Monitoring key performance indicators (KPIs) is an important part of your operations when tracking and managing your 3PL performance. When eCommerce companies continue to grow, fulfilling orders in-house no longer makes sense. For that reason, outsourcing the work to third-party logistics providers (3PLs) allows for a more efficient and more streamlined process. By outsourcing, these companies no longer have to handle warehousing, transportation, distribution and fulfillment on their own.
Yet when your company outsources to a third party, you gain efficiency lose direct involvement and control. When you engage a 3PL, you can no longer directly intervene in logistics processes, and you instead have to go through the third party company. Instead of walking into your own warehouse and evaluating the efficiency, you have to rely on information provided to you by the 3PL. While this might sound a bit scary, it actually is not all that bad. If you know what to look for, you can easily monitor the performance of your 3PL.
All you need to do is pick a handful of key performance indicators (KPIs) and keep an eye on them. Here, we highlight some of the top KPIs to assist you in measuring your 3PL performance.
Inventory is the center of your logistics operations. You need sufficient inventory to meet demand or your warehouse will be inefficient. Inventory tracking metrics can be an indicator of efficiency in a variety of areas. Are your employees entering inventory data into the warehouse management system (WMS) as they should be? Are you able to give your customers enough notice of low inventory levels? Do you have enough staff to manage that level of inventory successfully? How much is this inventory costing you? Are you over- or under-committing?
Here are the essential metrics to track, so you can measure the effectiveness of your warehouse inventory management process.
- Inventory-to-Sales Ratio
This KPI tracks inventory on hand at the end of the month versus the number of sales you made within the same month. You can use this metric to detect when your sales are dropping as average inventory units on hand increase or do not deplete as fast as they typically do.
- Inventory Carrying Cost
Your inventory carrying cost is calculated by adding up all the expenses associated with holding and storing unsold finished goods. Tracking how much you’re spending on carrying costs helps you keep track of inventory expenses and makes inventory accounting much easier during tax season.
- Inventory Accuracy
Inventory accuracy refers to monitoring physical counts of inventory and comparing it with what has been recorded. Your inventory accuracy rate can give you some insight into how well you manage and track inventory as it enters and leaves the warehouse.
- Inventory Shrinkage
Finally, shrinkage is an unfortunate but necessary aspect of inventory KPI monitoring. Shrinkage, in addition to theft, can also include damaged items, lost items, unsellable items, or other losses due to unforeseen circumstances. Calculating shrinkage, however, is only the first step. It’s important to identify the source, determine if the problem can be rectified, and identify a plan of action.
- Inventory Turnover Rate
Inventory turnover rate can also help you assess your customer profitability. Especially once you have calculated your carrying cost per unit, monitoring inventory turnover is another way to get an idea of exactly how much the product sitting in your warehouse is costing you and if your policies around storing inventory are working for you. This can also offer you insights into what your best-selling versus slow-moving items are. The faster you turn over inventory, the quicker you are selling products and recouping money. The goal is to increase your inventory turnover rate over time.
Tracking these essential inventory KPIs is a great start in optimizing your warehouse, but it’s also time-consuming and requires technology — such as an inventory management system — to accurately track inventory activity in real time.
Fulfillment KPIs often focus heavily on efficiency and profitability. As most 3PLs probably know, efficiency and probability are closely linked. Measuring fulfillment- related KPIs can help you understand how long the process is taking and where you may be leaving money on the table.
Average Lead Time
Fulfillment lead time refers to the length of time it takes the end-consumer to receive a product after it has been ordered. It is important to process orders as quickly as possible, so that the end consumer can receive them with minimal delay. Lead time can be an indicator of customer satisfaction, as well as efficiency of your processes and management of inventory.
Cost Per Unit Shipped
Adding up all the costs associated with fulfilling and shipping a product can give insight into efficiency of processes and give you an idea of the profitability of your operations. Shipping costs include all picking, packing, shipping costs and even includes labor.
