Everyone in the fulfillment business knows how important it is to get product to customers But how do you know you are effective? One trap many companies fall into is looking at internally focused metrics to gauge their success. Let’s take on-time shipments. According to the Warehouse Education Research Council’s (WERC) 2005 benchmarking study being released in May at its annual conference, on-time shipments ranked as the number one most-used metric.
So your company is achieving 99.5% on-time shipments. According to WERC – you’d be considered “best-in-class” among your peers. Now let’s stop and think about this from the customer’s perspective. To make our point we’ll talk about Grandma Smith who ordered a pale blue sweater and hat set to arrive in time for Mother’s Day brunch with her entire family. The company shipped it out on time. Was Grandma Smith a satisfied customer? The answer? It depends. In this case, when Grandma opened the box, the sweater she received was the wrong size.
What really matters in today’s customer driven economy is “Did the customer get what they want, when they wanted it, how they wanted it?” In essence, on time shipments is just one part of the overall equation.
The desire to meet the needs of customers continues to increase. As companies’ drill down into their customer satisfaction, many are discovering they lack sound operational measures that can represent customer satisfaction. Several companies use customer satisfaction surveys–often done annually or at best quarterly. Or relying on customer satisfaction cards sent with the order. Even worse are companies that have fallen into the trap mentioned above as looking at functional specific metrics such as on time shipments as a proxy for customer satisfaction.
What is missing is a true connection to hard quantifiable operational measures that can help reflect customer satisfaction with a particular order. So when it comes to measuring a customer order, what does make sense measure? While every customer may list different attributes–logistics and warehousing thought leaders are encouraging companies to look at a new measurement–the perfect order index–to help them measure the success of a customer’s order:
A perfect order is typically defined as being delivered on time, complete, damage free, and having the correct invoice. The perfect order is calculated by multiplying the results of each of the four metrics to each other. For example, if a firm was experiencing 95% on time delivery, fill rate, correct invoice and damage free shipments, the resulting perfect order index would be 81.4% (95% x 95% x 95% x 95%). Had each of the measures been 90%, the perfect order index would drop significantly–to 65.6%.
While there are certainly variations on this theme, one of the benefits of this definition is its simplicity and the intuitive approach of measuring what is important to the customer.
While the on-time shipments metric reflects a distribution centers effectiveness, the perfect order index goes beyond functional performance and measures the effectiveness of the entire fulfillment process. As a metric, it the perfect order index has several benefits. First and foremost, it strives to capture the experience of the customer – from their perspective. Being out of synch on even one aspect can lead to a less than acceptable result. Second, it is easy to understand; executives understand and can grasp if the order was perfect or not. Third, it is based on metrics that most company should already be measuring.
At first glance, using the perfect order would seem fairly straight forward. And, for the most part, it is. Yet, before implementing this metric, it would be wise to fully define each of the components to avoid confusion. As “on-time delivery” is the one component that has the greatest opportunity for improvement, we will define it last.
Delivered damage free Defects or damage can happen in various areas including manufacturing, the distribution center, or the carrier. Often each area is only focused on quality within their four walls and do not extend their view of defective or damaged product once it has left their dock. The customer does not care if the product was damaged by the distribution center or the carrier–it is damaged and it causes them an inconvenience or worse, an out of stock situation.
By extending the measurements of damage-free product through the carrier, it helps the company see damage from their customer’s vantage point. In essence, tracking damage throughout the process helps companies work with the different areas where quality can be affected–be in manufacturing, distribution or the carrier. It also helps a company get the various functional areas on board to achieve an overall quality level from a holistic customer point of view. Root-cause analysis can be done and various departments can work to improve their actions to increase overall quality. Tracking down the root cause of the damage is imperative to making actionable improvements in damage.
Delivered complete Orders should be shipped–and delivered–complete. This is a 100% fill rate for all products and all lines; no items shall be left behind. While a complete order may at first glance appear to be straightforward one aspect that should be addressed is substitutions.
For instance, a customer may order an item, only to find that it is out of stock. Instead of back ordering the item, they request a substitute. The order could be defined as being complete, since the shipment includes all of the products that the customer ordered. Yet, it doesn’t capture the original intent and desire of the customer. Nor does it capture the lost sale for the original item. Compounding the problem, this tends to skew the demand pattern for the substituted item, potentially leading to more inventory being held for this product. For these reasons, we believe that shipments containing substituted products should not be considered “complete”
Unfortunately, not all situations are as clear cut as the one above. All of us have had customers that will call to inquire what is on hand, and then order accordingly. Inquiries about what is in stock are different than placing an order. If inventory levels are made available to customers over the Internet, it may be impossible to efficiently ascertain to their initial intent and desire. Managers will have to determine how they will define an inquiry about inventory levels, and whether these inquires led to a substitution.
Accurate invoice Defining this metric is fairly straightforward. Either the invoice accurately reflects the shipment, or it does not. The invoice should reflect the items ordered, the correct quantity, correct terms, and the correct price. If substitutes were made and agreed to by the customer, the invoice should show the substituted products, not the originally requested items. This is especially important for companies shipping business to business shipments. If an invoice is correct and accurate in all details it can be easily processed and paid.
On-time delivery to requested date without expedites
One of the hardest measures to gain agreement on is on time delivery. We recommend that companies track their on time delivery to the date requested by the customer without expedited processes (pick and pack or shipment). This means measuring that product shipped when the customer asked–not when a company can ship.
For companies that do not have sophisticated systems or links into the carriers it may be hard for them to measure on time to delivery. For many customers, the gap between on time shipment and delivery is very important. This is especially true in the retail sector where retailers schedule delivery appointments to ease their back-end operations. Carriers–especially the larger and more sophisticated ones–are offering delivery time information, which is making this more possible. And parcel shipment carriers such as FedEx and UPS have been offering proof of on time delivery for years.
Finally, this metric must take into account whether or not the order was expedited to meet delivery times. Failure to do so could lead to an exponential rise in expedited shipping and have a negative impact on firm profitability. This does not mean that a company should not expedite shipments–especially of the customer is willing to pay for the expedited service.
There is good news and bad news associated with perfecting your perfect order. The good news is that our experience shows that many companies are already collecting data for many of the components involved a perfect order. The bad news is that the components may have not been well defined across the company. To start, we recommend five steps:
- Find out what metrics are currently being employed
- Determine the definition of the metrics and communicate across the organization
- Determine how often the metric will be calculated; that is, by week, month, customer, etc.
- Put someone in charge – and responsible – for the measure
- Set a realistic goal
Kate Vitasek is managing partner of Bellevue, WA-based Supply Chain Visions. Karl Manrodt is an associate professor at Georgia Southern University.