Measuring key performance indicators (KPIs) is essential not only for your operations but also for tracking the performance of your 3PL. That is why businesses that outsource their operations should constantly measure the performance of their 3PL partners. We explore the KPIs they can use.
What is 3PL?
A 3PL refers to a company specializing in services dealing with distribution, transport, storage and fulfilment services to customers. Some companies choose to outsource the services of 3PLs to assist in their business operations. Therefore 3PLs can be regarded as being essential in supply chain management.
KPIs are essential to gain an understanding of how a business is performing. Whenever businesses use the services of a 3PL, the intention is always to increase the efficiency of their operations. Using a 3PL also directly impacts the efficiency of the business. Therefore, companies can use the following KPIs to measure operations.
1. Inbound Receiving On Time
The first key performance indicator that businesses need to measure is the 3PLs’ ability to receive and process inbound inventory timelessly. To measure this KPI, companies will need to look at the time the order arrives at the 3PLs’ facility until the end when they have checked the inventory. You should also measure the put away to a bulk storage location and the 3PL confirming when they are ready to deliver. The service level agreement will establish the expected performance of the process in place. The expectation for the 3PL should be 95% or higher for inbound orders being checked and put away based on the service level agreement.
2. Dispatch on Time
The dispatch KPI measures the 3PLs’ ability to be efficient in the order fulfilment process. The business should measure the time the 3PL uses from the time it receives an outbound order until the order is picked and then packed so that it is ready to be dispatched or collected by the carrier. The time expected to fulfil orders will depend on the business’ service level agreement with the 3PL. In the case of eCommerce orders, if the company wants to offer same-day delivery, then the 3PL is expected to ensure that the order is received by the agreed cut off time.
The 3PL’s performance is measured based on their ability to have orders ready for collection or dispatch by the carrier on the specified date or before the date arrives. The goal is for the 3PL to have 95% or more outbound orders delivered based on the service level agreement in place.
3. Inventory Accuracy
Inventory accuracy is measured based on the outbound order fulfilment process. If items required for orders cannot be found during the picking process, it will affect the order fulfilment process. These inventory accuracy issues can result from errors within the receiving and put-away processes. Inventory accuracy issues can also be due to theft or pilferage happening when goods are stored. The purpose of this KPI is to measure the 3PLs ability to have accurate inventory levels as this will lead to them being able to meet other expectations, such as the receiving and dispatch KPIs. Ideally, the 3PL should experience discrepancy levels of less than 1% of the total units.
4. Returns Processing Time
With the rise in eCommerce, businesses are experiencing higher volumes of returns than before. Some businesses have also started to offer their customers free returns to entice them to buy more items. Therefore, the 3PL provider must process returns on time as most returned items will be in good condition and could be used for resale. For businesses to measure the returns KPI, they need to consider when the 3PL receives a returned order until the end of the process when that item has been processed where it is put back for resale or when it is disposed because it is faulty or damaged. Ideally, the 3PL should process returns for 48 to 72 hours. The goal is for the 3PL to achieve a 95% or more returns process.
5. Cost Per Unit Shipped
While the four KPIs mentioned above measure the process performance, the cost per unit shipped measure the overall costs for the 3PL operations based on the units shipped. It might seem like you should monitor the costs of each activity, such as storage, put away, receiving and order fulfilment. It is better if the business uses the relative measure as it will offer a better comparison of each cost period. For efficient operations, the cost per unit shipped needs to remain constant or reduce costs even with increased outbound volume.
Whenever 3PLs experience a higher cost per unit, they will need to look at the charges involved for each activity to determine what is driving the rise in expenses. The cost per unit shipped will differ based on the items that your business ships and the location of your customers. However, if your expenses are too high or rapidly increasing, it could indicate a problem.
6. Return Rate Due to Shipment Damage or Error
There is always the possibility that some packages will be damaged when being delivered to customers. However, if customers are constantly returning packages due to them being damaged, this could indicate there being an issue with the 3PL. Packages can be damaged because they are packed without enough padding or are packed in boxes that are too big.
The business must choose key performance indicators that they will use to monitor the performance of 3PL operations to ensure that they are meeting customer needs. By using the KPIs mentioned above, they will ensure that their performance gets better by ensuring that goods are delivered on time.