Fulfillment: Measuring Your Performance

Industry
Fulfillment: Measuring Your Performance

by: Tom Quinn

Spring, 2010

Are you on the leading edge of your industry? Have you incorporated mailing and/or fulfillment into your service mix? If you can answer yes to this question, did you ever wonder how your company was performing compared to your competitors in the mailing and fulfillment industry?

The printing and binding industries have been fortunate to have associations with ample resources to provide valuable comparison data to gauge the progress of your company compared to similar companies in your industry. The Mailing & Fulfillment Service Association (MFSA) also has a variety of reports and studies conducted on a regular basis to compare both operational and financial performance primarily for the mailing industry, which can be found at www.MFSAnet.org.

This article will focus on the measurement and calculation of important financial and operational parameters to measure your success in the fulfillment industry. The measurement discussion will be broken into two sections: financials and operational performance. A list of evaluation criteria also is provided.

Financials
My duties as director of fulfillment services and chief consultant have allowed me to visit as many as 20 different companies each year for the past six years. Most of these companies were printers just starting in fulfillment or new to the fulfillment industry in the past five years. Their reason for starting a fulfillment operation was to protect print volumes and to help grow the company in the future with an expanded service offering.

The following discussion of financials should be read with the understanding that a fulfillment operation within your company should yield extremely high bottom line contributions. Certainly, the contribution should be a double-digit contribution. For every dollar billed, a minimum of 10 cents should flow to the bottom line. A 10 percent contribution should be considered a minimal performance level because 20-30 percent contributions to the bottom line are still possible and being realized by efficient and progressive companies in the industry. While the printing and mailing industries are very mature with many buying decisions being made on price alone, the fulfillment industry can still be a very profitable entity. Several general observations from company visits are as follows:

1. No Financials. Most of the companies visited do not compile a monthly P&L statement for their fulfillment operation and, therefore, do not have any understanding of the contribution to the bottom line for the fulfillment industry. In a recent visit to a company, time was spent with the controller estimating a P&L for the company for the fulfillment operation. The analysis was completed in a very cursory fashion, but the costs associated with the analysis were estimated conservatively (high). This conservative approach still yielded a 20+ percent bottom line contribution, which accounted for most of the company’s annual profit in the year studied. This posed the question, “Are you making any money on print?”

The financials for a fulfillment operation are simple because there are very few cost parameters: labor, rent, utilities, system, packaging, and shipping make up the bulk of all costs. I do not suggest that the fulfillment operation should try to be fit into the financial structure or operating system designed to report on a bindery operation. The operating system for the bindery was designed to manage and measure a production operation and the fulfillment operation is a service operation. I would suggest an Excel spreadsheet with a simple P&L statement each month to measure the contribution. This statement will have the added benefit of informing fulfillment employees and management of their contribution and providing company management with the ability to establish performance and measurement goals for the future.

2. Low or No Pricing. The goal to save print and bindery volumes by adding additional services has a dual edge to it. In most cases, the client was saved as a result of adding fulfillment; however, in many cases, the industry gave away critical value-added activities. The most popular giveaway has been storage. Storage is a critical billing parameter for the fulfillment industry. The suggested method for calculating storage cost is to divide total rent and utilities by the number of pallet positions at 80 percent capacity, which will yield a billing parameter of $/pallet/month. If you are just starting your fulfillment operation, conduct a survey of storage costs. Labor pricing should be a minimum of three times the fully loaded cost of the labor category. A fulfillment pricing PowerPoint is available from the Mailing & Fulfillment Service Association to assist in better pricing of fulfillment services.

3. No Trained Sales Personnel. Very few of the sales personnel in print and bindery operations were trained to sell fulfillment. This results in either very slow or no growth of the fulfillment client base after the initial clients are satisfied. The fulfillment operation, like any other, has a minimum revenue requirement to break even. Very few fulfillment operations start with a large enough client base to become profitable immediately and will depend on future growth to achieve breakeven and the wonderful profit potentials of the operation. Incorporating fulfillment as a valuable tool in the service mix and utilizing the service as an offensive sales tool, instead of a defensive tool, will yield higher revenue and profit in the future.

