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How to Manage Order Fulfillment Costs: A Guide for Business

Are you spending way too much on order fulfillment?

Order fulfillment involves the costs and processes associated with shipping and handling.

To stay competitive, it's vital for businesses to fulfill customer orders in a timely and cost-effective manner. 

However, shipping and handling expenditures are on the rise. In 2017, companies spent a record $1.5 trillion on shipping costs alone!

Managing shipping logistics as a business owner can be incredibly difficult, especially if you are working with some tight budgets.

In this post, we discuss how to manage order fulfillment costs the right way. Read further for more insight!

What is Order Fulfillment?

Order fulfillment refers to the processing, packaging, and delivery of product orders. Any company that sells a tangible product likely deals with order fulfillment of some kind.

There's more to order fulfillment than mere shipping and handling, however. Order fulfillment is also closely tied to inventory management. You have to know what is in your warehouse on a daily basis to properly fulfill orders, after all!

It also likely involves warehousing or storage solutions, depending on the extent of a company's inventory.

Lastly, order fulfillment could also refer to processing of returns and exchanges. Most companies do offer both of these to paying customers, depending on the product.

As you can imagine, order fulfillment takes a lot of time and resources.

This is particularly the case if you handle order fulfillment in-house. Most small business owners or entrepreneurs are forced to fulfill orders themselves at the outset.

If you are the person responsible for order fulfillment at your company, your team puts in the valuable time to process, package, and ship items. You manage the productivity of this team to gain maximum through put.

The costs of order fulfillment are fairly steep. Business owners must pay for packaging materials, postage, employee hours, and any additional delivery fees. 

It is sometimes best to outsource order fulfillment, however. Working with an order fulfillment provider can offload all of your shipping and handling work to one provider that specializes in this work.

We'll talk more about this later. 

How to Manage Order Fulfillment Costs

It's important to offer your customers premium packaging and delivery. 

So how can you stay on top of order fulfillment costs and stay in the black? What's more, how can you manage your order fulfillment without cutting corners?

Here's what you can do to effectively manage order fulfillment costs, regardless of your industry.

1. Understand Current Fulfillment Costs

It can be difficult to manage your order fulfillment costs without having a clear understanding of your expenditures. 

Begin by calculating how much you are currently spending on order fulfillment per month. This can be more complex than most business owners assume! It's important to account for all aspects of order fulfillment.

For this reason, we recommend calculating how much it costs to fulfill a single customer order.

The Cost of a Single Customer Order

First, identify how much it costs to warehouse each individual item per month (if applicable). This is vital if you are already paying for inventory storage!

To calculate this cost, find out how much it is costing your business to store one pallet of products in a warehouse per month. Divide this number by the total products contained in one pallet.

Next, calculate the cost of packaging materials and postage for the one individual item. If you offer different shipping rates to customers, start by calculating the postage for standard and domestic delivery.

Finally, identify handling and receiving fees. These include how much it costs you to pay for the processing of one customer order. This may be a percentage of an hour, billed at an employee's hourly rate.

Add these three numbers together--warehousing, packaging, and handling costs per product--and this is your order fulfillment cost per one single order.

Now, it's also important to account for higher postage or shipping costs for expedited shipping. You may also deliver products to international locations.

Calculate how many international and/or expedited orders you process per month. You can easily do this by inspecting recent order sheets.

Then, perform the same calculations above for orders processed at these different shipping rates.  

Identify a Budget

Now that you have an idea of how much it costs to fulfill one customer order, it's time to establish a budget.

Note what aspects of your order fulfillment are costing you the most. Are you paying more, for example, for customized packaging? How about postage?

Some aspects of order fulfillment are naturally costly (such as postage). But others can easily be modified.

Identify a budget for how much you'd like to spend, on average, per customer order. This will likely involve a few more calculations to see how this number translates to monthly and annual costs.

You will also want to compare order fulfillment costs to other costs of running your business. These include annual revenue, tax obligations, employee salaries, and more.

