Optimizing logistics costs stands as a pivotal challenge for businesses striving to remain competitive and profitable. The rise of online shopping has spurred a demand for efficient order fulfillment, timely shipping, and streamlined inventory management.
Amidst this dynamic backdrop, the role of fulfillment providers has come to the forefront as a strategic solution.
Below, we delve into the realm of optimizing logistics costs with fulfillment providers. From cost-effective inventory management to nimble order processing, we unravel the key components that can drive efficiency and financial savings, while enhancing the customer experience.
So without further ado, let’s explore the tangible benefits and strategies that empower e-commerce businesses to thrive in the digital age.
10 Ways to Optimize Logistics Costs
Reducing logistics costs is crucial for improving profitability and maintaining competitiveness in the e-commerce industry.
Here are some effective strategies to optimize logistics cost:
Optimize Inventory Management
- Implement just-in-time (JIT) inventory practices to minimize carrying costs.
- Use demand forecasting and historical sales data to maintain optimal stock levels.
- Adopt inventory management software to track and control stock efficiently.
Efficient Order Fulfillment
- Utilize a network of strategically located fulfillment centers to reduce shipping distances.
- Implement order batching and efficient picking and packing processes.
- Consider third-party logistics (3PL) services to handle fulfillment and reduce labor costs.
- Invest in route planning and optimization software to reduce transportation costs.
- Consider consolidating shipments to reduce the number of deliveries.
- Opt for multi-modal transportation solutions, including rail and sea, for cost-effective long-distance shipping.
Negotiate Favorable Shipping Rates
- Leverage your shipping volume to negotiate better rates with carriers.
- Explore partnerships with multiple carriers to access competitive pricing.
- Consider alternative shipping options, such as regional carriers, to lower costs.
- Use right-sized packaging to minimize dimensional weight charges.
- Invest in packaging materials that are cost-effective and lightweight.
- Implement eco-friendly packaging solutions to reduce waste and lower shipping costs.
- Utilize transportation management systems (TMS) and warehouse management systems (WMS) to streamline operations.
- Implement real-time tracking and visibility tools to reduce shipment errors and delays.
- Embrace automation in warehouses, such as conveyor systems and robotics, to improve efficiency.
Reverse Logistics Optimization
- Develop efficient processes for handling returns and exchanges.
- Consider restocking returned items quickly to minimize losses.
- Implement a well-structured returns policy to reduce return rates.
- Collaborate closely with suppliers to negotiate better terms and pricing.
- Explore opportunities for vendor-managed inventory (VMI) to reduce carrying costs.
- Consider sourcing products locally to reduce transportation expenses.
Data Analysis and Continuous Improvement
- Regularly analyze logistics data to identify cost-saving opportunities.
- Benchmark your logistics performance against industry standards.
- Continuously review and improve processes to enhance efficiency.
- Explore sustainable transportation options, such as electric or hybrid vehicles.
- Implement eco-friendly packaging materials and practices to reduce waste and appeal to environmentally conscious customers.
- Consider carbon offset programs to mitigate the environmental impact of logistics.
Related content: Sustainable Ecommerce
By implementing these strategies and continuously evaluating your logistics operations, you can significantly reduce costs while maintaining a high level of service.
How to Find the Right Fulfillment Partner?
Finding the right fulfillment provider is essential for ensuring smooth operations and customer satisfaction. Here’s a step-by-step guide on how to find a suitable fulfillment partner:
- Assess your needs. Start by understanding your business’s specific requirements. Consider factors like product type, order volume, shipping destinations, and any special handling or packaging needs.
- Budget and cost analysis. Determine your budget for fulfillment services. Calculate your current logistics costs to establish a baseline for comparison.
- Define your criteria. Focus on what’s important to your business. For example: shipping speed, geographical coverage, order accuracy, technology capabilities, and sustainability practices.
- Market research. Investigate different fulfillment providers. You can start with a simple Google search and explore directories of fulfillment companies.
- Seek recommendations. Reach out to other e-commerce sellers in your industry or network for recommendations. Their experiences can provide valuable insights.
- Check reviews and ratings. Look for reviews and ratings of fulfillment providers on websites like Trustpilot, BBB (Better Business Bureau), and industry-specific forums.
- Evaluate experience and reputation. Consider the provider’s experience and reputation in the industry. A well-established company with a proven track record is often a safer choice.
