There is a lot of effort that goes into a fulfillment contract, but there are only a handful of major metrics that drive the overall relationship and costing with a provider. These metrics form the basis of the SLA – Service Level Agreements. Here’s a quick review of what they are and what they mean.
Total Orders Shipped within SLA / Total Orders Possible within SLA
This is probably the most important metric and it measures how well (or quickly) your fulfillment center is shipping something out after they receive the order.
Sometimes there may be a delay between when an order is placed and when your fulfillment center receives that order. The SLA should be based on when the fulfillment center has the order in hand. Once received, the fulfillment center has some predetermined amount of time before the order needs to be shipped; if an order shows up five minutes before they leave for the day, they’re not going to commit to having that order out the same day. The key here is knowing the cutoff time for the day which could be 12pm, 2pm, 4pm or anything in between. We recommend structuring your SLA to say something like “ships within 24 hours after receipt”, or “items that are received by 2 pm ship same day”.
One of the major levers that brands can pull to optimize their shipping SLAs and pricing from the fulfillment center is to be selective about which type of orders need to ship quickly – and being clear on what can wait. For example, if you’re shipping a medical device that you know consumers need ASAP, you probably want to set that up for same day shipping. If you also offer a subscription box of non-medical goods, then you can likely have them shipped within 2 days of receipt to save some money. Giving this kind of flexibility should give you a lower total cost as a result. Having same day cut offs late in the day (say 4pm) is more difficult for the fulfillment center and the higher the number of days that you can give, the happier they will be.
Number of Correct Orders Shipped / Total number of Orders Shipped
While it’s important to get things out quickly, it’s more important to get them out correctly. You want to make sure that your fulfillment center didn’t mix up sizes, products, or put your product in somebody else’s branded box. Every fulfillment center strives for perfection, but typically, you’ll see a 99.5% SLA commitment, which basically means that they can mix up five out of every thousand orders that they ship out. There are some common reasons why things could be incorrect -mislabeling at the line, a quality process that wasn’t followed, or new people all have an effect on order accuracy.
Unfortunately, the only way to measure order accuracy is after the fact because we assume that everything that goes out is accurate. You only know of a problem if a customer reaches out and says, “Hey, I got the wrong thing” or “this doesn’t work”, or “it’s damaged in some way”.
For this metric to really be accurate, it’s important that you have a strong linkage between your customer service team and your supply chain team so that any sort of mispicks or errors can be sent back to the fulfillment center for review. You and your fulfillment partner can do some research to see if there was a new crew working that day or if people were distracted over something else. Understanding the root cause can help you determine if it was a one-off event or a systematic problem that needs further review. Note that issues with shipping (IE lost package or delays) generally aren’t considered the responsibility of the fulfillment center.
Units Physically Counted / Units Expected in System
Inventory usually represents one of the biggest outlays of cash for a brand and when you send inventory to a fulfillment center you expect them to be good stewards of that inventory. Each fulfillment center will have some sort of system of record that will be used to keep track of the inventory on hand. This number will be reported by the Brand on their balance sheet and in most cases the fulfillment center will use the number to assess storage charges. In theory all damaged, off quality, and returned inventory should be accounted for until dispositioned by the Brand.
There are a few different ways that you can validate how well the inventory is being tracked. On one end of the spectrum, you could physically count every single item every day, however this is extremely costly, takes time, and may still be prone to errors given the human element. On the other end of the spectrum is a completely virtual cycle count where their system adds or subtracts items based on the activities that are happening to tell them how many units they have left. Virtually all fulfillment centers will do a physical count of inventory at least annually or as often as quarterly depending on the client.
It’s important for Brands to understand how frequently a physical count is actually going to happen because even if the system says that there are 100 units, it means that in reality there could be 94 units or 105 units. Comparing the physical and the virtual cycle counts can help you understand the most accurate picture. If there’s a big variance, it’s possible that someone miscounted and so you want them to go take a look at it again. If that doesn’t solve the problem then you may have a “shrinkage” problem and should dig into it with your fulfillment center.
Most providers tend to cap their liability to a specific percentage variance on a dollar perspective.
Correct Number of Invoices Received / Total Number of Invoices Received
Dollar value of Correct Charges / Total value of All Charges Received
You want your fulfillment center to make sure that they’re billing you correctly. This means that they’re using the right rates, shipping carriers, and there are no errors in the billing system. I had one experience where we were sending out full pallets to a retail customer and the fulfillment center in their system thought that it was 800 individual units and charged us that way versus a single pallet (the cost difference was a few thousand dollars!).
Measuring SLA’s is vitally important, but it doesn’t have to be a full-time job or a headache. This is why we’ve created Capabl to help you measure on time performance and order accuracy SLA’s in a clear concise way.
