Despite the growing popularity of online shopping after the pandemic, these are difficult times for e-commerce. Inflation, international conflict, interrupted supply chains and the global economic crisis have caused an increase in labor costs, prices of raw materials, as well as rent and utilities. Loan installments and tax burdens are also increasing.
All this means that not only are the costs of doing business higher, but that customers are also much less willing to open their wallets. The result is a reduced volume of orders. With high fixed costs, such as logistics costs for companies that use their own warehouse, this causes a decrease in business profitability.
What areas of logistics are worth paying special attention to today and how can you increase the profitability of e-commerce in times of crisis?
Logistics in e-commerce - what generates the greatest costs?
It is estimated that as much as 92% of e-commerce logistics costs in companies that use their own warehouse are fixed costs. This means that such a company, regardless of the number of orders handled, incurs significant monthly expenses. They include, for example, fees for renting warehouse space, utilities, salaries, etc. These costs are inflexible and practically unchangeable in the short term. When a crisis comes and it is necessary to optimize expenses, they become a heavy burden - especially when they grow at a fast and unpredictable pace.
So if you want to increase business profitability in difficult times, logistics is one of the most important areas in which you should strive to reduce expenses. However, before we discuss our 5 ways to reduce them, let's see what are the reasons behind such high costs.
It is estimated that 30-40% of warehouse space is not used to store goods. These include alleys, offices, health and safety zones, packing stations, driveways, ramps, etc. Meanwhile, each square meter not used for storing goods increases the cost of maintaining the warehouse. What's more, the storage space is not flexible and it is impossible to adjust its size to current needs in the short term.
The prices of materials needed to fulfill orders (foils, packaging, boxes) are constantly increasing due to the interruption of supply chains and limited access to raw materials. Another problem is the minimum order quantity (MOQ), i.e. the need to order large volumes to make the order possible or profitable at all. Added to this is inflationary pressure, which causes companies to buy more than they need for fear of further increases. This in turn requires more storage space and increases storage costs.
Rising labor costs are another challenge for e-commerce. This generates higher employment costs for warehouse workers. These costs are also inflexible - it is difficult to fire or hire in the short term due to notice periods and the length and complexity of recruitment, onboarding and training processes. Acquiring candidates is made more difficult by current market conditions which favor employees, which also affects warehouse positions.
Transportation and delivery
Price increases also apply to courier services, mainly due to the increase in fuel prices and wages. In order to be in a position to negotiate with delivery companies, it is necessary to outsource a significant number of orders. In turn, with an increased number of transactions, it may be necessary to hire additional people who will contact couriers, handle complaints and solve problems. What's more, customers expect the availability of various delivery methods, so resignation from some options is not possible.
5 tips for reducing logistics costs and increasing profitability
How can you reduce logistics costs (especially fixed costs) and make your company less affected by the crisis? Read along for 5 tips from Omnipack experts.
1. Understand the cost structure of your e-commerce
To find optimization opportunities, you first need to understand your cost structure. Analyze it in terms of space efficiency, employment, equipment servicing, shipping handling, etc.
Here’s what it might look like in practice:
- Start by determining how much your company's logistics service costs in total. This is primarily about fixed expenses for warehouse space (rental, fees, taxes), courier services, staff, materials, equipment and its servicing, etc. Then compare those costs with all operating costs and determine what part they constitute.
- Divide the resulting total cost into specific logistics departments (warehouse, couriers, HR, equipment servicing, etc.). You will then specify the weight and dimension of each cost item.
2. Calculate the impact of inflation and determine the cost of handling one package
Consider to what extent inflation and price spikes affect your individual lines of business.
After analyzing the costs and business margins broken down by areas, recalculate the logistics cost per package. This way, you will find out how price changes translate into profitability. The cost of logistics per package is a good indicator that will help you control costs and identify optimization opportunities.
3. Eliminate inefficiencies
Warehouse space offers many possibilities for optimization. Just the correct placement of goods in the warehouse can generate significant savings. Analyze the placement of products at the warehouse, the inbound and outbound areas, the handling zones, offices, aisles and high-storage areas, and then organize stations and packaging processes so that they take up as little space as possible and allow comfortable work.
At Omnipack, we take EFFICIENCY very seriously:
📦 at the inbound stage, we use technology that measures the weight, size and volume of products, thanks to which we know exactly how much space we need to store each product and we can choose the best place for it
📦 we can store several SKUs in one place, so there are no empty spaces on the shelves
📦 we use high-storage for slower-rotating products.
The results? Over 50% more efficient use of space… and lower costs for our merchants.
