Guest Post: How to Combat Rising Fulfillment Costs

Running an e-commerce business is a tough task, and events in the international marketplace have made it even more challenging over the last few years. The global pandemic shifted e-commerce buying behavior, putting an accelerator on the gas pedal of online sales growth. However, that has now led to rising fulfillment costs.

While the boom in online sales growth represented a great opportunity, it also brought with it numerous obstacles including managing disrupted supply chains, maintaining adequate stock to meet consumers’ growing demands, tempering customer expectations with increased delivery time sensitivities, and battling for key competitive resources such as warehouse space and warehouse staff.

As if those hurdles weren’t high enough to jump over, rising inflation has resulted in out-of-control costs that have forced web merchants to no doubt have their eyes fixed on cost management. Attracting and keeping employees from joining in the great resignation is becoming a difficult and expensive task. Furthermore, warehouse space costs and shipping costs are rising at an alarming rate.

How Much Have Warehousing and Fulfillment Costs Risen Over the Past Few Years?

According to WarehousingAndFulfillment.com’s latest warehousing cost and pricing survey, the average cost of warehouse space has risen a whopping 22% over the last 5 years from $6.53 per square foot to $7.96 per square foot, and the average hourly rate of a warehouse employee has risen 31% from $11.44 to $14.97 over the same period.

Even providers of outsourced e-commerce fulfillment services are feeling the pain of inflation – rates they charge customers for fulfilling orders have increased by 19% and pricing for outsourced warehousing has jumped 25% over the last five years.

What can e-merchants do to battle rising warehousing and order fulfillment costs within the confines of this remarkably difficult macroeconomic environment? Fortunately, there are several strategies to employ that can help companies not only weather the storm but also thrive in the e-commerce landscape for years to come.

Focus on the Largest Warehouse Cost Drivers

The best way to make a significant impact on the internal costs of running a warehouse is to focus on improving efficiencies or rate decreases of the highest cost areas. Most notably, the three highest cost areas of running a warehouse are:

• Shipping products (including inbound and outbound freight)
• Warehouse leases and managing inventory
• Labor related to receiving, picking, and packing orders

According to a recent study, warehouse rental and utility costs account for anywhere between 22-26% of overall warehouse costs, labor costs account for a staggering 32-35%, and administrative costs account for 14-15%. Tackling these top three drivers of warehouse-related costs is paramount to surviving in an inflationary period.

How to Lower Shipping Costs

Shipping fees increase each year, with a baseline increase on average of 5.9% for most small parcel carriers. In times of hyperinflation, those rates could increase even more. And outbound parcel and LTL freight costs aren’t the only shipping fees on the rise – inbound container freight rates are set to remain high throughout 2022. In order to contend with rising shipping costs, some of the best strategies include:

•     Piggybacking off freight aggregators to achieve better overall shipping discounts from carriers. With shipping software like Shippo, businesses save on these costs by accessing pre-negotiated discount shipping rates for USPS, UPS, and DHL. This is especially important for smaller and growing companies with lower order volumes.
•     Making it a best practice to negotiate freight rates every year with preferred carriers. If internal shipping rates are used for outbound shipping, instituting an annual shipping bid process will force the carriers to bring forth their best rates.
•     Getting multiple quotes on every inbound freight shipment with multiple carriers. Even if the same freight forwarder is ultimately used each time, letting them know that they need to bring their best offer to earn the business will guarantee the best rate for each shipment.