2. Invest in the Right Packaging

One way that you can manage order fulfillment costs effectively is to assess your packaging strategy.

Packaging plays an essential role in the impression you leave on clients. In many senses, packaging should be part of your overall marketing strategy.

For this reason, it's important to not sacrifice on high-quality packaging when budgeting for order fulfillment. But you can be more strategic in how you package.

For example, you may want to invest more on thicker, higher-quality external packaging. This will ensure that your products arrive secure and intact. 

You can skimp a little bit more on interior packaging. Wrapping items in brown paper or tissue, for example, can save dollars without sacrificing impression.

Consumers are also becoming more mindful about the packaging their products arrive in. They may be looking for companies that use recycled or recyclable material when packaging their products.

Don't be shy about using recycled materials--these can save money but also demonstrate an eye for sustainability.

3. Identify all Shipping Options

Some businesses spend more on shipping because they don't know what options for shipping exist! 

A lot of business owners send their products through the United States Postal System. But other options do exist, including FedEx, UPS, and DHL. 

It's even possible to work with a private carrier to deliver products. Order fulfillment providers also handle the delivery of specific orders as part of their services.

What's more, you may not need to use one specific carrier. It's possible to rely on several at once, depending on destination and shipping speeds.

Inspect shipping pricing from multiple providers.

Make sure you know the average size and weight of one of your packaged products! This is vital, as flat-rate shipping may sometimes prove more cost-effective than cost-per-weight packaging.

If you explore order fulfillment services, there will likely be a different pricing structure involved.

When browsing providers, be sure to compare prices wisely. Keep in mind that fees per order will be more comprehensive, as order fulfillment services also include warehousing and packaging solutions.

4. Boost Employee Productivity

If you handle your order fulfillment in-house, there are other ways to manage costs than inspecting shipping and handling methodology.

Identify ways to boost employee productivity to ensure that handling occurs in the quickest way possible.

For example, consider outsourcing smaller, tech-dependent tasks like label printing. Automate what you can and invest in paperless software to track orders.

Make sure your employees have the tools they need to effectively package products, too!

5. Optimize Inventory Management 

Don't forget that inventory management is a part of order fulfillment. You may be spending valuable resources on an inefficient means of managing your inventory.

We highly recommend investing in inventory management software. If you do end up outsourcing order fulfillment, don't worry--you'll likely be able to easily integrate this software with a provider's!

Learn more about inventory management software here in a future article.

Such software will also be likely to reduce any customer order errors, including processing issues, accidental back-ordering, and overselling a specific product. These errors can be costly, especially when it comes to customer satisfaction!

6. Know What Your Customers Want

Make sure you understand your customers' shipping needs as you manage order fulfillment costs.

Are your customers expecting free shipping on their orders, for example? Do they want two-day shipping as an option? Are most of your customers from international locations?

Whatever you've answered to these questions, make sure your current order fulfillment is meeting these needs. Unhappy customers, after all, can mean decreased sales.

For this reason, it may be more cost-effective to offer free shipping on all orders given the spike it sales this can guarantee!

7. Outsource Order Fulfillment

At the end of the day, it is possible to manage shipping and handling costs by investing in a fulfillment provider.

This may seem counterintuitive. However, fulfillment providers offer comprehensive services, including warehousing and inventory management.

Their pricing structures may even include shipping discounts. For this reason, fulfillment services can actually reduce overall shipping and handling costs--rather than skyrocketing them.

How to Manage Order Fulfillment Costs

If you're keen to manage order fulfillment costs effectively, make sure you have a solid handle on what you are spending per customer order.

Identify cost-effective shipping solutions that suit your customers' needs, and invest in packaging strategically. Optimize the way that you manage your inventory, and consider outsourcing order fulfillment to ultimately save costs!

At Verst Logistics, we are here to help you fulfill customer orders without breaking the bank.

Get Your Free Quote Here!

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