How to make eCommerce logistics profitable: strategies for success

As eCommerce continues to grow globally, the complexity and costs associated with logistics have increased, posing challenges to profitability. However, with the right strategies and innovations, eCommerce businesses can turn logistics from a cost center into a competitive advantage and profit driver. Here’s how.

1. Optimize inventory management

Inventory management involves supervising and controlling a company’s stock to ensure the right amount is available at the right time, helping to minimize costs and boost efficiency. This process includes tracking inventory levels, forecasting demand, placing orders, replenishing stock, and overseeing storage and distribution.

Effective inventory management strikes a balance between meeting customer demand promptly and avoiding overstocking, which can tie up capital and increase storage expenses, or understocking, which may result in lost sales and customer dissatisfaction. Optimizing stock levels helps businesses lower costs, improve cash flow, and increase profitability.

Overstocking locks up capital and raises storage expenses, while understocking leads to missed sales and unhappy customers. Using a strong inventory management system (IMS) enables businesses to accurately forecast demand, dynamically manage stock levels, and cut costs related to excess inventory.

• Just-in-Time Inventory: By adopting a just-in-time (JIT) approach, businesses can minimize the costs of holding inventory by aligning stock levels more closely with demand. This approach requires precise demand forecasting and strong supplier relationships.
• Data-Driven Forecasting: Leveraging data analytics to predict trends and demand fluctuations helps in making informed purchasing and stocking decisions. Real-time data can prevent both overstock and stockouts, enhancing profitability.

2. Streamline warehouse operations

Warehouse efficiency plays a crucial role in determining the profitability of logistics operations. Streamlining processes from receiving goods to picking, packing, and shipping can result in significant cost savings and faster delivery times.

• Warehouse automation: Implementing automation technologies such as conveyor systems, automated storage and retrieval systems (AS/RS), and robotics can significantly enhance warehouse efficiency. Automation reduces labor costs, minimizes errors, and accelerates the fulfillment process.
• Efficient layout design: An optimized warehouse layout shortens the distance workers or automated systems must travel to pick items. By placing high-demand products closer to packing stations, businesses can reduce fulfillment times and lower labor costs.

3. Negotiate favorable shipping rates

Shipping costs are a major expense in eCommerce logistics. To remain profitable, businesses must find ways to reduce these costs without sacrificing delivery speed or reliability.

4. Enhance last-mile delivery efficiency

Final mile delivery is often the most challenging and expensive part of the logistics chain, accounting for a significant portion of total delivery costs. Improving efficiency in this area is crucial for maintaining profitability.

• Local Fulfillment Centers: By establishing smaller, strategically located fulfillment centers closer to key markets, businesses can reduce delivery times and costs. This approach also allows for quicker and more flexible responses to local demand.
• Delivery Route Optimization: Using advanced route optimization software, companies can plan the most efficient delivery routes, reducing fuel costs, labor hours, and overall delivery times. This is particularly important for same-day or next-day delivery services.
• Crowdsourced Delivery Solutions: Partnering with crowdsourced delivery platforms or using gig economy workers for last-mile delivery can offer flexibility and cost savings, particularly during peak demand periods.

5. Leverage technology for end-to-end visibility

Visibility throughout the entire logistics chain is critical for controlling costs, ensuring timely deliveries, and maintaining customer satisfaction. By integrating technology at every stage of the logistics process, businesses can gain real-time insights and make better decisions.

• Integrated Logistics Management Systems: Deploying end-to-end logistics or fulfillment software allows for real-time tracking, automates workflows, and provides data-driven insights into all supply chain operations. This enhanced visibility helps identify inefficiencies and lowers operational costs.
• IoT and Sensor Technology: Internet of Things (IoT) devices and sensors can track the condition and location of goods in transit, delivering valuable data to optimize routes, predict delays, and minimize losses from damage or theft.

6. Embrace sustainable practices

Sustainability is increasingly becoming a key consideration for consumers and a potential differentiator for eCommerce businesses. While sustainable practices may initially seem like an added expense, they can lead to long-term cost savings and increased customer loyalty.

• Eco-Friendly Packaging: Reducing packaging waste not only lowers material costs but also reduces shipping costs by decreasing package weight and volume. Investing in recyclable or reusable packaging can also enhance brand image and appeal to eco-conscious consumers.
• Green Shipping Initiatives: Partnering with carriers that offer carbon-neutral or reduced-emission shipping options can help reduce the environmental impact of deliveries. Additionally, optimizing delivery routes and consolidating shipments can decrease fuel consumption and emissions.

7. Focus on customer experience and satisfaction

While logistics is often seen as a back-end function, its impact on customer experience is profound. A positive delivery experience can drive repeat business, reduce return rates, and enhance profitability.

• Transparent Communication: Keeping customers informed about their order status through proactive communication and real-time tracking reduces anxiety and improves satisfaction. Satisfied customers are more likely to become repeat buyers, which increases lifetime value.
• Flexible Delivery Options: Offering flexible delivery options, such as scheduled delivery times, pick-up points, or lockers, can cater to customer preferences and reduce the likelihood of failed delivery attempts, which can be costly.

8. Monitor and improve performance continuously

The eCommerce environment is constantly changing, and strategies that work today may not be effective tomorrow. Continuously monitoring, analyzing, and refining logistics operations is crucial for remaining competitive and profitable.

• Key Performance Indicators (KPIs): Regularly tracking KPIs like order accuracy, on-time delivery rates, cost per order, and customer satisfaction helps pinpoint areas that need improvement. Making data-driven decisions enables businesses to quickly adapt to shifts in the market.
• Continuous Improvement Programs: Fostering a culture of continuous improvement, by implementing methodologies like Lean or Six Sigma, helps businesses identify inefficiencies, reduce waste, and enhance processes over time.

Fulfillment Service and Logistics Profitability

A fulfillment service can greatly boost logistics profitability by streamlining operations, lowering overhead, and increasing delivery efficiency. When a company manages its own logistics, it faces high fixed costs for warehousing, staffing, and equipment, which can be particularly burdensome for small to mid-sized businesses as they grow. Outsourcing logistics to a fulfillment service allows businesses to turn these fixed costs into variable expenses, paying only for the services they use, thereby improving cash flow and overall profitability.

Profit in numbers

Let’s consider a supplement company that sells a variety of health products online. This company handles 15,000 orders per month, and initially manages its own fulfillment. The company incurs costs of $4 per order for warehousing and inventory management, $3 per order for picking and packing, and $6 per order for shipping, bringing the total logistics cost to $13 per order. This results in monthly logistics expenses of $195,000.

The company decides to outsource to a supplement fulfillment service that specializes in handling supplements. The fulfillment service charges $8 per order, which covers storage, picking, packing, and shipping. By outsourcing, the company reduces its per-order logistics cost by $5, lowering its monthly expenses to $120,000. This results in a monthly savings of $75,000, or $900,000 annually.

Furthermore, the fulfillment service offers optimized shipping routes and bulk shipping discounts, which save the company an additional $1 per order on average. With these extra savings, the company’s total cost per order drops to $7, further reducing monthly logistics costs to $105,000. This brings the total annual savings to $1,080,000.

By using a fulfillment service, the supplement company not only saves significantly on logistics but also benefits from the fulfillment provider’s expertise in handling sensitive products, ensuring compliance with regulations and maintaining product quality. These savings can then be reinvested into expanding product lines, marketing campaigns, or other growth initiatives, driving long-term profitability and competitive advantage in the market.

The key is to view logistics not just as a cost, but as an opportunity to drive profitability and enhance the overall customer experience.