This is the last of three articles around measuring the health and performance of your fulfillment operations.
As we discussed in the first and second articles, measuring and tracking your key performance indicators (KPIs) will allow you to judge the health of the firm's operations, identify trends, and identify opportunities for improvement. In this article, we identify metrics used to measure the firm's fulfillment operation's financial health.
These KPIs refer to factors that have the potential to impact the profitability of your operation directly. By understanding how you are currently performing and taking steps to improve them, it is possible to immediately improve your financial performance and free up capital for use elsewhere in your business.
Carrying Cost of Inventory: Every warehouse manager knows that stagnant inventory costs money. Quantifying these specific carrying costs — including capital costs, inventory risk, inventory service costs, and obsolescence — enables warehouse managers to make smarter buying and forecasting decisions, which leads to higher inventory turnover. Inventory Carrying Rate × Average Inventory Value = Carrying Cost of Inventory
Average fulfillment cost per order: While you should also know how to calculate cost per order, this is the average cost of fulfilling each order. This distribution metric lets you see the base cost of order fulfillment to determine if you can reduce it and save money. Average fulfillment cost per order = Total fulfillment cost across orders / Total number of orders
Average storage cost per unit: This is the average cost of storing each inventory unit (across all SKUs). Average storage cost per unit = Average units on hand / Total warehousing costs
Inventory turnover rate: Inventory turnover rate measures how many times inventory is sold and replaced in a specific time period. Understanding your average inventory turnover by SKU is a critical measure of business performance, cost management, and sales and can be benchmarked against other companies in each industry. Inventory turnover = (Cost of goods sold / Average inventory)
Inventory-to-sales ratio: This ratio helps warehouse managers identify early cash flow problems by holding increasing inventory levels up against declining sales rates. The inventory-to-sales ratio of a thriving warehouse distribution center will reflect a streamlined order fulfillment process. (End of Month Inventory Balance) / (Sales for Same Month) = Inventory to Sales Ratio
Inventory Days of Supply: This refers to the number of finished goods/inventory on hand to cover many projected usage days.
To ensure that you are taking a holistic approach to analyze your business operations, it's essential to evaluate all of the key performance indicators in this series regularly. Focusing on just one or two of these metrics—say, inbound and outbound metrics—can easily skew your understanding of your strengths and weaknesses. You must see the big picture to know where you need to focus your improvement efforts truly.
If, after analysis, you realize that you are consistently scoring high in all your KPIs, congratulations. Chances are, though, that you have got at least one or two areas that can stand to improve. Even relatively small improvements can lead to significant gains in profitability.