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Logistics
How to Calculate and Minimise Order Fulfillment Costs
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Cathy Carpetta
May 30, 2025
If you’re looking to improve your profits, you might be looking for areas to cut costs. One area to consider is your order fulfilment costs, which can be one of your largest operational expenses.
In this guide, you'll learn how to break down the components of order fulfilment costs, calculate your current expenses using methods, and identify the metrics that matter most for optimisation.
We'll explore common inefficiencies that drive up costs and provide practical strategies to minimise expenses without compromising service quality.
By the end, you'll have a roadmap for transforming your fulfilment operations from a cost centre to a competitive advantage.
1. Understanding the components of order fulfilment costs
Breaking down your fulfilment costs is the first step toward optimisation.
Think of it as dissecting a complex machine to understand how each part contributes to the whole. Just as modern financial analytics from OneStream helps businesses gain visibility into their financial operations, understanding fulfillment costs shows you exactly where your money is going.
1.1 Inventory holding costs
Inventory holding costs often lurk in the shadows of your balance sheet. These include warehouse costs, insurance, depreciation, and opportunity costs of capital tied up in stock. For some businesses, holding inventory can cost more than the inventory value.
1.2 Picking and packing labour
Picking and packing labour represents the human element of fulfilment. Your team members locate items, prepare orders, and ensure accuracy. These costs fluctuate based on order complexity, training levels, and seasonal demand spikes.
1.3 Packaging materials
Packaging materials might seem minor, but they add up quickly. Boxes, mailers, void fill, tape, labels—each element contributes to your total cost. Smart packaging choices balance protection, presentation, and price.
1.4 Shipping and delivery
Shipping and delivery make up almost 90% of fulfilment expenses. These rates vary dramatically based on your provider of choice, as well weight, dimensions, distance, and service level. Your negotiating power with carriers will directly impact this.
1.5 Returns processing
Returns processing can be quite the logistics challenge. Each return requires inspection, restocking, and often customer service interaction. High return rates can silently drain profits through hidden labour and processing costs.
1.6 Technology and infrastructure
Technology and infrastructure form the backbone of efficient operations. Warehouse management systems, transportation management system, picking tools, and automation equipment require initial investment and ongoing maintenance.
It’s worth noting, however, that they often deliver the highest ROI for cost reduction efforts.
Now that you understand what makes up your fulfilment costs, let's see where all that money goes.
2. 4 Common inefficiencies that drive up fulfilment costs
Even well-run fulfillment operations often harbour hidden inefficiencies that quietly drain profits. Identifying these issues is your first step toward meaningful cost reduction.
2.1 Inventory management problems
Excess inventory ties up valuable capital and warehouse space. Many businesses overstock due to inaccurate demand forecasting or fear of stockouts.
Your safety stock levels might be unnecessarily high, particularly for slow-moving items.
Conversely, frequent stockouts create rush orders and expedited shipping costs. Each emergency restock erodes margins while disappointing customers.
Finding the balance requires regular inventory analysis and dynamic reorder points.
2.2 Labour inefficiencies
Training gaps and unclear procedures can lead to errors and rework. When team members lack standardised processes, fulfilment quality varies widely.
Simple checklists and visual guides can dramatically improve consistency.
Think about staff involved in the fulfilment process elsewhere, too.
Does your customer service team spend a lot of time manually handling returns? You could make this more efficient through the use of AI agents, as well as reduce the likelihood of human error impacting the process.
Another thing to consider is whether your team members are spending too much time searching for products. Walking time often accounts for the majority of picking hours in poorly organised warehouses.
Every unnecessary step adds labour costs to each order, which brings us to our next point.
2.3 Suboptimal warehouse layout
Your best-selling items might be stored in hard-to-reach locations. Efficient warehouses position high-velocity products in prime picking zones to minimise travel time.
They also create a flow between products that are often ordered together - for instance, a beauty brand might ensure all their shampoo and their conditioners are next to each other.
Inadequate space planning can create bottlenecks during busy periods. When packing stations become crowded or picking aisles get congested, productivity suffers and overtime costs climb.
