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It’s no secret that inefficient fulfilment operations cost businesses a lot of money.
But it’s not just money. Any eCommerce business owner knows that a poorly run fulfilment centre can result in damage to a brand’s reputation, eroding customer satisfaction, and hamstrings innovation and scalability.
Operational efficiency makes or breaks a business. It’s what makes the difference between a business that’s struggling to grow and a business that’s growing exponentially year on year. It’s the engine that propels a business forward from survival mode to prosperity.
In this article, we’re going to take a look at the true costs of inefficient fulfilment. We’ll explore how suboptimal fulfilment operations result in a business becoming burdened with customer complaints, inventory mismanagement, lost productivity, and more.
But first, an important question: How can you tell if you’re running an inefficient fulfilment operation in the first place?
In this article
How can you tell if you’re running an efficient (or inefficient) operation?
The only sure-fire way to gain a true understanding of operational efficiency is through data. Key KPIs for operational efficiency include pick and pack accuracy, staff efficiency, inventory levels and availability, carrying costs, and more. There are also peripheral costs, such as the cost of labour, warehouse space, and energy.
Having a real-time, visual overview of the day-to-day efficiency of your operation is crucial to understanding where the problems lie. Collecting the right data about your fulfilment operation enables you to pick apart where your inefficiencies are, and formulate a plan for improvement.
Using data to perform regular audits of operational performance drives a mindset of continuous improvement, a key ingredient to the success of every eCommerce giant on the planet. This mindset can result in great things happening in other areas of your business, too.
- “As an operationally focused CEO, I don’t just think about the efficiency of picking and packing (although that’s very important, of course!). I also think about the processes of the entire business, across every department. Within every single one of those processes, we need to fully understand a set of metrics and KPIs to measure success.” – Emma Dempsey, CEO, James and James Fulfilment
This isn’t to say that all eCommerce businesses are inefficient. Failing to collect the right data doesn’t automatically mean you’re running an ineffective operation. For example, smaller businesses – or those businesses that only stock a handful of SKUs – are likely to be efficient as it’s scaling up that often results in problems emerging. While tracking the right data and implementing the right actions might enable you to squeeze the most out of a smaller fulfilment operation, it likely won’t have an enormous impact on your business’ profitability.
However, as businesses grow and scale, they often face increased inefficiencies for a variety of reasons. One key factor is the complexity that comes with expansion. As a company grows, it typically adds new products, enters different markets, and hires more employees. This expansion can lead to more complex organisational structures and operational processes.
With each new layer of complexity, the risk of miscommunication and coordination problems increases. Processes that were once straightforward when the company was smaller can become cumbersome and time-consuming, resulting in delays and errors.
Signs of an inefficient operation
Many signs of operational inefficiencies aren’t particularly subtle. If your customer service team is drowning in enquiries and complaints, chances are you’re experiencing some inefficiencies. Likewise, if you’re struggling to price your product in line with competitors, chances are operational costs have not been optimised.
The telltale signs of an inefficient fulfilment operation include:
- Customer complaints
- Poor pick and pack accuracy
- Long processing times, which are often delayed
- High handling and shipping costs
- Excessive stockouts
- High return and refund requests
- Low productivity
It doesn’t take a rocket scientist to conclude that a poorly performing fulfilment operation is likely the main culprit for the issues outlined above. Without intervention, these issues will get far worse as your business scales… if you’re even able to scale your business in the first place.
That said, there a number of subtler signs that allude to a fulfilment operation with efficiency issues:
- Time mismanagement
- Running over budget
- Low employee morale, high turnover
- Excessive meetings
- Poor resource utilisation; work duplication
- Lack of innovation
- Constantly firefighting
- “As businesses scale, things can become more inefficient. Unless you have the data, knowledge, money, and expertise in-house to know how to scale effectively, inefficiencies can and will happen. And it takes time and resources to learn this expertise and hire the right people.” – Mo Oseni, Fulfilment Expert, James and James
The impact of running an inefficient fulfilment operation
Inventory mismanagement
When talking about inventory mismanagement, the primary area we tend to focus on is inefficient stock holding. This can be summed up into one of two issues: either not holding enough stock to meet demand, or eroding profit margins caused by overstocking. One of these issues has a negative impact on your customer experience, where the other can massively limit your ability to scale.
Overstocking
On one hand, overstocking inhibits a company’s ability to scale because it throttles cash flow. Businesses need cash to invest in themselves, which isn’t possible if an unhealthy amount of capital is tied up in stock. Likewise, if a business is consistently overstocking, they may end up spending too much on storage costs, warehouse space, bills, and labour, when running a leaner operation could have allowed for spending in other areas.
There is also a greater chance of products becoming obsolete if you’re keeping too much stock on-hand. Clothes might go out of trend, or perishables might go out of date. You’ll either need to sell those products at a highly discounted price or waste them. That could be a lot of profit that an ambitious business can’t afford to lose.
