Calculating your true e-commerce fulfillment cost per order
Ecommerce fulfillment cost per order (CPO) is the sum of all the warehousing expenses involved in receiving, put away and storage of product, picking, packing and shipping and reverse logistics or returns processing from customers.
Historically fulfillment managers have looked at the labor portion of the CPO. But because this may only be 50% of the total, a fully loaded CPO should be calculated including facilities and occupancy costs and packing materials.
From CPO component costs, calculate the total fulfillment cost per order, cost per line and cost per box shipped.
Data to Calculate Fully Loaded Ecommerce Fulfillment CPO
The following are the basic statistical and cost data elements you’ll need to calculate cost per order:
Statistical:
Annual net sales: gross sales minus returns and exchanges
Annual orders shipped: the number of marketing orders processed
Total order lines: the total lines ordered on the marketing orders
Annual boxes shipped: the boxes or cartons shipped by the fulfillment center. The number will always be higher than orders because it will take multiple cartons to ship some orders
Expenses:
Total direct labor: functions including receiving, put away, pick, pack, shipping, returns required to fill orders
Total indirect labor: any fulfillment center labor function not classified as direct labor. Usually includes support functions such as supervision, maintenance, clerical, inventory, etc.
Total occupancy (fixed CPO): facility costs for leases, utilities, amortization and depreciation for material handling, conveyors and sortation, WMS, etc.
Total packing supplies: boxes, envelops and dunnage
Total fulfillment center: the sum of all expenses above
Calculating Ecommerce Fulfillment CPO
Here are the four calculations which are helpful to understanding your ecommerce fulfillment CPO:
Total fulfillment center cost/order: Total fulfillment center costs divided by annual orders shipped
Total fulfillment center cost per order line: Total fulfillment center costs divided by total order lines
Total fulfillment center cost/box: Total fulfillment center costs divided by annual boxes shipped
Total fulfillment center cost as a percentage of net sales: Total fulfillment center costs divided by annual net sales, times 100. See the paragraph below which has further details about this measure.
Reduce Labor Costs
More than 50% of your CPO is direct and indirect labor costs. What are you doing to use labor more effectively? Here are six major considerations.
Fixed Cost Per Order
When you review your fulfillment center expenses, the fixed cost per order would in large part be the total occupancy costs as defined above. This is the cost to store product and fulfill orders until the capacity is totally used. In other words, that fixed expense will be allocated over more orders as the business grows until capacity is used up.
There is also a fixed cost of management overhead for the director of fulfillment and the departmental managers. Their salary and benefit costs can be spread over an increasing number of orders too.
Outbound Shipping Costs
You will want to calculate the cost per order and box separately from the fulfillment center costs above. Here is why:
Outbound shipping costs vary widely between companies. For example, in direct-to-customer ecommerce small parcel shipping, the cost of shipping now exceeds all the other expenses shown above. Adding it into the above costs distorts any comparison you may wish to make.
Calculate these two additional fulfillment costs elements which are helpful to understanding your business: outbound shipping cost per order (total outbound shipping costs divided by the total orders) and outbound shipping cost per box (total outbound shipping costs divided by total boxes).
B2B ecommerce companies which have larger orders, distributors and wholesalers may use LTL so the comparison to ecommerce and small parcel shipping is not valid.
Employee Benefits and Payroll Taxes
We also excluded these costs from fulfillment center costs above. These include the employer’s share of payroll taxes and paid benefits. These vary widely and can add 15% to 30% additional cost to those shown above.
Fulfillment Costs as Percentage of Sales
Regarding fulfillment costs to the total business, CFOs want a convenient ratio to compare fulfillment costs between companies. The best way to do this is to calculate the fulfillment costs as a percentage of net sales by taking the total fulfillment center costs and dividing it by annual net sales, then multiplying by 100.
The danger of this method is that the average order value varies widely between businesses. We understand the desire to compare but it may give a result that is misleading.
Can a 3PL Stabilize or Lower CPO?
Third-party logistics is not cost effective for every company, but we have seen companies use a 3PL and achieve quality and competitive costs. Companies pay an order fulfillment fee based on monthly services such as receiving, inventory storage, order processing and returns processing. To get an apples-to-apples comparison between internal fulfillment and outsourcing, consider all of the CPO elements.
The Most Important Measurement
In the end the most important objective is to create a historical comparison for your business that isn’t on a calendar basis, as major events like Black Friday and Cyber Monday fall on different dates each year. Then create planning and reporting based on this history. Is your productivity measured in dollars and units of work improving seasonally and annually? Many businesses are not. Low unemployment and increasing labor costs as well as outbound shipping costs are eroding profits.
Conclusion
Calculating your total CPO gives you a much broader understanding of the major fulfillment costs. Because a major portion of CPO is fixed costs, it challenges us to maximize the productivity of labor, which is something every fulfillment manager can do something about.
Brian Barry is President of F. Curtis Barry & Company
