Controlling and Reducing Your Fulfillment Costs

We all know we’re in a tough business climate. With many companies coming out of less than perfect fall and holiday seasons, there is an urgent need to increase productivity and reduce costs without having to make major capital purchases to do so. Here are five major areas and 25 ways to reduce your cost per order, increase capacity without expansion, and improve service levels in warehouse and fulfillment. 

Perform an Operational Audit

An operational audit is a starting point. Operational assessments should identify your needs, and help recognize potential improvements to process, layout and use of space, staff productivity, systems and freight analysis. The objectives are to lower the cost per order, increase storage capacity within the center, reduce inbound and outbound freight costs, and improve service levels and turnaround times. 

Because they represent the largest expenditures, the areas of greatest potential savings are:

• Direct labor
• Indirect labor
• Outbound freight
• Inbound freight
• Occupancy
• Packing materials

Benchmarking

A program to set up internal benchmarks will reduce your cost per order or hold the cost in line as volumes increase. Translate these as goals down to department and individual work standards. 

The table, Total Warehouse Cost Per Order, shows 20 direct companies back end fulfillment expenses including direct and indirect labor, occupancy and packing materials.  Total Warehouse Cost Per Order column does not include shipping costs nor does it include any offset for shipping and processing revenue.  The reason for excluding   these is that they distort comparisons because of average package weight and distance. 

All these businesses have been 1.5 and 2.5 items per order.

While external benchmarking will give you valuable insight into other businesses productivity and practices, it’s always best to develop work standards that apply to your business type, product type, level of warehouse automation, labor rates, etc.  Then benchmark against yourself – meaning to continually compare your productivity against standard to your actual performance by week, month, season and year.

The accompanying graph shows the breakdown of direct labor, indirect labor, occupancy and packing costs as a percent of the Total Warehouse Cost Per Order for average company.  It also points out the importance of focusing attention on the management of the Direct Labor cost factor in the warehouse.

F. Curtis Barry & Company looks at industry wide benchmarking numbers that represent an extensive range of business types, sizes, productivity levels, and pay rates.   The overall average per cost per order is between $3.00 and $5.00 comprised of direct labor, indirect labor, occupancy and packing costs. 

In the table, Total Warehouse Cost per Order, the cost per order at the low end of the table ($1.10 to $2.90) have a high degree of automation implemented in the center.  There are others above this level that also have automation but are not as productive. 

Additionally, it’s interesting that order volume doesn’t always translate to lower cost per order.  Direct labor costs range between $15.50 and $17.50 plus anywhere from 15% to 30% benefits depending on the company.

Another variable in the costs are the facilities themselves.  Some are very modern, air conditioned facilities and highly automated; others are very basic.

Management often wants to compare companies based on percent to net sales.  Percent to net sales can be a dangerous measure to compare because of the wide range of average order values in this industry.  However, the average company is in the range of 3% to 5% of net sales.   

Using this range of values and determining where you fit within this range can point out areas where you might want to focus attention. If you are approaching “Best in Class” numbers, you might want to consider investing your time and attention on other areas where that investment would yield a greater return on your investment. If you find yourself at the higher end of the range, there are possible cost savings available.

All of the variability in these external metrics doesn’t make comparability invalid.  You just have to get behind the numbers and understand their basis.  Additionally, by exchanging benchmarks and touring other’s facilities, you learn a great deal about how others gain efficiency, provide customer service and apply best practices.

Managing the Work Force

Develop labor budgets
Have a labor budget by season, month and week based on order forecasts and planned productivity. This is the tool to use to determine your detailed staffing plan, hiring and training plan and seasonal hiring.

Take a good look at your current staffing ratio. Full time, if not kept productive, may be costly. Change the mix of full time, part time and flex time staff.  Consider different shift structures and schedules to match regular labor to the volume (3 12-hour or 4 10-hour shifts, or split weeks).

Manage the labor force
Labor is the largest controllable expense item in your DC. Capture regular and premium hours and labor dollars. Set these daily against volumes (e.g. orders, lines, etc.). Include history as a cumulative report by month, week and day, and measure your continual improvement internally against yourself. This history helps with your budgeting next season. Look for ways to improve picking and packing as about 50% of the labor dollars are in these two areas. 

Hiring, retention and attrition (turnover)
Review the reasons attrition is so high and work to close the gap. Review your hiring, retention and training practices. How well are you able to staff for the peaks? Consider some type of incentives for keeping good people. Spend more time in the hiring process explaining the job and your expectations. Don’t underestimate the need for adequate training; consider cross-training in jobs where it makes sense. Use your staff to provide leads for new hires. Stay in touch with past seasonal help and offer them incentives to return.

Using an agency for peaks
If you just can’t staff for the peak, seek out a good temporary agency. How can this bring more flexibility to your operation?  The trade offs are overstaffing or overtime.

Scheduling
Take advantage of off-shift functions such as primary pick slot replenishment, staggering start times by functions (picking and packing), multiple shifts, and doing your slot moves at night. Better utilization of space means less congestion, and improves labor efficiency and MHE utilization. 

Team building
Successful organizations take team building seriously. Use team building to take your organization to a new level and improve productivity. You can communicate your vision and your plans, while involving the team in the planning and decisions. Set goals and objectives to maintain the corporate vision and hold your management team accountable in achieving the vision. Do effective personnel evaluations which tie in productivity and goals. 

Transportation Management

Controlling inbound and outbound freight costs can make the difference between profit and loss for your business.

