The Common Components of Fulfillment Costs

Order fulfillment is one of the main jobs handled by a warehouse or distribution center. A warehouse handles every stage of the fulfillment process, including receiving products from the manufacturer, storing, picking, packing and finally shipping orders to end customers.

Every stage of this process comes with its own set of expenses, which add up to the total fulfillment cost per order. In this guide, learn about fulfillment costs and how to calculate them to get a better idea of exactly how much it costs your company to store and ship products. The fulfillment cost per order will also help you to determine whether or not outsourcing fulfillment to a third-party logistics (3PL) warehouse will save you money.

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What Are Fulfillment Costs?

In warehousing, fulfillment costs represent the sum of all the expenses involved in the course of handling product from receiving to distribution. These costs can include:

  • Receiving, segregating and storing the product
  • Picking, packing and shipping
  • Reverse logistics (processing returns from customers)

The problem with many warehouses is that some fulfillment managers only look at the labor portion of the costs. But this number provides a limited picture of how much it really costs to handle product.

In fact, by only focusing on labor costs, the total fulfillment cost per order could be wrong by as much as 50 percent. By tallying up all the costs, including facility and occupancy costs, as well as packing material costs, you gain a clearer and more accurate picture of the actual expenses.

What Are the Common Components of Fulfillment Costs?

Look for several common components when calculating total fulfillment costs. These can include both statistical data and actual cost data. Below is a breakdown of what each component entails.

Statistical Data

  • Annual net sales
  • Annual number of marketing orders processed and shipped
  • Total number of lines ordered on the marketing orders
  • Annual number of boxes shipped by the fulfillment center

Cost Data

  • Total cost of direct labor for all functions required to fill orders, including receiving, putting away, picking, packing, shipping and returning items
  • Total cost of indirect labor, which is any labor function not classified as direct labor, such as supervision, maintenance, clerical and inventory
  • Total occupancy costs, including lease amount, utilities, amortization and depreciation for material handling, conveyor and sortation equipment, and the warehouse management system
  • Total cost of packing supplies required to fill orders

Fulfillment Cost Calculator

There are four different ways to calculate fulfillment costs. These fulfillment cost calculator equations provide a picture of how much it costs to fulfill orders:

  • Total warehouse cost (cost data) divided by annual orders shipped (statistical data)
  • Total warehouse cost divided by total order lines
  • Total warehouse cost divided by annual boxes shipped (to determine total cost per box instead of per order)
  • Total warehouse cost divided by annual net sales in dollars multiplied by 100 (to determine cost as a percentage of net sales)

When you handle your own in-house logistics, the total fulfillment cost per order will directly impact the profit ratio. Depending on costs, you may find greater savings by outsourcing the fulfillment processes to a 3PL provider.

With a 3PL provider, you pay an order fulfillment fee for services, such as receiving, storage, order processing and returns processing. These services are all-inclusive and static over the course of the contract.

Depending on your current fulfillment costs, a 3PL provider could save you money. But in order to weigh the savings, you must first know how much it currently costs to handle your own fulfillment process. Start by using the cost calculator above and then compare 3PL providers.

Learn more about distribution and fulfillment centers and how Prologis can help your company’s needs.