What a time to be alive! Business is booming and ever-evolving. The ecommerce industry specifically continues to grow in terms of demand, competition, and customer expectations, calling for increasingly efficient fulfillment solutions and infrastructure to better deliver on your brand promises.
If you’re an ecommerce business owner, particularly one at the onset of his or her entrepreneurial journey, it’s critical to know all the shipping, fulfillment, inventory terms and beyond to run your business at its best. And if you’re a veteran in the ecommerce game, it doesn’t hurt to get a refresher AND perhaps learn new applications of terms you’re familiar with.
ShipMonk presents you with a thorough A-Z glossary of ecommerce terms merchants in the know should know. Peruse PART 1 below; heck, print it out and paste the terms on flashcards if you so wish. You’re in for a concise, informative ride on the Ecommerce Express!
Inventory purchased and stored in anticipation of a change of season or a major event such as a Black Friday or Cyber Monday sale.
Some (but not all) 3PLs offer assembly services. Assembly services involve modifying merchandise or its packaging after it arrives at a warehouse—a type of finishing touch to your products that manufacturers don’t execute. Some examples include:
- Placing poly-bagged jewelry into branded jewelry boxes
- Removing protective packaging placed by the manufacturer for bulk shipping
- Unboxing, replacing a faulty or incorrect part, and re-boxing
- Pre-packing fragile items to prevent breakage
- Adding a promotional insert, catalog, or handwritten note to an order
- Adding custom packaging materials such as ribbons or stickers
- Pre-packing oddly shaped items so they’ll fit more snuggly into shipping boxes
- Repackaging merchandise following a rebranding
- Replacing or covering an incorrect or outdated label
The average amount spent per order during any given time period. To calculate, simply divide total revenue during a given time period (say one month) by the number of orders during that same timeframe. For example, if your ecommerce business processed 5,000 orders last month for a total of $300,000, the average order value for the month was $60.
This shipping term means the package is out for delivery, but has not been scanned at the door yet. The designation doesn’t necessarily mean the package wasn’t delivered; sometimes the mail carrier simply forgets to scan the package, or the system hasn’t yet updated its status. Unfortunately, “Awaiting Delivery Scan” might also mean the carrier didn’t see the package, ran out of time, or there wasn’t enough room on the truck for it, which resulted in failed delivery. This status is usually resolved by waiting a day or two though.
A backordered item is one that is not in stock now, but will be once an already-ordered supply refresh arrives. With a backordered item, customers typically can order the item with the understanding that (based on vendor notes) the item will not ship right away. Sometimes the vendor can give projections of when the item will be back in stock and shipped, for example: “Won’t Ship Until July,” “Won’t Ship for 10 Business Days,” etc.
If a 3PL is fulfilling incomplete orders (i.e. orders with a backorder purchase), pickers and packers in a warehouse need to be aware of what is and isn’t going in the shipment. Sophisticated automation can be a huge help here—fulfilling backorders as soon as resupply comes in, refunding orders, and canceling orders if need arises.
Beginning inventory is just what it sounds like, the value of the inventory you have in stock at the beginning of a specific accounting period. Let’s break that down.
- By inventory we mean finished goods that are on hand and ready to sell. Not raw materials, goods in the process of being manufactured, goods you ordered but haven’t paid for yet, or goods you already sold but haven’t shipped out yet.
- By value we mean how much that inventory cost to make or purchase, plus how much it’s costing you to store it. It’s the cash you have tied up in that inventory.
- A specific accounting period might be the beginning of the year, the quarter, or the month—i.e. however often you’re counting inventory. Most companies perform a physical count at least once a year, but if your ecommerce fulfillment warehouse has a perpetual inventory system you’re tracking inventory 24/7/365.
A carrier facility is a large warehouse that acts as a regional hub for the shipping carrier, whether that be FedEx, UPS, DHL, or USPS, etc.. These carrier facilities are similar to distribution centers in that they receive bulk shipments of packages from other regions of the country and sort them into smaller vehicles for delivery to specific addresses in their own regions. For example, packages headed for New York might be shipped to a UPS carrier facility in New Jersey where they are sorted and loaded onto smaller trucks for delivery into Manhattan.
