KPIs for Shipping and Logistics 101: A Beginner’s Guide for SMBs

KPIs for Shipping and Logistics 101: A Beginner’s Guide for SMBs
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When it comes to shipping and logistics, details count, especially for small and medium-sized businesses (SMBs). Here’s a simple truth: boosting your supply chain efficiency by just 10% can yield better results with less effort than increasing sales by the same percentage. 

In other words, focusing on supply chain efficiency can have a more significant impact on your profits than simply trying to sell more.

So, how can you tap into this potential? The answer lies in Key Performance Indicators (KPIs).

KPIs are like your compass in the complex landscape of logistics. They guide you toward operational efficiency and cost savings, revealing successful strategies, areas of weakness, and opportunities for improvement.

This guide is here to demystify KPIs in shipping and logistics for SMBs, giving you the crucial insights you need to steer your business in the right direction, regardless of whether you’re doing it on your own or with the help of a trusted freight forwarding partner.

What are KPIs?

So, what does KPI mean in shipping? In shipping, Key Performance Indicators (KPIs) are measurable metrics that indicate the effectiveness of shipping operations. Think of them as objective health indicators for your company’s performance.

Importance of KPIs in Shipping Operations

SMBs use KPIs to optimize their logistic operations for the following reasons:

  • KPIs Offer You Measurable Results: They provide tangible, clear-cut data that tells you exactly how you’re doing. 
  • They Serve as a Strategic Guide: By understanding your current performance, you can make proactive plans for the future. 
  • KPIs Drive Improvement: They highlight areas of strength and weakness, enabling you to refine your operations and foster growth.

Use of KPIs in the Shipping Industry

KPIs in shipping are crucial to the sector. Common KPIs aid businesses in refining shipping operations and meeting customer demands. For example, high on-time delivery rates usually coincide with an SMBs high shipping efficiency. High rates often result in satisfied customers and recurring business.

Conversely, a high freight cost per unit suggests a need for a more affordable shipping strategy.

KPIs also benchmark performance against industry standards or competitors, suggesting strategy adjustments when lagging.

Beyond data collection, KPIs convert data into actionable insights. In shipping and logistics, this means data-driven decisions fostering efficiency, cost reduction, and business growth.

So, now you understand the importance of KPIs in the shipping and logistics industry, but which ones should you focus on as an SMB? Let’s dive into some key indicators that can significantly impact your operations.

On-Time Delivery Rate (OTD)

Ensuring On-Time Delivery (OTD) is key to customer satisfaction, especially for delivery services and eCommerce businesses. They often use a Key Performance Indicator (KPI) to measure their effectiveness in fulfilling orders within the set delivery period. One of the most critical KPIs for transport and logistics is the on-time delivery rate. 

Your ability to fulfill customer orders relies heavily on your ability to import and handle the goods you intend to sell to customers, which is why this KPI plays a crucial role in the entire shipping process.

While it’s often used in a B2C context to measure the effectiveness of delivering orders to end customers, it can also be applied in a Business-to-Business (B2B) context. For instance, a business importing goods would be interested in whether their freight forwarder is delivering their shipments on time. Delays in receiving imported goods can have a negative impact on the rest of the business operations, including the B2C process.

The formula to calculate the On-Time Delivery KPI is as follows:

100 – [ (No. of late deliveries*100) / Total no. of deliveries] = % of on-time deliveries

Let’s assume you have made a total of 500 deliveries in a month, out of which 450 were on time and 50 were late.

On-Time Delivery Rate = 100 – [(50*100) / 500] = 90%

Benefits of On-Time Delivery KPI

  • Customer Satisfaction: Customers appreciate a reliable delivery service. Delivering on time builds trust, leading to repeat business and customer loyalty.
  • Operational Efficiency: Regularly monitoring this KPI allows you to identify bottlenecks in your supply chain and optimize your processes.
  • Competitive Advantage: On-time delivery can distinguish your business from competitors, especially in an era where instant gratification is expected.

