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Unveiling Hidden Expenses: Managing Fulfillment Costs for Business Efficiency

Improve your bottom line with effective fulfillment cost management. Learn what affects fulfillment costs and what you can do to lower expenses.

Fulfillment is a critical component of retail and e-commerce. From processing to delivering orders and every distribution channel in between, fulfillment plays a significant role in the customer experience, directly impacting your reputation.

Outsourcing fulfillment operations can lead to higher profits through customer retention. However, it can also hinder your profitability. High fulfillment costs minimize profit margins, while more effective strategies can lead to cost savings without sacrificing the customer experience.

Fulfillment costs are expenses related to storing, picking, packing, and shipping products to customers. The costs associated with fulfillment processes can directly influence profit margins and contribute to the total cost of selling products to customers. Keep reading to learn more about fulfillment costs and how they impact your business.

Understanding the role of fulfillment costs

While small retail establishments might fulfill their orders in-house, many e-commerce businesses outsource to third-party logistics (3PL) or fulfillment service providers. Through these suppliers, you can start dropshipping and have an online store without inventory, warehouses, or additional overhead.

Fulfillment services pricing varies by company. Some providers offer fixed-rate solutions, while others develop customized solutions based on an individual company’s fulfillment needs. Fulfillment center pricing refers to the expenses included in storing inventory and fulfilling orders—picking, packing, and shipping items directly to customers or retail establishments.

Some 3PL companies offer a fulfillment cost calculator to determine pricing before working with them. However, since every business is different, most will provide you with a quote based on projected orders.

Managing fulfillment costs is crucial for businesses because it can directly affect their profitability. The higher your fulfillment costs, the less you make from a sale. At the same time, the lower your fulfillment costs, the better you can price your products, allowing you to offer more competitive prices than the competition.

Fulfillment costs can also have a direct influence on customer satisfaction. Efficient fulfillment may lead to faster delivery times and fewer mistakes that keep your customers happy.

At the same time, working with fulfillment providers enables your business to scale. Managing your fulfillment costs can help you save money while handling higher order volumes.

Breaking down fulfillment costs

To calculate fulfillment pricing, you must understand the different steps involved in the fulfillment process when working with a 3PL. In general, fulfillment service pricing is more expensive than managing fulfillment in-house, but it’s well worth it if you want to avoid having a warehouse and shipping products yourself.

That said, understanding the different components of fulfillment center pricing can give you a better idea of the total cost associated with each order.

Setup and onboarding

Setup and onboarding costs are there to ensure your fulfillment provider meets your needs. You’ll be trained on the different types of software they utilize, such as order processing and integrations for your website.

Intake and receiving

Intake and receiving refers to the costs associated with sending your products to the fulfillment center. There, they’ll be checked for damage and added to the warehouse as inventory, where they can be picked, packed, and shipped when an order arrives.

Inventory storage and management

Fulfillment providers handle inventory storage and management on your behalf. The inventory and storage costs include warehousing, utilities, and security. In addition, they’ll manage your merchandise using inventory management systems.

Order pick-and-pack

Pick-and-pack begins after an order is processed from your e-commerce store. The costs are labor-related and include retrieving items from the warehouse shelves and packing them for shipment.

Kitting

Kitting is the process of assembling parts into a single order to create a final package. The costs associated with kitting include the same inventory storage and management costs as single products, but you’ll primarily pay for labor.

Packaging

Packaging costs include items associated with packing the items for shipment, such as boxes, shipping labels, tape, and the labor that goes into it. 3PLs offer standard and custom packaging. Standard packaging is the more cost-effective solution, but your customers will receive basic boxes.

On the other hand, you might choose custom packaging for a more branded experience, which may include special wrapping materials and decorative boxes.

Outbound shipping

E-commerce shipping refers to the process of shipping packages directly to costumes and includes all associated shipping costs, such as carrier shipping rates, taxes and customs fees, and insurance. These may be variable costs depending on the shipping option chosen by the customer and where they live.

Product returns

Returns management, also known as reverse logistics, is another service offered by 3PLs. The costs associated with returns include inspecting the items, restocking, disposing, and refunding the customer or sending a replacement.

