Order Fulfillment Costs: Types and Strategies To Reduce Costs

Order fulfillment plays a pivotal role in the supply chain, ensuring that products reach customers promptly and accurately. In a market where customer expectations are continually rising, maintaining control over order fulfillment costs becomes crucial. Order fulfillment costs involve multiple factors that range from warehousing expenses and inventory carrying costs to labor costs and shipping expenses. It is imperative for businesses to meticulously monitor and optimize related metrics to ensure efficiency and cost-effectiveness, particularly in high-volume fulfillment centers.

This blog will offer insights into managing and reducing order fulfillment costs across various channels, including e-commerce, bulk, and wholesale distribution. Our aim is to help you create a more cost-effective fulfillment operation capable of meeting customer expectations without compromising your bottom line.

Different Types of Order Fulfillment Costs

Understanding the complexities of order fulfillment costs requires examining each contributing factor, especially as these costs can vary significantly depending on the type of order fulfillment—e-commerce, bulk, or wholesale distribution. Here’s a closer look at the different types of order fulfillment costs:

• Setup Fees: These are often one-time costs that businesses incur when establishing a new warehouse or when adding a new product to an existing system. In e-commerce, for instance, setup fees can be related to the integration of shopping carts, initial software implementation, or the preparation of warehouse space for specific products. In distribution or wholesale, setup may involve configuring spaces for bulk storage or setting parameters for large-scale shipping.
• Labor Costs: For reducing cost in ecommerce fulfillment, picking and packing individual orders require human intervention, whereas wholesale or bulk might involve heavier use of machinery for large orders. Efficient labor management is especially crucial for operations that move large volumes of inventory.
• Inventory Costs: Costs here include spoilage, expiry, and shrinkage of products. E-commerce often involves diverse inventory with quick turnover, while wholesale or bulk might mean larger quantities moving at a lower velocity. If you’re using a 3PL provider, then the costs for inbound and outbound logistics may vary based on an agreed-upon fee structure.
• Kitting Fees: In e-commerce, businesses should consider kitting fees if they need packaging or promotional materials for ready-to-ship sets or kits. For wholesale or bulk orders, kitting might involve creating specified packages for retailers or assembling various parts for manufacturing processes. These costs can vary based on the complexity and the time it takes to assemble the kits, and they directly affect labor and material costs.
• Equipment Costs: Consider the tools that keep your operation running. E-commerce might need more complex conveyor and sorting systems due to varied order sizes, while distribution and bulk require heavier machinery like forklifts and pallet jacks.
• Material Costs: It covers everything from boxes to packing tape. E-commerce order fulfillment typically sees a wider variety of packaging due to different product types and sizes, while wholesale and bulk may use standardized and larger packaging, impacting bulk purchasing discounts.
• Shipping/Freight Costs: Shipping rates can vary widely based on the type of order fulfillment, range of products, shipping distance, billable weight, and more. E-commerce often involves direct-to-consumer shipments or expedited shipping process which can be costly, whereas wholesale or bulk shipping might benefit from economies of scale. Most order fulfillment centers and 3PLs have relationships with carriers that allow them to negotiate favorable shipping rates on behalf of their clients. 
• Software Costs: Investing in the right warehouse management system (WMS) can seem like a hefty upfront cost. However, the payoffs include better inventory control, improved accuracy, and labor optimization, which can significantly reduce order fulfillment costs per order, especially for e-commerce with dynamic order fulfillment KPIs.
• Real Estate, Utilities, Security Costs: Fixed costs like rent or mortgage, utilities, and security systems are recurring expenses. Larger bulk storage might need more space, unlike e-commerce with diverse, high-value items.

Amazon’s fulfillment costs have skyrocketed since 2009, reaching an estimated USD 75.1 billion in 2021. 

Figure: Amazon’s escalating shipping and fulfillment costs over time. (Source: Statista)

By understanding these costs in the context of your specific operation type, you can start to identify areas for savings and efficiency. 

Eight Strategies to Reduce Order Fulfillment Costs

The supply chain and logistics landscape is continuously evolving. Therefore, optimization strategies must build resilience to changing market needs while creating a strong operational framework. Let’s explore eight key strategies to reduce order fulfillment pricing, boost efficiency, and keep your business ahead of the curve.

1. Enhance Worker Productivity

By focusing on the productivity of your workforce, businesses can optimize labor costs and lay the foundation for a more streamlined, efficient, and effective fulfillment process. Establishing a productivity standard serves as the first step in the journey to reduce costs and enhance service quality.

Equip with Essential Tools: Providing your workers with the latest technology like scanners, PDAs, or automated mobile robots (AMRs) ensures that they can perform their tasks with greater accuracy and speed. Especially in environments like e-commerce, where precision and speed are critical, these tools can significantly reduce errors and boost output.

Automate Where Necessary: Manual processes can be prone to errors and can be time-consuming. Automation, especially in core operations like warehouse packing, picking, receiving, and putaway process, substantially reduces processing time and unforced errors. In wholesale or bulk fulfillment, for instance, automating picking or packing can drastically reduce the time it takes to process large orders.

