5 Key Performance Indicators for Monitoring 3PL Operations

In this article we look at 5 Key Performance Indicators (KPI) for managing your third party logistics (3PL) operations.

Whilst there is a tendency to think that a lot of KPI are required to monitor an outsourced 3PL operation , the reality is that the following 5 are really all that are needed.

1. Inbound receiving timeliness
2. Dispatch timeliness
3. Inventory accuracy
4. Returns processing timeliness
5. Cost per unit shipped

1. Inbound receiving timeliness

Inbound receiving timeliness - sometimes referred to as "dock to stock" is the measure of the 3PLs ability to process inbound inventory in a timely manner.

For this key performance indicator (KPI) , the clock starts from the time the order arrives at the 3PL facility and ends once the stock has been checked, put away to a pick face or bulk storage location and has been confirmed by the 3PL as available to ship.

The service level agreement will determine the expected performance level but a reasonable expectation is 24 hours for AIR and less that full container loads (LCL) shipments and 48 hours for full container loads (FCL)

A goal of 95% or more of inbound orders being checked and put away by the agreed service level is a reasonable expectation for  any 3PL.

2. Dispatch timeliness

Dispatch timeliness measures the efficiency of the order fulfillment process.

For this key performance indicator (KPI) the clock starts from time the 3PL receives an outbound order and ends when the order has been picked and packed and is ready for dispatch or collection by the carrier.

The expected service level will vary depending on the order type and the service level agreement with the 3PL.

For eCommerce orders or "at once orders" (where there is no future disaptch specficied) same day shipment is a reasonable expectation providing the order is received by the agreed cut off time.
e.g. any order received by 10 am should be ready to ship on the same day and any order received after the 10 am cut off is not expected to be ready to ship ship until the next day. Most 3PLs will make every effort to ship these orders on the same day but they should not be considered as a service level failure if they do not.

For orders where there is a future dispatch date specified - sometimes refereed to as the "ship by date" or "cancel date" the expectation is that the orders will be ready to ship on or before the specified date.

The 3PL should be measured on their ability to make the order ready for dispatch or collection by the carrier on or before the future date specified on the order.

Regardless of the order type, a goal of 95% or more of outbound orders being ready to ship by the agreed service level is a reasonable expectation for  any 3PL.

3. Inventory accuracy

Inventory accuracy is ultimately measured as function of the outbound order fulfillment process.

If an item that is required to be picked and can not be located during the order fulfillment process then there is obviously a problem with the integrity of what is showing as stock on hand in the 3PLs warehouse management system (WMS) and what is physically located in the pick face or bulk storage location.

Inventory accuracy issues can be caused by errors in the receiving and put away process or in the order fulfillment process. They can also be caused by  theft or pilferage occurring whilst the goods are being stored at the 3PL site.

Cycle counting and stock takes can be undertaken to check the integrity of  the stock on hand and to mitigate the occurrence of ordered items not being available to ship during the order fulfillment process.

In this KPI the 3PL is being measured on their ability to maintain accurate inventory levels which are supported by robust inbound receiving and outbound dispatch processes that must also be performed in a timely manner in order to also satisfy the expectations of the receiving and dispatch  KPIs.

The service level agreement will determine the expected performance level but a reasonable expectation is that a discrepancy of less than 1% of the total units on hand would be discovered during the outbound order fulfillment process or as a result of any cycle counting or stock taking activities.

4. Returns processing timeliness

Returns processing timeliness measures the ability of the 3PL to process returned goods in a timely manner.

Historically goods were only returned if an item was received in a damaged or faulty state or to rectify a warehouse picking or shipping error.

As a percentage of units shipped the volume was much lower for these types of cases but these days the volume is significantly higher due to the increase in the number of eCommerce orders. To entice customers to buy, many online retailers offer free returns and therefore customers will buy multiple color or size options with the intention of sending back what they don't want.

In order to cater for this increased volume of "convenience returns" it is now even more important that returns are processed in a timely manner as quite often a large portion of the goods will be in perfectly good condition and will need to be processed and returned to stock as soon as possible so as they can be made available for resale.

For this key performance indicator (KPI) the clock starts from the time the 3PL receives the returned item and will end when the item has been processed and either put back to stock for good items or disposed of, or quarantined pending further action, for faulty or damaged items.

The service level agreement will determine the expected performance level but 48 to 72 hours for processing returns is a reasonable expectation.

A goal of 95% or more of returned items being processed by the agreed service level is a reasonable expectation for  any 3PL.

5. Cost per unit shipped

Whilst the other four key performance indicator (KPI)  are measuring process performance the cost per unit (CPU) shipped KPI is a measure of the overall cost of the 3PL operation using units shipped as the common denominator.

Although it is important to monitor the total and combined cost of each activity (receiving and put away, storage, order fulfillment) using a relative measure provides a better comparison of each cost period.

Obviously an increase in outbound volume will increase the overall cost of the 3PL operation.

For an efficient operation however the cost per unit (CPU) shipped should remain constant or should actually start to reduce as the outbound volume increases.

A rising CPU is a trigger to start taking a closer look at the charges for each activity to determine what is driving the anomaly.

Cost per unit (CPU) shipped is calculated  by dividing the total cost of the operation for the period by the total number of units shipped for the same period. It typically excludes the transportation costs from the 3PL site to the customer.

It is difficult to compare the cost of one 3PL operation to another as the customer requirements and therefore the cost components for each activity can vary, the key however it to be able to detect inconsistencies in the cost per unit shipped from period to period, to determine the cause and to take the necessary action to rectify the situation.

For some practical tips on how to reduce some of these costs you can refer to my previous post on 5 Opportunities for Cost Reduction in your 3PL Warehouse