Sales and Fulfillment

Key performance indicators for measuring 3PL outsourcing success

Once you decide on a third-party logistics (3PL) supplier, you need decisive key performance indicators (KPIs) to track and manage performance. After you grow beyond a certain point, you must consider outsourcing warehousing, distribution, transportation, logistics, and analytics technology. This increases efficiency, lowers cost, and eliminates direct involvement in a non-core process.

Some of the 3PL KPI examples include the speed and accuracy of order fulfilment and maintaining accurate inventory levels as per the changing demand. This article discusses the key 3PL performance metrics that help measure outsourcing success.

Top KPIs in third-party logistics

From order fulfilment to inventory management, KPIs help you measure if the 3PL outsourcing is meeting business and revenue objectives. We can divide the 3PL performance measurement KPIs into the following broad categories:

• Inventory KPIs
• Fulfilment KPIs
• Receiving KPIs
• Picking and packaging KPIs
• Performance KPIs

Let us delve deeper into each one of these categories.

Inventory KPIs

Inventory management is a critical pillar within 3PL. Your business needs to adjust the inventory such that it meets changing demands dynamically. The KPIs applicable are:

1. Inventory carrying cost – Add all the expenses of holding unsold finished goods. This helps you track inventory expenses and makes accounting and taxation easier.
2. Inventory-to-sales ratio – Tracks the inventory in hand v/s the sales in any given month. This metric helps understand if the sales are dropping.
3. Inventory turnover rate – This measures the cost of a product sitting on a warehouse shelf. It helps you assess the storage policies and best/worst-selling products.
4. Inventory accuracy – It monitors the inventory count and compares it with the numbers on record. This tells how well you manage and track the items as they enter or leave the warehouse. A low score indicates that the 3PL logistics outsourcing agency may not be using the warehouse management system (WMS) efficiently.
5. Inventory shrinkage – Measure the loss of inventory due to damage, theft, lost items, unsellable items, and other losses due to unforeseen circumstances.

Fulfilment KPIs

Fulfilment KPIs focus on profitability and service delivery efficiency. These KPIs help you understand where you are leaving money on the table, thus reducing profitability:

1. Average lead time – It is the time it takes for the customer to receive a product after placing the order. Lead time indicates customer satisfaction and efficiency of processes.
2. Cost per unit – The combined cost of fulfilling and shipping the product indicates efficiency and profitability. It includes picking, packaging, shipping, and labour costs.
3. On-time delivery – Studies show that delivery time impacts 87% of purchasing decisions online. This KPI tracks the number of orders delivered on time in e-commerce businesses where on-time delivery is critical.

Receiving KPIs

These KPIs account for the inventory before sorting. It ensures that the inventory-receiving process is efficient and accurate. Common receiving KPIs are:

1. Receiving efficiency – This KPI calculates the efficiency of work while receiving new stock at the warehouse and the time from dock to stock. A low score indicates the need for training the staff or optimising processes.
2. Receiving cycle-time – This indicates the time it takes to process new stock at the warehouse and includes counting, sorting, and storing.
3. Cost of receiving per line – It includes the cost of time and labour and indicates the money you spend on receiving new products at the warehouse.

Picking and packaging KPIs

These KPIs measure staff productivity, delivery accuracy, and customer satisfaction. Some of the KPIs under this category are:

1. Picking efficiency – This KPI, also known as picking productivity, tracks the number of order lines picked every hour.
2. Picking accuracy – It measures the picking accuracy, which is crucial for order fulfilment. Inaccuracy in this KPI can impact all the other KPIs discussed above.
3. Picking cycle time – This tells how much time it takes to pick an order. A longer time indicates that you may need technology and process optimisation at the warehouse.
4. Picking and packing cost – This KPI indicates how much you are spending on packaging the items and labour.

Performance KPIs

These KPIs monitor order management and shipping and provide insights into the warehouse operations:

1. Order lead time – This is the lead time between order placement and delivery. A longer lead time may indicate that you need to optimise invoice time, supplier lead time, and accounts payable/receivable.
2. Total order cycle time – This KPI indicates the time it takes for an order to be ready for shipping. It includes picking, packing, labelling, and so on before you hand it over to the carrier.
3. On-time shipping rate – It is the ratio of orders you ship on or before the target shipping date. This KPI would help you decide the shipping methods and carriers to partner with.
4. Rate of returns – This is the ratio of returned products due to malfunction, inferior quality, and other reasons. It helps you assess issues with the supplier and choose the right ones. High-quality reverse logistics should process 95% of returns between 48 and 72 hours.
5. Accurate shipping rate – In addition to shipping the goods before the date, you also need to deliver them accurately. If the shipping accuracy goes below 99%, you may incur a high cost of delivery to the wrong addresses.

How can Infosys BPM help?

3PL at Infosys BPM combines cutting-edge technology and a core team with domain expertise in different industry verticals. Some of the key focus areas include activity-based billing, information security, tracking asset management and maintenance.

Learn more about 3PL logistics outsourcing at Infosys BPM.