Fulfillment cost per order is the total cost required to receive, store, pick, pack, ship, and process customer orders. It is one of the most important warehouse performance metrics because it measures the true cost of fulfilling each order shipped.
Fulfillment Cost Per Order = Total Fulfillment Costs ÷ Total Orders Shipped
Suppose your warehouse incurs the following monthly fulfillment expenses:
Labor: $120,000
Facility and occupancy costs: $35,000
Packing materials: $15,000
Equipment and technology costs: $10,000
Total fulfillment costs = $180,000
If the warehouse ships 18,000 orders during the same month:
$180,000 ÷ 18,000 orders = $10 per order
In this example, the fulfillment cost per order is $10.
A complete fulfillment cost per order calculation should include all costs associated with processing and shipping orders, including:
Receiving and inventory putaway
Storage and occupancy costs
Picking and packing labor
Shipping preparation activities
Packing materials and supplies
Equipment and facility expenses
Returns processing and reverse logistics
Many companies only measure direct labor costs when calculating fulfillment cost per order. However, labor often represents only 50-60% of total fulfillment expenses.
To understand true warehouse performance, organizations should use a fully loaded fulfillment cost calculation that includes labor, facilities, equipment, occupancy, and packaging costs.
Monitoring fulfillment cost per order helps warehouse operators identify inefficiencies, benchmark performance, evaluate automation opportunities, and uncover cost-reduction opportunities throughout the operation.
In this article, we explain how to calculate fulfillment cost per order, cost per line fulfilled, cost per unit fulfilled and cost per shipment - along with practical ways to improve operational efficiency and reduce fulfillment costs.
Many companies track fulfillment costs but struggle to identify the operational issues driving those costs. Warehouse layout problems, excessive travel time, poor slotting, labor inefficiencies, inventory inaccuracies, and space constraints can all increase fulfillment cost per order.
FCBCO helps companies evaluate warehouse operations, identify cost drivers, and develop practical improvement roadmaps that reduce fulfillment costs while improving service levels.
Request a consultation to discuss your warehouse operation and cost-reduction opportunities.
Comparing the cost per order between businesses is difficult because businesses, product, and order profiles vary widely. Fulfillment costs vary depending on the level of automation, technology, and warehouse management systems implemented. This can make comparison of total fulfillment costs difficult between companies. At times, comparing warehouse benchmarking and metrics should be avoided all together.
The best way to compare your fulfillment cost per order is to create internal historical comparisons to show the trends over time.
The following are the basic statistical and cost data elements you’ll need to calculate cost per order:
Here are four calculations that every fulfillment company should be measuring long term.
Total warehouse costs divided by annual orders shipped.
Total warehouse costs divided by total order lines.
Total warehouse costs divided by annual boxes/pallets/etc.shipped.
Total warehouse costs divided by annual net sales in dollars multiplied by 100. Further details about this measure are below.
The above calculations of fulfillment cost per order are helpful when understanding your overall business. Now the challenge is to apply this process to the departmental costs and productivity.
Departmental functions include any major warehouse functions, such as receiving, putaway, picking, packing, shipping and returning items to fill orders and process returns.
To get a meaningful measurement of these costs, you will need to collect data at a much lower level and include paid hours for those activities. We recommend using a timekeeping system that allows measurement of the employee in/out for various departments. Without this, any cross training you have adopted will distort how many transactions, such as orders, lines, and boxes, are processed.
You’ll also want to calculate the paid hours worked in the department from the time collected.
As you start the measurement of department functions, different units of work may be applicable between departments. For example, receiving functions may have little performed inspection compared to other businesses. The number of cases or pallets received rather than units received may be a more meaningful metric.
What are good fulfillment cost per order results? Unfortunately, industry surveys often fail to give accurate and usable results because they average together dissimilar businesses.
If you are going to compare your results to other businesses, it will require considerably more data than we illustrated.
Chief Financial Officers often want a convenient ratio to compare fulfillment costs between companies. While a true comparison is likely impossible, the best way to do this is to calculate the fulfillment costs as a percent to net sales.
Percent to net sales = total warehouse costs divided by annual net sales in dollars multiplied by 100.
The danger of this method is that the average order value (AOV) can be widely different between businesses. Generally, this discrepancy is caused by wide differences in average retail price points and average order value. We understand the desire to compare, but it may give a result that is misleading.
In the end, the most important aspect is creating a historical comparison for your business and adding history to management reporting. Is your productivity measured in dollars and units of work produced improving seasonally and annually?
Many businesses are not. Low unemployment and increasing labor costs, as well as outbound shipping costs, are eroding profits.
Third-party logistics may benefit your business by helping you maintain high customer service and cost-effective fulfillment applications. While 3PL isn’t for everyone, we have seen companies use 3PL and achieve quality and competitive costs.
Companies using third-party fulfillment will pay an order fulfillment fee for particular services, such as receiving, inventory storage, order processing (pick/pack), and returns processing.
Before deciding if a 3PL is right for you, it is important to compare 3PL fulfillment costs. To get an apples to apples comparison between internal fulfillment and third party, consider all of the cost per order elements.
Summary
Rising labor costs and outbound shipping costs are hurting many companies’ profits. When trying to improve fulfillment cost per order, the best comparison is reviewing your internal operational results historically within your company.
Learn how a warehouse consultant can assist with understanding your costs, as well as other warehouse improvement projects focused on fulfillment service and warehouses assessments.