Sales and Fulfillment
Understanding order fulfilment costs: Key types and cost-reduction strategies
Mastering the order fulfilment process is crucial for exceeding consumer expectations and optimising costs. These expenses are a significant portion of operational budgets, impacting profitability, efficiency, and customer satisfaction. As businesses scale, fulfilment costs become a major area of spending, covering key stages such as receiving, packing, and shipping products. By gaining insights into the primary types of fulfilment costs and applying smart cost-reduction strategies, businesses can streamline operations, boost efficiency, and drive profitability.
Key types of order fulfilment costs
Identifying cost-reduction opportunities requires understanding various order fulfilment costs, including warehousing, order processing, shipping, and returns management.
Order processing costs
Order processing costs refer to the expenses incurred during the picking, packing, and preparation of products for shipment. These processes are labour-intensive, involving the selection of items from warehouse shelves, their secure packaging, and readiness for dispatch. These costs vary depending on the size of the warehouse, layout, and efficiency of the process. As order volumes grow, costs can rise rapidly. Inefficient order interactions can account for 13 to 19 per cent of logistics costs.
Warehousing costs
Warehousing expenses include storage, facility rental, utilities, and employee wages, covering inventory management and organisation. These costs can be fixed or variable, changing with inventory size and handling. For businesses with large inventories or high turnover, warehousing costs can comprise a significant portion of fulfilment expenses, averaging 13% of the total logistics process. Managing them is key to optimising profitability.
Shipping and delivery costs
Shipping costs, a major part of fulfilment expenses, include carrier fees, fuel surcharges, and packaging materials. Influenced by order weight, delivery speed, and distance, these costs are challenging to manage—especially as consumers increasingly expect fast, free shipping. Balancing these demands is crucial for maintaining profitability. Offering free shipping to customers can be a competitive advantage, but it can also significantly impact the profitability of each sale.
Returns processing costs
Returns management, also known as reverse logistics, is a critical yet often underestimated aspect of fulfilment costs, particularly in industries like fashion, consumer electronics, and e-commerce. It encompasses expenses such as return shipping, restocking fees, and labour for inspecting, repairing, repackaging, or disposing of returned items. High return rates, especially during holiday seasons or promotional sales, can significantly inflate these costs. Maintaining profitability and ensuring customer satisfaction can be challenging.
Effective strategies to reduce fulfilment costs
While each component of order fulfilment incurs costs, businesses can implement strategies to streamline processes and reduce overall expenses.
Implement inventory optimisation
Inventory management is crucial for balancing stock levels and reducing unnecessary warehousing costs. Predictive analytics and demand forecasting help businesses maintain optimal inventory levels, reducing the likelihood of overstocking or stockouts. With accurate data, companies can minimise excess inventory and associated carrying costs. Data-driven inventory management can reduce carrying costs by as much as 15%.
Use automation to enhance efficiency
Automation helps cut labour costs in picking, packing, and order tracking by streamlining routine tasks, reducing errors, and minimising costly returns. Technologies like robotics, warehouse management systems (WMS), and automated conveyors boost efficiency and speed in fulfilment, lowering reliance on manual processes and enhancing accuracy across operations.
Partner with a 3PL provider
Outsourcing fulfilment to a third-party logistics (3PL) provider can reduce warehousing, labour, and shipping expenses. 3PL providers often have established infrastructure and relationships with carriers, which can result in lower shipping costs. Additionally, they have optimised systems for picking, packing, and inventory management, allowing businesses to scale without needing to invest in new facilities or additional labour.
Optimise packaging to reduce costs and environmental impact
Packaging optimisation, such as using lightweight materials or right-sizing packages, can reduce both material costs and shipping fees. By decreasing package weight and volume, companies can save on carrier costs, which often depend on dimensional weight. Eco-friendly packaging is another strategy that can reduce material expenses and appeal to environmentally conscious consumers, enhancing brand loyalty.
Negotiate with multiple carriers
Working with multiple carriers allows businesses to compare rates and choose the most cost-effective option for each order. Many carriers offer volume discounts, so larger businesses can negotiate better rates for frequently used routes. Using a multi-carrier strategy also allows flexibility if one carrier faces delays or price changes.
Enhance customer experience to reduce returns
A focus on customer experience can reduce fulfilment costs indirectly by minimising returns. Clear product descriptions, accurate photos, and customer reviews provide buyers with better information, reducing the likelihood of returns. Post-purchase communications, such as order tracking and follow-up emails, can further enhance satisfaction, potentially lowering the overall return rate.
How can Infosys BPM help?
Optimise your sales and fulfilment journey with Infosys BPM. We streamline processes, accelerate order-to-cash cycles, and enhance customer satisfaction. From pre-sales to fulfilment and supply chain optimisation, we control costs and ensure sustainability with carbon footprint analytics. Transform your sales operations and drive better outcomes with expertise you can trust.
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