The online shopping trend has been an experiential revolution. All vendors and retailers have adopted e-commerce technology to reach out to their customers for sales.
The primary area of concern in this industry is the e-commerce fulfillment cost. On the customer's end, there are high expectations regarding delivering an order in minimal time with minimal charges.
A report from Statista suggests that 63% of customers abandoned their cart orders due to high shipping costs. While on the vendor's end, the e-commerce fulfillment costs account for 70% of an average order value.
Consequently, what has provided a convenient shopping experience to customers of buying anything from anywhere, has significantly affected the vendor's business models.
To ensure their sales and revenue generation, the vendors or online retailers elicit a competitive logistics facility to customers. Additionally, to retain competitive advantage and uniqueness, they offer customers options like COD(cash-on-delivery) and return or exchange of orders.
These e-commerce fulfillment costs are likely to be feasting on the profit margins of the vendors or online retailers.
To bridge this gap between customer expectations and vendor surplus charges, we discuss the 6 ways to reduce costs in e-commerce fulfillment logistics. But before that, we discuss the costs involved in the order fulfillment logistics.
Costs involved in E-commerce Fulfillment Logistics
The e-commerce fulfillment logistics consists of all the processes involved from the point a seller gets an order until it is delivered to the customer. Now zoom out on this situation to get a bigger picture.
There are hundreds and thousands of orders that a seller receives from across the state or country and has to deliver to its customer in minimal possible time and shipping charges; this task tops the checklist for critical costing factors involved in each process.
- E-commerce Inventory Costs: These costs consist of stocking a product to meet the unusual user demand based on statistical forecasts. The inventory costs are a calculative summation of ordering, purchase, holding, and shortage costs.
- E-commerce Return Costs: These costs account for the delivery and shipping charges when a customer returns an order after receiving it or cancels the order mid-way.
- Warehouse Outbound Cost: These costs include all warehouse outbound operations like order picking, packaging, sorting, and shipping, followed by delivery at the customer's doorstep.
- Storage Costs - Every e-commerce company must incur storage costs as a part of their e-commerce fulfillment costs to store their inventory within the warehouse. With crunched delivery timelines in the current scenario, retailers need multiple storage spaces, fulfillment centers, and dark stores to fulfill customer orders faster. Operational costs, such as creating innovative storage designs and MHEs for inventory movement, are associated with this.
- Reverse logistics Costs - Most e-commerce companies have to bear reverse logistics costs as a part of their fulfillment costs because of order returns. When a customer opts to return a product to the retailer, the seller must incur the charge of picking up the product from the customer's place. Additionally, the product is sent back to the warehouse for resale.
- Packaging and Handling Charges - Merchants must spend on product packaging and handling as a part of their e-commerce fulfillment costs. For sustainable packaging, businesses must procure eco-friendly materials that incur extra charges. Certain products need specialized packaging solutions for safety. For instance, fragile items need extra care; some temperature-sensitive products require special packaging.
- Labor Costs - In the entire supply chain process, associates are required in every step, such as warehouse packaging, warehousing, picking, sorting, shipping, etc. Retailers must incur these costs if they outsource the fulfillment process.
A Statista report suggests that the inventory distortion (the imbalance between supply and demand registered) resulted in $580 billion in losses in US stores in 2020.
If the above mentioned costs are addressed correctly, they will consume the profit margins or even succumb to unnoticed and unforeseen losses for the sellers.
Factors that Impact e-commerce fulfillment logistics costs
There are a variety of factors that have a direct impact on e-commerce fulfillment costs. Merchants need to understand the influences of those factors on their logistics costs.
1. Consumer expectations
To remain competitive in the marketplace, e-commerce sellers are taking consumer feedback and expectations into account. Consumers expect good quality products and faster delivery.
Merchants addressing this customer demand invest in multiple warehouse setups and create dark stores and fulfillment centers. It increases the logistics cost drastically.
Also, sellers need to match the pricing of their products in the marketplace and keep it lower to attract more customers, which also affects overall fulfillment costs.
2. Technological factors
The use of AI and ML in the supply chain has completely changed how eCommerce warehousing and distribution operations. Special fulfillment software is used by e-commerce businesses to drive the supply chain, which becomes a part of fulfillment costs. A solid tech infrastructure in the backbone enables better warehouse and fulfillment operations management while giving a competitive edge.
3. Delivery Times
E-commerce companies are striving hard to deliver their customer orders faster than ever. Companies must spend on infrastructure and the latest technologies to fulfill orders on time. E-commerce giants like Amazon and Walmart have started same-day deliveries, creating fierce competition among other retailers. They need to invest in hiring renowned shipping carriers as a part of fulfillment costs for faster order delivery.
4. Fuel Prices
Fuel is required for all forms of transportation, and stable fuel prices result in lower transportation expenses. Fuel price fluctuations cause a cascade of logistical expenditures. Even if the eCommerce retailer tries to cut costs in other areas during a surge, it will amount to nothing because increasing fuel prices would eliminate all the extra savings.
5. Economic situation
The E-commerce and supply chain industry depends a lot on the economic situation of a country. The pandemic has impacted a lot on the supply chain and logistics industries. The E-commerce sector was among the worst affected. On the other hand, inflation also increases fulfillment and shipping costs because of the heightened price of shipping carriers and lower consumer spending habits.