2.4 Manual or outdated processes
Paper-based systems can introduce errors and delays. Handwritten pick lists, manual inventory counts, and physical filing systems all consume time that could be spent processing orders.
Plus, there’s an increased chance of human error when writing down the information.
It’s not enough to replace this with software however - you need to make sure you have a well-integrated tech-stack. Disconnected software leads to information silos and duplicate work.
When your inventory system doesn't talk to your shipping platform, team members waste precious minutes on data re-entry instead of value-adding activities.
Make sure you have a hybrid integration strategy in place, and if you’re using legacy systems with modern applications, keep an eye on any inefficiencies and manual workarounds.
3. How to calculate your current fulfilment costs
Now you know what might be costing you money, it’s time to look at the numbers. Knowing which calculation technique works best for your company will help you make wise choices. Let's explore three proven methods to calculate these costs, each offering different insights.
3.1 Cost per order method
This straightforward approach divides your total fulfilment expenses by the number of orders processed.
Basic formula:
Cost Per Order = Total Fulfillment Costs ÷ Number of Orders
What to include in total fulfilment costs:
- Warehouse rent/mortgage
- Staff wages and benefits
- Packaging materials
- Shipping expenses
- Technology and equipment costs
- Utilities and other overhead
Example calculation: If your monthly fulfilment expenses total £15,000 and you ship 1,000 orders, your cost per order is £15.
One risk of this method is oversimplification. A £15 average might hide that small orders cost £8 while large ones cost £25. Breaking down cost per order by order type or value bracket often reveals surprising insights.
3.2 Percentage of sales method
This method helps you understand fulfilment costs relative to your revenue.
Basic formula:
Fulfillment Cost Percentage = (Total Fulfillment Costs ÷ Total Sales) × 100
When to use this method:
- Comparing performance against industry benchmarks
- Evaluating cost changes as sales volume fluctuates
- Setting fulfilment budgets based on sales forecasts
Example calculation: If your monthly fulfilment costs are £12,000 and monthly sales are £100,000, your fulfilment cost percentage is 12%.
3.3 Activity-based costing approach
This more detailed method assigns costs to specific activities within your fulfilment process, revealing exactly where your money goes. Perhaps picking costs are higher than industry averages, pointing to layout inefficiencies. Or maybe packaging costs exceed norms, suggesting potential material optimisations.
Key steps:
- Identify all fulfilment activities (receiving, storage, picking, packing, shipping)
- Determine the cost drivers for each activity
- Calculate the cost per activity
- Assign costs to individual orders
The main benefits of this approach are that it can reveal hidden cost drivers, as well as identifying which products or customers are most costly to serve.
Example activity cost breakdown:
The extra effort pays off. Armed with activity-based insights, you can target improvements with surgical precision rather than making blind cuts that might affect customer experience.
These deeper insights are similar to what advanced FP&A tools provide finance teams, helping them move beyond basic reporting to actionable intelligence.
Once you calculate your costs, you need to know which metrics to monitor to keep those costs under control.
4. 5 key metrics to track for cost optimisation
You can't improve what you don't measure. These five metrics will give you the visibility needed to drive meaningful fulfilment cost reductions:
- Order accuracy rate. Track your order accuracy by dividing error-free orders by total orders shipped, then multiply by 100 to get a percentage. A rate below 98% signals costly problems in your picking process.
- Average fulfilment cycle time. This metric reveals bottlenecks and capacity issues within your operation. Calculate it by measuring the time between when orders are received and when they ship out.
- Cost per order. This fundamental metric divides total fulfilment expenses by the number of orders shipped. Consider breaking it down by order type or value to gain deeper insights - for instance, you might discover that international orders cost 40% more to process than domestic ones, helping you refine pricing strategies accordingly.
- Inventory turnover ratio. Calculate this ratio by dividing your cost of goods sold by your average inventory value. Higher ratios indicate more efficient inventory management. If your turnover lags industry benchmarks, you're likely carrying too much stock relative to your sales volume.