Common Challenges with On-Time Delivery KPI

  • Internal Issues: Mismanagement of inventory, inefficiencies in order processing, or poor logistics planning can lead to late deliveries.
  • External Factors: Factors like traffic, weather conditions, and carrier delays are beyond a company’s control but can negatively impact on-time delivery rates. One way to mitigate the impact of such factors is to work with reliable logistics and freight forwarder partners that offer efficient communication channels for updates and possible questions.

Order Accuracy Rate 

The order accuracy rate is a critical KPI for shipping and logistics that measures the percentage of orders delivered without any errors. Errors can include wrong items, incorrect quantities, or damaged products. As an SMB engaged in import or export activities, the ability to accurately deliver or receive goods will influence your overall supply chain operations. 

You can use this KPI to determine if your partners are trustworthy or if you might want to consider changing your manufacturing company, carrier, or freight forwarder.

The formula to calculate the order accuracy rate is as follows:

Order Accuracy Rate = (total orders fulfilled accurately / total orders fulfilled)*100

Suppose you’ve imported 1000 items, out of which 975 were delivered accurately.

Order Accuracy Rate = (975 / 1000) * 100 = 97.5%

Benefits of Order Accuracy Rate

  • Improved Customer Satisfaction: An accurate shipment of imported goods will result in smooth business operations and the ability to fulfill orders for customers, ensuring loyalty and retention.
  • Reduced Costs: Minimizing errors cut down on return, exchange, and re-shipment costs.

Common Challenges with Order Accuracy Rate

  • Inventory Mismanagement: Incorrect inventory levels can lead to picking and shipping wrong items, impacting the order accuracy rate.
  • Human Errors: In the picking, packing, and shipping process, mistakes can happen. These mistakes lead to inaccuracies in orders.
  • System Errors: Inaccuracies in the order management system or glitches in technology can also lead to order errors.
  • Revaluing Partnerships: If the Order Accuracy Rate is not sufficient, you might be working with the wrong service provider. Perhaps it is time to choose a new freight forwarding service.

Order Cycle Time

Order Cycle Time is a vital KPI in shipping and logistics that measures the amount of time from when a customer places an order until the product is delivered to them. The lower the order cycle time, the more efficient the order fulfillment process.

If an SMB can reduce its order cycle time by streamlining processes or improving supplier relationships, it can promise faster delivery times to its customers. This could be a significant advantage in industries where delivery speed is a key factor in customer choice, such as e-commerce or the retail sector.

The formula to calculate order cycle time is as follows:

Order Cycle Time = (time customer received order – time customer placed order) / # total shipped orders

If you received 300 orders this month, and the total time taken to fulfill these orders (from the time the order was placed to when it was received by the customer) was 6000 hours.

Order Cycle Time = 6000 / 300 = 20 hours

Benefits of Order Cycle Time

  • Enhanced Customer Satisfaction: A shorter order cycle time means customers get their orders faster, improving satisfaction and loyalty.
  • Operational Efficiency: Monitoring this KPI can help identify inefficiencies in the supply chain and enable improvements.
  • Increased Revenue: Efficient order processing can lead to higher order volumes and, consequently, increased revenue.

Common Challenges with Order Cycle Time

  • Supplier Delays: Any delay in receiving supplies can prolong the order cycle time.
  • Operational Inefficiencies: Bottlenecks in the order processing, picking, packing, or shipping processes can increase order cycle time.
  • Logistics Delays: Factors such as carrier delays or customs hold-ups can also extend the order cycle time.

Cost Per Order

Cost Per Order, a crucial KPI in shipping and logistics, refers to the total operational cost involved in fulfilling an order, divided by the number of orders. This includes costs related to order processing, picking, packing, and shipping.

Cost Per Order allows businesses to quantify the direct costs associated with each order shipped internationally, including freight charges, customs duties, insurance, and other related expenses. This granular insight into shipping costs can help SMBs optimize their supply chain, negotiate better rates with shipping providers, and make informed decisions about which markets to target based on shipping cost efficiency. 

Freight forwarders, with their expertise and network, can help SMBs reduce their Cost Per Order by finding the most cost-effective and efficient routes, handling customs paperwork, and consolidating shipments. 