- Website research. Visit the websites of potential fulfillment providers to learn more about their services, locations, and technology offerings.
- Contact providers. Reach out to a shortlist of fulfillment providers to request more information. Be prepared to discuss your specific needs and ask relevant questions.
- Ask questions. During your discussions with potential providers, enquire the following:
- What are your shipping rates and fees?
- Can you handle peak-season order surges?
- What technology and software do you use for order management?
- How do you handle returns and inventory management?
- Do you offer customized packaging options?
- What sustainability practices do you have in place?
- Can you provide references from existing clients?
- Request proposals. Ask the providers to submit proposals that outline their services, pricing, and terms. Then, determine which proposal aligns best with your needs and budget.
- Visit facilities. If feasible, visit the fulfillment provider’s facilities to see their operations firsthand. This can provide a better understanding of their capabilities and quality of service.
- Check references. Contact the references provided by the fulfillment providers to get feedback from their current or former clients.
- Consider scalability. Ensure that the provider can scale their services to accommodate your business’s growth.
- Negotiate terms. Once you’ve selected a preferred provider, negotiate contract terms that align with your business goals. Consider pricing, contract duration, and volume discounts.
- Review the contract. Ensure that the contract terms cover all aspects of your agreement, including service level agreements (SLAs) and termination clauses.
- Start with a trial period. Consider starting with a trial period to evaluate the fulfillment provider’s performance before committing to a long-term contract.
- Continuously monitor and assess. Monitor the fulfillment provider’s performance and assess whether they meet your expectations and cost-saving goals. Be open to making adjustments as needed.
- Find a common ground. Make sure to choose a provider that aligns with your business goals and values and can adapt to your evolving needs.
Related content: How to Manage Your Amazon Inventory
Finding the right fulfillment provider may take some time and effort, but it’s a crucial step in optimizing your logistics and ensuring a positive customer experience.
The Obvious Benefit of Fulfillment Partner
Businesses think in numbers. Therefore let’s consider a specific food supplement product, “SuperBoost Health Capsules,” where will we calculate the difference between using one’s own logistics apparatus, and using a fulfillment partner.
Without a Fulfillment Provider
Cost breakdown (per unit):
$20 (cost to manufacture the health capsules)
Warehouse Rental: $1,000 per month (assuming a small warehouse)
Utilities, Maintenance, and Insurance: $250 per month
1 Warehouse Employee: $3,000 per month (salary and benefits)
- Shipping and handling
Shipping Materials (bottles, labels, etc.): $2 per unit
Shipping Carrier Costs: $8 per unit (shipping fee for standard shipping)
- Inventory carrying
Financing Costs (interest on capital tied up in inventory): $40 per unit annually (estimated)
Storage Costs (per square foot): $0.75 per month
|Total cost (per unit)
|($1,000 + $250) / 30
|Shipping and Handling
|$2 + $8
|$40 / 12
|$0.75 / 30
|$50.42 per unit
Scenario 2: With a Fulfillment Provider
Cost breakdown (per unit):
$20 (cost to manufacture the health capsules).
- Fulfillment provider fees:
Pick and Pack Fee: $1.50 per unit.
Storage Fee: $0.20 per unit per month.
Shipping Fee (fulfillment provider’s negotiated rate): $5 per unit.
- Inventory carrying
Financing Costs (interest on capital tied up in inventory): $40 per unit annually (estimated).
|Total cost (per unit)
|Fulfillment provider fees
|$1.50 + $0.20 + $5
|$40 / 12
|$27.70 per unit
Using a fulfillment provider results in a substantial cost savings of $22.72 per unit.
|Cost Savings (with Fulfillment Provider)
|Cost Without Fulfillment Provider
|Cost with Fulfillment Provider
|$22.72 per unit
Such savings can have a significant impact on profitability, especially when considering larger production volumes for food supplements.
The significant cost difference demonstrates the potential benefits of outsourcing fulfillment for a product with high warehousing, labor, and shipping expenses.
What About Cases of Using Fulfillment Partners?
Medium-sized companies often find themselves seeking innovative ways to enhance efficiency and trim operational costs. Fulfillment providers have emerged as valuable allies in this endeavor, enabling businesses to navigate complex logistics challenges with finesse.