Inbound freight
Represents 2% to 4% of gross sales for domestic product and 6% to 12% of imported product. Freight consortiums like DM Transportation have lowered some of our clients’ inbound costs by 15% to 24%. Equally important are the vendor compliance and inbound in transit visibility that shippers can provide so that you can schedule receipts, plan labor, and alert buyers and, ultimately, the customer to product availability. Your company, not the vendor, should control the routing and carriers for inbound receipts. 

Outbound freight
Can represent 6% to 8% of the average order. Customers are becoming more sensitive to the cost of shipping in their purchasing decisions. Expedited carrier plans have 90+ accessorial charges which continually increase the shipping costs. Continually look at renegotiating contracts. Use USPS and zone skipping where tracking and slower delivery will be acceptable. Use a qualified consultant to negotiate contracts. 

Best Practices and Process Improvement

Use what you have more productively
This is a mantra in fulfillment today. By not taking care of the basics of fulfillment, you are adding costs to the warehouse operation. Increasing current capacity and utilizing that capacity more effectively are key objectives. Do the basics well before you consider more sophisticated systems and methods. Get as much productivity as possible out of the existing layout, processes and systems first. Keep the processes simple so that part-time people can be hired and become productive in shorter times.

Reduce handling and touches
The fewer touches of product, the less cost of incurred to process orders. Streamline the operation and apply industry best practices to reduce handling and costs. Flow chart the receiving process through putaway, and the picking process including replenishment through to the shipping function. The areas for improvement will become more obvious.

Replenishment
Effective replenishment is the basis of efficient order fulfillment. Inefficient replenishment will cost a huge amount of dollars and negatively impact customer service. Use a combination of min/max and demand practices to fill forward pick locations. Make sure replenishments are scheduled and completed prior to the start of the picking process.

Slotting
Effective slotting practices can lower your costs for picking, replenishment, and putaway warehouse labor. Try to have seven days of average demand in the primary pick location. This reduces the number of times the picker finds an empty pick slot. Use velocity slotting to determine pick locations and reduce travel time. Consider the development of a dynamic hot pick zone for very fast selling items.

Inventory control
Effective inventory management is the single most important tool to improve customer service and reduce cost of operation. Aisle mapping—verifying product to all locations— is a fundamental way to improve inventory control. Cycle counting—counting product in all locations for a single SKU—insures inventory accuracy. Cycle count programs can eliminate annual physical inventory taking. Using bar codes throughout the inventory process (from inbound cartons and pallets, to putaway, through picking, pack confirmation and shipping) increases accuracy to 99.9% and dramatically increases efficiency.

Picking options
How can you use best practices to improve picking productivity? Match the method to the pick problem. Batch pick singles. Consider cart/bin or zone picking for multi-line orders. Batch picking and sorting as a separate functions. Consider the total cost of a combined operation of picking and packing as an alternative.  

Packing options
The key to packing performance is to keep the packer at the station. All materials, inserts and supplies must be within the packer’s reach. Insure good ways of moving sealed packages to the shipping and manifesting stations. Are there automated sealers that give an return on investment (ROI) for your volume and shipping containers? Consider the design of the pack station as a critical factor (e.g. height, work surface size, fatigue mats, supply storage, etc.). 

Receiving practices and cross docking
Efficient receiving starts with having all purchase orders in the receiving system prior to merchandise arrival. Review your company policies regarding vendor compliance. Cross docking is an effective practice to reduce handling costs while improving customer service, as in filling back orders. Advanced Shipping Notices (ASNs) improve efficiency and accuracy, speed dock-to-stock, and allow scheduling of receipts and labor.

Use proper levels of quality assurance throughout the warehouse
Are you “over inspecting” customer orders, rather than basing inspections on the benefit gained? Focus inspection activity on the outbound process at the pack station. Some operations do inspection activities to the point of diminishing returns; avoid spending money that does not result in an ROI. 

Overstocks
How much space in the center is taken up by overstocks that merchants are sitting on?  One center we are working with has, conservatively, 15% of its space tied up in overstocks. Together with merchants and management, they are undertaking a revamping of planning, forecasting and liquidation practices to avoid the need for expansion. 

Process returns more efficiently
Returns cost more than orders to process because you lose the product margin; returns require refurbishing and return processes are not as streamlined as order processing. The best return policy is to try to eliminate the causes of returns before they happen. Large return categories of goods (e.g. electronics, apparel, etc.) have high labor costs and require significant space use. Untimely processing of customer credits, refunds and exchanges can damage customer service. Look at use of staff, space, service levels and systems to improve productivity. These operations also generate lots of trash. Do you have the right equipment to take it away? Are you selling recyclable waste at a profit?  

Outsourcing as an option
There are practical and cost effective reasons to outsource part or all of your business. It may be to deal with a peak, adding new product categories, or when fulfillment is not a company core competency. It may also help to serve a new market, such as Canada or the opposite coast. One large electronics retailer that we worked with implemented Canadian outsource fulfillment which serves the customers well and at an affordable cost.

Finding the right level of automation and systems
ROI analysis could put automation into your planning for cost improvement. The wrong material handling equipment can be creating hidden lost time and inefficient product flow, impacting cost and customer service.

Warehouse management/bar code systems

This should include reviewing how bar coding is used throughout the warehouse. Conveyance, material handling and warehouse management systems can improve productivity, increase accuracy and service levels and reduce costs.