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Online businesses are seemingly booming. But as an entrepreneur, you must keep up with eCommerce trends and find means to boost your profits. On the other hand, you should also find ways to minimize your expenses. The ultimate goal is to earn more than you spend on your click-and-order store.
So, how do you optimize your eCommerce operations and reduce logistics costs? Read on to earn some viable solutions for the upcoming year.
Understanding Logistics Costs in eCommerce
First things first, what is logistics? It's the efficient and effective management of complex operations in business by overseeing personnel, processes, supplies, as well as products and services.
But what about for online businesses? eCommerce logistics entails managing various processes, from material procurement to inventory and warehouse management to product delivery. It involves all expenses required for running your online store and meeting consumer needs.
Wondering what to expect for eCommerce logistics costs? Below are some types of expenditures:
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Procurement Costs: They entail buying raw materials or products from different suppliers.
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Inventory Costs: They include storage, warehousing, and handling expenses.
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Order Fulfillment Costs: They cover labor expenses for order processing as well as the purchase and maintenance of order management systems.
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Packaging Costs: They include material costs for packaging as well as labor and equipment expenses for packaging and labeling.
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Shipping Costs: They generally cover freight expenses for shipping goods or items, whether via land, air, or sea. You can contract with shipping service providers and pay them regularly.
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Customer Service Costs: As customer service works with consumers, you must pay for the salaries of your employed CSRs. You should also invest in customer relationship management (CRM) systems used for customer service.
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Administrative Costs: You must stay on top of several administrative expenses for your eCommerce operations. These include employee wages, legal compliance expenses, IT support costs, as well as tax and insurance.
How To Cut Expenses for Your eCommerce Logistics
According to McKinsey, businesses should expect a rise in logistics costs from 12%-20% to 15%-25% of e-commerce sales in the near future. This forecasted increase puts much pressure on online stores moving forward. Therefore, staying on top of your logistics expenses is imperative for your e-commerce success
But how do you manage to do that?
Let’s cut to the chase—here’s how to reduce your eCommerce logistics costs:
1. Apply Lean Principles for eCommerce Operations
The lean principle originates from the Japanese automotive industry and applies to the manufacturing industry. It primarily seeks to reduce waste for the producers and create value for the consumers.
You can use the lean principles for your eCommerce operations to optimize your processes, reduce waste, and improve overall efficiency. That can translate to cost-effectiveness and customer satisfaction.
Below are the five principles you can apply in your eCommerce operations to reduce logistics costs:
- Customer Value: This entails defining the eCommerce value you offer to your end consumers. It helps you attract more customers to boost profits and save money at the same time.
- Value Stream Mapping: This helps you align your eCommerce processes with your primary goals. This mapping also aids you in minimizing irrelevant costs in your operations.
- Flow Creation: This guarantees the continuous flow of your eCommerce operations without disruptions and delays. It also assists in reducing your supply chain costs.
- Pull System: This regulates your inventory, often contributing to your biggest waste. By controlling your stock levels, you can save money in the process.
- Perfection Pursuit: This involves aiming for excellence through continuous improvements. Streamlining your eCommerce operations translates to cost reduction and business profitability.
Efficiency is key in today's rapid eCommerce world," states Naman Sarawagi, CEO of Refrens.com. "Many of our clients reduce administrative expenses using technologies like Invoicing APIs. Their seamless integration and automation allow businesses to shift funds from operations to growth, simplifying challenges and ensuring every penny's worth.
2. Provide Excellent Customer Service for Cost Reduction
Excellent customer service ensures a consistent cash flow. For one, it boosts customer satisfaction. On the other hand, it goes as far as reducing expenditures. How? Ensuring good customer service helps you achieve the following objectives.
- To minimize customer complaints. Note that complaint handling can be costly for your eCommerce business. Avoid them as much as possible by providing outstanding services and satisfying customers.
- To reduce handling and restocking costs. Poor customer service can add up to your overall expenditures. Provide customers with quality products on time, and you won’t need to incur more expenses associated with product returns.
- To avoid legal and regulatory issues. Customer complaints can escalate to compliance penalties. You don’t want to receive hefty fines for not satisfying customers, meeting quality standards, and complying with the laws.