For example, a small and medium-sized business selling handmade furniture to retail furniture stores might find that the Cost Per Order for shipments to North America is significantly lower when using a particular freight forwarder who specializes in that route and can consolidate their goods with others to fill a container, leading to lower costs. 

The use of the Cost Per Order KPI in conjunction with freight forwarders can lead to more strategic decision-making and cost savings in international shipping for SMBs.

The formula to calculate the Cost Per Order is as follows:

Cost Per Order = Total Order Fulfillment Cost / Number of Orders

Assuming the total order fulfillment cost for the month was $5000 and you had 1000 orders.

Cost Per Order = $5000 / 1000 = $5

Benefits of Cost Per Order

  • Financial Oversight: Knowing the cost per order helps a business understand its financial health and profitability.
  • Operational Efficiency: It allows a company to identify areas where costs are high, and efficiency can be improved.
  • Pricing Strategy: Understanding the true cost of fulfilling an order can guide pricing and discounting strategies.

Common Challenges with Cost Per Order

  • Variable Costs: Costs associated with order fulfillment can vary, making it challenging to accurately calculate cost per order.
  • Indirect Costs: There may be indirect costs that are not easily attributable to specific orders, but they should nevertheless be factored into the calculations. Incorporating these costs can make the calculations more challenging, but it’s necessary for an accurate representation of the Order Accuracy Rate. This requires a more nuanced approach where you distribute these indirect costs across all orders based on some logical method, such as the proportion of direct costs each order incurs, or evenly among all orders if a more specific distribution can’t be determined.
  • Complexity in Large Operations: In large operations with various product lines and fulfillment processes, calculating an accurate cost per order can be complicated.

Inventory Turnover Rate

Inventory Turnover Rate is a key KPI in shipping and logistics that measures how frequently a business sells and replaces its inventory within a certain period. A higher rate indicates more sales, while a lower rate might signify slow-moving stock or overstocking.

For example, an SMB involved in shipping furniture globally could use the Inventory Turnover Rate to identify which devices sell faster in different markets, allowing them to adjust their inventory based on regional demand and reduce the risk of obsolescence. 

When partnering with a freight forwarder, this KPI becomes even more beneficial. Freight forwarders can help optimize shipping schedules based on the Inventory Turnover Rate, ensuring that inventory levels align with demand and minimizing storage costs at both the origin and destination.

By monitoring and optimizing their Inventory Turnover Rate, SMBs can make more informed decisions, improve their supply chain efficiency, and enhance their overall business performance in the competitive landscape of international shipping.

The formula to calculate the inventory turnover rate is as follows:

Inventory turnover = Cost of Goods Sold (COGS) / Average Inventory

If your cost of goods sold (COGS) for the year was $200,000, and your average inventory value was $50,000.

Inventory Turnover Rate = $200,000 / $50,000 = 4 times

Benefits of Inventory Turnover Rate

  • Inventory Management: Understanding your inventory turnover rate can help you better manage your stock levels, reducing holding costs.
  • Profitability Insight: A high turnover rate often means that a business is selling its inventory efficiently, which can lead to higher profitability.
  • Sales Trend Analysis: Inventory turnover can help you spot trends in sales and customer demand.

Common Challenges with Inventory Turnover Rate

  • Overstocking: A low turnover rate might indicate that you’re overstocking, which can lead to higher holding costs and obsolete inventory.
  • Understocking: A high turnover rate could indicate that your inventory is depleting too quickly. This might lead to situations where you’re out of stock, which can result in lost sales. However, the challenge here isn’t just about calculating turnover rates or managing inventory—it’s about understanding the potentially significant impact on your business outcomes. Running out of inventory means not just lost sales but also lost customers who may turn to competitors. This potential damage to customer loyalty and your business’s reputation is a serious consequence of understocking that must be strategically managed.
  • Seasonal Variations: Some businesses might experience high turnover during certain seasons and low turnover during off-peak times, making it challenging to maintain optimal stock levels.

Back Order Rate

Back Order Rate, a vital shipping and logistics KPI, quantifies orders that can’t be fulfilled immediately but are awaited by customers. A lower rate suggests good inventory control, whereas a higher rate could signal stock management problems. By monitoring this KPI, SMBs can identify bottlenecks in their supply chain and take corrective actions to improve their service level and reduce lead times.

