“If you cannot measure it, you cannot improve it.”
That’s an observation that famed British physicist, Lord Kelvin, made about scientific experimentation and operational improvements over 100 years ago. It’s still pertinent today as we seek to improve e-commerce operations, be competitive and look to improve our profitability and customer service.
In order to improve operations, we first need to measure key metrics, which are units of work such as the total warehouse cost per order, shipped cost per carton, the cost per line on an order and cost per unit. Once we understand what these metrics show, we can then develop options for processes that reduce steps and therefore cost; or improve service levels in the warehouse such as order turnaround time measured in hours.
What key operational performance metrics do you monitor and use to improve processes? Here are the metrics which we recommend as the starting point in measurement and improvement process:
Warehouse cost per order
This calculation is the total warehouse costs for all warehouse functions divided by the number of orders processed for the measurement time frame. The measurement time frame or reporting period start out as annual (or trailing 12 months) and then more frequently (such as monthly).
Total warehouse cost ($) without shipping costs and employee benefits and payroll taxes =
- Payroll expense ($) - management + direct labor + indirect labor without benefits and payroll taxes
- Facilities or occupancy costs ($) - leases or depreciation for the space + utilities + depreciation and amortization (for MHE, systems and automation)
- Packing supply costs ($) – for boxes and dunnage
These warehouse expenses should be available from your company’s profit & loss statement, and they comprise a high percentage of all fulfillment expenses. The number of orders may come from marketing or better yet your WMS system.
An efficient total warehouse cost per order without benefits or shipping costs would be $5.00 to $7.00 per order.
Our recommendation is to measure the total warehouse costs per order two ways.
- The first is to calculate warehouse cost per order excluding employee benefits and outbound shipping costs.
- The second calculation of warehouse cost per order includes employee benefit, payroll taxes and shipping costs.
These expenses vary widely between operations. The benefits and payroll taxes - health care; paid personal and vacation days; payroll taxes paid; matching savings and retirement plans are not something an operations executive has direct control over generally. However, they may add 15% to 30% to the total warehouse cost per order.
Outbound shipping costs are the single largest costs involved in order fulfillment. Shipping costs are larger than the sum of all warehouse costs per order as defined above. Outbound shipping varies based on company volumes shipped and shipping cost negotiation, which is why they distort comparisons you make to other e-commerce fulfillment operations.
Using the total cost per order you can now drive the calculation to a more granular level:
Cost per order
Calculate cost per order based on marketing orders processed by dividing total warehouse cost by the number of marketing orders.
Cost per carton shipped
Cost per carton shipped is derived by dividing the total warehouse cost by the number of cartons shipped. The number of cartons shipped may be 10% to 20% higher than the number of marketing orders because all items cannot be combined into one carton.
Cost per order line processed
Cost per order line processed can be found by dividing the total order cost by the number of order lines. The majority of consumer e-commerce orders are 3 order lines (and units) or less. B2B e-commerce will have a much larger orders.
Cost per unit shipped
Cost per unit shipped is found by dividing the warehouse cost by the number of units. As you develop these comparisons, it is helpful to calculate costs for larger orders versus smaller direct to customer orders.
Labor cost per order
In most e-commerce companies, labor is more than 50% of the total warehouse cost per order when you exclude benefits and shipping costs. In terms of giving a metric to supervisors to manage and monitor, the labor cost for your operation is the one they can influence and reduce. The cost per order, carton, line and unit is key.
Fulfillment costs as a percent of net sales
CFOs are interested in the fulfillment expense as a percent to net sales. This is calculated by dividing the total warehousing cost by the net sales, and then multiplying by 100 to determine the percentage. Efficient companies are often around 5% to 8% of net sales. Small to moderate sized businesses may be between 10% and 15%. This ratio can be misleading because e-commerce average orders can vary widely and be misleading when comparing two businesses.
Characteristically, e-commerce fulfillment is largely manual in terms of process until automation can be justified. In largely manual operations, order volume and size of the company doesn’t always translate to efficiency on a cost per order basis. The key to getting more acceptable fulfillment cost still depends on how effective your managers and supervisors are.
Expand measurement to departments and functions
Don’t try to develop to many metrics at once. Sometimes businesses have dozens of metrics, but they are meaningless and cumbersome to keep collecting and reporting. Here are a few which are important: Do You Understand Where You’re Losing Money on Shipping & Handling?
Other important metrics include returns-based measures such as cost per return, cost per returned unit and returns as a percent to gross demand (orders) of dollars; fulfillment service levels such as dock to stock turnaround time, order fulfillment turnaround time, returns processing time, and percent of orders shipped same day.
Picking and packing are important because together they often are more than 50% of the labor expenses. Costs for picking, such as cost to pick per order -- per line and per unit -- and packing, such as cost to pack a shipped carton and a marketing order, should be measured.
Data accuracy and timeliness
Many order management systems and ERPs used in e-commerce fulfillment were not designed to collect the basic fulfillment data. They may be strong in many other functions but weak on the warehouse data side. Warehouse management systems designed specifically for fulfillment and warehousing often collect this data and have the ability to report these metrics. Investigate closely how the data available to you is collected and its accuracy and timeliness.
Also, when you decide to collect and report at a lower level of detail, such as by department, you will need to determine how you’re going to collect the data and determine its accuracy. For example, as companies do more cross training and use employees across two or more departments – e.g. receiving and returns – collecting the number of transactions and hours worked may not be available without a time keeping system set up to collect departmental data.
How does your e-commerce fulfillment operation stack up? Remember to define the data that represents a unit of work and a good process measurement. Work with your people on how to collect the data on a timely basis. Some data will be operational and other data can be derived from financial systems. Determine how timely and accurate the results will be. What do these statistics tell you about your business? Do they show you where you should improve your operation?