5 Strategies to Reduce Your Operation’s Fulfillment Costs
By 2021, it’s expected that global B2C ecommerce sales will exceed $4.5 trillion, nearly double the amount that was done in 2018. If there was any doubt in your mind (and really, there shouldn’t have been), the verdict is in: Ecommerce is here to stay.
As ecommerce continues to grow in popularity and importance, many order fulfillment operations and businesses are finding it harder and harder to keep their fulfillment costs under control. As the cost to pick, process, pack, and ship each order increases, that package’s inherent value and contribution to profit decreases; clearly, operations need to find ways to reduce these costs if they are going to remain competitive in today’s business landscape.
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Luckily, businesses can leverage several potential solutions and strategies to optimize their fulfillment processes and realize significant savings, bolstering their bottom line and becoming more profitable over time. These include:
- Optimizing your facility’s layout and internal processes
- Rethinking packaging and shipping
- Incorporating omni-channel fulfillment
- Embracing automation and technology
Below, we explore these potential solutions that you can leverage in order to keep your fulfillment costs under control and streamline your operation to make it more efficient and profitable.
How to Reduce Your Operation’s Fulfillment Costs
1. Optimize your facility’s layout and internal processes.
One of the most valuable resources that any order fulfillment operation has is time. The faster you can fulfill orders as they are received, the greater the number of orders you can fulfill, and the more profitable you can be. Unfortunately, inefficient warehouse design—in the form of poorly-placed inventory, equipment, and even entire departments—leads inefficient internal processes and, ultimately, costly wasted time.
If you are able to identify the areas and workflows within your operation that are performing suboptimally, it will be possible to make them more efficient, and that increased efficiency will filter down to reduced fulfillment costs.
Think critically about all of the various aspects of your business, and determine where an increase in efficiency stands to make the greatest difference. Some areas you should consider include:
- Racking configuration
- Receiving and putaway
- Inventory management
- Picking strategies
- Packing and shipping requirements
- The number of personnel
- The number and frequency of work shifts
- The various technologies supporting the operation and their layout in relation to each other
2. Think smarter packaging and shipping.
Another costly element (if not the most costly element) of fulfilling orders is actually shipping those orders to customers. Case-in-point: In 2018, Amazon’s shipping costs came in at $27.7 billion—and that’s on top of the $34 billion already earmarked specifically for “fulfillment.” That is a massive dollar amount, which shows just how much shipping costs can scale over time.
If shipping costs are a sore point for your operation, there are steps that you can take to reduce your shipping costs and realize significant savings. One such solution is to embrace cartonization.
Cartonization is the process by which the proper type and size shipping container are selected for each order shipped. Many people equate cartonization to cubing. Although it is a very important part of cartonization, cubing is only one of several factors used to determine the right container selected for an order. Cartonization can be used to help determine what packing method is best used based upon labor and packaging costs and product attributes such as cube, fragility, temperature, etc. The exact cartonization strategy that makes sense for your operation will, of course, depend on the specific characteristics of the product being packaged and shipped.
While cartonization has become somewhat of the “new normal” in order fulfillment, the fact remains that there are still operations that have not fully embraced the practice. For those operations, a move as simple as seeking cartonization software to automate the process can lead to significant savings when it comes to shipping.
3. Train your customers.
In the past, when a consumer needed to make a purchase, they would compile a list of everything that they needed and then head to the store (or stores) at which point they would purchase everything on that list. Thanks to the rise of Amazon Prime and other speedy delivery options, that habit is not so deeply ingrained in today’s consumers.
In a given week, a customer might place an order on Monday for toothpaste, an order on Tuesday for floss, and an order on Thursday for mouthwash, simply because they didn’t realize that they were running low on all three of those essentials. What is a matter of convenience for the customer, however, is a matter of cost for the retailer. As I’m sure you know, a single large order is worth more to a customer than multiple smaller orders—even if they ultimately come to the same total—due to all of the costs associated with fulfilling those orders.
Retailers can reduce these micro orders by putting in place policies which train, or incentivize, customers to place larger orders. Consider offering a small discount whenever a customer meets a certain price threshold or making free shipping contingent upon an order being a certain dollar amount. If you have a firm understanding of product affinity (which items are often purchased together) you can even gently remind your customers that they might want to consider adding something to their cart—for example, toothpaste if they are thinking about purchasing a toothbrush.
Simply increasing your average order value in these ways can help you reduce your fulfillment and shipping costs substantially over time.
4. Consider omnichannel fulfillment solutions.
For retailers with an extensive footprint of brick-and-mortar stores, it might be possible to leverage a number of omnichannel solutions in order to reduce shipping and fulfillment costs. As just one example, Target managed to cut fulfillment costs by approximately 40 percent by beginning to fulfill its ecommerce orders from stores instead of more centralized DCs.
Which strategy makes the most sense to you will depend on the type of operation you have and how extensive your network of distribution centers and physical stores is, but each of these strategies can be effective in the right circumstances.
5. Embrace automation.
If your people, processes, or existing equipment is not operating as efficiently as it needs to in order for you to be profitable, full or partial automation might be the solution to your problem. Automation of repetitive tasks can not only drive down labor costs by allowing your workers to focus on more value-adding services; it can also improve efficiencies by ensuring that all processes are occurring in the most logical and streamlined way.
Automated storage and retrieval systems (AS/RS), sortation, autonomous mobile robots (AMRs), and goods-to-person technologies can all be leveraged to improve your order picking and inventory replenishment practices. Similarly, automated packaging and robotic palletization can help you keep keep shipping fees as low as possible.
Charting Your Path to Lower Fulfillment Costs
Each of the five strategies outlined above can help you realize significant cost savings as it applies to fulfilling orders. Which of them makes the most sense for you to pursue will depend upon the specifics of your operation: The kind of product you handle and ship, the service level agreement your customers expect you to keep, the average demand you see on a daily basis. A skilled systems integrator can help you determine the best path forward in automating your facilities.