Packages traveling internationally or across the US might spend time in more than one carrier facility, each one a little closer to a package’s final delivery destination. In this case, the customer and seller might get a notification each time your order arrives at a new shipping carrier facility.
Cost of Goods Sold (COGS)
COGS refers to the direct costs of producing a company’s products. This total includes the cost of the materials and labor directly used to create each product but excludes indirect expenses like distribution and sales force costs.
Cost of Goods Managed (COGM)
COGM is a term more commonly used by accounts than in day-to-day ecommerce business operation. The amount refers to a statement that shows the total production costs for a company within a specified period of time (one week, one month, one quarter, one year, etc.).
This form of periodic inventory accounting counts only certain portions of inventory at a time, eventually cycling through all the SKUs within a designated cycle. Fast-moving SKUs might get counted every week, while slower moving items may get counted monthly, quarterly, or annually. A business that uses cycle counting doesn’t have to close for a long period of time to take total inventory; they just need to account for one shelf, bay, or department at a time. The scheduling and process of when and how to do this is handled through your inventory management system.
Also called working stock, this is the amount of inventory an ecommerce business keeps on hand to fill a typical number of orders during a specified period of time. Cycle stock is replaced as soon as it is sold.
Demand forecasting uses a variety of data points to foresee customer demand and inform major business decisions, from launching new products to finding the perfect 3PL partner. While demand forecasting is a challenging endeavor and never 100% accurate, having an educated idea of what you need to stock and when is pretty much a prerequisite for running a successful ecommerce business. At a glance, demand forecasting helps you:
- Optimize inventory
- Align with your operational strategy
- Analyze demographic and product trends
- Surprise and delight customers
- Protect yourself against financial risks
- Prepare for peak season
With this kind of shipping, in the buyer-and-seller relationship the seller is responsible for every aspect of the buying process. This would include:
- Providing and delivering ordered goods
- Drafting sales contracts and documents
- Arranging all export packaging
- Overseeing customs clearance
- Fulfilling customs requirements
- Arranging proof of delivery
- Paying all associated fees, such as transportation and delivery costs
If you (as an ecommerce business owner) opt for DDP shipping, the customer is charged at checkout for the price of their order, the shipping rate, and any other additional costs that may be incurred during the delivery process. This would require you, the seller, to estimate these fees in advance and factor them into the checkout price.
Here, the responsibility of shipping costs is split between the buyer and the seller. The seller ensures that the goods are delivered to the country of destination’s customs office and absorbs any costs and risks associated with the shipment until it reaches the country of destination. This means that at checkout the buyer only pays for the cost of their order plus shipping. Once the order reaches customs, the buyer is now responsible for paying any import duties and/or transportation costs before they can successfully receive their package.
While DDU may seem like the simpler route for ecommerce business owners, it’s also a surefire way to upset international buyers by hitting them with unexpected costs and potential delays at customs. If you’re not yet convinced, take a look at the infographic below (also featured on ShipMonk’s DDP fulfillment services hub) and you’ll soon see why DDP is the better way to go.
The Difference in Customer Experience: DDP vs. DDU
A delivery exception is any type of unforeseen interruption that a shipping carrier experiences while a package is in transit. It may be a temporary holdup such as a snowstorm, or a bigger problem such as a pandemic that shuts down border crossings.
Delivery exceptions last different amounts of time based on the nature of the delay. If we’re dealing with the snowstorm example or a truck breakdown, a new delivery date will be scheduled. Or perhaps a package required a signature and there was no one home to sign for it, or a guard dog prevented the carrier from reaching the door.
While unfortunate, these causes could not have been foreseen or prevented by the merchant. Some delivery exceptions may not be anyone’s fault i.e. a snowstorm or truck breakdown. Some may be the customer’s responsibility i.e a package required a signature and there was no one home to sign for it, or a guard dog prevented the carrier from reaching the door. Other delivery exceptions may be the shipping carrier’s fault; for example a label that was damaged in transit, or package was lost or damaged. Merchants must be vigilant though, and keep customers informed of any such instances—updating them on rescheduled deliveries. This is vital for maintaining customer satisfaction and retention.
