SME

By FedEx | May 17, 2024

From order fulfilment to inventory and delivery time, discover some key metrics for measuring the logistics efficiency of your small business and streamlining your supply chain.

Effective shipping, packing and delivery management can impact businesses of all kinds. Even if you don’t sell goods or engage in import and export activities, you may still need to ship something in a professional capacity, from office supplies to urgent documents. That’s where supply chain decision-making – or logistics strategy – comes in.

Logistics management is also essential for e-commerce-related businesses, but the formula for success can be tricky to nail. Developing the right supply chain strategy takes time and depends on your specific role. Whether you’re a buyer, seller, e-tailer or manufacturer, your logistics priorities will differ.

Other factors that will influence your logistics strategy include the type of goods you sell, your sector, your chosen logistics partner, and how far your company has gone to adopt digital-first operations.

To enhance the overall customer experience, small business owners need to understand how to measure efficiency across their supply chains. For those new to logistics, navigating supply chain metrics, terms, processes, shipping formulas and calculations can be confusing. Understanding them properly means you can ship more smoothly. Plus, you’ll be better equipped to determine the full capabilities of any potential logistics partners.

Read on for our guide to some key logistics metrics to help you evaluate and optimize your supply chain strategy.

Useful logistics metrics for small businesses that ship

A wide range of different metrics measure efficiency and customer satisfaction in relation to supply chain. To get started, focus on those most relevant to your business operations. This includes a range of metrics spanning inventory, order fulfilment, delivery experience and cost efficiency. By tracking these areas, you will be able to gain valuable insights into how your overall approach to logistics is impacting your business.

1. Inventory-based metrics

Regular data on the movement of your inventory is critical for understanding if your business is operating correctly: are you holding and buying the right stock?

Inventory turnover rate

The inventory turnover rate measures how quickly you sell stock of a certain product over a set period of time. This metric is calculated by dividing the cost of goods sold by the average cost of inventory during a certain period.

Higher inventory turnover rates can mean sales are high, which is beneficial for retailers looking to compete. However, higher inventory turnover rates might also indicate mismanagement with inventory ordering, so it’s important to analyze the source of a turnover rate.

Cost of goods sold (COGS)

Knowing your cost of goods sold and average inventory value are key indicators of how efficiently your inventory is operating. COGS is calculated by subtracting ending inventory (the value of all the products that have not been sold) from the total sum of beginning inventory (which should equate to the ending inventory from the previous accounting period) and cost of purchases.

Average inventory value

To calculate the average inventory value, add the value of beginning inventory and ending inventory, and divide the total by two.

Inventory to sales ratio

Another useful metric to measure is inventory to sales ratio. Also known as stock to sales ratio, it is calculated by dividing the average inventory value by your net sales (gross sales minus any discounts, allowances and returns).

2. Order fulfillment metrics

These metrics can help you quickly get a handle on whether you’re delivering a consistently high customer experience when you make a sale. You can also use these metrics to evaluate your wholesalers or suppliers.

Lead time

Lead time is the time between a customer placing an order with you and them receiving it. The most basic way to calculate lead time is by subtracting the order request date from the order delivery date. Small businesses can calculate a percentage of how often deliveries reach customers on time.

Customer backorder rate

Metrics like customer backorder rate and order error rate track supply chain slip-ups, alerting you to areas of logistics that can be improved. The backorder rate (total backorders divided by total orders, multiplied by 100) looks at how many orders you’re unable to fulfil at the time a customer places them.

This could be due to a lack of stock or miscalculated inventory, gaps in your supply chain, being under-resourced, or technical blips. To avoid backorder issues, consider proper forecasting, better adoption of digital tools for more precision and accuracy, and diversifying your supply chain to address shortages and bottlenecks as soon as they occur.

Order error rate

Order error rates track how many times you got an order wrong. This metric can flag issues with your order processing platforms or systems and highlight human error. To calculate the percentage of orders with errors, divide the number of orders fulfilled incorrectly by the total number of orders, and multiply that by 100. The order accuracy rate is the inverse of the order error rate.

Manufacturing cycle time

If you rely on a manufacturer directly or make your own products, tracking the manufacturing cycle time also helps to understand whether goods you manufacture are taking too long from factory to final sale.

3. Delivery-based metrics

Particularly useful for suppliers and e-tailers, calculating how often deliveries are made on time and without error are also important indicators of how your business is doing.

On-time delivery rate

The on-time delivery rate is an important metric for knowing if you’re meeting delivery targets and reaching customers in the window promised. This often depends on the reliability of your logistics provider and the accuracy of their delivery forecasting.

One way to measure is to divide the number of orders delivered on time by the total number of orders delivered, and multiply that by 100. To understand if you are preparing your shipments quickly enough, you can substitute orders delivered on time for orders packed on time.

Perfect order rate or index

When orders are fulfilled correctly and precisely (right products, quantity, quality, shipping details, etc.) in all aspects of the supply chain, it can be scored as a perfect order. A perfect order rate reflects how error-free your deliveries are. One formula for calculating this is by dividing the number of perfect orders (total orders minus orders with errors) by total orders, and multiplying that by 100.

Damage-free delivery rate

Some businesses also calculate the damage-free delivery rate, which refers to the number of orders that were delivered free of any damage. This is calculated by dividing the number of damage-free deliveries by the total number of deliveries, multiplied by 100.

4. Cost-efficiency metrics

Freight cost per unit

If you’re shipping volume, freight cost per unit (total freight cost divided by total units) helps you optimize shipping costs. Shipping prices for freight can rise and fall depending on supply chains contracting, time of year, destination, origin and supplier.

Established global logistics players often commit to standardizing service costs even if they experience supply chain disruption. One major benefit of using a third-party logistics provider is that they can absorb higher operating costs on your behalf. For last-minute shipments, you can often get discounts on bulk shipping, bringing your freight cost per unit down overall.

5. Sustainability-based metrics

Shipping emissions

Small businesses and e-tailers can minimize their carbon footprint all along the supply chain by keeping track of metrics such as carbon emissions, generated waste, energy use and supplier sustainability. As well as keeping up with growing regulatory compliance, this information can be shared with customers who want to know more about the environmental impact of their orders.

For emissions, our FedEx Sustainability Insights tool offers customers near-real-time data on their shipments. Every company’s shipping emissions look different, even within the same industry. The best baseline is your own emissions. You can track your results by mode of transport, service type, and country or territory, and look for ways to help them trend lower. If you’re reducing emissions over time, you can use the data to show customers your commitment to protecting the environment.

When it comes to supply chains, measuring efficiency matters

Tracking these performance metrics was once done manually, but these days, digital-first tools and advanced technology mean you can use automation to tap insights in seconds.

Ultimately, identifying the right logistics partner is key. With access to innovative solutions for speed, reliability and guaranteed delivery times, your business can focus on other areas of growth.