## Order Fulfillment: ‘Kitting’ Can Dramatically Slash Your Costs

The term “kitting” is order fulfillment jargon for preassembly of individual items into ready-to-ship kits instead of picking and packing those individual items as orders are received. If you ship similar orders in quantity, the savings potential of fulfillment kitting can be huge.

### A Real World Example

Miles operates a web store specializing in nutraceuticals. He ships about 1,000 orders a week and offers a total of 25 different diet and health items. But 80 percent of his orders involve a popular three-for-the-price-of-two offer for his lead product.

Prior to kitting, Miles had his fulfillment house pick and pack all orders as they arrived. The cost was \$1.85 per order plus \$.40 per item and, in the case of his buy-two-get-one-free orders, his fulfillment cost was therefore \$3.05 [\$1.85 + (3 x \$.40)] per order.

### Costs Were Cut Three Ways

At the suggestion of his fulfillment house, Miles switched to preassembly of the buy-two-get-one-free kits and immediately earned three big cost savings.

1. Reduction of fulfillment fee. The fulfillment fee dropped from \$3.05 per order to \$2.25 [\$1.85 + (1 x \$.40)] because all 3-for-2 orders were then processed as prepacked kits thus saving \$.80 per order in picking fees. The cost savings offset was the kit assembly labor of \$.30 per kit, which was based on a \$35 per hour labor fee divided by the 120 kits per hour assembly rate. In spite of the assembly cost, Miles’ net pick-and-pack savings was \$400.00 per week (\$.80 – \$.30 = \$.50 x 800 orders a week) or \$20,800 per year.
2. Postal savings. The ship weight of the 3-for-2 orders was 14 ounces, which resulted in a Priority Mail delivery cost of \$4.95 when shipped in a Priority Mail flat rate box. By kitting the orders using a custom made box, however, the ship weight could be reduced to 13 ounces, which made the entire 800 orders per week eligible for First Class package postage of \$3.26 per package. The resulting \$1.69 per order postage savings worked out to a \$70,306 annual cost reduction.
3. Expedite weighing and labeling. It was further realized that by accumulating the 3-for-2 orders to twice a week shipping, the fulfillment house could pre-print the first class mail ship labels in 400-order batches, thus eliminating the individual weighing and label printing steps. As such, the base fee per order was cut from \$1.85 to \$1.30, saving an additional \$.55 per order or \$22,800 per year.

It is true that not all kitting projects yield savings in all three areas, but in this real life example, the web store merchant was able to use kitting to cut his costs by roughly \$114,000 per year.

### A Handy Spreadsheet Makes Kitting Easy to Calculate

One reason that fulfillment kitting isn’t used more often is the added inventory management problem posed by pulling stock for prepacked kits. Once inventory has been pulled from stock for kitting, it is no longer available to be shipped on its own.

A simple way to manage this is to think of your merchandise or sales literature as “parent” and “child” SKUs (stock keeping units). A child SKU is an individual component and a parent SKU is a collection of child SKU items in a kit ready for sale on its own, as in the above nutraceutical example.

What is needed is a worksheet that lists how many parent and child SKUs are on hand, how many parent SKUs need to be assembled and how many child items will be required. What makes it tricky is one child SKU component may be used for more than one parent SKU kit.

### This Template Will Get You Started

Here is an example kitting worksheet that I use, and you can download a copy by clicking here. This one is designed for 25 child SKUs and 5 parent SKUs, but you can easily modify the template to accommodate your unique situation.

Screen capture of part of kitting worksheet.

In effect, each time you set up a new kitting project you need to enter the parent and child stock-on-hand figures as they are at that time, then enter the estimated number of kits you will need until the next kit assembly session. The spreadsheet reports how many parent kits will need to be assembled and how child items will be left over or need to be ordered for the project. The spreadsheet has redlined reorder points for all child items so that you can control your on-hand stock minimums.

### Summary

Even though fulfillment kitting is simple, the cost savings potential can be huge. Individual pick-and-pack fees can be reduced, and lower UPS, FedEx or postage charges may be possible by fine-tuning packing materials. And preprinting shipping labels and packing lists in batches could speed up order processing drastically. Kitting does require careful inventory planning and control, but a custom spreadsheet can make that task easy. No matter if you outsource order fulfillment or do it yourself, if kitting is right for you, this could be the cost breakthrough you have been looking for.

## John Lindberg

1. Nate Gilmore March 22, 2010 Reply

Great post John! Wanted to just add a few small thoughts for your opinion and to keep this post active and trending as its a great topic for retailers to pay attention to.

If you are looking for low cost kitting, why not look all the way back to the point of manufacture? Especially if you are manufacturing overseas where hourly/piecemeal work can be extremely low cost. US manufacturers will often similarly be able to handle kitting for less than the cost of order fulfillment/warehouse kitting.

If the merchant is dealing with apparel, there is the "kit of kits" type conversation as well that can get pretty interesting. Two examples are the "Pre-packs" (essentially a kit) typically this is one style one color multiple sizes; or one style, one size, multiple colors. The second are "Musicals (kits of kits)": A bunch of pre-packs assembled into a standard retailer resupply box of sizes and styles that match the retailers’ typical apparel buyer patters (Do they sell to large bodies or small?) For musicals you need to understand your end-retailer sales pattern very well and that typically only comes from your retailer telling you what they tend to sell OR working with them for a long time and slowly assembling enough data to understand how to build a musical.

Nate Gilmore
Shipwire [online product fulfillment]

2. Eric Brown July 29, 2011 Reply

John,

This post helps educate people working smart. Another perspective that I have is:

If you sell "kits" but also many of those products are sold individually, pre-kitting may not be for you. Why? This will require you to have more product on hand (not in kits). It really becomes a balance/analysis of your sales and supply chain.

Another perspective to this would be, if you "kit" on demand – meaning you pull multiple products together as a part of a kit or offer as they are requested or sold. This gives you the flexibility to fulfill single units or kits.

Eric Brown, CEO
Fulfilltopia.com
Ecommerce Order Fulfillment for Brands and Manufacturers

3. CJ August 13, 2012 Reply

I will definitely be passing on this spreadsheet to clients. It’s important to demonstrate the math behind the potential savings. I think Eric’s point is also an excellent one – ecommerce fulfillment businesses don’t necessarily have to offer their clients one option or the other.

4. Antoine Mahieu October 25, 2012 Reply