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Fulfillment Fundamentals: Cost Management

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We recently held a webinar to explore the fundamental elements of order fulfillment. Capacity's co-founder and CSO Thom Campbell identified five key areas to focus on if you truly want to develop a fulfillment process that keeps customers coming back to your business time and time again. Today we look at how you can keep fulfillment costs down, with regular process reviews and by building constructive partnerships in the industry. You can read the rest of the entries in this compelling series under the tag Fulfillment Fundamentals. cost-management-dollar-sign The fulfillment landscape can be complex, even confusing if you have little experience with the industry. That's especially true when it comes to pricing, which makes it all the more important to understand how providers set their prices and how you can use that knowledge to better manage your own shipping costs. Fulfillment providers work from a variety of cost models. Some ship goods based on an agreed percentage of a client's gross revenues, while others set prices based on the cost of transactions. Most service providers who specialize in B2C fulfillment offer transactional pricing, where orders and items shipped have a set fee. Some providers prefer to use cost plus pricing, whereby prices are marked up according to a set percentage. In this scenario, you hope that the company details specific costs, otherwise you have far less visibility of where service expenditure ends and profiteering begins. Percentage-based pricing can be attractive because it clarifies what order fulfillment will cost as a proportion of your gross. Here it's important to focus on a collaborative partnership with your fulfillment provider in order to keep costs down. For a closer look at how to evaluate fulfillment provider pricing, read our full post on the topic. So how do you know when to outsource and when to keep your fulfillment in-house? There's very little research at the low end of the volume spectrum, mostly because there is not very much data. It's fair to say that the early days of a business see smaller volumes that can be managed by a skeleton staff. As volumes grow and a company expands, however, the idea that your time is valuable, and perhaps better used across other functions, should fuel the consideration of outsourcing at an early stage. Even if you find time and again that you do not need to outsource, going through the exercise is a valuable monitor. There are several reasons to keep your fulfillment and customer service functions in-house at the beginning:
  • You gain an understanding of what’s involved and your company's unique fulfillment challenges,
  • You can document the fulfillment process and create standards specific to your business,
  • You get closer to your customers, creating more touch points with them and learning opportunities,
  • You ensure your brand is being represented by its #1 brand ambassador: you.
  Clearly those advantages are attractive, but this isn't a scalable system as you seek to expand your business. The demands on your time grow, distractions increase, and order fulfillment inevitably threatens to fall through the cracks. This is why we find that the point at which your fulfillment drives you crazy on a daily basis, is also the time to look for a partner to take the weight off your shoulders, no matter how broad you assumed they are! At the other end of the spectrum, Forrester did research back in the late 90s which indicated that at about 10,000 orders per day you may be better served by bringing fulfillment back in-house. You can afford a facility, a top shelf manager and the appropriate technology and equipment, if you have the million dollars or so in up-front costs (which you should if your order value is more than $1.) The landscape of third party order fulfillment providers is broad and highly fragmented. It is confusing to attempt to distill these varied offerings and price models. A well-informed, well-prepared consumer of any service is always going to be more successful. For example, consider the parts and packaging suppliers, McMaster Carr and Uline. Both of these organizations have very large operational arms.  They both fulfill as many complex multi-line items and orders as anyone in business. Lines per order are the number of unique items on an order; units are the total quantity. This means they would be very hard pressed to outsource these activities. There is simply too much labor in picking from hundreds of thousands of SKUs and too much real estate to house them. There would not be anything left over for a fulfillment providerto make a profit. Conversely, a single SKU (or small SKU base) is a fairly straightforward fulfillment challenge. Even a modestly competent provider should be able to handle this work, as it involves very little planning and minimal travel time during picking. With pick time a major driver of labor costs, it is therefore considerably easier to manage costs when less complex fulfillment challenges are presented.

The Bottom Line

Make sure you understand your pricing. Lay out anything you currently pay and question potential new providers about their cost structure and any unlikely or unexpected extras you could incur. Although there will always be extraordinary circumstances with some fulfillment challenges, they should be the exception, not the norm, and any reputable provider should be willing to discuss exceptional pricing Model sample orders, including your most regular scenarios and a selection of emergency situations, and ask the provider to confirm them. This way, you can understand excessive costs early on and decide how much weight to allocate them in your decision to go with a certain provider Finally, go to see the warehouse. There is so much you can tell about a provider in a single visit, from their security to cleanliness, organization and morale. All are key to a successful partnership and any questions your visit raises should be answered there on the spot.