Distribution metrics are specific measurements of supply chain processes. They help track the performance of the supply chain. You can use these metrics as key performance indicators (KPIs).
This will help you gauge the efficiency of warehousing, logistics, inventory management, shipping, and so on. You can also use different types of distribution metrics to track the performance of your 3PL or 4PL logistics partners.
The distribution performance metrics are numeric representations of process efficiency. They help you derive insights from data. You can use these insights to drive strategic decisions, pinpoint disruptions, and identify cost-saving opportunities.
Let’s look at some of the most important distribution channel metrics that you should track.
Inventory Turnover Ratio
This distribution performance metric tells you how many times you can sell out the entire inventory within a given time. Calculating the inventory turnover ratio can help you determine the inventory levels for different SKUs.
Inventory Turnover Rate = Cost of Sold Products / Average Inventory Value
You can also use it as a distribution channel metric to analyse the performance of different channels. You can also use it to track the performance of your SKUs. A high inventory turnover ratio is an indicator of efficient sales.
But, it can also or show insufficient inventory levels. But, a low turnover ratio can or show poor sales as well as overstocking. You can also use this formula to calculate the time it takes to sell the inventory on hand.
Based on the inventory turnover ratio, you can also estimate the time needed to consume the entire inventory. You only need to flip the formula. You can use the total inventory value instead of the cost of sold products. You also need to replace the average inventory value with the average order value multiplied by the average number of orders in a given time.
Order Accuracy Rate
This distribution performance metric tells you the percentage of orders that are shipped without errors. A high order accuracy rate is a hallmark of efficient distribution and logistics management.
Order Accuracy Rate = (Accurately Fulfilled Orders / Total Fulfilled Orders) x 100
Order accuracy has a significant impact on marketing, sales, customer satisfaction, and brand loyalty. 33% of online orders are returned because of incorrect delivery. This can significantly damage a brand’s reputation and result in a loss of customers. 76% of online shoppers would not buy from a brand after a poor experience.
Product returns can also increase logistics expenses and deplete profit margins. Hence, you need to track the order accuracy rate to measure the performance of your distribution logistics.
Perfect Order Rate
The perfect order rate shows the percentage of orders that are fulfilled as required. The benchmarks of a perfect order include:
- The order was delivered to the correct address
- The order was delivered on time
- The order contained the right products
- The quantity of the products was exactly as ordered
- The order was not damaged
- All the documents concerning the order were complete
The perfect order rate is an extension of the order accuracy rate. While the latter is only concerned with fulfilled orders, the perfect order rate encompasses all orders received by the company.
Perfect Order Rate = (% of Orders Delivered on Time) x (% of Orders Delivered to the Correct Address) x (% of Orders Delivered Undamaged) x (% of Orders Delivered with Correct Documentation)
The perfect order rate is a measure of the efficiency of the distribution system. This formula also helps you identify the problem areas that bring down the perfect order rate. You can also use it to calculate the performance of different distribution types and logistics partners to find the most suitable option for your supply chain.
Fill Rate / Order Fulfilment Rate
Fill rate, also known as order fulfilment rate, is a measure of the number of orders you can process without going out of stock. The fill rate only accounts for orders that are shipped from distribution or fulfilment centres. The order fulfilment rate is a useful distribution channel metric to determine the stability of your supply chain processes.
Fill Rate = (Number of Completed Orders / Total Orders) / 100
The fill rate depends on several factors including procurement, production, and inventory supply. It can also serve as a distribution centre performance metric to gauge the efficiency of warehousing, inventory management, picking, and packaging.
The order fulfilment rate also has a direct impact on other distribution metrics such as the perfect order rate. If the fill rate drops, so does the perfect order rate.
A low fill rate is an indicator of issues in inventory supply, warehousing, and logistics. On the other hand, a high fill rate (close to 100) shows that your distribution is competent enough to execute fast shipping for the majority of your customers.
Optimal Inventory Level
This is one of the most important types of distribution centre metrics for warehousing and inventory management. This formula helps you calculate the ideal inventory levels to run the supply chain. The optimal inventory level is a representation of the balance between your supply and demand.
Optimal Inventory Level = Optimal Order Quantity + Minimum Stock Level + Safety Stock
While the formula for distribution channel metrics is simple, the calculation for its components is quite complex. You will use the Economic Order Quantity (EOQ) formula to calculate the first component.
You can calculate EOQ for any time by replacing the value of “K”. You need to use the following formulas to calculate the other two components for optimal inventory levels:
Minimum Stock Level = Quantity Consumed x Supplier Lead Time
Safety Stock Level = (Normal Lead Time - Maximum Lead Time) x Quantity Consumed
All the components of the optimal inventory level formula are calculated in deference to a time frame such as days, months, or years. This distribution metric formula helps you determine the supply volume required to run the distribution chain. The components of this formula can also help you with various aspects of inventory management in your distribution chain.
You will use different types of distribution metrics for different purposes. Some of them will help you measure the performance of your distribution strategy. While other distribution channel metrics are necessary to define protocols for processes such as procurement and inventory management. You can use them to identify problem areas and room for improvement in your distribution channel.