# 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.