Training for Proficiency: Investing in comprehensive training programs ensures that every employee understands their role, the tools they're using, and the processes they're following. Well-trained employees can operate at peak productivity, making it possible to achieve more with fewer workers. Investing in employee training also improves associate retention, further reducing expenses on recruitment and training of new candidates.

2. Automate Redundant Processes

Repetitive and manual tasks can weigh down the order fulfillment pipeline and increase order fulfillment pricing. Integrating the right warehouse management software (WMS) can leverage automated order fulfillment for direct savings on OpEx. Time saved can be utilized for other critical tasks, making the overall workflow more fluid with quicker order turnarounds. 

Automated data entry means fewer errors and swift processing, and features like automatic picklist creation can streamline picking and packing operations. Smart automation and hardware integration can minimize human intervention in picking, packing, and quality control processes, significantly improving order accuracy and cost to fulfill.

When redundant tasks are automated, workers are freed up to focus on more skilled, value-added functions. This integration of technology and human effort ensures that the workforce is not just productive but also engaged in roles that truly make a difference. 

3. Multi-carrier Shipping and Freight

By strategically leveraging multi-carrier shipping and freight, businesses can significantly reduce order fulfillment costs per order, leading to better delivery timelines, and an enhanced customer experience.

• Exploring Multiple Options: Working with various ecommerce shipping carriers and freight providers grants businesses the flexibility to shop around. This approach ensures that you're always accessing the best rates and achieving optimal delivery times, enhancing cost-effectiveness and customer satisfaction. Using multiple fulfillment centers can reduce the overall shipping distance by placing the inventory closer to large markets.
• Harness the Power of Aggregators: Tools like eHub, Shippo, and Easypost act as comprehensive platforms that aggregate multiple shipping rates, offering a clear comparative view. They simplify decision-making by laying out costs, delivery times, billable weight, and other details, eliminating the need for manual research and comparisons.
• Integrated Fulfillment Software: Many order fulfillment software come equipped with built-in multi-carrier shipping and freight options. This built-in capability allows businesses to automatically select the best shipping rate based on variables like cost, delivery speed, and package size.

4. Non-linear Cost Scaling

In a study by Saddle Creek, an estimated 51% of respondents said their fulfillment costs increased somewhat or substantially. By strategically implementing non-linear cost scaling, businesses can ensure that as they grow, they process orders more efficiently and economically. Here’s how:

1. Understanding Cost Dynamics: In an ideal scenario, as the order volumes in a warehouse increase, the associated costs shouldn't rise at the same rate. Certain fixed costs—like utilities, rent, and some labor—remain relatively stable regardless of the volume of orders. Thus, when order numbers climb, these fixed costs get distributed over a larger number of orders, resulting in a decrease in the per-order cost.
2. Achieving Economy in Operations: As the warehouse processes more orders, the average cost per order should go down, leading to greater operational economies. This doesn't just mean lower expenses but also better utilization of resources.

5. Layout and Space Optimization

A well-optimized warehouse layout facilitates smoother operations, reducing both time and costs. By meticulously planning and optimizing warehouse layouts, businesses can transform their storage facilities into dynamic, efficient hubs of activity.

• Maximizing ROI on Real Estate: Warehousing often involves significant investment in real estate. To ensure the highest returns on this investment, it's essential to make every square foot count. The right layout and space utilization strategy can mean fitting more goods into the same space, reducing the need for expansion or external storage facilities. Value-added services like kitting and bundling not only save on storage costs but also the associated utility and maintenance expenses.
• Streamlining Movements & Storage: Intelligent slotting ensures that every item is easily accessible and that goods can move in and out with maximum efficiency. This means minimizing unnecessary movements, reducing retrieval times, and ensuring that personnel and equipment can operate without hindrance. Furthermore, by maximizing storage capacity through efficient racking systems and pallet stacking, warehouses can hold more inventory, better manage stock levels, and cater to fluctuating demand more effectively.

6. Optimized Packaging

When we think of order fulfillment process, it's easy to overlook the packaging process. However, packaging plays a pivotal role not just as a cost-saving exercise but also as a strategic move to enhance customer satisfaction.

Understanding the Cumulative Cost of Packing Materials

At first glance, the cost of packing materials—be it bubble wrap, boxes, or tape—might seem minuscule. But multiply that by hundreds or thousands of orders, and it's evident how quickly these 'small' costs can add up. According to a report, Ikea saved USD 1.4 million just by redesigning the packaging for one sofa.

An inefficient packing process might lead to wastage, overuse of materials, or even the use of inappropriately sized packaging. Some fulfillment center costs also include the expenses for storing the packaging materials.

By streamlining the process and choosing the right materials, businesses can reduce these cumulative expenses. In addition, efficient packaging can lead to reduced shipping costs, as carriers often charge based on package dimensions and weight. 

Leverage warehouse management systems to use advanced processes like cartonization and determine the best configurations for your shipments.