This message indicates a package was out for delivery, but something prevented the driver from delivering it. The driver may simply have run out of time that day, or they physically could not get there due to one reason or another—unplowed streets, locked gates, etc.
The number of units in stock, as determined by software and digital scanners. Physical counts (or inventory audits) should be conducted by ecommerce businesses periodically to verify these numbers.
Shipping carriers, like FedEx, UPS, USPS and DHL, charge customers for two things: their services and physical space in their transports (trucks or airplanes). Since shipping carriers have a lot of costs to cover, the more packages they can fit into a trailer or cargo hold, the more money they’ll make on a trip across the country. Hence the use of the dimensional weight metric. DIM weight, or volumetric weight, is a pricing formula adapted by shipping carriers to charge customers for the volume (cubic inches per pound) their ecommerce package takes up. And, like an airplane seat with more legroom, the more space you take up, the more you’re going to pay.
To see how different DIM factors affect shipping costs across carriers, check out ShipMonk’s dimensional weight calculator.
Direct-to-consumer (DTC or D2C) describes a sales model in which goods flow from the manufacturer directly to the end user without middlemen (i.e. distributors or retailers). A DTC business or brand is responsible for the entire supply chain, from manufacturing or purchasing finished goods, to marketing and managing an ecommerce store, to fulfilling and shipping orders. Direct fulfillment is the last link of the DTC supply chain. It involves storing inventory and picking, packing, and shipping orders to individual customers.
Most ecommerce businesses start out managing their own direct fulfillment operations from a garage or warehouse. As they grow, it becomes more difficult to keep track of inventory, keep up with orders, and manage the customer service issues that erupt when things go wrong. These ecommerce businesses often don’t have the infrastructure and expertise needed to manage fast growth, and they often don’t have time to build it. Growing ecommerce businesses usually reach a breaking point at around 1,000 orders per month. At this point, owners have two choices: invest in more space, more people, and better systems, or outsource fulfillment operations to a third-party logistics provider (3PL) that specializes in DTC order fulfillment.
When ecommerce sellers don’t want anyone, even their customers, to know what’s inside the packages they’re sending, they use what’s called “discreet shipping”. Essentially this means no labels, no branding, and no addresses to identify the seller or the contents. Why would someone want this? There are plenty of reasons that both ecommerce merchants and shoppers might request discreet shipping. Products people typically want kept discreet could be private and personal like medications and other pharmaceutical products, hygiene products, and medical devices. Also, ecommerce merchants who sell valuable items such as jewelry or electronic devices may use discreet shipping to avoid attracting the attention of porch pirates. The third situation past privacy and value for utilizing discreet shipping is simply that the delivery is a surprise!
Dunnage is any kind of durable padding material that protects goods when they are shipped. Examples most people are familiar with include: packing peanuts, bubble wrap, and crinkle paper. These are just a few examples of dunnage. There are actually MANY kinds of dunnage; the type of dunnage you use, and how much of it you use, is determined by the type of product you’re looking to protect during packing. The more fragile the product, the more dunnage it needs in order to safeguard it through the shipping, handling, and delivery process.
Ending inventory is an accounting term that refers to the value of the inventory you have left at the end of an accounting period. The amount you have left over, expressed as a dollar value, is both your ending inventory for the current period, and the beginning inventory (or the amount you start with) for the next accounting period. This simple metric tells you how much cash you have tied up in inventory on an ongoing basis.
Depending on the size of your business, you could physically count your inventory every month. But for many businesses this would be a cumbersome, time-consuming process. Today’s inventory management systems integrate smoothly with warehouse management systems and sophisticated 3PL fulfillment platforms to put real-time numbers at your fingertips in seconds.
The EOQ formula calculates the ideal quantity of inventory to order from your manufacturer to avoid stockouts and overstocks, while also minimizing storage and setup costs. Many companies use the EOQ model to manage inventory more efficiently while simultaneously minimizing inventory costs.