Understocking
On the other end of the spectrum, understocking can often result in stunted growth because a consistent understocking situation is incredibly detrimental to your customer experience. Businesses that grow successfully are the ones able to keep momentum. Maintaining momentum is impossible if your customers are met with regular stock outs or waiting lists.
You will also miss out on lots of potential sales opportunities if you can’t meet demand. What’s the point in investing in marketing, lead-generation tools, and other customer acquisition strategies if you’re not in a position to serve them? A missed opportunity isn’t as simple as missing a single transaction. Rather, it’s missing years of potential transactions, and a waste of money you paid to acquire that customer.
Inventory mismanagement can have greater consequences, too…
We see understocking and overstocking quite commonly across many industries. That said, different industries have different issues, too. For example, one sign of inventory mismanagement caused by operational inefficiencies in the beauty, health, and food sectors is poor batch control.
We asked one of our fulfilment experts, Ben Nutley, about the implications of poor batch control in the eCommerce industry:
- “When it comes to industries such as beauty and ambient food, the worst-case scenario is if a faulty or out-of-date product goes out, ruining someone’s skin or making them poorly. This doesn’t just bring reputational problems… a customer service issue could rapidly become a legal issue. Good batch control enables you to recall a particular batch, rather than the whole range, which could potentially save your business.” – Ben Nutley, Fulfilment Expert, James and James
Customer dissatisfaction
If you’re drowning in enquiries and are struggling to keep customers coming back for more, chances are you’ve got some problems with your fulfilment operation.
In terms of fulfilment specifically, there are two primary factors that impact a customer’s satisfaction. The first is the time it takes for their order to arrive. The second is the quality of their order when it does arrive.
Time of the essence
In the age of Amazon Prime, it’s no surprise that consumers have come to expect ultra-fast delivery as the norm. These expectations have had a ripple effect across the industry, where businesses who can provide next-day delivery enjoy a competitive edge.
That’s not to say that you must be in a position to deliver an order the day after it’s made. If the value is good, the service is good, and the quality is good, customers will often be happy to wait a little longer. What it does mean, however, is that consumers are generally less accepting of overly-long shipping times, especially if they can get a similar product on their doorstep far quicker and at a similar price point.
If your business has efficiency problems in the fulfilment department, it’s very unlikely that you’ll be able to offer quick shipping consistently. There’s also a good chance of missing your delivery promise regularly, which can very quickly lead to an array of customer service complaints. The result is a compounding detrimental impact to customer satisfaction over time, and natural gravitation towards competitors.
Every order counts
Let’s say your order arrives the day after a customer makes it. Happy days – you’re well on your way to having a satisfied customer. But if the orders are not right or damaged, it’s on you to offer a refund or a replacement.
Refunds and returns are not the same. Returns are a normal part of running a customer-friendly business. Every business needs a generous returns policy to be competitive in today’s market.
Refunds, on the other hand, should be handed out sparingly. Refunds aren’t given out because a customer has changed their mind, they’re given out – in most cases – because the seller has done something wrong.
It all starts with fulfilment. An excess of refund requests stem from a variety of issues, including inadequate inventory management, errors in picking and packing processes, and insufficient quality checks before an order is labelled for dispatch.
When orders turn up damaged or incorrect, it’s more than just an inconvenience. It’s an unhappy customer, a financial loss, and reputational damage. If it happens often enough, you could see it culminating in a raft of negative attention across review platforms and social media. Too much negativity around your brand can be difficult to recover from, dissuading new customers from buying from you.
- “While rapid and accurate delivery is important, the true measure of success extends beyond these factors to encompass the overall unboxing experience. Each interaction is an opportunity to reinforce your brand’s commitment to excellence, whether that’s through exciting packaging, unique inserts, or surprises inside the box.” – Neil Sant, Chief Operations Officer, James and James
Lost productivity
For businesses with ambitious growth plans, productivity is everything. Efficiency and productivity go hand in hand; higher productivity means a more efficient use of resources, whether they be human, material, or time. In fulfilment operations, higher productivity results in increased throughput, lower processing times, and more cash to spend on scaling up.
Bottlenecks are the enemy of growth
An inefficient fulfilment operation results in bottlenecked productivity across the board, which in turn bottlenecks growth. Inside a poorly run fulfilment centre, many bottlenecks tend to manifest from weak inventory management, usually driven by a lack of visibility and disorganised stock.
This leads to errors in picking and packing, and that’s if the right stock is even there to be picked and packed in the first place. You can already see the impact that this might have on productivity.
Employees spending time looking for an item that may or not be there. Raising an issue with their supervisor who has to spend time looking into it. Escalating further when the business has to refund orders because the product turns out to be out of stock. And so it continues…
Fires! Fires everywhere
Firefighting is an often chaotic and disorganised response to an unexpected problem. They’re commonplace in operations that are rife with systemic flaws, disrupting normal workflows and often accompanied by stress.