Track the number of orders delivered on time or early from your warehouse. This is especially important for warehouses participating in ecommerce fulfillment where timely delivery is paramount. Next, you can turn this into a ratio or percentage to make interpretation easy for a wide variety of stakeholders.
Receiving inventory is a crucial part of managing a warehouse. It ensures that all inventory is accounted before it gets stored. Monitoring warehouse receiving performance ensures that your receiving process is efficient and accurate. It also provides you with a better understanding of when to reorder more inventory, putting both production and receiving timelines into consideration. Here are some of the most common receiving KPIs.
- Receiving Efficiency
Monitoring receiving efficiency tracks the productivity of work being carried out when receiving more stock. Any inefficiency in this area could indicate a need to optimize it with more streamlined processes, staff training, or new equipment.
- Receiving Cycle Time
The receiving cycle time refers to how long it takes to process new stock received in your warehouse. It includes everything from counting it, to sorting and storing it. A long receiving cycle time could indicate a need to improve your processes to make them more efficient.
- Cost of Receiving Per Line
Warehouse receiving involves time and labor. Cost of receiving per line refers to how much money you spend on receiving new products.
Picking and Packing KPIs
Measuring picking and packing performance KPIs can help you gauge the productivity of your staff, the accuracy of your deliveries, and the satisfaction of your customers. There are many KPIs applicable here that can be flexible enough to apply to other warehouse operations as well, such as receiving and putaway. To track picking performance, here are a few KPIs worth monitoring.
- Picking Efficiency
Also known as “picking productivity,” tracking picking efficiency refers to the number of order lines that are picked every hour.
- Picking Accuracy
Picking accuracy is essential to successful order fulfillment. If picking is inaccurate, it can greatly slow down the process, resulting in a negative change in all other metrics discussed thus far. In addition, consistent picking inaccuracy can have a negative impact on consumer satisfaction and word of mouth.
- Picking Cycle Time
The picking cycle time tells you how long it takes to pick each order. If cycle times are longer than average, it might be time to implement warehouse technology and automation tools.
- Picking and Packing Cost
Tracking picking and pack costs can tell you how much you are spending, from labor costs to packaging materials.
Other important parts of warehouse operations include order management and shipping. Looking at your entire supply chain operation as a whole can provide more insights into how well your warehouse operations are performing.
Here are a few more distribution metrics and performance-related KPIs worth tracking to optimize warehouse performance.
- Order Lead Time
The average length of time it takes from when a customer places an order until they receive it. A longer cycle may show that you need to address other areas, like invoicing times, supplier lead times, and accounts payable or receivable, to resolve issues and lower the amount of time between order and delivery.
- Total Order Cycle Time
With a direct impact on fulfillment, average order cycle time refers to how long it takes to get your order ready to be shipped. It starts from the moment an order is placed and includes the entire process of picking, packing, and any other step(s) needed for it to get in the carrier’s hands.
- On-Time Shipping Rate
The ratio of orders that were shipped on or before the requested shipping date versus the total number of orders. This helps you decide what shipping methods to offer and what carriers to partner with.
- Rate of Returns
This KPI tells you how much of your stock is returned to you due to defective or malfunctioning products, inferior quality products, etc. This allows you to address issues with suppliers and employees to lower the number of items that are sent back.
The FLEX Logistics Team is Here to Help!
The experts at FLEX Logistics are constantly learning and researching for the most advanced technologies that help us create better products. Whether we’re storing, transporting, or delivering your goods, we always treat your items with the care and respect they deserve.
Contact FLEX Logistics to learn more about our 3PL warehousing solutions and value-added services. Our team understands the importance of getting your products to the market. That is why we aim to understand your business and build lasting relationships with you and your team. Whether you are looking to add a new warehouse to your existing operations, growing and need to increase your distribution efforts, or starting a new company, FLEX has the solutions to meet your supply chain needs.
Contact us today to discuss your current and future warehousing and logistics needs. We will work together with you to understand your requirements and develop a solution that will set you up for future success.