example, automation that forces a warehouse associate to pick the correct product before proceeding greatly improves order accuracy and customer satisfaction. There are costs associated with eCommerce returns and customer frustration if an inaccurate order reaches the customer. These bigger-picture advantages are often left out of the cost justification for technology investments, but they often represent the most compelling savings.
Every day, thousands and thousands of products arrive at and leave your fulfillment centers and those of your 3PL partners. That eCommerce order fulfillment activity generates a ton of data you can use to improve decision-making. Make sure you’re mining this data from your own systems or working with 3PLs that make easy for you to access and analyze the data to recognize trends and opportunities.
Let’s look at a few ways to turn data into actionable improvements.
Data from your receiving operation can help you manage vendors. Did it arrive when they said it would and in compliance with your requirements? Were the orders complete or are there regular overages or shortages? Is there a pattern of box or product damage? This data provides the evidence you need to go back to specific suppliers and demand compliance.
For assessing productivity, comparing labor costs to total throughput indicates whether the operation is getting more or less efficient. If you don’t see a pattern of continuous improvement here, it’s time to find out why.
For SLA-related metrics like dock-to-stock time, same-day shipping adherence, order accuracy and on-time shipping, you want this data to be easy to access and analyze. Think about investment firms like Fidelity and Schwab. They have tools that allow investors to slice and dice performance in many ways and to see the data displayed in clear charts and graphs.
Another area where data analysis is critical is demand forecasting. Over time, data on order volumes – by day, week and month – indicate peaks and valleys in demand and allow you to plan ahead to ensure inventory levels and labor are sufficient to handle the predicted volume.
If you outsource eCommerce order fulfillment, make sure your 3PL can provide the data you need to analyze your operation and continue to improve.
Fulfillment operations for online sales differ drastically from retail fulfillment. Despite these differences, it’s still most efficient to combine fulfillment for all sales channels under a single strategy and from one central pool of inventory. Otherwise, you end up with too much stock, too much warehouse space, too many truck runs, and redundant management structures.
But it’s not easy. With each new sales channel you add, you have to consider variations in demand and product velocity and the complexities of returns and shipping. You also have to merge SKUs and keep a sharp eye on available inventory to support all channels. If you outsource fulfillment, it’s tough to find a 3PL that is equally adept at both D2C and bulk retail replenishment.
B2B fulfillment typically involves a high frequency of similar bulk orders. Inventory is stored and shipped by the pallet or case, and there is less labor involved per sellable unit. Retailer compliance is critical. Retailers set their own shipping and receiving demands for pallet size, labeling and more. Run afoul of their routing guide directives and you’ll pay hefty fines.
B2C fulfillment volumes are less predictable because they depend on the changing needs and desires of the buying public. In B2C, you’re dealing with lots of individual consumer orders and order picks that are more labor-intensive, making labor a far more significant cost driver.
Because the 2 operating models are so different, it’s challenging to master all the distinct nuances of each sales channel’s inventory, infrastructure and information requirements. One answer is to outsource to a 3PL that helps many brands manage multi-channel distribution. But first, look for evidence that they’ve mastered the requirements of each channel. You don’t want to be the guinea pig.
Parcel shipping costs represent around two-thirds of your total fulfillment costs. If you’re looking to control overall costs, this is the place to start. Here are a few ideas from our guide on reducing parcel shipping costs.
Dimensional weight is the industry norm, which means fulfilling orders in boxes bigger than necessary can create waste. Shipping in smaller boxes or changing from boxes to polybags or jiffy bubble mailers for smaller items could reduce shipping charges even more.
Don’t be afraid to put your contract on the market and shop for a better deal. For eTailers working with a 3PL, re-bidding becomes less of a concern since 3PLs tend to be aggressive negotiators. Also, they understand how carriers can use accessorial charges to generate revenues beyond an otherwise attractive shipping rate.
There are various services available across parcel carriers, each with characteristics that may make it a more cost-effective option for some shipments. Understand your options. Also, this is an ideal time to diversify your carrier base. The pandemic created serious freight capacity challenges for parcel shippers. Regional parcel carriers, could be a wise choice for a portion of your shipments.
3PLs negotiate with parcel carriers using their aggregate spend as leverage. Switching from your account to a 3PL partner’s account (assuming you are using that 3PL to store your products) can yield 7-figure savings for some high-volume shippers. Shift inner-zone express shipments to ground shipping For shipments to homes that are close to your DC (within parcel zones 1, 2 or 3), you can shift the service from Express service to Ground service and still meet customer requests for rapid delivery. For instance, a shipment from Dallas to Waco can ship via Ground in 2 days for $7–$20 less than Express service.
Seemingly innocuous, the inexpensive material used to protect products during transportation can elevate parcel shipping costs by adding weight to your package. Using less or lighter dunnage, for example, allows you to use a smaller package.
It costs you more to ship orders than to prepare orders. To get your CFO’s attention (in a good way), cut your parcel shipping costs.
There are more than 7.7 billion people globally and just 4% of them live in the US, which means that a huge global market awaits your online business. In 2021, retail eCommerce sales were about $4.9 trillion, worldwide. That figure is expected to grow to $7.4 trillion by 2025, according to Statista, and eTailers want their share of that growth.