4. Negotiate and cut costs
Another way to reduce logistics costs is to negotiate with suppliers. Look for cuts and optimizations. Even if it is not possible to reduce prices or volumes, you can always try to negotiate other areas. Suggest spreading payments over time. Thanks to this, you will avoid "freezing" large amounts of cash and reduce warehousing costs.
Also, consider subleasing some of your own warehousing space. Although few companies decide to do this, it is an easy step that can bring significant savings in a difficult period.
5. Bet on logistics outsourcing - replace fixed costs with variable costs thanks to fulfillment
One of the most popular and effective ways to optimize logistics costs is its outsourcing, i.e. delegating all logistics processes to an external fulfillment center.
A fulfillment center - such as Omnipack - is fully responsible for the logistics of an online store, including the inbound and storage of goods, picking, packing and shipping orders, as well as handling returns. All operations are integrated - the fulfillment center registers incoming orders on an ongoing basis, packs them and sends them directly to the end customer of the e-shop. Although the owner of the online store is not personally present in the warehouse, all operations are carried out in accordance with predetermined instructions, and the progress of work can be tracked on an ongoing basis via a dedicated application.
This solution has many advantages:
- Cost optimization
When working with a fulfillment center, you only pay for the space you actually use and the packages you send. You do not pay for alleys, driveways, social areas or storage of packaging materials. Fulfillment allows you to change fixed costs into variable costs. Costs then become flexible and can be adjusted to current needs.
- Price guarantee
The fulfillment center also guarantees fixed prices throughout the year. This is possible because the outsourcing partner cooperates with suppliers on preferential terms and has a good negotiating position due to handling a large volume of orders. In times of crisis, this greatly increases your control over spendings.
- Flawless and efficient order handling
The fulfillment center works for many customers (in Omnipack it is 100+ e-commerce brands). Such extensive experience makes all logistics processes well-thought-out, optimized, automated and fully adapted to the needs of e-commerce companies. Such a level of process excellence is impossible to achieve for someone who does not deal with logistics on a daily basis. For example, Omnipack has a 99.95% perfect order ratio i.e. accuracy in order fulfillment. This reduces the costs of handling returns and complaints.
- Fast delivery
The location of the fulfillment center is also an important factor. Warehouses located at major transport hubs are much more likely to be visited by couriers. Large volumes handled at the centers also allow for them to negotiate late courier pick-up, which improves the speed of parcel delivery - the later the courier arrives, the more parcels he will take on a given day, i.e. the more customers will receive the order even the next day. In Omnipack, the courier will pick up your parcels even after 8 pm, thanks to which, for example, we can offer 1-day delivery in Germany and Poland.
- Greater customer satisfaction
Well-planned and implemented operations improve lead time, and constant access to information allows merchants to respond very quickly to customer inquiries. All this increases their level of satisfaction with your services.
- Access to experts
By establishing cooperation with a fulfillment center, you gain access to logistics and e-commerce experts who have completed hundreds of projects in various markets and countries. Thanks to this, they have the know-how that helps them solve problems effectively and optimize your processes. You don't have to hire consultants or organize training - you can ask the supplier about everything. This is a good option for companies that want to grow and stay up to date with trends without maintaining many specialist jobs.
- Growth - flexibility and the ability to scale your business without limits
Cooperation with a fulfillment center is also a way to scale your business. When there is a spike in sales (e.g. during a promotional campaign, Black Week or Christmas), all you have to do is report it to the fulfillment center and you will get access to more warehouse space and more employees who will handle your orders. When business is slow, it is just as easy to limit these resources. Working in your own warehouse, similar changes are not so easy to implement.
- Foreign expansion
An experienced outsourcing partner will also help you in cross-border growth. For example, at Omnipack we handle orders to 40+ countries around the world. We know that entering international markets is a challenge. Its incorrect implementation can generate serious consequences for the business. Therefore, it is definitely worth trusting professionals in this matter.
- Marketplace sales support
Nowadays, a significant part of e-commerce sales takes place through popular sales platforms (so-called marketplaces), which give easy access to customers (including foreign ones) without the need to invest large amounts of money in creating and promoting a new brand. However, meeting the requirements of marketplaces is a real challenge from the perspective of an e-commerce owner. At Omnipack, we help with integration and comply with restrictions regarding the process of handling orders coming from marketplaces, e.g. Allegro, eBay, Zalando, Amazon (also in the AVO and FBA models).
- Opportunity to focus on key business areas
Entrusting specialists with logistics frees up time and resources that you can use to deal with other business areas.
Are you still wondering how to reduce logistics costs in your e-commerce?
If you want to learn more about the possibilities and choose the best solutions for you, reach out to us. Omnipack experts will tell you how to optimize costs to make your business as flexible and resistant to the negative effects of the crisis as possible.