How to Reduce Shipping Costs: 20% of Shipping Costs are Soft Costs

20% of Shipping Costs Are Actually "Soft Costs"

Every shipper wants to reduce shipping costs. It’s a no-brainer for improving the bottom line and growing margins. Tariff based shipping charges account for 80% of shipping expenses, but a lot more goes into your shipping rates than the carrier tariff. In fact, 20%, and sometimes more, of true shipping costs actually lie in soft costs.

What are Soft Shipping Costs?

Shipping is the greatest non-COGS expense and it’s growing more than 5% each year. To truly understand everything that contributes to shipping costs, let’s examine the life of an order.

The life of an order

Order fulfillment is a long and expensive process that touches every aspect of your business:

• Customer Service - handles all post-purchase customer inquiries and complaints
• Operations - handles returns, damages, lost shipments, insurance claims
• Finance - is in charge of rebills, accessorial charges, invoice reconciliation, materials charges, labor usage
• eCommerce - depends on shipping to influence initial and repeat purchase rates, conversion rates, buyer delivery experience, and online sales
• Marketing - funds shipping subsidization and order growth driven by similar promotions
• IT - ensures all carrier integrations work and all systems effectively communicate

If an expense is related to shipping but is not a direct shipping cost, it can be considered a "soft cost." Items like labor, refunds, fulfillment, customer service, damages, errors, exceptions, and returns can all fall under this category.

Dissecting the Fulfillment Process

Every company’s internal processes are a little bit unique, but they all have similarities. Let’s look at an average order fulfillment process.

Step One - Order is placed

Accepting the order

The customer order is the most important stage of the sales process and the fulfillment process.

Order fulfillment begins

System connections are vital to successful, low-cost order fulfillment. Standard systems usually include:

• ERP (Enterprise Resource Planning) like NetSuite, SAP, Oracle or Sage
• Ecommerce like Magento, Shopify Plus, Hybris, or Demandware
• WMS - (Warehouse Management System) like 3PL Central or an IMS like Stitch Labs
• TMS (Transportation Management System) like ShipHawk

Automation starts with the flow of the order data from the commerce platform into the other systems.

Order Fulfillment Best Practices (Step One)

• Provide customers will all relevant data up front.
• Ensure policies are clear, easy to find, and acceptable to the target audience.
• Connect all internal systems (ERP, TMS, etc.)
• Maintain accurate inventory data

Step Two - Order contents are identified

Order fulfillment automation

There are 5 levels of order fulfillment automation that shippers can choose from:

1. Manually select and key order
2. Scan box to populate order
3. Scan box to populate order then batch
4. Scan box to print label
5. Don’t scan

Order Fulfillment Best Practices (Step Two)

• Employ level 4 or 5 automation if inventory data is accurate.
• Improve inventory data if it is incomplete.

Step Three - Order is picked

Generating the pick list

Order fulfillment best practices include:

• Auto generate pick lists either on paper or a mobile device

Step Four - Order container is selected

Box selection

Order Fulfillment Best Practices (Step Four)

• Auto determine packing materials and box selection at the time of sale

Step Five - Order is packed.

Packing Materials

Order Fulfillment Best Practices (Step Five)

• Programmatically assign packing materials

Step Six - Shipping carrier and service is selected and label is printed

Order Fulfillment Best Practices (Step Six)

• Pre-configure business rules to account for shipping policies, shipping subsidies, etc.

Step Seven - Carrier dispatch and order staging

Order Fulfillment Best Practices (Step Seven)

• Use third party software to connect to all carriers via a single API.

Step Eight - Carrier pickup

Order Fulfillment Best Practices (Step Eight)

• Notify carriers of all changes in shipment volume

Step Nine - Data returned to ERP and/or customer tracking software

Order Fulfillment Best Practices (Step Nine)

• Keep customers updated via email and text message with tracking information.

Step Ten - Carrier invoice reconciliation

Order Fulfillment Best Practices (Step Ten)

• Use software to manage and automate carrier invoice reconciliation.

How do Soft Shipping Costs Impact Your Bottom Line?

After reviewing the 10 stages of order fulfillment, it is clear how soft costs can impact your true shipping costs.

Defining Soft Shipping Costs

Companies incur fulfillment related costs that often account for an average of 20% of a company’s total true shipping costs. For clarity, here are some examples of soft shipping costs:

1. Fulfillment labor
2. Packing materials
3. Errors
4. Returns processing
5. Finance
6. Customer service
7. Soft cost behaviors

How to Save on Soft Shipping Costs

Two key elements missing from manual order fulfillment:

1. Automation
2. Data

Customer Service

Automation reduces customer service use and costs.

Returns, Damage and Mispicks

• Returns
  Automation and accurate data can reduce costs.

What is the ShipHawk Solution?

ShipHawk is a Smart Transportation Management System™ helping omnichannel retailers, manufacturers, and distributors create data-driven, automated supply chains. ShipHawk's features include:

• RESTful APIs.
• Plugins for easy integration with eCommerce platforms.

Final Thoughts

Around 20% of true shipping expenses are related to the fulfillment process. The answer to saving on soft shipping expenses is automation and data-driven decision-making.