To calculate EOQ you’ll need to know your setup costs, demand rate, and holding costs (sometimes referred to as carrying costs). You probably know your demand rate off the top of your head, or can quickly find it. It’s simply how many units you sold last year. Setup costs and holding costs are a little more difficult to calculate though. Continue reading ShipMonk’s full EOQ article on our ecommerce blog here for a full understanding of this formula.
UPS uses this language on notifications to flag delivery exceptions that need attention before the package can move further. Most often, the action involves verifying an address due to a damaged label or correcting an incorrect address. In these cases, the ecommerce merchant’s customer service department may have to contact the end-customer.
Also called dead stock, this includes unused raw materials past their expiration dates, unsold finished goods, and items that are no longer sellable for one reason or another.
The FIFO (first in, first out) inventory method assumes that your inventory is being sold in the order it was purchased. When calculating Cost of Goods Sold (COGS), the cost of the oldest item in the warehouse is attributed to the first item sold in a given year, regardless of which item is grabbed off the shelf. The cost of the second oldest item in the warehouse is assigned to the cost of the second item sold, and so on. Because the Cost of goods tends to rise over time, the FIFO method usually results in lower cost of goods sold at year’s end, which translates to higher profits. In addition, your greatest asset, the remaining or “ending inventory,” is valued at its actual (usually higher) cost.
FIFO is the most common inventory management method for ecommerce businesses because selling the oldest units before the newer units helps ensure a consistent turnover of inventory. Additionally, most ecommerce businesses use the FIFO method because it paints a more accurate picture of income and costs, and matches the ideal physical flow of products.
What you may not realize is that FIFO is both an inventory management method and an accounting method—and, while similar, these are two completely different processes. What’s the difference? Visit our blog for ecommerce businesses and find out!
Inventory that is finished, packaged, and ready for sale. This inventory metric includes the COGM (Cost of Goods Manufactured) minus the COGS (Cost of Goods Sold). Manufacturers use the term, “finished goods,” while retailers generally refer to it as merchandise inventory or stock.
Here we have essentially the easiest form of order fulfillment. In this case, you—the ecommerce brand owner—use your own employees and methods of transportation to pick, pack, and deliver your customers their orders. All your logistics and order fulfillment assets are in-house (warehouse space, transportation, order fillers, delivery drivers, etc.) On the plus side there is no outsourcing; you have your hands directly in all the pies. The downside is that instead of running the more complex, scaling endeavors of your business, you are distracted by making sure a million and one things get done. You are trapped in logistics prison vs. focusing on being an entrepreneur and growing your ecommerce brand. Not only that, but the costs of fulfilling in-house rival the complexities of fulfilling in-house.
There are two different kinds of flat rate shipping in the ecommerce business world:
Flat Rate Shipping for Sellers: This shipping method charges sellers one price. USPS Priority Flat Rate Shipping is the most well-known flat rate shipping provider. USPS charges sellers one flat rate to ship a certain size envelope or box, as long the contents don’t exceed their 70lb. weight limit. Packages can be shipped anywhere in the U.S. for delivery in 1-3 days, depending on their destination. There are several box sizes to choose from, each set at a different price. The price includes the cost of the box, insurance, tracking, and shipping. All you have to do is pick and pack the order. For most brands, the 70lb. limit eliminates the need for weighing and measuring orders. Note, that while the seller pays a flat rate, they can charge their customers more or less than that amount for shipping.
Flat Rate Shipping for Customers: Some DTC companies offer flat rate shipping to their customers, which has little to do with the actual cost of shipping an order. These companies calculate that they can cover their overall shipping costs by charging all customers the same price per order, no matter the size of the order. They set a price for shipping based on what their customers will tolerate, knowing they may lose money on large orders, but make up for it with higher margins and possibly a higher volume of small orders. The company then pays real-time shipping costs for each order.
