How Well Are You Serving Your Customers?

Apr 26, 2006 11:07 PM  By

When you look at all the metrics multichannel companies can use to measure customer service, initial customer order fill rate (ICOFR) is the one that I think is best.

ICOFR is the percentage of orders that are shipped complete—all items that were on the customer order—within your company’s shipping standard. For in-stock product the shipping standard of most well-run operations is 24 hours from receipt of an order.

Many consider ICOFR to be just an inventory measure, but its usefulness goes far beyond that. To understand this metric’s value better, let’s look at some results from three clients that had not previously measured ICOFR.

The first example is a $25 million apparel Website that has 3.0 lines per order. Seventy-five percent of the product is reorderable. This company has always used the backorder rate to gauge its in-stock position and customer service; the backorder rate is 10%, day in and day out, so the client inferred a 90% service rate. The company’s first ICOFR report showed a rate of 76.5% for an entire season—hardly the world-class customer service it is striving to achieve! But the ICOFR is generally 10-15 full percentage points below the item fill rate or the backorder rate.

The second example comes from a $30 million food merchant that averages 2.25 lines per order. This business is characterized by high repeat-customer purchases and a low percentage of new product. It has a 1.5% backorder rate daily—wow! But its first ICOFR report showed a 88.5% rate—another big surprise for the owners.

The third example (see figure 1) is a $90 million apparel business with catalog and Internet channels. Fifty percent of the styles are reorderable. The attached graphic shows the pattern for ICOFR when charted weekly for a year. The numbers are highly variable, with the ICOFR as low as 52% one week and up to 80% another, depending on when item receipts are heaviest.

During the past 20 years of working with multichannel companies, we have observed the results in figure 2, which shows several major categories of businesses and their initial customer orders, cancellations, inventory turnover, and customer returns. These are results for companies that are performing well and have capitalization for inventory purchases. It’s difficult for companies in the fashion apparel industry to perform above 70%, because 50%-75% of product is new in each major edition of their catalogs. A higher reorderability rate of product, an accurate history of item selling, shorter item lead time to restock, and higher inventory levels all potentially improve the ICOFR.

So let’s look at a few customer service nuances of this calculation. I like it as a measure of customer service because I believe it truly reflects what the customer expects. If he gives you an order for 3.0 items, he expects 3.0 items shipped. It’s a measure of inventory availability when the customer orders.

Also, if there are three lines on an order and you ship two, the calculation credits your ICOFR with 0% complete, which is why the ICOFR falls so dramatically. New products that really sell well with no history from which to accurately project demand strip the inventory and create the low customer service rate. This is shown in the figure 2 statistics comparing fashion apparel and reorderable/weekend apparel.

But we all know that there is a balance point between ICOFR and turnover. No business can service 100% of all orders daily and have an acceptable turnover or take the risk of overstocks. So the challenge is to find the optimal inventory point and determine how much risk you want to take.

The merchant also needs to take into account the cost of backordered merchandise. Our studies with hundreds of multichannel companies show that it costs $7 -$12 for each backordered unit of merchandise. This includes the shipping cost of the backordered unit, shipping material, additional labor, and the “Where is my order?” calls to the contact center. It does not include loss of shipping and handling revenue, potential loss of a customer from poor service, the merchandise buyer’s labor for expediting backorders, or the cost of air freight to expedite.

Measuring ICOFR does not mean you should stop measuring backorder rates or item rates. You should report all three. But the ICOFR is the only one that looks at customer service and inventory availability by order—as the individual customer experiences service.

If your management team doesn’t measure initial customer order fill rate, make it a priority to measure and report it by class and category as well as the total business weekly rate. Add it to your key performance indicator (KPI) dashboards and maybe your management objectives. Hopefully you will gain a new perspective on how well you’re serving your customer and in turn will manage the inventory optimally.

Curt Barry is president of F. Curtis Barry & Company, a consultancy specializing in fulfillment, contact center and inventory management for multichannel companies.