Imagine this – There’s an Indiana-based eCommerce company that manufactures pillowcases.
Their sales are booming, business is growing, and they’re looking to redesign their facility to streamline warehouse operations in order to reduce their shipping and logistics costs.
Traditionally, all of this takes years in implementation time and hefty pre-profit investments to materialize the redesign. And by the time you recover the profits, let’s say over a period of 3-5 years, the ROI would have just broken even.
This means the cost of automating the warehouse traditionally is losing profits now and jeopardizing profitability in the future with compounding pre-profit investments.
However, there’s an alternative to these time-consuming construction processes.
Automate your warehouse operations by detangling your data and knowing what to measure. And to detangle your data, you need standard metrics and KPIs to consistently improve your warehouse operations performance.
Here are the key metrics to track to reduce your warehouse and shipping costs by automating your crucial supply chain processe
1. Customer Order Cycle Time
Amazon Prime is not actually an entertainment option provided by Amazon.
Originally, in 2007, Amazon launched Amazon Prime Membership — offering an unlimited one-day delivery subscription program for about a million products.
This made fast delivery an everyday experience.
This express delivery service for Amazon’s loyal customers is probably one of the world’s most popular subscription services.
Now, what does this tell you about eCommerce customers?
They’re willing to pay money to get their orders faster. Everyone wants their order fast because nobody wants to wait.
If a customer waits too long to receive an order from you, that’s the death of orders from that customer.
This means you’ve lost a customer.
With key players like Amazon, eCommerce businesses are forced to keep up with Amazonian standards, like express and same-day deliveries.
And one way to track and determine the speed of your supply chain is to measure the customer order cycle time.
The total time it takes in days for the customer to place the order, the supplier to prepare the order, and the customer to receive the order is the customer order cycle time.
Customer Order Cycle Time = Source Cycle Time + Make Cycle Time + Deliver Cycle Time
This metric tells you how efficient (or not) your supply chain is.
With the above formula, you can also see what’s slowing down your supply chain.
With data measurement tools, you can accurately pinpoint if:
- The source cycle time is overshot and causing a delay in manufacturing goods
- Production and shipping is a challenge
- Logistics and transport systems are failing to deliver orders on time
2. Order Delivery Rate Calculation
For every 100 orders placed, pull out the number of orders that were delivered on time.
That’s how you determine the efficiency of your supply chain.
Order Delivery Rate Calculation = Number of orders delivered on time/100
This metric gives you a solid starting point to backtrack delayed deliveries, tackle delivery inefficacies, and improve supply chain efficiency
3. Stock Coverage
Retail chains like Tesco or Target order millions of goods and necessities like soaps, shampoos, shower gels, toothpaste, etc.
In order to bring in the supplies to the retail store, how do they estimate the quantity of each of these items?
By studying inventory history.
By calculating how long they can continue selling an item or a set of items without placing a new order.
This estimate based on sales history is called stock coverage.
It helps you manage inventory, systemize sales, and ensure customer satisfaction by not disappointing them often.
This is an important metric because it indicates the health of your supply chain:
- If the stock coverage is too high, it results in excessive inventory stock and leads to losses and warehouse overflow
- If the stock coverage is too low, there’s a risk of running out of stock
4. Days Sales Outstanding (DSO)
Days Sales Outstanding is often determined on a monthly, quarterly, or annual basis.
It’s the average number of days it takes a company to collect payments after a sale.
Days Sales Outstanding = (Total number of accounts/bills receivable during a given period / Total value of credit sales during the same period) X Number of days in the period
Let’s look at an example.
Company ABC had total sales worth $100,000 in a year.
$5,000 worth of goods were returned to the company as part of reverse logistics.
ABC has $10,000 worth of accounts receivables. Accounts receivable is nothing but the number of clients who owe the company.
Now, let’s calculate the Days Sales Outstanding for ABC.
Net credit sales = ($100,000 – $5,000) = $95,000.
Accounts receivables = $10,000.
DSO = Accounts Receivables / Net Credit Sales * 365
Days Sales Outstanding = $10,000 / $95,000 * 365 = 38.42 days
This means that, on average, Company ABC takes 38.42 days to collect money from its accounts/debtors.
Now comes the next important metric.
5. Cash-to-Cash Time Cycle
Days to Sales Outstanding is mainly used by loyalty subscription supply chains.
With Days to Sales Outstanding, you have an idea of how long it takes to collect the money after sales.
The Cash-to-cash (C2C) cycle is the total period of time between investments and returns.
The C2C cycle starts from the time a business pays its suppliers for raw materials until the time the business gets paid by its customers.
Let’s look at an example.
On average, a toy manufacturer takes 25 days to sell its inventory.
It takes them 10 more days to collect payments. And let’s assume that the manufacturer pays its suppliers in 15 days.
The Cash-to-Cash Cycle Time = 25 Days Inventory Outstanding + 10 Days Sales Outstanding – 15 Days Payables Outstanding = 20 days.
This means that this toy manufacturer takes 20 days to get paid by their customers.
6. Inventory Turnover
Inventory turnover is the number of times a company sells and replaces its stock of goods in a time period. The frequency at which the complete inventory gets sold out is termed Inventory Turnover.
The goal here is to calculate which inventory is moving slowly compared to the other goods on the shelf.
This indicates two things:
- A downtrend in consumer buying behavior for this product
- Further decline in demand
Inventory turnover indicates sales effectiveness.
Let’s look at an example.
Assume a retail chain ABC has reported $500 billion in annual sales with a year-end inventory of $40 billion, beginning inventory of $35 billion, and an annual cost of goods sold worth $350 billion.
Inventory Turnover = Annual cost of goods sold / (year-end inventory + beginning inventory) / 2
ABC’s inventory turnover for the year is calculated as shown below:
Inventory Turnover = $350 billion / ($40 billion + $35 billion)/2 = 2.33
ABC’s Days Inventory equals:
(1 ÷ 2.33) x 365 = 156 days
This means that ABC sells all its inventory within a 156-day period.
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