Once you’ve implemented a decentralized shipping strategy that makes sense for your business, the work doesn’t end there; keeping costs down while maintaining on-time deliveries is crucial to ensuring continued success.
To identify efficiencies and pinpoint the best delivery options, shippers must consistently evaluate their data—and this becomes particularly important during times of unpredictability and uncertainty.
To get a better idea of what exactly to monitor when evaluating logistics processes, practices and partners, the United States Postal Service® spoke to several U.S. shipping leaders.
The consensus was clear: Looking at the big picture, rather than using a single key performance indicator (KPI), can help you get the most valuable insights. Here are some important KPIs to get you started:
Perfect Order Index (POI)
Perfect order index measures the flawless fulfillment of customer orders. Here’s what constitutes flawless fulfillment:
- Error-free order entry
- Speedy inventory allocation
- On-time delivery
- Accurate invoicing
Companies with higher perfect order indexes tend to have shorter cash-to-cash cycle times, carry less inventory and experience many fewer stock-outs than competitors with lower indexes. POI can be calculated using the following formula:
% of orders
shipped on time
% of orders
% of orders
% of orders
Visualizing the Perfect Order Index Formula
To help you better understand how this formula may be put to use, consider the example below:
Say a supplier has shipped out 94% of all orders on time, arriving at their destination on or before the time agreed upon by the customer and the shipper. Ninety-five percent of orders were complete—in other words, had no missing items or parts, etc.
Ninety-two percent were free of damage, arriving in good and usable condition. Finally, 95% of orders were accurately documented, meaning the customer was provided with a complete and accurate invoice, along with any other required documents.
To calculate POI, the shipper would plug in the percentages like this:
94% of orders
shipped on time
95% of orders
92% of orders
95% of orders
Although each of the perfect-order attributes was above 90%, when analyzed as a whole, total performance falls below 80%. Moving forward, this business will likely be seeking ways to better meet customer needs and increase their satisfaction.
Consistently monitoring your perfect order index makes it easier to identify gaps and errors in the supply chain, which can then be targeted to bring about smoother, more streamlined operations that benefit both you and the customer—and ultimately, help lower costs.
Inventory velocity refers to the period between the receipt of raw materials and the sale of the finished goods. In general, the higher the inventory velocity, the faster you’re selling product, though this can vary widely from industry to industry.
Put simply, maintaining good inventory velocity can be extremely helpful in keeping costs down and efficiencies high.
Regular monitoring is important for three key reasons:
- Owning inventory involves significant financial investments—especially when interest rates are high.
- Holding inventory also requires investments in warehousing and warehousing technologies, staff, storage and moving equipment, security and tracking systems, and so on.
- Some companies carry products that become obsolete, expired or outdated quickly, meaning they need to be sold faster to minimize waste.
To calculate this important figure, you can work with this simple formula:
Breaking Down the Inventory Velocity Formula
Calculating Cost of Goods Sold
In this formula, “cost of goods sold”—or “COGS”—refers to the direct costs involved in producing product. This would include materials and labor, for example, but not indirect costs related to distribution, overhead or sales and marketing.
COGS can be calculated with the following formula:
“Beginning inventory” refers to inventory left over from the previous accounting period, “purchases” refers to any purchases or additions made to inventory during the period, and “ending inventory” refers to any inventory not sold by the end of the period.
Calculating Average Inventory
“Average inventory,” meanwhile, refers to the average quantity of stock available in a particular period. To calculate this, shippers must identify the inventory available at the beginning of the period, as well as inventory available at the end of the accounting period they’re analyzing, and divide their sum by the number of months in the period at hand:
+ Ending Inventory
months in period
Visualizing the Inventory Velocity Formula
Explore the example below to see how a business may apply this formula in the real world, beginning by calculating cost of goods sold.
Say a company has $200,000 worth of inventory at the beginning of a certain accounting period, and it spends $350,000 on additional inventory during the same period. By the end of the accounting period, the business has $40,000 worth of inventory left over.
Using the cost-of-goods-sold formula above, the company would plug in the numbers like this:
cost of goods sold
Next, the company would calculate their average inventory. The business will leverage the beginning inventory ($200,000) and ending inventory ($40,000) again in this formula. As you can see in the average inventory formula above, the company will also need to account for the number of months in the accounting period they’re analyzing—let’s say, in this case, it’s two months.
Here’s how the numbers would be plugged in:
$200,000 beginning inventory
+ $40,000 ending Inventory
Now that the company has calculated both the cost of goods sold and the average inventory, it can plug in those numbers to determine inventory velocity:
cost of goods sold
This shows that the company replaced inventory an average of 4.25 times over the course of a two-month period. Depending on the type of products this company sells, 4.25 could be too low, too high or just right. Car dealerships typically have inventory velocities as low as 2 or 3, for example, while auto components can have inventory velocities as high as 40.
To improve your inventory velocity, look to four key metrics:
- Planning cycle time — The lag between receiving an order coming in and its release to a supplier
- Supplier lead time — The time lag between the supplier receiving the purchase order and shipping it
- Transit time — The time it takes to receive the order after the supplier ships it
- Demand variability — A measure of variability in customer demand
Ultimately, improving these will allow you to improve inventory velocity over time—and in turn, improve your return on investment.
Total Cost to Ship
While many businesses assess rate per mile, it’s also important to think holistically and consider the total cost to ship.
Total cost to ship measures all activities involved in completing a customer delivery. The measurement criteria may include a range of factors, including:
- Special product requirements — Depending on the type of product, shipping regulations and delivery route, some shipments may necessitate more costly measures, such as temperature control, leak resistance or sanitary transportation, to name just a few.
- Shipping insurance — Purchasing insurance to protect items from damage or loss can also add to costs.
- Surcharges — Some carriers add surcharges in certain situations, such as Saturday, residential or rural area delivery. Fuel, address correction and undeliverable-as-addressed surcharges may also come into play.
- Speed to destination — How quickly will the shipment be delivered? Generally speaking, the faster it’s scheduled to reach its destination, the more expensive it will be.
- Dimensional weight (DIM weight) — This refers to the amount of space a package occupies in relation to its weight—in other words, its density. Dimensional-weight charges may be applied to both domestic and international shipments.
- Shipping supplies— Packaging supplies—whether simple boxes or protective materials for hazardous materials—should also be calculated into total cost to ship.
With COVID-19 resulting in rising costs across the globe, many businesses are exploring other warehousing options and fulfillment models. Costs should be assessed regularly to identify areas for improvement and help ensure your business can adapt quickly in the face of disruption.
As you work to future-ready your decentralized shipping operations, each of the KPIs discussed above—perfect order index, inventory velocity and total cost to ship—can help shape your plans and prepare you for the unexpected.
Keeping the big picture in mind, rather than zeroing in on a single KPI, will help you obtain the most accurate insights for your business, so you can reduce costs, raise efficiencies and maximize profits while adapting quickly to an ever-shifting market.
- Nick Phelps, MRM McCann Decentralized Shipping Study, Forrester Consulting, April 2020.