3. Diversify Your Supplies and Partner with Local Suppliers
The supply chain contributes much to your logistics costs. Working with various suppliers for raw materials, components, and products is imperative to ensure undisrupted eCommerce operations. But often, partnering with global suppliers can be costly. What better way to proceed than to diversify your partnered vendors?
Gerald Lombardo, Head of Growth at Popl, recommends working with local suppliers for eCommerce businesses. “It’s just a matter of sealing favorable contracts that benefit both parties. Just ensure they offer affordable materials or products without compromising quality. Doing so can help you save money long-term.”
4. Work with Affordable eCommerce Service Providers
As mentioned, logistics costs cover various aspects of your eCommerce operations, from procurement to warehousing to shipping. Unfortunately, you might attempt to handle all these parts of operations by yourself. Doing so can be laborious, time-consuming, and expensive. You must ensure they offer affordable yet quality services. Work with vendors that can help minimize your expenses while maximizing your profits.
In particular:
- Fulfillment Centers: You can reduce logistics costs with next-level fulfillment offered by reliable third-party vendors. For instance, you can outsource your eCommerce order fulfillment to trained business process outsourcing (BPO) teams overseas.
- Warehouse Facilities: Building, maintaining, and operating warehouses can be expensive. It’s better to entrust your eCommerce warehousing to third-party service providers for seamless management and cost reduction.
- Shipping and Trucking Companies: You might have your fleet of vehicles and local drivers to handle your product deliveries. However, work with shipping or trucking providers that can help you save money in the long run. They can consider freight factoring for trucking companies or shipping providers for a consistent cash flow.
- Referral Programs: Additionally, consider implementing referral programs as part of your cost-saving strategy. By encouraging your satisfied customers to refer new clients to your eCommerce business, you can tap into a powerful source of cost-effective customer acquisition, further reducing your logistics expenses.
5. Employ Financial Forecasting for Supply and Demand
Financial management is almost always the key to eCommerce success. The ultimate goal is to earn more than you spend on your online business. The key here is to conduct financial forecasting to predict the flow of supply and demand. That’s when you can set a proper budget!
It’s crucial to balance your product supply and consumer demand. That way, you won’t have excess inventory or fewer stocks to meet customer needs. You can even set contingency plans like getting business insurance for unforeseen expenditures.
Your eCommerce operations must stay on top of the following:
- Supply: When launching your startup, you usually start with fewer supplies before you get your finished products out in the market. You then analyze how many customers will buy products and patronize your business. But later in your eCommerce business, consumer demands will dictate the flow and quantity of your supply.
- Demand: It’s best to have regular tracking and reporting of your eCommerce operations. See how many products are sold and stocks are kept every month. Likewise, identify peak and off seasons to regulate your inventory, thus decreasing expenses and increasing profits.
6. Implement Sustainable Practices for eCommerce Processes
Sustainability has become a buzzword in business, and the eCommerce industry is one of the key players pushing for sustainable practices. Promoting sustainability will push you to sustain your online business long-term without negatively impacting the environment. It will also help you save money in the long run through various approaches.
The following sustainable practices could be suggested:
- Work with local suppliers. They are much more affordable than established ones while offering quality supplies.
- Get reusable, eco-friendly materials. Reusing these materials can help you save money in the long term.
- Utilize energy-efficient equipment. That will help you reduce your energy consumption and lower your utility bill.
- Employ waste management. That way, you won’t be wasting money and resources.
7. Request Upfront Payments from Clients
In addition to implementing sustainable practices and other cost-saving measures, it's prudent to ask your clients for upfront payment. This practice not only helps you manage your cash flow more efficiently but also minimizes the risk of unpaid invoices and late payments, ultimately contributing to the overall financial health of your online business.
Final Words
The eCommerce industry is thriving, so it makes sense to capitalize on its market growth. However, you shouldn’t solely focus on boosting your profits. Likewise, find ways to minimize the expenses of your eCommerce operations.
That said, consider the top solutions recommended above for reducing your eCommerce logistics costs. Apply the Lean principles, partner with affordable service providers, and implement sustainable practices, among others.
By doing so, you can save money in the long run and even make more money for your click-and-order store. Ultimately, that can translate to eCommerce growth and success!