Jump right in: How Order Fulfillment Affects Profit Margins

• Introduction
• What is order fulfillment?
• Why is order fulfillment important for a business?
• Types of order fulfillment costs
• Ways to keep order fulfillment costs down
• Summary & Key Points

Introduction:

A multi-step process called order fulfillment is crucial for all businesses before the delivery of goods to customers. It involves processes that help products get delivered on time and safely, and if not handled properly, it can cause massive lost sales and decreased customer satisfaction. 

The evolving eCommerce space requires a more robust order fulfillment process to meet increasing customer demands. In this article, we will explain order fulfillment, its role in the business cycle, how it impacts profit margins, and what you can do to keep order fulfillment costs down.

What is order fulfillment?

Order fulfillment is the stage between placing an order and safely delivering the product to the customer. It may also include considering a product’s potential returns.

There are seven main stages in order fulfillment, as follows:

1. Storing products in the inventory until they are ready for shipment;
2. Processing received orders;
3. Picking orders in the warehouse;
4. Packing of all orders so they are ready for dispatch;
5. Arranging shipping methods of products to the customers;
6. Delivery of items to the customer;
7. Processing returns (if applicable).

“The scale of an order fulfillment process can also vary depending on business size…” – Julia Doak

Julia Doak, Franchisor at Bedpost, says, “The scale of an order fulfillment process can also vary depending on business size. A large retail business may have a large warehouse with several employees who pick and pack items for deliveries using order fulfillment software. In contrast, small online businesses can opt to arrange their manual order fulfillment process.”

Why is order fulfillment important for a business?

Order fulfillment is one of the longest and most crucial processes in completing a sale. You must complete the order fulfillment process to consider an order a sale because a customer may require refunds for lost, undelivered, or unsatisfactory items.

Operating profit margin

“Order fulfillment plays a massive role in a business’s operating profit margin, or the percentage or margin of a company’s sales that have turned into profit after deducting direct and operational-related costs. This value is one of the most significant markers of how a business makes money,” explains Jeffrey Zhou, CEO and Founder of Fig Loans.

“Order fulfillment plays a massive role in a business’s operating profit margin…” – Jeffrey Zhou

The role of order fulfillment in a good profit margin can be traced to the fact that order fulfillment is one of the key processes in completing a sale—from inventory management, warehousing, labor costs in picking and packing, shipment fees, and lost sales from item returns. All these processes are costly and can significantly increase operational expenses, thereby reducing profit margin. 

Simply put, the higher the order fulfillment cost, the lower the profit margin and vice versa.

Gary Hemming, Owner & Finance Director at ABC Finance, explains, “However, in this scenario, the profit margin should be called the operating profit margin when considering order fulfillment process costs because order fulfillment is an overhead cost rather than a direct cost of manufacturing a product.”

Customer satisfaction

The relationship between order fulfillment and customer satisfaction is simple: the more promptly, accurately, and without issues goods are delivered, the more satisfied a customer is. 

According to Greg Arnold, General Manager at Kitchen Mania, “When customers are happy and satisfied with the product and the manner and speed of delivery, they are more likely to become repeat and loyal customers. At the same time, satisfied customers are highly likely to become your unintended marketers through word-of-mouth referrals—still one of the most effective marketing tactics today.”

Inventory management

Inventory management plays a vital role in order fulfillment. Before an order is made, products are stored in an inventory room or a warehouse. When customers place an order, an efficient inventory system or order fulfillment system ensures enough available stock for a product to reduce errors in accepting orders for items with insufficient stock and delays in processing and delivery.

With an efficient order fulfillment process and effective inventory control, businesses could avoid stockouts and manage inventory levels appropriately, avoiding overstocking that may reduce the value and quality of products or understocking that may cause fulfillment delays.

