The success of your business depends on satisfied customers, so you must ensure all aspects of your order management are optimised, efficient and cost-effective. Ignore this, and you could lose out on sales or spend more than you should on order processing.
This article looks at nine crucial order management metrics and KPIs to start tracking in your organisation.
What is order management?
Order management is the end-to-end process of processing and fulfilling customer orders. It includes all steps required to get an item into the hands of a customer. This ranges from the IT systems used to process an order right through to warehouse management, shipping, returns and refunds, and customer service.
Order management performance
Order management performance is understanding how your internal processes operate to meet the expectations of your customers. It’s how we measure the effectiveness of order management processes.
By tracking key performance metrics, we can identify areas of low efficiency or poor productivity. When you have a clear picture of how well, or poorly, you’re managing customer orders, you can then take action to rectify those issues.
9 order management metrics and KPIs
Making smarter order management decisions based on real-life metrics and performance is the best way to grow your business. The order management performance metrics below will help you understand which order processes and systems need improvement.
1. Cost per Order
Total Fulfilment Costs / Number of Orders = Cost per Order
Cost per Order calculates the operational expenses required to fulfil a customer order. Warehousing, labour, shipping, and other fulfilment costs all contribute to this number. Actual product cost is not included.
This metric can tell you how your fulfilment costs are impacting the profit from each sale, and whether they’re eating away at your margins.
How to improve your Cost per Order:
- Map out your order fulfilment processes to determine which efforts could be optimised, sped up, or refined.
- Minimise manual labour where possible as this is often the most expensive part of fulfilment.
- Create minimum order quantities (MOQs) for customers to protect your margins.
2. Internal Order Cycle Time
Time & Date Order Shipped – Time & Date Order Place = Internal Order Cycle Time
There are two order cycle times you should be tracking. The first is Internal Order Cycle Time. This metric reflects the time it takes to ship an order from the moment it’s received from the customer.
Your benchmark for this will be determined by a combination of customer expectations and also the capabilities of your internal processes.
How to improve Internal Order Cycle Time:
- If your Internal Order Cycle Time is too long, implement automated systems to help speed up manual processes.
- Ensure that your warehouse flow (the movement of inventory from picking to shipping) allows for maximum order fulfilment efficiency.
3. Order Fulfilment Cycle Time
Time & Date Order Reaches Customer – Time & Date Order was Placed = Order Fulfilment Cycle Time
This order management performance metric measures the complete fulfilment cycle time, from the moment an order is placed by a customer to the time they receive it. Where the Internal Order Cycle Time only deals with the first leg of the journey, Order Fulfilment Cycle Time also includes the time it takes to ship.
The type of products your business sells will affect shipping times. Your benchmark should account for this and distinguish between a satisfactory Order Fulfilment Cycle Time and an unsatisfactory one.
How to improve Order Fulfilment Cycle Time:
- Find the bottlenecks in your fulfilment process and remove or reduce them where possible.
- If your internal fulfilment cycle time is long and the average lead time is high, consider switching to a more reliable shipping vendor.
- Introduce an omnichannel fulfilment strategy that integrates sales and inventory across all your channels.
4. On-time Shipping Rate
Number of Orders Shipped on Time / Total Number of Orders Shipped × 100 = On-time Shipping Rate
On-time Shipping Rate calculates the percentage of orders that are ready on time for shipment. In other words, it measures how frequently you hit your target fulfilment times.
This metric tells you how your business performs in terms of fulfilment efficiency and matching customer expectations. While it can be difficult to have complete control over what happens with third-party shipping carriers, you do have the ability to ensure orders are shipped on time.
How to improve On-time Shipping Rate:
- A high On-time Shipping Rate comes down to an organised, efficient warehouse; clear communication; and effectively established processes between sales and order dispatch.
- Set a realistic On-time Shipping Rate. Is what you’re trying to achieve possible under current conditions? If not, you could be setting expectations too high.
- Automation is a key component of speeding up picking and packing. Is there potential to include more automation in your order management process?
5. Purchasing Frequency
Number of Purchases in a Given Period / Number of Unique Customers Across the Same Period = Purchasing Frequency
Purchasing Frequency measures how often customers place an order.
This frequency, and the rate at which those customers return time and again, are key indicators of your business’ performance. A decrease in order frequency may signal seasonality or something more severe such as a depreciating brand reputation.
How to improve Purchasing Frequency:
- Implement a customer loyalty programme, encouraging repeat orders over a specific period.
- Identify what it would take to convert one-time customers into repeat customers. Do they want easier returns? Lower shipping costs? A bigger product range?
