An important metric in the e-commerce space is the calculation of cost per order (also known as CPO). The CPO is not simply the labor involved in the shipment of the product, but it is a sum of items, including the costs associated with accepting the shipment of the product at your facility (receiving, storage and inventory costs), fulfillment (picking, packing and shipping) and reverse logistics (processing returns to the facility).
Of course, whether you’re tracking the CPO for a short timeframe (day, week or month) or for a longer period (quarter or year), there are a series of additional numbers beyond labor that you’ll need in order to accurately calculate your organization’s CPO. There are additional outlays for consumables (packaging for the orders) as well as costs for shipping (postage and/or freight service charges). Within logistics accounting, there are a lot of moving parts and costs that fluctuate from week to week, so the correct numbers need to be plugged into your CPO formula in order to achieve accurate results.
for the orders) as well as costs for shipping (postage and/or freight service charges). Within logistics accounting, there are a lot of moving parts and costs that fluctuate from week to week, so the correct numbers need to be plugged into your CPO formula in order to achieve accurate results.
Labor costs are the sum of all the labor involved in actual management of inventory (pickers, packers and inventory workers). Note that this should also include labor that deals with receiving (inbound shipments)–counting, inspecting and integrating it into inventory as well as picking and packing orders. Labor also includes workers at the facility not directly involved with the products: supervisors, administrative personnel and maintenance staff. Note that labor costs include benefits and payroll taxes in addition to salaries.
Physical Facility Costs
Another line item is facility costs. The overhead of the physical facility is no doubt the largest number in the calculation—it includes mortgage or lease expenses, insurance, taxes, utilities, equipment and maintenance. The equipment uses for fulfillment along with the warehouse management system (WMS) systems and software (which includes system maintenance, software licenses and upgrades) must be included in the calculation.
Packing and Shipping
In addition to the labor and physical facility costs, there are other expenses to factor in. This includes the cost of consumables (shipping supplies), which includes boxes, envelopes, packing material and labels. It is necessary to include the total cost of shipping services, as it is an outlay on every shipped order. The costs of consumables and shipping can vary from order to order.
Getting a Total
Once you’ve calculated all the totals from the labor, facility and supplies categories, you’ll need to know the number of orders shipped for that time period. Your total costs divided by the number of orders shipped is the total cost per order. Understand that the CPO (the quotient) is an average order value and that there are variables in each order, such as weight, number of boxes and shipping method.
The CPO calculation doesn’t include the following accounting functions that can result in a higher or lower total. One must also consider depreciation of equipment, utility rate changes, insurance premiums, tax hikes (or decreases), legal costs and others that may be one-time charges, such as a city sewer assessment.
Author, Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.