How to Calculate Fulfillment Cost Per Order
By Brian Barry | President, F. Curtis Barry & Company
Fulfillment cost per order (CPO) is the sum of all the warehousing expenses involved, including:
- receiving, putting away and storing the product.
- fulfilling orders through picking, packing, shipping.
- reverse logistics or returns processing from customers.
Historically, fulfillment managers only looked at the labor portion of the CPO. But, this may only be 50% of the costs. A fully loaded cost per order is a better metric and includes facilities and occupancy costs and packing material costs.
For omnichannel businesses, the cost and complexity of filling customer orders from DCs and stores is much harder to identify and may be considerably higher. This blog shows you how to calculate the fulfillment cost per order, cost per line, and cost per box shipped from ecommerce DCs.
Calculating Cost Per Order
Comparing the cost per order between fulfillment businesses is difficult because businesses, product, and order profiles vary widely. Varying application automation and technology also makes comparison difficult.
The best way to compare your CPO is to create internal historical comparisons to show the trending.
Data required to calculate fully loaded fulfillment CPO
The following are the basic statistical and cost data elements you’ll need to calculate cost per order:
- Annual net sales $ - the gross sales net of 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.
- Total direct labor $ – the cost to complete functions including receiving, putting away, picking, packing, shipping, and returning items required to fill orders.
- Total indirect labor $ – the cost to complete any warehouse labor function not classified as direct labor. Usually includes support functions, such as supervision, maintenance, clerical, and inventory.
- Total occupancy $ (fixed CPO) – the facility costs for leases, utilities, amortization and depreciation for material handling, conveyor and sortation, WMS.
- Total packing supplies $ – the cost of any boxes, envelops and dunnage required to fill orders.
- Total warehouse $ – the sum of warehouse expenses above.
Calculating Fulfillment Cost Per Order
Here are the four calculations which are helpful in understanding your four walls fulfillment costs:
1. Total warehouse cost per order - total warehouse costs divided by annual orders shipped.
2. Total warehouse cost per order line – total warehouse costs divided by total order lines.
3. Total warehouse cost per box - total warehouse costs divided by annual boxes shipped.
4. Total warehouse cost as a percent of net sales $ - total warehouse costs divided by annual net sales in dollars multiplied by 100. Further details about this measure are below.
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Metrics to Consider
More than 50% of your cost per order is direct and indirect labor costs. What are you doing to use labor more effectively? We recommend implementing these six major strategies that will help you manage your warehouse labor more effectively while also controlling your warehouse expenses.
Fixed cost per order
When you review your warehouse expenses, the fixed cost per order is mostly made up of the total occupancy costs defined above. The total occupancy cost represents the costs 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, or allocated, over an increasing number of orders, too.
Outbound shipping costs
For outbound shipping costs, you will want to calculate the cost per order and box separately from the warehouse costs above.
Outbound shipping costs vary widely between companies. For example, in consumer ecommerce small parcel shipping, the cost of shipping now exceeds all of the other expenses shown above. Adding it into the warehouse expenses distorts any comparison you may wish to make.
Additionally, business to business ecommerce companies, which have larger orders, distributors, and wholesalers, may use LTL. So, a comparison to ecommerce using small parcel shipping is not valid.
Instead, calculate these two additional fulfillment costs:
1. Outbound shipping cost per order: the total outbound shipping costs divided by the total orders.
2. Outbound shipping cost per box: the total outbound shipping costs divided by total boxes.
Employee benefits and payroll taxes
We also exclude these costs from warehousing costs above. These costs include the employer’s share of payroll taxes and paid benefits, such as medical, retirement, and educational assistance. Employee benefits vary widely between companies and can add 15% to 30% additional cost to those costs shown above.
The above calculations of fulfillment cost per order are helpful when understanding your overall business. Now the challenge is to apply this process to the departmental costs and productivity. Departmental functions include any major warehouse functions, such as receiving, putting away, picking, packing, shipping and returning items to fill orders and process returns.
To get a meaningful measurement of these departmental costs and functions, you will need to have data collection at a much lower level and include paid hours for those activities. We recommend using a timekeeping system that allows measurement of the employee in/out for various departments. Without this, any cross training you have adopted will distort how many transactions, such as orders, lines, and boxes, are processed.
You’ll also want to calculate the paid hours worked in the department from the time collected.
As you start the measurement of department functions, different units of work may be applicable between departments. For example, receiving functions may have little performed inspection compared to other businesses. The number of cases or pallets received rather than units received may be a more meaningful metric.
Now That You Know Your CPO
How does my fulfillment cost compare?
What are good fulfillment CPO results? Unfortunately, industry surveys often fail to give accurate and usable results because they average together dissimilar businesses.
If you are going to compare your results to other similar businesses, it will require considerably more data than we illustrated above to ensure you understand participating businesses and are making a valid comparison.
Here are a few things to consider:
- Did you define cost per order the same way, with the same data elements?
- How does the order profile differ between businesses? For example, consumer ecommerce businesses average less than three lines per order. Business to business will often average far higher. What is the number of lines and units per order average? If you are a consumer apparel ecommerce business, your returns may be 20%. A home décor business may be 8%. Those operating costs affect CPO.
- Labor cost per hour will vary by marketplace and company as much as $3 to $4 per labor hour.
- The level of automation between fulfillment businesses varies. Most are conventional, largely manual operations and are not highly automated. CPO will vary widely where automation has been effectively applied.
Chief Financial Officers often want a convenient ratio to compare fulfillment costs between companies. While a true comparison is likely impossible, the best way to do this is to calculate the fulfillment costs as a percent to net sales.
Percent to net sales = total warehouse costs divided by annual net sales in dollars multiplied by 100.
The danger of this method is that the average order value (AOV) can be widely different between businesses. Generally, this discrepancy is caused by wide differences in average retail price points and average order value. We understand the desire to compare, but it may give a result that is misleading.
Most important measurement
In the end, the most important aspect is creating a historical comparison for your business and adding history to management reporting. Is your productivity measured in dollars and units of work produced improving seasonally and annually? Many businesses are not. Low unemployment and increasing labor costs, as well as outbound shipping costs, are eroding profits.
Can third-party logistics (3PL) stabilize or lower CPO?
Third-party logistics may benefit your business by helping you maintain high customer service and cost-effective fulfillment applications. While 3PL isn’t for everyone, we have seen companies use 3PL and achieve quality and competitive costs.
Companies using third-party fulfillment will pay an order fulfillment fee for particular services, such as receiving, inventory storage, order processing (pick/pack), and returns processing.
Before deciding if a 3PL is right for you, it is important to complete a fully loaded cost study. To get an apples to apples comparison between internal fulfillment and third party, consider all of the cost per order elements.
Product net contribution to profit
Another use of fulfillment cost per order is with your company’s merchants. This will be helpful to them to understand the cost of storing product, filling and shipping orders, and processing high return products. We recommend including the cost of fulfillment during their decision making process about your product line and also using it in their postseason merchandise analysis.
Rising labor costs and outbound shipping costs are hurting many companies’ profits. When trying to improve CPO, the best comparison is reviewing your internal operational results historically with your company.
By Brian Barry | President, F. Curtis Barry & Company