Below, we explore real-world examples of medium-sized companies that have harnessed the capabilities of fulfillment providers. These examples use providers to optimize their supply chain, reduce expenses, and ultimately thrive in competitive markets.
Each case sheds light on the tangible benefits of outsourcing fulfillment in Europe and USA, demonstrating how it can unlock cost-saving opportunities that drive growth and profitability.
- MVMT Watches partnered with a 3PL provider to handle its warehousing and order fulfillment. By outsourcing their logistics operations, MVMT reduced its warehousing costs by approximately 30%. Additionally, they experienced a 15% reduction in shipping costs due to the 3PL’s ability to negotiate better shipping rates.
- Boll & Branch started using a fulfillment provider to handle its order fulfillment. The company reported a 25% reduction in labor costs due to the efficient order processing, and picking and packing capabilities of the fulfillment provider. Their inventory carrying costs decreased by 20% as the provider optimized inventory management.
- UNTUCKit expanded its e-commerce operations and partnered with a fulfillment provider. The company saw a 40% reduction in overall fulfillment costs. This included a 30% decrease in shipping expenses, as the provider helped negotiate better rates and optimize shipping routes. UNTUCKit also reduced its need for additional warehouse space, which translated to significant cost savings.
- Untappd utilized a fulfillment provider for its merchandise sales. By outsourcing fulfillment, the company saved approximately 20% on storage costs, thanks to efficient inventory management and reduced warehousing needs. Untappd also reported a 15% reduction in order processing costs due to streamlined operations.
- The Goulet Pen Company partnered with a 3PL provider to improve its order fulfillment process. They experienced a 25% reduction in order processing times, leading to better customer satisfaction and repeat business.
These cases illustrate the potential benefits of outsourcing fulfillment for medium-sized businesses, including cost reductions in warehousing, shipping, labor, and inventory management.
Note. Specific cost reductions and percentages may vary depending on each company’s unique circumstances, services provided, and the duration of the partnership.
The Most Suitable Products for Fulfillment Services
Fulfillment providers are well-suited for a wide range of product categories, but some product categories tend to benefit more from fulfillment services. This is due to the products’ characteristics and demand patterns.
Here are some of the best product categories that are well-suited for fulfillment providers:
- Consumer Electronics. Smartphones, tablets, headphones, and tech accessories are often small and high in demand. Fulfillment providers can efficiently handle storage, order processing, and shipping for these items.
- Apparel and Fashion. Clothing and footwear are popular e-commerce products. Fulfillment providers can help with inventory management, size and style variations, and shipping for these items.
- Health and Wellness. Dietary supplements, vitamins, fitness equipment, and personal care products often have a broad customer base. Fulfillment providers can manage inventory rotation and shipping efficiently.
- Beauty and Cosmetics. Skincare, makeup, haircare, and cosmetics are frequently sold online. Fulfillment providers can help ensure the safe and timely delivery of these products.
- Books, Media, and Entertainment. Books, DVDs, CDs, and other media products benefit from efficient order processing and shipping services provided by fulfillment centers
- Home and Kitchen. Items such as kitchen appliances, cookware, home decor, and bedding are popular e-commerce products. Fulfillment providers can manage large and bulky items effectively.
- Toys and Games. Board games, puzzles, and hobby-related items often have seasonal demand. Fulfillment providers can help manage inventory and handle order surges during peak seasons.
- Pet Supplies. Pet food, toys, grooming products, and accessories are regularly purchased online. Fulfillment providers can assist with storing and shipping these items to pet owners.
- Sports and Outdoor Equipment. Sporting goods, outdoor gear, and athletic apparel can vary in size and shape. Fulfillment providers can handle the logistics of these products efficiently.
- Electronics Accessories. Products like phone cases, chargers, and screen protectors are small and lightweight, making them ideal for fulfillment services.
- Subscription Boxes. These services rely on fulfillment providers to curate and deliver monthly boxes to subscribers.
- Supplements and Nutraceutical. Dietary supplements, vitamins, and nutraceuticals are often sold online in various forms. Efficient inventory management is crucial in this category.
- Office Supplies. Items like stationery, printer ink, and office equipment can be efficiently managed by fulfillment providers.
- Jewelry. Small, high-value items like jewelry can benefit from secure warehousing and reliable shipping provided by fulfillment centers.
- Home Improvement and DIY. Products related to home improvement, tools, and DIY projects can be effectively stored and shipped by fulfillment providers.
