The Direct and Indirect Costs of Mispicks

How much are mispicks costing you? Industry studies say the average distribution center/warehouse is losing nearly $400,000 each year due to mispicks.

Not only are mispick errors expensive, but you also run the risk of damaging customer relationships, which can have an even bigger long-term impact.

So, let’s break down the true cost of mispicks including direct and indirect costs.

Direct Costs For Mispicks

There are significant direct costs for mispicks, particularly when it comes to the cost of labor — the most expensive cost for most warehouse operations. 

Labor Costs

In incurring and rectifying each mispick, you’re paying labor costs for:

• Picking, packing, and shipping the incorrect product
• Customer support to resolve mispick issues
• Handling the return process and restocking
• Picking, packing, and shipping the correct product

Returns And Shipping

Not all returns come back in perfect condition either. So, your direct costs may include loss of product and having to replace products in inventory. You also pay for shipping costs, often three times over to handle the initial order, the replacement order, and the return.

Packing Costs

Part of the returns equation is the cost of packaging. While this may be a minimal cost, it can add up over time. If you use custom packaging, it can add up even more quickly.

Lost Products

Some customers will demand you ship them the correct item but neglect (or refuse) to send back the item you shipped initially. Even though they are legally obligated to return the incorrect item, many simply do not.

Even though automation tools and better inventory control have reduced the mispick rate in many warehouses, the overall cost for mistakes has grown. As volume grows, so do incidents. If you cut your mispick rate in half but double your online business, you still lose the same amount of money.

Mispicks eliminate any profit margin and can quickly become money losers. Several studies put the cost of a single mispick anywhere from $22-100 per incident. And the costs can be significantly higher if you’re shipping globally or selling high-value items.

4 Indirect Costs for Mispicks

Besides your hard costs, indirect costs that can be harder to quantify can also cause damage.

For example, mispicks reduce your inventory levels. That can potentially cost you sales because you don’t have as much available inventory. Sometimes, it also creates inaccurate inventory counts, which can create havoc when you have to reconcile. There's also the lost cash flow resulting from the mispick that doesn’t hit your bottom line.

Then, there are the consumer costs.

1. Unhappy Customers

Unhappy customers are profit-killers for companies. Every time you make an error you risk damaging the customer experience. 80% of consumers already believe companies need to improve customer experience, so when you ship a mispick, you’re just adding fuel to the fire.

One out of every five customers says they will never shop with a brand again after just a single error.

Companies often offer additional incentives to make up for mistakes by offering discounts on future orders. This has a cost, too.

2. Loss of Future Sales

Two-thirds of customers say they have switched to a different brand because of a poor customer experience. That means a mispick can not only cost you money to remedy the problem, but you could be driving your customers directly to your competitor, losing out on future sales, and reducing your customer lifetime value (CLV).

3. Bad Reviews

And then there are the bad reviews that often follow. People today are not shy about telling everyone when they’ve had a bad experience. When bad reviews show up on your website, third-party review sites, or social media, it damages your brand.

Over time, bad reviews add up. Bad reviews can lower your star rating on search engines and hurt your visibility. This costs you sales. A study by McKinsey reported that 95% of sales came from companies with at least 3.5 out of 5 stars. Increasing your star rating from 4.2 to 4.4 stars added an average of 37% in sales volume. Conversely, lowering your star ratings due to bad reviews can have the opposite effect.

4. Increased Customer Acquisition Spending

Indirect costs can be much more significant than you realize. Unhappy customers may never return, causing lost sales. In turn, this negates the impact of your overall marketing dollars and requires increased customer acquisition spending. The resulting situation is you constantly need a flow of new customers to make up for your losses.

Conclusion

Many businesses don’t even track the cost of mispicks. If that sounds familiar, it’s time to start tracking them and working on reducing mispicks. The direct and indirect costs add up to significant dollars. In today’s competitive marketplace with thin margins, companies simply cannot afford to ignore the true cost of mispicks.

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