Types of order fulfillment costs

As a multi-step process, here are some of the significant costs that go with the order fulfillment process:

• Inventory and warehousing costs. These include warehouse rental and leasing fees, utility costs for electricity and water, stock insurance, and warehouse repair costs.
• Picking and packing costs. These include labor costs for pickers and packers of warehouse items, storage costs for pallets, packing materials like boxes and tapes, and forklifts that help transfer packed boxes from one place to another.
• Labor costs. Labor costs include salary, wages, overtime, and other benefits paid to warehouse and packing staff, administrative personnel, and training.
• Software costs. Software costs include necessary technological software investments to maintain an orderly and proper order fulfillment process, including inventory management software or automated machines and robots in the warehouse.
• Returns costs. Returns costs include the possible cost of returning defective or unsatisfactory products, including their disposal value and the shipment fee for the return.
• Logistics costs. Logistics costs include transporting and shipping the products to your customers’ doors, fuel charges, vehicle repair, or shipping charges if shipping is made through a third party.

Ways to keep order fulfillment costs down

A deep dive into the order fulfillment process will show you its cost is not cheap. However, there are ways a business can keep order fulfillment costs down through the following strategies:

Keep a proper inventory management system

Good inventory management ensures that your business has enough product stock to fulfill orders, avoid shipment delays, and avoid lost sales, but not too much stock, which can reduce product quality and cause excessive storage costs. 

While manually managing inventory is manageable for small businesses with only one or two products, it becomes challenging for entities with several product lineups and a large customer base. Without a proper inventory management system, products cannot be properly accounted for, and picking and packing items can take too much time, especially in a large warehouse.

“Businesses with fluctuating inventory needs can opt for shared warehousing, where two or more companies share warehouse space, rent, and utilities, reducing operational costs and optimizing resources.” – Lifei Chen, Founder of buysmart.ai

Keeping a proper inventory management system ensures that:

• Purchasing decisions are made based on actual inventory levels, reducing the cost of holding excess inventory;

• Minimize storage costs like rent, electricity, and maintenance;

• Increased productivity is seen in order fulfillment, especially in automating the picking and packing processes through barcode scanners tied to the system.

Outsource order fulfillment

To help you focus on building your business and products and spend more time on value-adding matters, you can outsource your order fulfillment process by choosing the best 3PL for your needs and reduce costs in the long run.

Outsourcing order fulfillment means using a third-party logistics company, or 3PL, to store, pick, pack, and ship your orders for delivery to your customers. Because 3PLs are high-volume shippers, they usually have preferential and discounted rates from carriers, which can help you reduce the cost of shipping goods. 

Brooke Webber, Head of Marketing at Ninja Patches says, “3PLs also typically have warehouses in several parts of the country, so order fulfillment can start at a 3PL warehouse closest to the customer’s location, reducing shipping costs, ensuring faster delivery, and increasing customer satisfaction.”

Maintain strong relationships with suppliers and logistics companies

Business owners value loyalty and commitment and are more likely to offer discounted rates to partners that help them keep their business running in the long run—including suppliers and carriers.

When you establish a strong relationship with your suppliers and carrier partners, you have a higher chance of negotiating discounted costs for a longer contract period with a partner who already knows your business and processes, making the entire fulfillment method easier.

Toni Farrell, Marketing Manager at Coastal Motorhomes & Caravans, says, “Maintaining strong business partnerships does not mean you must stick with only one carrier or supplier. Finding that cost-service balance is still very important—finding the most optimal rate in the market while not sacrificing product and service quality for your customers.”

Be conscious of your packaging

Your product packaging is just as important as your product itself. It ensures that the items reach your customers safely. 

Sustainability will be a key term in the packaging demands of the business industry in 2024 and beyond, and more and more businesses are switching to sustainable packaging to reduce costs, increase bottom-line profits, increase customer loyalty, and improve business branding.

Switching to eco-friendly packaging means exchanging traditional plastics and bubble wraps for corrugated boards, compostable packaging, kraft papers, recyclable padded mailers, and the like—the list is endless. While eco-friendly options are more costly upfront, they generally save you money in the long run through:

1. Reduced shipping costs by exchanging heavy traditional packaging for lighter, eco-friendly materials;

2. Local governments offer grants and tax credits for businesses that switch to eco-packaging.

About the Author

Jesse Galanis is a professional writer whose aim is to make complex concepts easy to understand. He strives to provide quality content that assists people in everyday life.