Operations: The Steel Cog of E-commerce
If you are an operations manager, you are already familiar with some of the major challenges of the role. You also comprehend the importance of delivering the right product to the right customer on time with the right services, while ensuring an effective work process and productive labor force.
However, it is a different ball-game altogether for e-commerce operations because of the promises e-commerce makes i.e. door to door timely deliveries, free shipping, easy (free in most cases) return/replacement.
Termed as ‘e-operations’, the functions that an e-commerce operations team performs spell out the difference between success and failure for an e-commerce business.
KPIs for E-commerce Operations
Operations need to be constantly analyzed to ensure that the goals are being met, that there are no bottlenecks in the process and ultimately that the customers are happy. The importance of setting and tracking the right Key Performance Indicators (KPIs) to ensure that these targets are achieved, is thus a no-brainer.
KPIs differ according to the level of the hierarchy and thus job functions in any organization. As operations manager in the e-commerce industry, the top three Key Result Areas (KRAs) are sales analysis and forecasting, inventory management, and shipping and logistics. This article will focus on 2-3 KPIs for each of these KRAs.
KPIs to Sales Analysis
E-commerce can be of three types – it either involves third-party sellers or merchandise (Alibaba) or selling your own products online (Online stores of retailers like Zara) or a mix of both (Amazon). For either of these, the three KPIs to monitor sales are:
This will tell you the product that has been the most popular and has been sold the most. The more popular the product is, the lesser time customers wish to spend before getting their hands on it and thus the lesser time it spends on your warehouse shelf. For you as an operations manager, this hints at the inventory level required to maintain to meet the customer demands.
What data is required? Product-wise sales data (refer to the dashboard shown later).
Sales by Region
As the name suggests, this KPI plays an extremely important role in leveraging warehouse locations (if your business has multiple warehouses). It is also key in offering free/cheaper shipping to gain a competitive advantage.
What data is required? Region-wise sales data (refer to the dashboard shown later).
Units per Transaction
This is an ideal KPI in understanding customers’ purchase trends. Offers like free shipping tempt customers to buy multiple products in a single purchase, making it crucial for the operations manager to ensure that there is enough inventory to meet demands and fulfill orders.
How is it calculated? Number of units sold Number of transactions
For multi-channel sales of e-commerce, it becomes even more important to analyze sales KPIs to understand purchase trends, product popularity and manage the supply chain operations accordingly.
KPIs for Inventory Management
Whether you manufacture and store your own products or have fulfillment centers like Amazon, the three basic and most important inventory KPIs are:
The basic metric (and KPI) of Supply Chain Management is Inventory Turnover. You need this KPI to analyze the inventory churn. Pairing this KPI with the Product Performance KPI will give you a significant insight for inventory planning and management. For example, if a certain product is very popular, it should be reflected in its high inventory turnover. This can help you set the re-order levels accordingly.
How is it calculated? Cost Of Goods Sold (COGS) Average Inventory
Holding Cost of the Inventory
This KPI indicates the cost incurred in holding and storing inventory. Track it to make sure that the inventory management does not leave a dent in the company’s pocket. Of course, holding costs vary depending on the inventory management strategy. For example, holding costs are lower for Just-in-Time inventory systems than they are for inventory based model.
The bright side of e-commerce is that it does not need to hold physical inventory. Methods like drop-shipping eliminate the complexity of managing large scale inventory thus leading to lower holding costs.
How is it calculated? Total of the holding costs during a certain period.
Back Order Rate
Since this tells the number of orders that could not be filled due to low or no inventory, this directly indicates how happy your customers are and thus how effective your inventory management system is. Back order rate is a crucial indicator as it indicates that you will either have to refund the money to your customers or lose the customers to your competitor. Track this KPI for a deeper insight into reasons such as seasonal demands and out-of-stock inventory.
E-retailers however, can also use back order for their benefit by gaining more customers and driving revenue. The out-of-stock item can still be available for purchase (online) and would be delivered as soon as the e-retailer’s vendor replaces it.
How is it calculated? Number of backorders Total number of orders
KPIs For Shipping and Logistics
Ultimately, it all comes down to shipping the product and fulfilling the orders. Following are the two main KPIs that highlight any delivery issues, to ensure timely shipping and fulfillment of the customers’ orders.
Rate of Return
No e-retailer appreciates a return due to shipping errors since this means an added expense of replacement shipping cost or refund. Track this KPI
to know why exactly a particular product was returned ( e.g. was it due to shipping issues or simply because the customer did not like the product?).
Make changes to the packaging and shipping process as required.
How is it calculated? Number of Items Returned Number of Items Shipped
Order Accuracy (Perfect Order Rate)
An ideal scenario for e-commerce supply chain management is highest number of perfect orders, i.e. orders devoid of shipping errors. This KPI proves how good you are at ensuring minimal shipping errors and hence achieve a higher customer satisfaction. You can use this KPI to further analyze the factors that contribute to shipping errors and incidences.
How is it calculated? Number of errors per order Total number of orders
Here is a sample dashboard created in Chartio, your data visualization BI tool, that gives you an at-a-glance look at all the operations KPIs, discussed above, for e-commerce.
Keeping up with the pace of a growing e-commerce business is a big challenge. In addition to that, the wider the range of products sold, the more complex the whole process of your e-commerce operations is. As e-commerce can be seen as a physical store which is open 24 hours and 7 days a week, putting an effective supply chain management in place enables the e-commerce industry to function at its best. This ensures that all the promises are met, leaving a smile on the customers face!