Operational Performance
The operation and performance of a literature fulfillment operation is quite unique. The receipt, storage, assembly, and shipment of sales support materials and data for another company is a niche industry and part of a much larger fulfillment, distribution, and logistics industry. The literature fulfillment industry has been specifically created to support the efforts of marketing departments across the country. The key operational parameter of this industry is inventory accuracy. If you can control and master this one parameter, you are guaranteed success in the industry. Poor inventory accuracy is the primary reason for clients to move their fulfillment operations. However, there are many more operational parameters to measure the efficiency of a fulfillment operation.

MFSA conducted its first Fulfillment Benchmark Survey in 2004-2005 and again the next year. The results and the details of the study are available on the website. A new Fulfillment Benchmark Survey is due to be introduced this year and will add several operational and financial parameters, also accessible via the internet. By participating in the survey, your company will be able to compare its monthly performance to both your previous submissions and the industry as a whole. Listed below are the operational parameters to be measured in this new study. The calculation methodology for each parameter and an example calculation also are included in the formal plan, and the online site will guide you through the survey process.

These parameters provide valuable data for you in terms of understanding the success and profitability of your fulfillment operation.

1. Orders picked per hour. The average number of orders picked per person per hour.

2. Lines picked per hour. The average number of lines picked per person per hour.

3. Items (pieces) picked per hour. The average number of items picked per person per hour.

4. Order turn times. Elapsed time from receipt of order to shipment of order to determine percent same day, percent next day, and percent beyond next day.

5. Order picking accuracy. The percentage of orders picked with the correct quantities ordered.

6. Order packing accuracy/appearance. The percentage of orders that are properly packed.

7. Order shipping accuracy. The percentage of orders shipped error-free. Proper service levels used to meet need-by dates or as specified by client. Packages labeled correctly, completely, and with correct addresses. This parameter pertains to functions completed in the shipping process.

8. Order accuracy (same as fulfillment accuracy internal). The percentage of orders shipped error-free. This parameter reflects the accuracy of the entire shipping process (picking, packaging, and shipping).

9. Fulfillment accuracy (external). Number of errors reported by clients.

10. Receiving cycle time (dock to stock). Elapsed time of arrival of material through the receiving process, assignment of location entry into the inventory system, and available for use…or in the case of a new item, delivery of the sample and receiver copy to the project manager and not entered into the inventory system.

11. Receiving accuracy. The percentage of items (SKUs) received correctly.

12. Inventory accuracy. The comparison of inventory system balances to actual counts; usually accomplished during cycle counting. It also can be the result of a complete physical inventory.

13. Employee turnover (voluntary and involuntary). The number of employees who have left (voluntary and involuntary) v. the number currently employed.

14. Total revenue per square foot. Total revenue for the company per income statement for the period divided by total facility space including operations, warehouse, administrative, etc.

15. Revenue per employee. Total revenue for the company per income statement for the period divided by average full-time employee equivalent (FTE) including all personnel.

16. Days sales outstanding (DSO). A measure of the average number of days that a company takes to collect revenue after a sale has been made. A low DSO number means that it takes a company fewer days to collect its accounts receivable. A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money.

17. Fulfillment revenue per pallet stored (FRPPS). Fulfillment sales revenue per pallet stored. Shows income generated by the space used. Especially meaningful when displayed by client and can be helpful in quoting new business.

18. What technology are you using? A table of user preferences and different technologies being employed in the operation of the fulfillment center.

It also should be noted that there is a wealth of data concerning the operation of a warehouse from the Warehouse Education & Research Council (WERC) and other logistics associations to measure and compare the success of your operation to others.

There is only one way to improve the operation of your company and that is with measuring your performance. Start by focusing on your P&L contribution and improving your financial performance. Then turn your focus to items 1 through 12 in the benchmark survey. Your fulfillment operation will grow and prosper as a result. I wish you good selling. n

Tom Quinn is the recently retired director of fulfillment services for the Mailing & Fulfillment Service Association (MFSA). He is now chief consultant for Q Fulfillment Solutions, Inc. in Peachtree City, Ga. Quinn can be contacted by phone at (770) 632-9253 or through email at Tom@Qfulfillmentsolutions.com.