9 Ways to reduce E-commerce Fulfillment Costs
The best way to sustain the profit margins for online retailers or vendors is to formulate a plan that reduces costs and enhances efficiency through automated order fulfillment. Let's see the 6 ways to reduce e-commerce fulfillment costs:
#1 Inventory Management
Inventory management is a tree that harbors the essential elements of the supply chain. Managing your stock in real-time with a wide range of SKUs is tedious. The main costing factors include:
- Choice of location (a warehouse or a fulfillment center)
- Smart AI data analytic tools (to forecast sales)
- Smart Inventory Management (inclusive of real-time stock tracking & visibility, low stock/stock-out alerts, item-level RFIDs, and FEFO (First-Expire-First-Out) compliance)
A report by the McKinsey & Company states that reducing stock-outs and overstocks can lower inventory costs by 10%. Similarly, a smart inventory drastically reduces the false data scenario and dead-lock situations with no scope for human errors. In comparison, FEFO compliance reduces costs involved in product wastage and workload associated with order returns due to product expiry.
The US retail businesses show only 63% of inventory accuracy, which owes to many losses in the supply chain. For this reason, it is also estimated that about 72% of businesses plan to adopt a smart inventory management system that enables real-time inventory visibility and revamps their supply chain to reduce costs or overhead losses.
#2 Packaging Tacts
Packaging is a crucial aspect that results in indirect costs if neglected. Improper packaging may lead to product damage, theft returns, or discarding.
It can ruin the customer's shopping experience and brand experience. Therefore, adapting smart packaging techniques or even integrating automation can help reduce costs in order fulfillment logistics.
Packaging contributes to one-third of the 1.6 million tonnes of domestic waste. (For 2018, as stated by Open Government Products).
Plastic packaging waste is a significant chunk that harms the earth's ecosystem. This factor, therefore, gets prior notice to reduce or recycle the materials and reduce the costs involved in the process.
#3 Optimise Shipping Costs
The global giant Amazon also learned to optimize the shipping costs the hard way by clocking a whopping loss of $7.2 billion owing to shipping costs in the year 2016 (Data: amazon.com).
E-commerce shipping costs take many variables into account, like the products' quantity, size, weight, type, and criticality. This significantly affects the logistic fulfillment costs.
The best way is to associate with centers that provide multiple carrier options. In addition, the right balance of delivery time and rates can also help to reduce costs.
#4 Strategise Order Returns
The best strategy for order returns is to avoid them. This begins with providing the correct pictures and detailed product descriptions on online e-commerce platforms.
Curbing the order returns reduces costs or profit depletion in logistic fulfillment processes. In fulfillment centers, it should be achieved by error-free order picking, efficient packaging, timely shipping, and tracking of products. If a product is returned, it should have a well-defined operational channel to receive the order, approve based on quality check and discard or put away in the inventory as per the designated standards of each product.
#5 Smart Automation
A smart warehouse automation integration replaces repetitive and standard tasks vulnerable to product damage, data distortion, human safety, and errors. Each fulfillment center needs automation, depending on the types of products and range of SKUs.
Hardware integrations like robotic arm pickers or order sorting channels ensure safety and reduce human efforts. Software automation solutions provide for consolidated omnichannel order and inventory tracking.
Automation is a worthy investment that accounts for speed and accuracy in the order fulfillment experience. This further saves time, money, and monotonous laborious efforts in the supply chain.
#6 Workforce Count & Training
Workforce training is the most commonly neglected factor and investment in fulfillment centers. A well-trained and well-informed staff can make necessary amendments to their code of conduct to impart product outcomes of their knowledge and skills.
Training expedites workforce adaptability to deliver various tasks more efficiently in less time. Parallel to an updated workforce, tracking the count of workforce required at a particular center also helps combat the logistic costs.
#7 Hire a 3PL
Sometimes retailers must achieve cost-efficiency by taking expert help to manage logistics effectively. Here come the third-party logistics service providers. 3PL companies help retailers provide services like inventory management, warehouse management, shipping, reverse logistics, etc.
Only some businesses can afford to buy or rent a warehouse or storage space or open a dark store to fulfill customer orders. In this case, hiring a 3PL can be proven cost-efficient for reducing logistics costs.
#8 Batching Similar Orders
Batching similar orders is yet another valuable technique for streamlining the warehouse operation. Instead of making many journeys to pick up the same item category for various orders, this can be accomplished by making only one trip to pick up orders with similar products.
Using a Warehouse management system will help in the intelligent batching of similar orders, reducing manual hours in sorting orders.
#9 Improve Slotting Orders
Warehouse associates use the slotting process for organizing the inventory to reduce travel time and minimize space requirements. Pickers may spend as much as 70% of their time in a fulfillment center, moving between the various locations where they perform their work.
Intelligent Slotting includes:
- Placing fast movers in a convenient location.
- Locating commodities that frequently ship together near to one another.
- Modifying preferred sites following popular or marketed seasonal products.
Depending on the product mix, a fulfillment center's labor expenses can be cut by 25% using an intelligent slotting procedure that improves pick efficiency.
Hopstack – One-Stop Solution
The best way to reduce costs in fulfillment logistics is by using end-to-end warehouse automation and optimization software like Hopstack. There are proprietary algorithms that provide an optimal solution for all the processes involved in the logistics cycle.
For example, the picking algorithm is powered by artificial intelligence that sequences the order pick-up and the route and segregates the order batches to contribute to an energy-savvy and time-savvy approach.
The real-time multichannel algorithm replaces the manual spreadsheets for data entries and analysis. Schedule a free demo today to learn more about algorithms like cartonization, order management, etc., in a single product.
High growth and low profit perfectly define the current e-commerce trends and predictions. To succumb to these challenges and sustain profit margins in the supply chain, the best way is to reduce the logistic fulfillment costs by adopting the right combination of technology and workforce that can help track the primary areas of a fulfillment center like inventory management, packaging and shipping, order tracking and returns and other related operations. An even better way is to adopt an omnichannel operating system as provided by Hopstack, which shall take care of the entire center in a single entity.