Fifth-Party Logistics (5PL)
If we’re talking outsourcing, your order fulfillment in every conceivable way, then we’re talking about fifth-party logistics. A 5PL manages an ecommerce brand’s entire supply chain from production to doorstep delivery. The big plus side is that 5PLs have strong, established relationships with different supply chain players (like the major shipping carriers). Since a 5PL can bring massive business to a shipping carrier, they can potentially leverage lower prices. The downside is that a 5PL means handing over the operational reins of your order fulfillment to another entity entirely. If we compare your ecommerce brand to your baby, hiring a 5PL is like sending your kid off to boarding school. In this total hands-off approach you outsource the management of your “baby” to some other entity entirely.
5PLs can also be so large that their level of expertise across domains may vary. For example, a certain 5PL might be fantastic at managing worldwide port-to-port freight operations for your inventory, but meanwhile they are rubbish at managing fulfillment operations and carrier deliveries.
Furthermore, if you rely on a 5PL for all your logistics needs, if the supply chain ever breaks up (ex. 2020-2021), you’re now wholly dependent on that partner to navigate these logistics challenges. That’s a lot of eggs in one basket, and with it a lot of risk. While you are really going to feel the pain if something happens to all your eggs, 5PLs are such large-scale entities that the daily pulse and consequences to your individual ecommerce brand aren’t going to make or break them the way they break you.
Fourth-Party Logistics (4PL)
A fourth-party logistics situation means your ecommerce brand works with a provider that has 3PL capabilities plus an additional outside contractor who oversees your company’s overarching supply chain operation. This neutral third party acts as the admin and point person for managing the ins and outs of your 3PL order fulfillment situation, as well as all other supply chain partners you may work with (for example manufacturers, freight forwarders, outsourced customer service teams, etc.)
Keep in mind that although 4PL companies are involved in logistics efforts, they do not necessarily own warehouse space, fulfillment technology, or picking and packing equipment. The benefit of working with a fourth-party logistics provider, therefore, is not the efficiency or resources they bring to the table, but the oversight, feedback, and progress reports that help you see the big picture without getting consumed by it.
This could be a good option for some ecommerce brands, but if you’re considering a 4PL partnership, lead with these three qualifiers:
1. Do they have a successful history of dealing with vendors, and keeping them accountable?
2. Do they have strong software and IT capabilities for managing mass supply chain data?
3. Do they have strong Key Performance Indicators (KPIs) to show you’re getting your money’s worth?
A fulfillment center is the heart of a 3PL (third-party logistics) operation, and a modern marvel of the ecommerce world. Here your products are processed, stored, picked, packed, and shipped out to customers. Basically, a fulfillment center handles every step to get your goods to the people who bought them, including storing your inventory. An ecommerce brand will integrate a top-tier fulfillment center solution like ShipMonk into their supply chain to streamline operations—increasing efficiency, decreasing the possibility of error, and shaving time off the shipping process so your customers get their orders as fast as possible.
As mentioned, one component of a fulfillment center is actually storing your inventory. A fulfillment center has the warehousing solution built in whereas a warehouse does not automatically come with fulfillment solutions. How it works with a fulfillment center is your inventory will arrive and be stored in its designated shelving location. This is called slotting. At ShipMonk, our method for slotting revolves around storing inventory in a place best optimized for your sales velocity, thus saving on efficiency for retrieving your items when they’re needed, and saving you money in the long run.
This shipping notification means your package is “en route” on a plane, train, ship, or truck. Its status won’t change until it arrives at its next location and is scanned.
Inbound logistics is the part of the ecommerce fulfillment process that involves the receiving of materials and products from a supplier or manufacturer. These goods are received at a warehouse or 3PL fulfillment center. There may be several stops along the way there, depending on each ecommerce brand’s supply chain (distributors, number of manufacturers, type of 3PL company you’re working with). Some significant steps in the inbound logistics process include:
- Sourcing or purchasing materials and products
- Keeping track of what has been ordered
- Maintaining a thorough means of tracking the freight and shipping entities transporting ordered goods
- Having teams at warehouse/fulfillment centers in charge of receiving, slotting and storing inventory where it belongs
- Utilizing advanced inventory management software to manage inventory at your warehouse/fulfillment center
Holding cost (or carrying cost) is the cost of holding inventory in a warehouse until it is sold or removed. It is most often expressed as a percentage of total inventory costs at the end of the year, but may also be calculated incrementally per unit or per SKU. Carrying costs typically average as much as 20 – 30% of the total cost of inventory.