For example, imagine a situation where a tonne of orders come in for an item that is out of stock. Resources are pulled for a frantic search for an adequate replacement, while others are directed towards having panicked conversations with suppliers to organise a rapid stock replenishment.
Meanwhile, the customer service team needs to drop everything to manage dissatisfied customers, offering apologies, discounts, or refunds. This reactive approach to problem-solving is stressful, inefficient, and will undoubtedly result in a negative customer experience.
Employee turnover
A happy, reliable, and engaged workforce is the key to any successful fulfilment operation. Nobody likes to work somewhere that’s plagued with a vicious cycle of operational challenges and inefficiencies. An employee’s work environment has an enormous impact on their happiness, productivity, and willingness to remain in the job.
Don’t set your employees up to fail
It’s common for employees of warehouses and fulfilment centres to have efficiency targets. If you’re hoping to run an efficient fulfilment operation, these targets are essential. However, a stressful, disorganised and chaotic environment is not conducive to a workplace where achieving such targets is achievable.
Whether the chaos is caused by unclear processes, out-of-date equipment or untidy storage areas, employees won’t be able to meet targets adequately if the deck is stacked against them. Systemic inefficiencies often lead to excessive overtime requests and, eventually, burnout. This constant struggle can be demoralising and exhausting for employees, who will either look elsewhere or at the very least be unincentivised to give 100%.
Brain drain is a real problem
A continuously revolving door costs eCommerce businesses time and money, and will impact their service levels. Recruiting and training staff isn’t cheap, and it takes time for new employees to become truly autonomous. Furthermore, when experienced employees hand in their notice and move on, they take their knowledge and skills with them.
This brain drain, coupled with a regular in-and-out cycle of new recruits, results in a compounding problem that only leads to further inefficiencies. Solving the problem when it gets to this stage requires an investment in training and retention that might not otherwise have been needed.
- “Engaging and retaining employees requires an active approach. This might involve creating clearer career progression paths, offering competitive compensation packages such as healthcare or discount schemes, fostering a positive work culture, or providing continuous learning and development opportunities.” – Clara Buckingham, Chief People Officer, James and James
Opportunity costs
An opportunity cost can be defined as the cost of what you are giving up to pursue a particular course of action. Every choice or action has an inherent trade-off, and so when a business invests time, money, and resources to a particular activity (or crisis), they inherently forego the potential benefits that could have been gained from using those resources on something else.
The opportunity costs of inefficient fulfilment
When a business uses resources in a non-optimal way, whether that’s to firefight, band-aid fix systemic issues, or solve problems that could have been avoided in the first place, they sacrifice the potential benefits of investing those resources into growth activities.
If you’re spending tons of capital on replacing staff, correcting orders, or paying for storage and labour you don’t need, you trade off investing that cash in marketing, technology, innovation etc.
Unfortunately, this trade-off extends beyond mere financial capital. It encompasses time, workforce productivity, and strategic focus. These resources are equally vital for a business’s success.
The true cost of a missed sale
Another way to think about opportunity costs is the cost associated with missing out on a sale, and hypothetical future sales from the same customer.
Attracting new customers involves a significant investment of both time and financial resources. Whether you’re generating sales through online ads, search marketing, a slick website or expertly crafted email marketing campaign, the tools, technology and people all cost money.
So, when you miss a sale or have to issue a refund, you’re not simply losing out on the profit from that sale. You’ve also wasted the money you paid to acquire that customer. When taking into account the cost of acquisition, the true cost of a refund could be double, triple, or even more than the cost of the original purchase.
And, that’s before you even start to think about the hypothetical sales that you could have won from that customer over their lifetime. That customer who went elsewhere because their order was late might have been somebody willing to spend hundreds or thousands of pounds with you over the next five years.
Closing thoughts
As we hope we’ve illustrated here, getting fulfilment right should be a top priority for any eCommerce brand, especially those who want to grow or who are already growing.
To do that, you need the data. Without the data, you’re stabbing in the dark. With the right metrics and the right people to drive your operation, you can solve inefficiencies before they become a huge, uncontrollable and possibly fatal problem.
The daunting prospect of in-house fulfilment is why many scaling brands choose to outsource. When outsourcing, you don’t need to worry about 95% of the things we’ve talked about today.
That’s what you pay your fulfilment partner for. It’s their job to take care of all the efficiencies for you. Giving you the time, confidence, and resources to work on other business activities that will drive growth.
If you’d like to speak to one of our fulfilment experts about outsourcing fulfilment, don’t hesitate to give us a call on +44 (0)333 200 9953. Alternatively, leave us your details here and we’ll be in touch very soon.
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