4 Strategies for Driving Down Fulfillment Center Costs
Whether you are a seasoned ecommerce veteran or new to navigating the complex world of online retail, constant changes in the economy and growing customer demands can make it difficult to sustain an efficient and cost-effective operation. Etailers are constantly competing to attract loyal customers with new ways to accommodate their expensive expectations. As a result, operational costs are rising and chipping away at profit.
One of the biggest culprits behind high operational costs is the hefty price tags associated with shipping. In fact, shipping can account for about 25 percent of the overall businesses costs, and many major shipping carriers, like FedEx and USPS, have announced plans to increase rates this year.
Retail giants like Amazon and Walmart are attempting to drive customer loyalty by offering the most competitive shipping options. After scrapping its ShippingPass subscription program, which offered free shipping for an annual fee of $49, Walmart implemented free two-day shipping for all transactions with a minimum of $35. To compete, Amazon lowered its free shipping minimum to match Walmart’s. However, they only offered the reduced rate for a shipping window between five and eight days. Free two-day shipping is only available for Prime members who pay a $99 annual fee for the service.
By setting such high standards, these companies have conditioned online shoppers to expect speedy delivery at no cost regardless of who they’re purchasing from. A study by Walker Sands Communications revealed that year after year, more customers consider free shipping the top incentive (88 percent) to shop online followed by one-day shipping (69 percent).
Despite customer expectations, competing at this level may not be financially feasible for small to mid-size ecommerce operations. If your business is struggling to remain profitable in response to lowering or eliminating shipping costs, consider these four cost-saving strategies for your fulfillment operation.
1. Reduce Excessive Inventory and Resources
In an effort to expedite the shipping process, it’s tempting to overcompensate for demand uncertainty by keeping excess inventory on hand at your fulfillment center. This mistake can be just as costly as being underprepared for a spike in demand, if not more so. Etailers need to strike a balance between the two approaches. It’s critical that you have a system in place that can track your inventory, tell you how well an item is selling. If product sits idly on a shelf in anticipation of an order that may never come to fruition, it can eat away at your bottom line.
Not only does excess inventory drive up operational costs, excess labor does as well. Volatile operations require agile workforces that can quickly scale to meet demand. However, scaling too large or too fast could result in worker underutilization. Labor costs come at a premium, especially during peak seasons, so it’s critical to only enlist the number of workers required to fulfill orders.
Trying to accommodate fluctuating demand and workforce scalability may seem like shooting at a moving target. Enlisting the help of a vendor who has experience with integrated demand planning is a good option for companies that struggle in this area. Integrated demand planning analyzes historical data and current market and economic trends to forecast future demand. This will help ensure that you have the right amount of product at a given time and the right number of workers on hand to fulfill orders.
2. Optimize Design, Size and Location of Facilities
Just as having the right amount of product is important, having an optimal space for housing that product is important too. Poorly designed facilities can lead to damaged product or packaging and possibly even lost inventory. Facility size is also a factor. A fulfillment center that is too large for your demand will result in product sitting on the shelf too long. A large space also causes unnecessary processing time and requires more movement for your workers, cutting into their picking and packing productivity. All of these things translate to money lost.
Lastly, the location of your facility is crucial. The Wall Street Journal suggests that, as consumers’ shipping expectations continue to grow, etailers are choosing to move their fulfillment centers closer to populated areas to get products to their end users as quickly as possible. However, it can become costly to be this close to large markets, so opting for smaller or even vertical spaces can help alleviate price inflation.
3. Refine Packaging
Another way to control costs is to change your packaging. This can be done in one of two ways: changing the material or changing the size. Many etailers, especially those that sell apparel, are opting for polybags rather than boxes because the size and minimal weight make them cheap. If your company’s branding or product constrains you to using boxes, then opt for corrugated boxes as opposed to inserts, which are more expensive.
When it comes to size, precision is key. Using oversized boxes to avoid carrying multiple size options is an unnecessary expense and also runs the risk of incurring product damage. Having numerous box sizes will ensure your product arrives to the customer undamaged and without additional expense. The caveat here is that, if you carry a wide variety of boxes, make sure not to order in excess or else they’ll go to waste. For etailers whose product dimensions are extremely variable, it’s better to opt for packaging customized to the specific piece. Although it may be more costly up front, it can save you money in the long run by reducing damages.
4. Rethink Returns
It’s not only important to consider how product is going out, but also how it’s coming back. While returns are unavoidable and should be planned for, they can put a dent in your bottom line if your policy or process isn’t optimized. Having a customer-friendly return policy is worth the cost, considering that free shipping for returns, coupled with a hassle-free post-return process, can boost customer spending up to 357 percent. Online shopping lends itself to consumer uncertainty; free returns can encourage customers to purchase something they’re unsure about knowing that they can return it without losing any money. Although you’ll be eating the return shipping cost, it’s possible to lessen the deficit if this offer encourages your customers to add more items to their basket and return for future purchases.
Running an efficient fulfillment center can alleviate the impact that returns have on your operational costs. Make sure the customer receives exactly what they ordered. Organization is key. Everything in your fulfillment center needs to be organized and labeled accurately. Not only will this keep your customer service rating positive, it will also minimize the need for a customer to return an item or for you to spend money sending another package.
Another way to combat return shipping costs is to take a second look at your company’s return policy. Consider reducing the amount of time allowed for returns. Many etailers accept returns more than 90 days after the purchase date which can lead to excess inventory that is out of date and less likely to be sold. Narrowing your window to 30 days or less can help with this issue while still offering customers flexibility.
Cost-Effective Customer Satisfaction
Consumers’ rising shipping and return expectations can make it costly for etailers to stay competitive. The good news is there are many cost-saving strategies you can implement in your fulfillment center. Storing and moving product is expensive, so invest in accurate forecasting and an agile workforce. Slash costs by reducing idle products and labor. Locate your operation in a facility sized and designed to suit your specific demand needs, and optimize packaging to avoid damages. Lastly, reconsider your return policy to reduce excess inventory.