Fortunately, international parcel shipping companies can offer a variety of service options based on your shipping priorities. Determining which solution makes sense is often based on volume – are you planning to ship 10 or 10,000 packages a month?
Similar to domestic, carriers have specific service niches. While the best option depends on the volume and your needs, you also want added flexibility. Using multiple carriers can provide it.
With international eCommerce shipments, you also need to calculate taxes and duties for the destination country. Every country has its own De Minimis value, and you can avoid paying duties if the value of the shipment does not exceed this De Minimis value. Items imported into the US are subject to duty when the value is over $800. In Australia, duty and taxes kick in after the first $1,000. Depending on the value of shipments, you may want to break orders down into multiple boxes to stay under the De Minimis value.
International eCommerce shipments are becoming more important in an increasingly global world and are central to growth for some companies. There are multiple solutions, depending on your order volume and service level goals. The right 3PL can help you figure out the shipping aspects of your plan to attract more international sales.
Margin pressures tend to increase, not decrease, as your business grows and as competition increases. So you want your eCommerce order fulfillment costs, over time, to make up a smaller and smaller percent of online revenue. Here are 5 cost-savings ideas that, while they may not be the primary focus for logistics and fulfillment executives, can generate disproportionate benefits.
1. Improve warehouse associate retention. You probably don’t realize it, but retaining warehouse associates is the most impactful thing you can do to reduce labor expenses. We estimate the total cost of losing a productive associate to be at least $7,500. So if 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. If you outsource, it’s a good idea to monitor your provider’s warehouse turnover rates.
2. Establish productivity standards. Sounds simple, but many fulfillment 3PLs don’t do it. Establishing and monitoring clearly defined productivity standards for warehouse associates can increase productivity by 10–15%, depending on order volumes, and even more for poorly performing operations. Studies have shown that associates want to meet or beat established productivity goals. However, if associates operating at 50% of established productivity standards are not informed and retrained, that behavior will continue, and you’ll double your labor costs.
3. Improve training. Companies often push to get new associates or temps 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; you’ll have 4 people operating at 50% productivity rather than 2 people who are 100% productive. If you tally the cost of fewer errors, increased labor efficiency, increased productivity, and reduced retraining time, an improved training program can reduce fulfillment center costs by tens of thousands of dollars per year.
4. Reduce the percentage of temporary workers. Again, this sounds counterintuitive. After all, temporary workers allow fulfillment centers to scale up and down quickly to economically manage demand fluctuations. But the advantages of hiring temp labor can be misleading. Temporary workers tend to operate at a lower productivity level than full-time warehouse associates, driving up labor costs. 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.
5. Ship from a warehouse in a cheaper secondary market. Your fulfillment center doesn’t need to be within the city limits of Chicago 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.
The “make or buy” decision on fulfillment services is driven by a number of factors, including growth rate and internal fulfillment expertise. But outsourcing fulfillment is not an either-or decision. Nearly half of all eTailers operate some hybrid of outsourced and in-house eCommerce order fulfillment. Several specific situations make the case for outsourcing all or part of your fulfillment operations.
Fast-growing, fast-changing businesses are simply better candidates for outsourcing. You could build what you believe is your future-state warehouse, but in 3 years your volume, SKU mix and order profile might require a completely different layout and fulfillment model. The value of third-party logistics (3PLs) lies in the inherent flexibility of the 3PL model. Outsourcing to the right partner allows you to grow in a modular fashion so your flexible fulfillment infrastructure – the size of the network, the degree of automation – adapts to any growth trajectory or shifting order profile.
Outsourcing can be helpful for eTailers entering new markets since finding, upfitting and staffing your own warehouse is an enormous resource drain. 3PLs can be your immediate “on switch,” increasing your go-to-market speed exponentially by leveraging an in-place national network of fulfillment centers. Example: France-based H20 at Home used Amware Fulfillment to quickly expand to the US and reach 330 million new consumers.
3PLs excel at economically managing order volume swings from things like seasonality, promotions and new product launches. Using different
strategies like cross-training personnel and tight alliances with temporary staffing agencies, they can staff up to handle peak volumes and then quickly ratchet down to normal levels so your costs parallel your revenue.
Multi-channel fulfillment adds complexity. You can decide to invest to become an expert in the nuances of both B2C and retail fulfillment, or you can use a multi-channel fulfillment specialist as your guide.
Whether you handle fulfillment in-house or partner with a 3PL, you need your fulfillment operations to scale through every stage of your growth journey, adapting seamlessly to changing volumes and operational requirements. An outsourced model for eCommerce order fulfillment tends to scale faster and more easily than home-grown infrastructures.
As the ship captain of your online sales business, it’s your job to push the throttle forward to grow faster. More customers. More orders. More sales and market momentum.
But it’s also your job to make sure you have the fine-tuned order fulfillment engine to support that growth and deliver on your promise of fast, accurate order fulfillment.
It’s here that many fast-growing online brands get tripped up.
They focus on top-line growth and fail to invest properly in what happens AFTER THE CLICK. Increasingly, it’s these back-end operations – more than product and price – that create happier, brand-loyal customers that are the foundation of a sustainable competitive advantage. Witness Amazon.
It is time for a wholesale mindset change among eTailers.
You need to stop thinking about your fulfillment operation as a necessary consequence of growth and start thinking about it as your growth engine.