Enhanced Customer Experience

Beyond cost, there's another compelling reason to optimize the packaging process: customer experience. Efficiently packed orders are less prone to damage during transit. A survey by Power Reviews revealed receiving a damaged or defective item is one of the top three reasons for returning an item. 

Moreover, sustainable and minimalistic packaging resonates with environmentally conscious consumers. Packaging tactfully and intelligently combining similar orders together can reduce labor costs. An order that arrives in an appropriately sized, eco-friendly package not only saves money but also leaves a positive impression on the recipient.

7. Inventory Optimization

Too much or too little inventory can cumulatively run up order fulfillment costs per order. By understanding and predicting demand, maintaining optimal stock levels, and ensuring swift inventory turnover, businesses can significantly reduce order fulfillment pricing while ensuring they’re always ready to meet their customers' needs. 

• Embracing JIT and Demand Forecasting: The 'Just In Time' (JIT) inventory model is all about efficiency. By receiving goods only when they're needed for sale or production, businesses can drastically reduce inventory holding costs. But, JIT is effective only when combined with accurate demand forecasting. Predicting demand helps businesses know when to order and how much, ensuring they're neither overstocked nor understocked.
• Maintaining Optimal Inventory Levels: Maintain a high inventory velocity, meaning products don't sit idle in the warehouse to reduce holding costs like storage, insurance, and potential obsolescence. To achieve this, businesses must be adept at setting and adjusting reorder points based on demand patterns, seasonal changes, market trends, and other influencing factors.
• Minimizing Holding Costs: Every product that sits in a warehouse comes with associated costs: storage space, utilities, potential spoilage or obsolescence, and tied-up capital. By adopting strategies like JIT, accurate demand forecasting, and maintaining optimal inventory levels, these holding costs can be minimized. This not only ensures cost savings but also contributes to faster and efficient order fulfillment as products are more readily available.

Inventory management is all about smart, data-driven decision-making.

8. Channel Diversification and Inventory Distribution

Diversifying channels and judiciously distributing inventory is a strategic move to tackle order fulfillment costs head-on.

Broadening Sales Channels

Expanding into newer sales channels can significantly enhance a business's operational efficiency and cost management. Marketplace fulfillment allows retailers and wholesalers to leverage existing customer networks and fulfillment operations. This channel diversification reduces overhead costs and accelerates market access by significantly reducing investment in in-house fulfillment operations. 

Incorporating physical retail caters to customers who prefer in-person shopping, creating an additional revenue stream without the substantial shipping costs associated with online commerce. It provides a unique opportunity to optimize inventory distribution across channels, potentially reducing holding costs and improving inventory turnover.

Direct-to-consumer (DTC) e-commerce allows businesses to curate a direct link with their customers, resulting in more control over the customer experience, from branding and marketing to order fulfillment. This control can lead to more efficient operations, better inventory management, and improved margins, ultimately contributing to cost reductions in the fulfillment process. By broadening sales channels, businesses can spread their operational risks, access various customer demographics, and achieve economies of scale, driving down costs across the board.

Strategic Inventory Placement

Strategically approaching inventory placement reduces shipping costs, as shorter shipping distances often translate to lower freight charges. Additionally, by having inventory closer to customers, businesses can meet delivery service level agreements (SLAs) more consistently, ensuring faster delivery times and enhancing customer satisfaction. This doesn't just save money but also helps in building a reputation for reliability and swift service.

By diversifying channels and astutely distributing inventory, businesses create a robust network that's not only resilient to market fluctuations but is also optimized for cost efficiency. It's about being in the right place, at the right time, with the right products, and ensuring that order fulfillment is as streamlined and cost-effective as possible.

Hopstack Helps Fulfillment Centers Scale Throughput Without Incurring Additional Cost

Are you looking to scale your order fulfillment operations? 

Hopstack has successfully empowered fulfillment centers increase order fulfiillment volumes by a remarkable 176% in over two years—without additional workforce, equipment, or real estate investments.

We have designed our platform to enhance your throughput capabilities while keeping costs in check. Here’s how Hopstack can transform your fulfillment operations:

• Built for Scalability: Seamlessly manage a higher number of SKUs and fulfill growing number of orders while minimizing the marginal costs.
• Guided Operations: Tap into the power of intelligent, system-guided workflows, that enhance the productivity of your workforce and help eliminate guessword in your operations.
• Optimal Product Slotting: Leverage our advanced system recommendations to ensure strategic and efficient product slotting, streamlining your operations for maximum efficiency.
• Integrated Rate Shopping: Make the most of cost-effective shipping with our integrated multi-carrier rate comparisons, ensuring you always choose the most economical shipping option for every order.
• Omnichannel Capabilities: Seamlessly add additional sales and distribution channels and operate each channel from a central location.

Choose Hopstack, and take one giant step towards building an optimized and cost-efficient fulfillment operation. Explore how Hopstack can redefine your fulfillment strategy. Schedule a demo today.