- Perfect order percentage. Multiply your percentages for on-time delivery, order accuracy, damage-free delivery, and complete order fulfilment. A 98% rating in each category produces a perfect order percentage of just 92.2%—showing how quickly small issues compound into significant performance gaps.
Now that you know what to measure, let's explore concrete ways to improve those numbers.
5. Practical strategies to minimise fulfilment costs
Ready to cut costs? Here are some proven approaches that will transform your fulfilment operations.
5.1 Optimising warehouse layout and workflow
Start by analysing your picking patterns. Place your fastest-moving products in the most accessible locations—ideally at waist height in zones closest to packing stations.
Consider implementing zone picking for larger operations. By assigning staff to specific warehouse sections, you minimise walking time and build product familiarity that speeds up the process.
5.2 Inventory management improvements
Optimise your inventory management with ABC analysis. Identify your "A" items (top 20% of products that generate 80% of sales) and manage them most actively.
Set dynamic reorder points based on lead times and sales velocity rather than fixed quantities. This approach prevents both costly stockouts and excess inventory situations.
5.3 Packaging optimisation
There are two things to think about here: how much packaging you buy at once, and what exactly you buy.
Firstly, consider buying in bulk if you’re sure you’ll get through it all. Some businesses will provide discounts, and you’ll save on interchange plus pricing and delivery costs.
Secondly, audit your packaging materials regularly. Are you using boxes that minimise dimensional weight charges? Are you having to use double the amount of tape you used to because you changed to a cheaper, less-effective option?
Consider protective materials carefully. Air pillows often provide adequate protection at lower weight than paper or foam alternatives (though they may be less eco-friendly).
Test different options to find the sweet spot between product protection, sustainability, and material costs.
5.4 Shipping negotiations and carrier selection
Volume discounts are just the starting point for negotiations with carriers. Request pricing tiers that support your growth and consider working with multiple carriers to leverage competitive pricing.
Look beyond the big names. Regional carriers often offer better rates and service levels for deliveries within their coverage areas. Last-mile shipping can be 53% of total shipping costs, so make sure to find the right provider for you.
Technology implementation and automation
Start small with targeted automation that addresses clear pain points - for instance, barcode scanning during picking can reduce errors with minimal investment.
Consider cloud-based warehouse management systems that scale with your needs. These platforms often eliminate paper processes while providing real-time inventory visibility.
Many fulfilment centers have discovered the benefits of VoIP for their operations. It allows team members to communicate instantly across the warehouse floor without leaving their stations, while also reducing phone system costs.
Just be prepared for an upfront investment here, and evaluate automation tools based on your specific volumes and labour costs. There will be a payback period, but often, the ROI is well worth it.
6. Case studies: Successful cost optimisation examples
Let's look at how different businesses have successfully transformed their fulfilment operations.
6.1 Eric Flag: Sports equipment specialist
Fulfilment experts Bigblue came into the picture when Eric Flag realised that managing logistics in-house would add zero value to its operations. Outsourcing allowed the brand to focus on its main value drivers - community building and product innovation.
The result? Eric Flag served over 100,000 global customers at a delivery satisfaction rate of 92%. Conversion rates also increased by 20% with the introduction of delivery time estimates on product pages.
This highlights the importance of transparency in order fulfilment, especially on purchasing decisions.
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6.2 Detective Box: Managing explosive growth
Demand for this home investigation game surged by a whopping 3,000% shortly after launch. This meant fulfilment needs that far exceeded initial estimates, so Detective Box partnered with Bigblue to manage its logistical challenges.
The result was an agile fulfilment system that streamlined operations regardless of the extreme spikes in demand.
Other notable results include 1,200 orders processed within 24 hours during a TV show appearance and a 92% customer satisfaction rate.
They also enhanced the unboxing experience with personalisation options (over 50% of customers use Bigblue’s gift notes) that drive demand during seasonal holidays.
Ready to achieve similar results for your business?
Calculate your current fulfilment costs using the methods outlined in this guide. Identify your biggest cost drivers and implement one targeted improvement strategy.
Track key metrics before and after each change to your fulfillment process, to measure success. Remember to balance cost reduction with customer experience—your fulfilment operation should build loyalty while driving profitability.
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