Customer service

3PLs may also offer customer support services that allow customers to track their packages, learn more about shipping times, and choose shipping options. The costs associated typically include labor and the software used to communicate directly with your customers.

Account support

Account management fees are those associated with the 3PL providing customer support to you, such as maintaining your account, processing transactions and fees, and other add-on services like fraud protection and sales tax.

How to calculate fulfillment costs

Fulfillment costs are calculated in several different ways. No single method is better than another; what’s most important is determining how much a particular provider will cost your business and affect your profit margins.

The 3 most common methods for calculating your fulfillment costs include:

Cost per box (CPB)

The cost per box is a fairly straightforward metric. Rather than calculating how much an order costs, which might include parts used in kitting, the cost per box calculates the total fulfillment cost of a single package. The total expenses include picking, packing, kitting, and shipping. You can use the following formula to calculate the cost per box:

Cost per box = Total order costs / # of boxes sent

Here’s an example to help you understand all the costs associated:

When an order is placed on your website, the fulfillment center and its employees gather all the necessary items and parts.

Your costs might look like this:

  • Labor: $5,000
  • Packaging: $2,000
  • Overhead: $3,000
  • Customer service: $2,000
  • Total expenses: $12,000

In the same time period, the fulfillment center sent out 2,000 boxes to customers. To calculate the CPB, you just plug these numbers into the formula:

$12,000 / 2,000 = $6

This means that, on average, it costs your business $6 to fulfill every box.

Cost per order (CPO)

Fulfillment cost per order is similar to the cost per box (CPB). However, instead of measuring on a per-box basis, it helps you determine how much you spend on each customer order, which may consist of multiple boxes. The formula is:

Cost per order = Total order expenses / # of orders received

Let’s use the same total order expenses from our previous example ($12,000).

Now, instead of 2,000 boxes, let’s measure the cost per 1,500 orders.

$12,000 / 1,500 = $8.

Cost as a percentage of sales (CPS)

The cost as a percentage of sales (CPS) measures the percentage of sales that goes toward fulfilling customer orders. This metric can provide you key insights into how profit margins and profitability are affected by fulfillment costs, with a lower CPS suggesting a business manages its expenses well. A higher CPS, on the other hand, means you might be paying too much for fulfillment.

The formula to calculate CPS is:

Cost as a percentage of sales = (Total order expenses / Net sales) x 100

Using the same expenses as before ($12,000), let’s say your net sales were $100,000.

($12,000 / 100,000) x 100 = 12%

This means that your business spends 12% of its net sales on order fulfillment. The goal is to spend as little as possible on fulfillment to maximize your profit margins, so this is a metric you should monitor over time and strategize ways to decrease it.

Tips for optimizing fulfillment costs

Optimizing fulfillment costs means keeping costs low without compromising the customer experience. Of course, if your order fulfillment costs are high, you’ll want to reduce them.

However, your order fulfillment cost may be higher because the company you work with offers superior customer service and manages more on your behalf while offering value-added services like engraving and customization.

Follow these tips to optimize fulfillment costs without compromising quality:

  • Audit your fulfillment process. Review your current fulfillment process to identify all the associated costs, including warehousing, shipping, carrier fees, and so forth.
  • Explore different providers. If you don’t do fulfillment in-house, consider shopping around for the best value. Since all 3PL providers are different, getting a custom quote based on your sales and needs can help you determine the right option.
  • Negotiate rates. Many fulfillment providers and carriers are open to negotiation. Even a small rate change in shipping costs can dramatically improve your bottom line, especially if you ship many orders every month.
  • Leverage automation. Many fulfillment centers use automation and robotics to reduce labor costs. Look for companies that offer automated processes to increase efficiency while reducing labor costs associated with the fees they charge you.
  • Manage returns effectively. Returns can be expensive for businesses. You can minimize returns by setting expectations with customers before they place an order. Then, when returns happen, ensure your fulfillment company has an efficient process in place for returns logistics, including customer service, inspection, and restocking.

Mange fulfillment costs for greater profits

Fulfillment costs are necessary for owning a retail business or e-commerce store. However, high fulfillment pricing can affect your profits, scalability, and growth. Effectively managing these costs can increase profits while helping you remain competitive.

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