Measuring and Reducing the Cost of Fulfillment Errors
By Paula Heikell
In today’s customer-driven marketplace, every business is acutely aware of the opportunity cost associated with a order fulfillment error. The days of long-term customer loyalty have all but disappeared, thanks to the open marketplace created by the Internet. Make a mistake on a customer’s order and they’re more than happy to take their business elsewhere.
When this happens, not only does a company lose the recurring revenue of that customer, but it probably also loses the chance of doing future business with all the friends and family the customer shares their frustration with. If the customer takes their complaints to Yelp or Facebook, the potential for lost business mushrooms.
Financial Costs: Larger Than You May Think
Beyond opportunity loss, fulfillment errors can also translate into significant financial loss. Consider this example:
ABC Company’s fulfillment accuracy rate is 99%. An error rate of 1% may seem small, but consider the cumulative effect over a year’s time. If ABC Company ships 1,000 orders per day, assuming a five-day work-week, 260 work days per year, the yearly output is 260,000 orders with 2600 defects. If the average cost to correct an order is $70, ABC Company shipping 1,000 orders each day spends $182,000 for the year to correct mistakes. If they ship 5,000 orders per day, mistakes cost $910,000 per year. Shipping 20,000 orders each day cost over $3.6 million.
Understandably, the cost per error will range depending on a company’s product line, process and delivery methods. The numbers in the example above may sound unbelievable, but they’re definitely on the mark for certain companies and industries. I remember working with one industrial product manufacturer that was struggling with six-figure fulfillment error costs related to inventory picking problems and shipping errors. In reality, many seemingly minor errors can add up to a significant loss to the bottom line if left unchecked.
If it has been awhile since your company has benchmarked its fulfillment error rate and costs, it’s wise to crunch the numbers.
Tips to Reduce Fulfillment Errors
Get a Complete Picture
One of the first steps to take in measuring and improving your fulfillment accuracy rate is to identify and quantify the types of errors that occur. At the same time, make sure that your entire team, including customer service, manufacturing, procurement, fulfillment and accounting – are all managing according to the same error metrics. Your customer service team, for example, may have the conception that the majority of errors are a result of shipping, when in reality, errors come about for a variety of reasons, including data entry errors on orders, miss-picks in product types or quantities, defects, damage to the order or shipping errors.
Some companies measure fulfillment accuracy by auditing orders before they are shipped, usually by checking a small sample of the orders. This method, while long accepted, does not truly capture the data on every order. Others base their order error rate on the number of order complaints divided by the total orders shipped. This method provides some insights, but it only captures those customers who actually file a complaint, not those who never make contact to let you know there is a problem and simply go away.
The better way to determine fulfillment accuracy is to measure it using three categories: inventory fulfillment accuracy, physical fulfillment accuracy, and total shipments shipped without error. This approach should capture all of the errors mentioned above and provide tactical insights into how to improve the process.¹
One of the most effective ways to reduce fulfillment errors is to adopt a scan-based order packing software solution that guides workers and prevents packing errors. In this scenario, order details are pulled down from the host order system. The order packer uses the packing software to scan and verify items as they pack. The solution provides audible and visual prompts warn the packer if wrong items or quantities are accidentally packed as well as incomplete or over-shipped orders.
The most effective solutions also offer integrated shipping software that enables packers to pack, verify and process shipments in one continuous motion from a pack/ship workstation. This eliminates the need for warehouse staff to key order details and make shipping decisions, reducing the risk of data entry or shipment routing errors. Combining shipping at the pack station also eliminates the need for dedicated shipping workstations and the staffing to operate them. It reduces the number of touches and the potential for bottlenecks. This is true even if the shipping station has little to no manual entry.
Of course, we’d all love to achieve 100% order accuracy, but it’s probably impossible to eliminate all errors. Companies can make tremendous progress by taking a measured approach to identify where fulfillment problems can occur, working with their team to improve processes, and implementing technology to replace error-prone manual processes.
Logistyx Technologies is a provider of carrier-agnostic e-commerce fulfillment software and shipping software solutions that enable shippers to manage all their small parcel, LTL postal, regional, national and international carriers on one platform. We also help companies automate their reverse logistics process for greater efficiency and lower cost. Contact us today.
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¹ Accuracy: Perception vs. Reality,” Operations and Fulfillment, July/August, 1995.