- Ensure your order management system is easy to use and efficient from a customer’s point of view. If it’s clunky, out of date, or time-consuming, it will put them off repeat orders.
6. Average Order Value (AOV)
Total Revenue Over a Given Period / Number of Orders in the Same Period
This order management performance metric is a straightforward calculation of how much revenue is produced, on average, per order received. This measurement is especially useful when it comes to planning strategies for pricing, marketing, and sales.
Increasing Average Order Value is a fast way to increase annual turnover without introducing new products or marketing channels. AOV is also helpful when used in conjunction with Cost per Order, as you can get a holistic picture of the margins per order and the cost of fulfilment.
How to improve Average Order Value:
- Offer special promotions, such as free or fast-tracked shipping on orders over a certain amount.
- Introduce product bundling and bulk purchase discounts, such as BOGO (Buy One, Get One) deals.
- Implement cross-selling and upselling steps in the path-to-purchase whereby the customer is shown similar products they may be interested in.
- Customise or personalise your customer experience to match individual users’ desires.
7. Order Picking Accuracy
Number of Accurately Picked Orders / Total Orders Picked × 100 = Order Picking Accuracy
Measuring the accuracy of your order picking helps you pick up on inefficient processes and determine whether further automation is required to meet customer expectations.
Inaccuracies can cost your business a lot of money. Add to the extra shipping costs the time taken to amend mistakes and communicate with the customer and you’re suddenly dealing with a lot of waste. All this on top of the negative experience for the customer makes Order Picking Accuracy a crucial metric to optimise.
How to improve Order Picking Accuracy:
- Pinpoint where the problems typically occur then work to rectify them.
- Automate your order-picking process using barcode scanners and other warehousing technologies.
8. Rate of Returns
Number of Orders Returned in a Given Period / Total Orders in the Same Period × 100 = Rate of Returns
From a clothing item that was the wrong size to a product that doesn’t work as it should, there are many reasons that items are returned to a business. Understanding your Rate of Returns will help you to find missteps during the production or fulfilment processes.
Some of this is outside of your control: mistaken orders placed by customers, for example. But you’ll still be required to deal with it and pay for the exchange or refund. In this example, being clearer in your product descriptions may be a solution.
If you have a high Rate of Returns, it’s important to understand why and to develop strategies to lower it.
How to improve Rate of Returns:
- Ensure you capture exactly why every product is returned. Then you can begin to build a picture of any consistent problems to remedy.
- Check that your products are represented as accurately as possible. You want customers to order items that they’re going to be satisfied with, so set the right expectations from the start.
9. Perfect Order Rate
Orders Delivered Without Issues in a Given Period / Total Number of Orders Over the Same Period × 100 = Perfect Order Rate
Order management is a multifaceted beast; there are ample opportunities for things to go wrong. Achieving a Perfect Order Rate should be the goal of any product business. But how often does yours manage to do this?
By understanding your Perfect Order Rate, you can identify how often things go wrong. The next step is to work out what you have in your control to rectify problems in the order management process.
How to improve Perfect Order Rate:
- Break each process down into its separate steps to find the common causes of imperfect orders.
- Double down on quality control best practices in your order management process.
How to improve order management metrics
Order management is one of the most important elements of your business-to-customer relationships.
Get order management performance right, and you have repeat customers who refer you to others.
Get it wrong, and you may struggle with growth.
To improve order management performance in your business you need to start with the essential components of order management. Introduce inventory management software and IT systems that will support your processes. Get familiar with how they work.
Getting order management performance right has a flow-on effect on all other areas of a business. By understanding which performance indicators are key to your business, you’ll have a clearer picture of what success looks like and know the steps needed to get there.
Benefits of order management metrics
Measuring order management performance is key in business, as it underpins how your customer will respond to the service and products your business provides.
Get it right, customers will refer others and keep coming back. Get it wrong, you risk losing repeat business and gaining a negative reputation.
3 main benefits of tracking order management performance metrics
- Data-informed decisions. Rather than relying on guesswork, you can make changes to your processes or systems based on hard evidence.
- Improved cash flow. Metrics can help to identify inefficiencies hurting your bottom line and teach you the most cost-effective ways to approach various activities, ultimately freeing up more cash flow.
- Optimised sales. Order management performance metrics can also highlight which products are selling well, which margins could be stretched, and how the optimal warehouse layout should look based on sales.
You may discover that selling bulk products at a lower price will actually yield a greater profit due to cost savings on the dispatch and shipping. Perhaps the picking and packing process takes longer than it should, reducing the total number of orders able to be dispatched in a day.