How Do You Calculate Fulfillment Cost Per Order?

   

Recently I was at a conference on a panel discussing key business metrics and KPIs. I encouraged the audience to step back and think about how they calculated their fulfillment cost per order and per unit.  (You may be thinking, how many different ways are there to calculate fulfillment costs?) 

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Let me give you an example.  We recently worked with a Home and Gift catalog and eCommerce client on an inventory management project to determine the fulfillment cost per order to be used in a contribution to net profit report for category and item profitability. The following includes their call center and fulfillment expenses:

Gross Sales:  $17,575,000
Net Sales:  $16,344,750
Average Order Value:  $122
Annual Orders:  135,814
Packages shipped:  187, 150
Avg. units per order:  2.5
Total units:  339,535
Avg. weight: 8 lbs.
Annual Indirect labor:   $214,372
Fully loaded costs:  $2,308,822
Fulfillment costs as a % to Net Sales:  14.1%
Shipping costs:  $1,710,000
 
Here is how this company’s fulfillment cost per order and per unit varies depending on how you calculate the fulfillment costs: 

 

Cost Per Order

Cost Per Unit

Using only variable indirect labor for call center and warehouse

$1.58

$0.63

Fully loaded costs including direct and indirect labor, occupancy, telecom, supplies, etc without shipping costs

$16.99

$6.80

Fully loaded cost per order + shipping costs

$29.59

$11.48

How do you use this?  As I said, companies are using fully loaded cost per order in the net contribution to profit calculation and reporting for categories, items and SKUs and in their seasonal post mortem analysis. Understating fulfillment costs will show merchandise profitability considerably higher than it actually is. 

For example, a direct marketer features greeting cards in the Fall/Holiday season. When changed from a variable fulfillment cost per order to a fully loaded cost per order, they found that 40% of its products would AUTOMATICALLY lose money.  Its average item retail needed to move from being in the “teens” to above $25. This is a radical change in merchandising and marketing. The net affect was that the entire season was automatically in jeopardy of losing money because the price points were too low.  

Fulfillment direct labor costs have increased 10% to 15% over the last 5 years - higher in many companies. List prices for small parcel shipping have increased 3% to 5% per year every year for the last 12 years. How businesses think about the fulfillment cost per order and its affect on the merchandise assortment may need to change in many companies. If products when fully loaded with costs do not make money, shouldn’t you take a serious look at your merchandising assortment and strategy?

If you would like to discuss how to calculate your fulfillment cost per order or if you have an inventory management question or project; we look forward to hearing from you at 804-740-8743, or info@fcbco.com.

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