November 2017 | Commentary | E_Commerce

5 Ways to Improve Fulfillment Center Efficiency

Tags: Retail, E-commerce, Logistics, Fulfillment, Supply Chain

Nick Jensen is Senior Director of Fulfillment, ShipBob, 844-474-4726

To capitalize on the e-commerce boom, fulfillment centers—which are different from distribution centers in that they do not distribute inventory but fulfill customer demand in either B2B or B2C businesses—need to scale and react nimbly and agily. Fulfillment centers must also be as efficient as possible to maximize customer satisfaction.

Fulfillment centers do not generate profit—they are pure cost centers, where transportation and labor are the two biggest expenses that degrade margins. Thus, the best way to drive down fulfillment costs is to improve the margin.

Here are five considerations for improving fulfillment center efficiency.

  1. Planning is critical, but only works when you have accurate data. It's critical to understand historical performance by line item (pick, pack, support labor spend) and utilize this past data to gauge capacity for the hour/day/week. Without those KPIs, you can't make educated decisions about process path flow and order fulfillment.
  2. What goes in must come out (and vice versa). Pick staffing should be equal to pack (input vs. output). Measure the pack queue's health in minutes of work available, with 30 minutes the lower control limit and 60 minutes the upper control limit. This ensures that unplanned labor moves, which are significant efficiency drains, are minimal, and pick and pack can continue picking and packing. If the process fails and they run out of work, you lose efficiency and must make up that cost somewhere else.
  3. There are only three ways to increase output. When efficiency is lost, production (output) is lost against planned capacity. The only ways to increase output are by adding labor hours (hiring/overtime), increasing working hours per day (overtime/adding or adjusting shift schedules), and processing faster.

    Processing faster is the most appealing solution, but is also the most complex and mismanaged. Before you can innovate, it's key to nail the basics of shift planning and execution. Only then can you find gains by keeping your workers in work and managing down time. Look to your workers for ideas to improve your operation; who knows better about what is broken in your process than the people performing those functions daily?

  4. Forecast accuracy is difficult to achieve. Significant variability in work available can cause inefficiencies and capacity failures. Depending on your operation size and variability level, you need to plan for your forecast's lower and upper limit.

    For example, if your daily/weekly forecast accuracy ranges between +/-10 percent, you should have a plan to solve for 90 percent and 110 percent of your forecast that your operations team can seamlessly execute. Solutions include temporary staffing, variable shift schedules, part-time schedules, voluntary time off, and investment in projects for longer-term strategic operations. Ultimately, you must have a plan for the variance and hold your teams accountable to execute accordingly.

  5. Always optimize for shipments with an understanding of what adds value and what doesn't. Think of every process that does not produce shipment volume as an indirect cost. Report productivity based only on order volume (the true measure of production and cost). And optimize to either produce more or spend less on non-producing process paths that simply support order shipping.

To drive fulfillment center efficiency, you have to master the basics. Spending less to produce more affords you the ability to innovate by freeing up capital that you would otherwise spend on production. Efficiency breeds innovation, which breeds efficiency; this is a cycle that can continue to evolve.

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