How to Lower Storage Costs

Warehouse leases and utility costs account for such a high percentage of overall warehouse management expenses – and leases are usually fixed costs over a multiple-year period, leaving merchants with little negotiating leverage. To positively impact overall storage costs, a little creativity is in order. Some commonly used strategies to lower storage costs include:

•     Reducing dead stock by routinely reviewing slow-moving SKUs and implementing strategies to discount and move products.
•     Implementing regular inventory best practices for planning stock levels. Using inventory data to adequately forecast demand not only helps to avoid stock-out scenarios, but it also helps to avoid over-stocks, plan and automate reorder points, and budget for appropriate levels of safety stock.
•     Review your inventory software to make sure it offers all the needed features to manage stock. Choosing the right warehouse management system can make the difference between success and failure.
•     Optimizing your warehouse layout. Even small changes to warehouse layout can decrease processing times for receiving, packing, and shipping significantly over a yearly period. Furthermore, some warehouse layout changes can help minimize errors, which also bring down overall costs.

One other large challenge for e-commerce sellers regarding inventory management has been finding ways to manage shorter-term overflow warehouse space needs. Whether it’s FBA long-term warehouse space fee avoidance, peak season inventory management, or simply managing short timeframes where warehouse space is not available, using outsourced overflow warehousing companies can help bridge the gap.

In some cases, 3PL warehouses offer a viable solution, as they charge by the pallet and can manage pallet in, pallet out scenarios. In other cases, the creative use of a co-warehousing space or short-term subleasing can help.

How to Lower Warehouse Labor Costs

Managing warehouse staff and helping them to become as productive and efficient as possible is a necessity in driving down costs. As the highest percentage driver of overall warehouse costs on average, labor costs management can make or break an organization. Below are a few tips to help manage labor and positively impact the company’s bottom line:

•     Get receiving ‘right’ from the start. The receiving process is one of the most critical parts of logistics warehousing. If counts are wrong, inventory management becomes extremely difficult to manage. Delayed receiving times increase overall costs as well and can result in increased negative reviews from customers. The best ways to improve receiving are to have formal receiving processes, utilize bar codes that can be scanned, avoid mixing multiple products in the same cartons, provide the receiving team with PO’s well in advance of receipt for adequate planning, and ensure proper pallet and carton labeling methodologies are being practiced, and have a very strict process for putting product away and entering it into the warehouse management system.
•     Add automation where possible. While scanning, picking, and software solutions require an upfront investment, they can also significantly reduce costs over the long term by making employees more productive and minimizing errors.
•     Track warehouse KPIs (key performance indicators). Employees not only need motivation and training to maximize output, but they also flourish under environments with clearly articulated goals. KPIs related to receiving timeframe expectations, order picking times, inventory accuracy, and order fulfillment and shipping accuracy rates will help get everyone on the same page for high-level performance. Finally, keeping employees rather than constantly churning through new hires will cut costs as well.

As an alternative to cutting in-house warehousing and fulfillment costs, one other way to reduce costs is to switch to an outsourced fulfillment model. Outsourced 3PL companies manage the entire fulfillment process (receiving, storage, fulfillment, shipping, and returns) and can help in a significant way. Outsourcing fulfillment is a pay-for-use model, meaning that storage and labor costs become variable – fees are paid only for the services that are used. For example, a company will only pay for the space needed and will only pay for the orders processed for each month, thereby lowering storage fees, and eliminating unnecessary employee hours. 

Managing Rising Warehousing and Fulfillment Costs Isn’t an Option – It’s a Necessity

Managing warehouse and fulfillment costs during these challenging times is critical to not only survive as an e-commerce seller but also thrive in the future. By taking a critical look at shipping relationships, warehouse and inventory management options, and labor and management practices, overall operating margins can be improved without negatively impacting customer satisfaction.

Those companies that best position themselves during these challenging times will be poised to maintain market leadership in the distant future.

This is a guest post was written by Will Schneider, co-founder and CEO of WarehousingAndFulfillment.com. The site helps businesses partner with the right warehouses and fulfillment centers based on the business’s unique needs. Prior to this role, Will served in executive management for multiple mid-sized 3PLs which has given him the right experience and understanding to help lead his own company as well as help other businesses make the most of their experience using a warehouse and/or fulfillment center. Interested business owners can visit today to get honest and detailed warehouse recommendations for free!