- Baby and Childcare. Diapers, baby food, toys, and other childcare products often have a steady demand and can be efficiently handled by fulfillment centers.
- Art and Craft Supplies. Art materials, craft supplies, and DIY kits are popular online purchases that can benefit from efficient order processing and shipping.
- Gourmet and Specialty Food. Specialty food items, gourmet gifts, and artisanal products often require careful handling and timely final mile delivery, which fulfillment providers can offer.
- Electronic Gadgets. Small electronic gadgets and accessories can be efficiently managed by fulfillment providers.
- Home Appliance. Larger appliances like coffee makers, blenders, and vacuum cleaners can be stored and shipped by fulfillment centers with appropriate storage capabilities.
These product categories benefit most from the streamlined logistics, inventory management, and shipping services provided by fulfillment providers.
However, it’s important to run a thorough analysis of your specific product requirements, sales volume, and business goals to determine if outsourcing fulfillment is the right choice for you, within your chosen product category.
Unsuitable Product Categories
While fulfillment providers can offer numerous advantages, there are specific types of businesses and situations where their services may not be suitable.
Here are some scenarios in which the assistance of a fulfillment provider might not be the best fit:
- Highly customized or perishable items. Customization often requires manual handling, which can be less efficient through a third-party provider. Perishable goods may have strict handling and storage requirements that a fulfillment provider may not accommodate.
- Niche or low-volume products. If your business deals with highly niche or low-volume products, the cost of using a fulfillment provider’s services may outweigh the benefits. Fulfillment providers typically work best for businesses with moderate to high sales volumes.
- Extremely fragile or high-value items. For products that are exceptionally fragile or high in value, businesses may prefer to have more control over their handling and packaging to minimize the risk of damage or theft.
- Complex assembly or kitting. If your products require complex assembly, kitting, or bundling, it may be more efficient to handle these processes in-house to maintain quality control and reduce errors.
- Unique branding or packaging requirements. Some businesses have specific branding or packaging requirements that are integral to their marketing strategy. These merchants may prefer to handle packaging themselves to maintain their brand identity.
- Limited control and visibility. If maintaining control over every aspect of your fulfillment process is crucial for your business, outsourcing to a fulfillment provider may not be the best option. You may prefer to have a dedicated in-house team to oversee these operations.
- Short-term or seasonal businesses. Businesses with fluctuating sales patterns, such as those that operate seasonally, may not benefit from a long-term contract with a fulfillment provider. The fixed costs associated with such a partnership may not align with their sales cycles.
- Highly variable product sizes and shapes. Some businesses deal with products that have highly variable dimensions. Fulfillment providers often require standardized packaging to optimize efficiency, which can be challenging with diverse product offerings.
- Complex returns handling. If your business deals with a high volume of returns and requires complex handling for returned products (e.g., testing, refurbishing), it may be more cost-effective to manage this process in-house.
- Regulatory compliance and quality control. Industries with strict regulatory requirements, such as pharmaceuticals or food products, may face challenges outsourcing fulfillment while maintaining the necessary quality control and compliance.
- Geographical limitations. If your business primarily serves a very specific local or regional market, it might not benefit as much from the geographical distribution advantages offered by fulfillment providers.
- Long lead times or custom manufacturing. If your products have long lead times or require custom manufacturing on demand, a fulfillment provider may not align with your production processes.
In such cases, businesses should carefully evaluate their unique needs and weigh the pros and cons of outsourcing fulfillment.
It’s essential to consider factors such as product characteristics, sales volume, control requirements, and cost-effectiveness when determining whether or not to utilize the services of a fulfillment provider.
The journey towards optimizing logistics costs with fulfillment providers is one that aligns seamlessly with the demands of today’s eCommerce landscape.
Partnering with a reliable fulfillment provider can yield substantial cost reductions, improved operational efficiency, and heightened customer satisfaction.
By entrusting key aspects of order processing, inventory management, and shipping to experts in the field, businesses position themselves for sustainable growth and enhanced competitiveness.
Alexandr Fridman is CEO and co-founder of WAPI, a fulfillment, marketplace and courier aggregator in Europe and the US. WAPI’s primary mission is to help online sellers grow globally, quickly and cost-effectively. As of 2023, WAPI’s helped more than 1000 sellers to expand to European countries.