Order fulfillment is one of the most expensive operating costs for direct-to-consumer brands. Research has shown that across industries, fulfillment costs account for 10-15% of gross sales on average, but can be as high as 20%. Naturally, a top priority for these companies is to reduce fulfillment costs to reach healthier margins in order to scale the business and achieve—or increase—profitability.
How to reduce fulfillment costs
Fulfillment costs are all the expenses incurred in the course of handling a product from its arrival at the warehouse to its departure, including receiving, storage, pick and pack, and shipping. Each of these expenses is highly variable, and not all of those variables are within your control. There’s little you can do about fuel surcharges from the shipping carrier or fluctuating costs in packaging materials.
The key to reducing fulfillment costs lies in identifying the variables that are within your control. In this post, we’ll address 13 ways to lower your fulfillment expenses across five categories:
- Economies of scale
- Fulfillment providers
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Reduce inventory costs
The costs associated with producing inventory are part of your greater distribution strategy. But the inventory costs associated with fulfillment are things like receiving, storage, and in some cases, projects like kitting or bundling. Keeping your inventory and SKU count simple—at least until you’ve achieved healthy margins—can go a long way in reducing fulfillment costs.
- Keep SKU count low. If your inventory is made up of only one or a handful of unique SKUs, the warehouse can stack the pallets your product is stored on, since employees won’t need to be able to physically access multiple pallets at a time. Stacking pallets can reduce storage fees. Similarly, fewer SKUs allow the warehouse to operate more efficiently, which in turn can reduce your pick fees—typically the most expensive warehouse activity.
- Streamline returns. Returns are inevitable in ecommerce, so it’s critical you have a solid return policy in place, which may be costly in itself if you’re covering the cost of return shipment for your customers. But once the return arrives at your warehouse, your costs will be determined by the complexity of the process. Returns that require careful inspection, rebagging, and retagging will cost more than an unopened item that can be returned to the shelf as-is. Factor in the overall expense of a return when writing your policy—in some cases, it may be smarter financially to refund the customer without requesting they return the product.
- Prepare inventory before it arrives at the warehouse. Many warehouses offer project services like barcoding, kitting, and bundling, but because these aren’t the warehouse’s primary function, these services tend to be very expensive. It’s almost always more cost- and time-efficient to work with a manufacturer that can prepare the inventory for shipment before it ever reaches the warehouse.
Reduce warehouse costs
Warehouse fees vary by location, storage specifications, and fulfillment provider. Ideally, you want to find a warehouse in a location that strikes a balance between the cost of real estate and proximity to your customers.
- Understand the impact of location on storage fees. Storage fees are heavily influenced by the warehouse’s location and the relative cost of property in the area. You can assume that storage in Los Angeles will be more expensive than in Dallas. Warehouses will also charge more for temperature-controlled storage (including ambient storage), so it’s cheapest to store products that are able to withstand hot and cold temperatures.
- Fulfill from a warehouse that is near the majority of your customers. Shipping carriers charge based on shipping zones, which are calculated based on the distance between a package’s origin and destination. If the majority of your customers live on the West Coast, you’ll save significantly on shipping costs with a West Coast warehouse. If your customers are evenly spread across the country, you’d likely be better off using a central location like Chicago to fulfill orders.
- Employ a multi-warehousing strategy. If you’re fulfilling a high volume of orders, it may be more cost-effective to use a multi-warehousing strategy in which orders are automatically routed to the warehouse closest to the customer’s address. This can reduce shipping costs and delivery times.
Reduce shipping and packaging costs
Much of the cost of shipping is unpredictable and determined by the carrier, but there are still some actions you can take to lower your shipping expenses.
- Minimize packaging and inserts. Packaging is one of the most variable costs between warehouses. Some offer standard packaging for free, some charge for it, and some require the seller to provide packaging materials. If you opt to use branded packaging, note that some warehouses will charge you to store those materials at the warehouse. What goes inside the packaging has a big impact on your bill, too. Fill, tissue paper, and inserts may all incur additional pick fees from the warehouse, which can quickly add up.
- Package orders for optimal billable weight. When determining the cost of sending an order, the shipping carrier will determine the actual weight and dimensional weight of the package and charge based on whichever is greater—known as the billable weight. Sending orders in oversized packages that are charged by dimensional weight can cause shipping costs to skyrocket—an inefficiency called “shipping air.” To reduce shipping costs, use packaging that closely fits the size of your average order composition.
- Use a cheaper shipping method. Most of the time, the shipping methods available for a given package are predetermined by the package’s dimensions, weight, and destination, but delivery speed is within your control. To reduce shipping costs, you might opt for a slower delivery method like ground shipping for most orders, but allow shoppers to pay a fee for expedited delivery if they want or need their order faster.
Reduce fulfillment costs using economies of scale
Every element of distribution, including fulfillment, is a numbers game that benefits large, established companies. High-quality fulfillment providers are often impossible for young businesses to access due to high minimums. The costs of manufacturing, fulfillment, and marketing are enormous because these companies are working with small quantities and little brand recognition.
That’s why scaling becomes not just a goal, but a matter of survival. The company has to strike a delicate balance: provide a high-quality product and customer experience using mid- to low-quality manufacturers and fulfillment centers until there’s enough cash flow to afford to upgrade. It’s a race to improve margins by moving larger quantities of inventory—the overall cost is higher, but the per unit cost is significantly lower.
- Increase order volume. Of course, all companies want to increase order volume, but it’s what has the greatest impact on fulfillment costs. Businesses that focus on growing order volume to the point of healthy margins before rolling out new products or expanding into new markets will be rewarded with far more affordable fulfillment.
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Reduce fulfillment costs with the right fulfillment partner
Yes, fulfillment costs are universally impacted by SKU count, shipping method, packaging details, and order volume; but the degree to which these variables impact your overall expenses depends fairly heavily on your fulfillment provider and what they charge for.
- Be cognizant of one-time or recurring usage fees. The pricing structure of each provider will vary, but it’s common to charge a one-time implementation fee when you onboard with the company and recurring account fees to cover software licensing and a portion of the cost of support staff. Consider these when choosing your fulfillment provider.
- Use an a la carte billing model. There are two dominant billing models among 3PLs: a la carte and all-in-one. The all-in-one model collapses all fees into a single rate, which can seem attractive at first for its simplicity, but ultimately reduces your visibility into your expenses, so you can seldom control the shipping method and packaging used to ship your orders. An a la carte model charges each fee as a separate line item, providing greater visibility into costs and opportunities to be more efficient.
- Put a price on your own time and reputation. It’s important to consider what a fulfillment provider may cost you in time as well as money. “Soft” costs include losses incurred during warehouse transition, when you can’t accept or ship new orders; time lost to poor communication or poor warehouse administration; and the negative business impacts that come with fulfillment errors. Fulfillment mistakes scale in tandem with order volume, meaning they can be incredibly expensive.
Optimize fulfillment for growth, not cost
Not all of the cost savings opportunities we’ve laid out here will work for every brand. Trying to cut costs at every corner often means sacrificing quality or efficiency in the name of healthier margins, but these are short-lived benefits.
As we mentioned earlier, the most effective way to lower your fulfillment costs is to increase order volume—so that should be the ultimate goal of the other cost-saving measures you take. In some cases this might mean spending more for higher quality in order to grow your customer base. It’s important to strike a balance between minimizing costs without introducing new hurdles to your growth, like a fulfillment provider that can’t scale with you, or a manufacturer that’s constantly causing delays.
Airhouse’s a la carte billing model can help you identify opportunities to reduce your fulfillment costs. Contact us for a free shipping analysis.