In our consulting practice, we often hear the question "how does my cost per order compare to others". Management wants to be sure that the warehouse and distribution expenses are in line, and as efficient as possible. Companies typically benchmark against other warehouse and distribution center operations, to measure the performance of their company’s services, processes and metrics against those of another business. Companies also benchmark against the best in a specific industry (i.e. “best in class.”). The point of benchmarking is to identify internal opportunities for improvement as companies strive for continuous process improvement.
Companies rely on articles and high-level industry studies as an information source. Typically, these average together a wide variety of business types of warehouses, such as wholesalers, ecommerce, and industrial, and publish results about cost per order or unit, cost per pick, as well as service level measures.
Having benchmarked hundreds of companies, we find some of the results published are lacking details, and not actionable. These broad surveys not only have different types of businesses, but they vary in size of company and level of automation. It is essential to “get behind the numbers” to understand what expenses are included and excluded and to be sure they accurately represent your operation.
How to calculate your Cost Per Order
When calculating the cost per order, the typical costs that are aggregated for the period of time being analyzed include the following:
- Labor costs associated processing transactions - such as receiving, inspection putaway, picking, packing, shipping, returns, inventory control, etc.
- Management and supervisory labor that are directly associated with the operations. This would include clerical, as well as those in the transportation department, janitorial, security etc.
- Facility costs including the lease, taxes, insurances and common area maintenance. Including depreciation and amortization for conveyance, sortation, WMS and MHE systems.
- Packing and shipping supplies including pallets, corrugate boxes, packing tape, strapping, all void fills and pallet wrap etc.
It is important to note, that historically companies do not include the inbound shipping costs, outbound shipping costs, or revenue generated from outbound shipping costs as part of a cost per order analysis. The reason is that DIM/weight and negotiated carrier costs vary widely between companies.
If you intend to compare your operation to another company, this article discusses what factors to take into account to get true comparability. It also discusses, internal benchmarking of results, to compare your internal performance and metrics by season and annual history - this is the most actionable benchmarking action you can take.
To illustrate the method we recommend in comparing companies, we are going to illustrate a “fully loaded” cost per order (CPO) and discuss four factors that can influence comparison:
1. Defining the metric
In comparing a “fully loaded” cost per order (CPO) with other companies, the objective of doing this is understand your cost per order shipped, cost per line, cost per pick and cost unit. By “fully loaded” we mean all expenses making up CPO. The most important first step is to define the data. What are the expenses that make up CPO? What time horizon are you looking at? Is the data to be included accurate? What is excluded from CPO calculation? What is the formulae to calculate CPO?
To calculate a “fully loaded” cost per order in most companies, you have to bring together data from several sources. By “fully loaded” costs we mean the major categories of operational costs discussed above. From a time-horizon perspective, 12 months data will average performance during the peaks and valleys some businesses have.
You can’t look at a single report and get an instant answer. As you look at other companies’ data and surveys, it’s important to “get behind the data” to under the comparability. There is a lot of data digging from a variety of operational and payroll reports to get the basic data together.
2. Order profile lines per order
At the heart of benchmarking processes and costs, like orders shipped or picked, is the order profile. This includes the number of orders shipped, number of lines per order and units per order. Benchmarking two dis-similar businesses has limited value. Just as an example, two businesses can be in the same industry but have widely different order profiles.
A consumer apparel business may average two lines (two SKUs) and two units per order; average order might ship in 1.25 cartons per order. Compared to a different apparel retailer which may have a completely different order profile. To make matters worse, some studies combine both consumer and business to business - you must understand the order profile.
3. Hourly labor cost per hour
Small to moderate sized businesses rely on manual labor for fulfillment. Direct and indirect labor costs typically make up 50% or more of the total cost per order. Hourly wage rates for fulfillment center employees around the USA varies widely. We have fulfillment clients that range from $9.25 per hour to $18.00 per hour depending on the quantity and quality of the market’s workforce. Understanding the labor component in the metrics you are benchmarking is critical to understanding the costs.
4. Automated versus conventional warehouses
In addition to relying on manual labor, conventional warehouses have far less automation. They use lift trucks for pallet movement; floor, rack and shelf storage; manual picking; and minimal automation. Understanding the degree of automation and how it affects cost per order is essential. A fully automated facility for example might have a lower cost per order under $2.50 for a 2 line order as illustrated above (having spent millions to achieve this). A conventional warehouse may have a fully loaded COP of $3.00 to $5.00.
There are other factors that will influence the cost per order. Some of these include:
- Implementing best practices including Lean Six Sigma. Companies committed to continuous process improvement will generally have better performance;
- Information systems such as WMS can allow greater options for efficiency such as labor management, automated picking, inventory management, etc.;
- Management experience and effectiveness.
These are much harder to factor in how they influence efficiency.
In summary, it is important to create internal KPIs, and to benchmark yourself over time. Benchmarking with other companies is important to understand the value of various metrics and to exchange best practices. However, the single most important principle and one every company can implement, is to internally benchmark your operation against yourself - by week, month, season and year.
To make it more meaningful, comparison not just on a calendar day basis but as holidays and peaks move around (CyberMonday, Thanksgiving, Christmas). It is only in this way can you show relative improvement as the business grows and changes.