In the final part of this blog series, we examine a complex but critical metric in warehouse operations—fully loaded fulfillment cost per order. This metric encompasses all expenses related to processing and shipping an order. Understanding fully loaded costs is vital for identifying areas for process improvements and assessing the financial impact of deploying automation in your warehouse.
Below, we show you how to calculate fully loaded fulfillment cost per order before and after automation.
Understanding Fulfillment Cost per Order
Fulfillment cost per order includes all operational expenses involved in processing and shipping orders, including labor costs associated with order fulfillment (i.e., receiving, inspection, put away, picking, packing, shipping, returns, and inventory control), facility costs, packing and shipping supplies, and reverse logistics or returns processing. This comprehensive view helps warehouse operators make informed decisions about process improvements and technology investments. Lower costs per order indicate higher profit margins and revenue.
How To Calculate Fulfillment Cost per Order
1. Data Collection
- Direct Labor Costs: Record wages, benefits, and overtime for employees involved in order fulfillment.
- Indirect Costs: Include utilities, facility costs, equipment depreciation, IT expenses, and labor costs for other warehouse workers.
- Shipping Costs: Document shipping fees, packaging materials, and handling charges.
- Cost of Returned Goods: Identify costs associated with product returns, including labor, transportation, and product depreciation.
- Total Orders Fulfilled: Record the number of orders processed in the same period.
2. Calculate Total Fulfillment Costs
- Formula: Total Fulfillment Cost = Direct Labor Costs + Indirect Costs + Shipping Costs + Cost of Returned Goods
3. Calculate Cost per Order
- Formula: Fulfillment Cost per Order = Total Fulfillment Cost / Annual Orders Fulfilled
- Example: If total fulfillment costs are $2,000,000 for 500,000 orders fulfilled in one year, the calculation would be:
$2,000,000 / 500,000 = $4 per order
4. Benchmarking
- Internal Benchmarks: Use historical data to set a baseline for current fulfillment costs.
- Industry Standards: Comparing fulfillment costs to other warehouse operations is tricky because each business defines and measures cost per order differently. A warehouse’s most useful benchmark is against itself.
Reducing Fulfillment Costs with Automation
Automation helps reduce fulfillment costs by:
- Reducing Labor Costs: Automated systems, such as AMRs, transport goods and perform tasks more efficiently than human workers.
- Enhancing Efficiency: Streamlined processes reduce the time and resources needed to fulfill orders, increasing throughput.
- Minimizing Errors: Automated picking systems pick, pack, and ship orders with greater accuracy, boosting customer satisfaction and lowering costs associated with returns.
Measuring Post-Automation Fulfillment Costs
After successfully integrating automation, repeat the fulfillment cost calculation. Compare the results with your baseline to assess the improvements.
Accurately calculating fulfillment cost per order is crucial for identifying areas for improvement, streamlining operations, and understanding the financial benefits of automation. By reducing these costs, warehouses achieve significant savings and improve overall profitability.
If you haven’t already, check out part one and part two of this blog series to learn how to measure and optimize pick rates and error rates.
Contact us to schedule your workflow assessment and learn how Prime can help you improve key operational metrics to maximize warehouse efficiency.
