Management & Finance

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.

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

John Lindberg

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