When using freight forwarders, the Back Order Rate KPI becomes even more valuable. Freight forwarders manage the logistics of shipping goods from one international destination to another, a process that involves multiple carriers, legalities, and jurisdictions. They can help SMBs navigate these complexities and ensure timely delivery of goods. 

For example, a wholesaler company shipping furniture from China to Canada might use the Back Order Rate KPI to identify issues with its inventory management. If they frequently run out of stock and have to place customer orders on back order, they might need to adjust their production schedule or inventory levels to better meet demand.

The formula to calculate Back Order Rate is as follows:

Back Order Rate = (Number of Back Orders / Total Number of Orders)*100

Let’s say you had 500 orders in a month, and 25 of them were back orders.

Back Order Rate = (25 / 500) * 100 = 5%

Benefits of Back Order Rate

  • Inventory Management Insight: A lower back order rate indicates effective inventory management and forecasting, minimizing the instances of stock-outs.
  • Customer Satisfaction: Keeping the back order rate low means customers get their orders fulfilled on time, which leads to higher customer satisfaction.
  • Profitability: A lower back order rate ensures that sales are not lost due to unavailable inventory, leading to higher profitability.

Common Challenges with Back Order Rate

  • Inventory Management: If the back order rate is high, it suggests inventory management issues, such as poor forecasting or supply chain disruptions.
  • Customer Dissatisfaction: Back orders may lead to customer dissatisfaction and lost sales as customers might not always be willing to wait for their orders to be fulfilled.
  • Operational Efficiency: Managing back orders requires additional resources and processes, which can impact operational efficiency.

Freight Cost per Unit (FCPU)

Freight Cost per Unit is an essential KPI in shipping and logistics that indicates the average shipping cost for each unit of a product. This measure aids businesses in assessing the efficiency and cost-effectiveness of their shipping practices. By monitoring and optimizing this KPI, SMBs can identify opportunities to reduce shipping costs, improve efficiency, and increase their profit margins.

Partnering with freight forwarders can further enhance these benefits. Freight forwarders have extensive knowledge and connections within the shipping industry, which can help SMBs secure better shipping rates and routes, thus reducing the Freight Cost per Unit. They can also provide valuable advice and solutions to optimize packaging and consolidate shipments, which can further decrease freight unit costs.

For example, an SMB that exports handmade crafts from Vietnam might find that their FCPU is high due to the irregular sizes and weights of their products. In order to solve this problem, they could redesign their packaging to fit more units into a standard shipping container, thereby reducing the FCPU.

The formula for Freight Cost per Unit is as follows:

Freight Cost per unit = Total Freight Cost / Total Number of Units shipped

If the total freight cost for the month was $10,000 and you shipped 5000 units.

Freight Cost per Unit = $10,000 / 5000 = $2

Benefits of Freight Cost per Unit

  • Shipping Efficiency: Understanding your Freight Cost per Unit can help identify inefficiencies in your shipping process and areas for improvement.
  • Cost Management: This KPI can help businesses better manage and control shipping costs, ultimately improving profitability.
  • Pricing Strategy: Freight cost per unit can impact pricing strategies, and understanding this KPI can guide more informed decisions about product pricing.

Common Challenges with Freight Cost per Unit

  • Fluctuating Freight Costs: Freight costs can fluctuate due to a variety of factors such as fuel prices, carrier rates, or changes in shipping regulations, making it challenging to maintain a consistent Freight Cost per Unit.
  • Diverse Product Sizes and Weights: If a business ships a wide range of products with different sizes and weights, calculating an average Freight Cost per Unit can be complex.
  • International Shipping: Different countries might have different shipping rates and customs regulations, which can complicate the calculation of Freight Cost per Unit for international shipments.

Return Rate

Return Rate, an important KPI for shipping, logistics, and especially e-commerce, calculates the proportion of sold items that customers send back. High return rates can indicate issues with product quality, inaccurate product descriptions, or problems with packaging and shipping, which can negatively impact customer trust and business reputation. On the other hand, a lower rate indicates higher customer satisfaction and reduced costs from handling returns.

