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How Operations Should Calculate Fulfillment Cost Per Order
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Fulfillment cost per order is the total cost required to receive, store, pick, pack, ship, and process customer orders. It is one of the most important warehouse performance metrics because it measures the true cost of fulfilling each order shipped. Fulfillment Cost Per Order Formula Fulfillment Cost Per Order = Total Fulfillment Costs ÷ Total Orders Shipped Suppose your warehouse incurs the following monthly fulfillment expenses: Labor: $120,000 Facility and occupancy costs: $35,000 Packing materials: $15,000 Equipment and technology costs: $10,000 Total fulfillment costs = $180,000 If the warehouse ships 18,000 orders during the same month: $180,000 ÷ 18,000 orders = $10 per order In this example, the fulfillment cost per order is $10. What Costs Should Be Included? A complete fulfillment cost per order calculation should include all costs associated with processing and shipping orders, including: Receiving and inventory putaway Storage and occupancy costs Picking and packing labor Shipping preparation activities Packing materials and supplies Equipment and facility expenses Returns processing and reverse logistics Many companies only measure direct labor costs when calculating fulfillment cost per order. However, labor often represents only 50-60% of total fulfillment expenses. To understand true warehouse performance, organizations should use a fully loaded fulfillment cost calculation that includes labor, facilities, equipment, occupancy, and packaging costs. Monitoring fulfillment cost per order helps warehouse operators identify inefficiencies, benchmark performance, evaluate automation opportunities, and uncover cost-reduction opportunities throughout the operation. In this article, we explain how to calculate fulfillment cost per order, cost per line fulfilled, cost per unit fulfilled and cost per shipment - along with practical ways to improve operational efficiency and reduce fulfillment costs. “Total direct labor dollars – the cost to complete functions including receiving, putting away, picking, packing, shipping, and returning items required to fill orders.” Usually includes support functions, such as supervision, maintenance, clerical, and inventory. Total occupancy dollars (fixed CPO) – the facility costs for leases, utilities, amortization and depreciation for material handling, conveyor and sortation, WMS. Total packing supplies dollars – the cost of any boxes, envelops and dunnage required to fill orders. Total warehouse dollars – the sum of warehouse expenses above. Key Fulfillment Cost Metrics to Track Here are four calculations that every fulfillment company should be measuring long term. Total Warehouse Cost per Order Total warehouse costs divided by annual orders shipped. Total Warehouse Cost per Order Line Total warehouse costs divided by total order lines. Total Warehouse Cost per Box/Shipment Total warehouse costs divided by annual boxes/pallets/etc.shipped. 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. What Metrics Affect Fulfillment Cost Per Order? Labor Costs Most likely, more than 50-60% of your cost per order is direct and indirect labor costs. What are you doing to use labor more effectively? We recommend implementing these major strategies that will help you manage warehouse labor effectively while also controlling your warehouse expenses. Fixed Cost Per Order When reviewing your warehouse expenses, the fixed cost per order is mostly made up of the total occupancy and storage space 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.
Usually includes support functions, such as supervision, maintenance, clerical, and inventory. Total occupancy dollars (fixed CPO) – the facility costs for leases, utilities, amortization and depreciation for material handling, conveyor and sortation, WMS. Total packing supplies dollars – the cost of any boxes, envelops and dunnage required to fill orders. Total warehouse dollars – the sum of warehouse expenses above. Key Fulfillment Cost Metrics to Track Here are four calculations that every fulfillment company should be measuring long term. Total Warehouse Cost per Order Total warehouse costs divided by annual orders shipped. Total Warehouse Cost per Order Line Total warehouse costs divided by total order lines. Total Warehouse Cost per Box/Shipment Total warehouse costs divided by annual boxes/pallets/etc.shipped. 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. What Metrics Affect Fulfillment Cost Per Order? Labor Costs Most likely, more than 50-60% of your cost per order is direct and indirect labor costs. What are you doing to use labor more effectively? We recommend implementing these major strategies that will help you manage warehouse labor effectively while also controlling your warehouse expenses. Fixed Cost Per Order When reviewing your warehouse expenses, the fixed cost per order is mostly made up of the total occupancy and storage space 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. “For outbound shipping costs, you will want to calculate the cost per order and box separately from the warehouse costs above.” 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. What is a Good Fulfillment Cost per Order? What are good fulfillment cost per order 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 businesses, it will require considerably more data than we illustrated. 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 fulfillment cost per order. 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.
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. What is a Good Fulfillment Cost per Order? What are good fulfillment cost per order 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 businesses, it will require considerably more data than we illustrated. 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 fulfillment cost per order. 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. “Third-party logistics may benefit your business by helping you maintain high customer service and cost-effective fulfillment applications.”