Economies of Scale and the Rise of Fulfilment Software

Economies of Scale is an important concept in microeconomics and refers to how average costs decrease with increased production levels. This economic principle has a special relevance to fulfilment operations, as the complexities of managing inventory, processing orders, and handling logistics become greater with increased business volume. Fulfilment software is very important to businesses looking to achieve economies of scale by transforming potential performance bottlenecks into efficient, streamlined processes.

Warehouse operations are often performed manually at lower volumes of operation. At low volumes, small groups can track inventory using spreadsheets; communicate directly on picking and packing; and process customer orders with little or no automation. However, as volume increases, manual operations become increasingly inefficient. As the number of stock-keeping units (SKUs), number of orders, and number of employees required to perform fulfilment functions increase, the principle of economies of scale begins to take effect.

Several fixed costs associated with setting up fulfilment software (including implementation, training, etc.) must occur upfront. However, once these systems are established, the marginal cost of each additional order processed decreases significantly as it takes a minimal amount of labour to perform each additional transaction. Thus, these firms are able to layer their initial gross investment or fixed cost across all total orders processed. The result is average costs that are lower, which is a characteristic of economies of scale.

The changes described above are primarily attributed to the rapid growth of e-commerce; e-commerce has surpassed $5 trillion in global online retail sales and is projected to continue to grow. These companies are going to be processing thousands to millions of orders, and thus will require efficient fulfilment activities. By utilizing software, these businesses will be able to improve their operational throughput within warehouses and process more orders per hour without a corresponding increase in labour.

For example, a large-scale fulfilment centre that processes over 10,000 orders per day, through traditional processing methods, would require far more personnel to coordinate these types of operations and create considerably greater variable costs while producing operational issues. The implementation of Warehouse Management Systems (WMS) automates inventory management, order routing, and picking sequence optimizations, leading to a substantial reduction in the amount of labour required, increased accuracy, and decreased service times.

Fulfilment software provides economies of scale and scope by allowing companies to service multiple customers with increased product and shipping variety, thereby minimizing additional costs associated with serving these more diverse customer groups. For example: if a company has its own warehouse with existing inventory; the company can utilize that existing inventory to support multiple customers, process returns from several different customers, and create a shipping network by integrating with multiple different shipping providers, all through a single software platform. By developing a standardized method of performing each of these three functions, all parties involved in the fulfilment process will have access to the same accurate and consolidated data, thus simplifying the overall management of these processes.

Gomonta is working to provide companies with platforms that facilitate the efficient scaling of fulfilment operations. Gomonta's platform combines inventory, sales, order fulfilment and logistics into one cohesive solution that improves the overall effectiveness of the use of a company's capacity while also controlling costs. This helps organisations experiencing rapid growth avoid many of the common issues and inefficiencies associated with fast-paced growth.

Changes resulting from this change have far-reaching implications which will not only impact individual organizations; as distribution activities become more effective, competition among organizations will become increasingly intense. Organizations that utilize more advanced systems will be capable of delivering their products at much greater speed and a lower overall cost than their competitors—thus adding additional competitive pressure on other organizations to adopt the same type of advancement in order to compete effectively. This degree of competition will cause the industry to broadly shift away from the previous model of success based primarily on an organization's size and efficiency.

In addition, the nature of the workforce employed by distribution facilities will also undergo an evolution. The use of tech-based systems will reduce the number of employees needed to manually coordinate product movement or complete a sale; however, that same technology will create an increased demand for employees who can oversee, manage and analyze very complex systems and large amounts of data. The increase in demand for these types of employment opportunities reflects a much larger trend in our economy as a whole; cumulative technology will continue to complement higher-skill occupations while replacing more repetitive types of positions.

Many articles and publications highlight this new trend. For example, one study found that organizations utilizing more advanced management systems are capable of increasing their picking efficiencies by as much as 30% and reducing errors dramatically. This increase in picking performance translates directly into savings and increased customer satisfaction—thus providing additional economic justification for the use of technology-based operating systems.

As order volumes continue to rise and customer expectations for speed and reliability continue to increase, fulfillment software will become even more central to the overall operation of the distribution facility. The ability for an organization to effectively scale up, deal with increased complexity and sustain lower average operating costs will no longer be optional to their overall competitiveness—this will be the major factor that defines organizations still able to compete successfully in today's distribution industry, as it is shaped by factors of scale, speed and accuracy.