When SMBs partner with freight forwarders, they can tap into their expertise in managing complex logistics and handling large goods like furniture or fragile items that require great care, ensuring that these goods are properly insured and delivered. 

Therefore, by monitoring the Return Rate KPI and collaborating with a freight forwarder, SMBs can achieve significant cost savings, improved customer satisfaction, and a stronger business reputation.

The formula for Return Rate is as follows:

Return rate = (Number of Returned Items / Number of Sold Items)*100

Suppose you sold 1000 items in a month, and 50 were returned.

Return Rate = (50 / 1000) * 100 = 5%

Benefits of Return Rate

  • Customer Satisfaction Insights: A low return rate can indicate high customer satisfaction, while a high return rate might suggest issues with the product or the fulfillment process.
  • Cost Management: Returns can be costly to process. Understanding your return rate can help in identifying ways to reduce these costs.

Common Challenges with Return Rate

  • Processing Costs: Returns involve shipping, handling, and restocking costs. High return rates can significantly impact a company’s profitability.
  • Quality Control: Returns may indicate problems with product quality, sizing, or accurate portrayal on e-commerce sites.

Ship4wd and your Business’ Logistics Processes

Understanding and effectively utilizing KPIs can be transformative for SMBs, enabling precise measurement of performance, identification of areas for enhancement, and data-informed decisions leading to success. For instance, based on your calculated KPIs, you may find that a Full-Container Load (FCL) is more beneficial than a Less-than-Container Load (LCL) shipment, or vice versa. These insights will help you execute the strategy that’s right for your specific needs. 

However, implementing these KPIs can be challenging, especially in the realm of international shipping, which is where Ship4wd steps in. 

As your trustworthy partner, Ship4wd simplifies the often complex world of shipping. Our platform is designed specifically to facilitate SMBs to quote, book, and track shipments swiftly. On top of that, by providing your business with a credit line (subject to meeting eligibility conditions), flexible payment terms, and secure online checkouts, Ship4wd removes the unpredictability typically associated with international shipping, helping you focus more on what matters – driving your business forward.

Ship4wd offers SMBs the following benefits:

  • SMB priority: Ship4wd puts the needs of SMBs first, offering targeted solutions that help these businesses grow in the international shipping space.
  • 24/7 customer support: When you’re in a jam, you need immediate help. Ship4wd’s support team is available all day, every day, to solve your problems. No chatbots, just human assistance when you need it​​.
  • Instant shipping quotes: As a digital platform, Ship4wd streamlines your shipping needs, helping you to instantly get shipping quotes, compare, and book the best option for your business in just a few clicks. Our secure online payment methods further simplify the process, saving you hours of chasing quotes from shipping providers and ensuring a smooth, safe transaction from start to finish.
  • One dashboard with all your shipments: Our user-friendly digital platform combines all the shipping information into one dashboard, which enables easy and quick access to quotes, shipment statuses, updates, financial and credit information and more.
  • Customized shipping solutions: Every business is different. That’s why Ship4wd helps you find Full-Container Load (FCL), Less-than-Container Load (LCL) ocean freight and air freight services for your specific business needs​​.
  • Global reach: Ship4wd’s transport network spans globally, meaning your goods can go almost anywhere in the world.
  • Allocation: Ship4wd provides valuable assistance with allocation, ensuring your goods are optimally placed and transported for efficiency and cost-effectiveness.
  • Flexible payment terms: Ship4wd helps SMBs manage their costs more effectively by offering flexible payment terms, including Ship Now, Pay Later, giving SMBs a competitive advantage to pay for the shipments up to 90 days from cargo delivery date and allowing them to take advantage of international shipping expertise now rather than later​​.
  • Advanced tracking: Ship4wd offers end-to-end tracking of your shipment, giving you peace of mind and allowing you to focus on your business​​.

Ship4wd is not just a digital freight forwarding platform; it’s a trustworthy partner that helps you drive your business forward. Get started with Ship4wd today and reach your SMB’s full potential.

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