There are formulas for manually calculating this metric, but there’s no need to. Today’s inventory management systems can make tracking inventory costs much simpler. When combined with the reporting capabilities of a tech-forward fulfillment provider, the numbers you need are easily accessible. So you may not need to do the math; still, you should at least know how carrying cost is calculated and how it affects your ecommerce business. Hence this article.
Kitting is the process of combining multiple SKUs into one SKU to be stored in your warehouse or fulfillment center and sold on an ecommerce merchant’s website as a single unit or kit. Examples of kitting include:
- Subscription boxes that contain a different assortment of items each month
- Several units of the same SKU prepackaged and sold at a volume discount
- One or more different SKUs sold as a “virtual bundle” online, but stored separately in the warehouse or fulfillment center
- A pre-packaged gift box of curated items
- A mystery bag of items chosen randomly by the picker
- A bonus gift, such as a free pair of socks added to any shoe order
Landed cost is the total cost of producing or purchasing a product and delivering it to a customer. It includes manufacturing or purchasing costs, shipping costs, and a potential plethora of hidden costs and fees that you may not realize are affecting your bottom line. Packaging, fulfillment services, customs duties and fees, exchange rates, licensing fees, shipping “insurance,” and payment processing fees are just some of the factors that go into calculating landed cost. And landed cost per unit must be calculated separately for every item you sell.
If your ecommerce business imports and/or exports products, landed costs affect the price you pay for imported goods, as well as the costs to ship those goods to your domestic or international customers. Shipping charges are just the beginning. Import duties, currency conversion fees, taxes, and other fees can mean the difference between making a profit or selling at a loss. That’s why understanding landed cost is key to a successful pricing strategy and making better business decisions.
Last-mile delivery refers to the last leg of a package’s journey from transportation hub to doorstep. It is vital that ecommerce businesses utilize a high-caliber logistics set up to ensure last-mile deliveries are consistently executed smoothly and on time. Nowadays, last-mile delivery is a reflection of the high customer expectations surrounding ecommerce shipping. We can trace many of these expectations back to Amazon, a company that has truly set the precedent for fast, free, and amazingly convenient shipping.
The LIFO (last in, last out) inventory method assumes that the newest (most recently stocked) inventory is sold first. When calculating Cost of Goods Sold (COGS), the cost of the most recently purchased item is the cost attributed to the first item sold each year. Because the cost of purchasing goods tends to rise over time, COGS, as reported under LIFO, is usually higher than what the company actually paid. This results in lower profits, lower net income and often lower taxes at year’s end. In addition, because the newer inventory presumably was sold first, the remaining or ending inventory may be years old or obsolete, so its calculated value will be lower than with other accounting methods.
For the aforementioned reasons, companies that hold inventory for long periods of time or want to reduce their tax burdens tend to benefit from the LIFO method. However, because the LIFO method distorts net income and inventory value during periods of high inflation, international accounting standards have moved away from using it. While LIFO is still accepted in the U.S., it is prohibited in all countries that follow international accounting guidelines under the International Financial Reporting Standards (IFRS).
In the simplest of terms, a logistics service provider provides logistics services! These services can include transportation, warehousing, distribution, and overall supply chain management.
Another way to look at a logistics service provider is to think of it as the before, during, and after of order fulfillment. Each of these stages comes with specific processes from storing inventory to arranging carrier pickups. A logistics service provider takes over all those processes (an action otherwise known as “outsourcing”) to make merchants’ lives much easier. But, not all logistics service providers are the same. There are first-party logistics providers (1PLs), second-party logistics providers (2PLs), third-party logistics providers (3PLs), fourth-party logistics providers (4PLs), and fifth-party logistics providers (5PLs). Learn the difference here!