What is Fill Rate and How It Affects Your Business
Since you are reading our article now, we are almost certain you are operating with a just-in-case inventory management system and maintain a full inventory. And the fill rate is a metric that will provide valuable insights on how reliable you are for your consumer as a supplier and how professionally you manage your resources.
In this article, we are going to answer questions like:
- what is fill rate in supply chain,
- how to calculate fill rate,
- how it’s different from service level,
- what types of fill rate exist,
- why that’s a must-track metric in the inventory management,
- how you can improve its performance.
What’s the fill rate definition?
Fill rate is the percentage of customer orders that a company can ship immediately from the stock without placing backorders or missing a sale. Backorders are orders that are not available in stock at the moment but the customers place them to receive later.
The fill rate formula is simple. You divide the number of customer orders shipped in full by the number of customer orders placed. When you multiply that number by 100, you will learn your fill rate in the form of a percentage.
For example, your customers placed 1800 orders in a month and you shipped only 1753 of the total. Your demand satisfaction rate = 97%.
Service level vs fill rate: What’s the difference?
Service level expresses customer satisfaction in a broader sense. If fill rate answers only that one single question (was the consumer’s desired item available in the stock?), service level covers questions like how you tried to manage the situation, maybe that exact item was sold out but you agreed with your customer to ship an alternative or he agreed to place a backorder. In this case, you may hurt your fill rate but your service level may increase. The other way around is also possible. You may satisfy your customer’s demand but his customer experience may be negative.
Which are the types of fill rate?
When people say “fill rate” in general, they mean “order fill rate” which is one of its types; another type is the “case fill rate“. What’s the difference? We will clarify with two separate examples.
1. Let’s assume you are a bookseller. You got 50 orders last month and every order was placed by 50 different customers (each of them ordered 1 book). 45 books were available, so your order FR is 90%.
2. The second scenario is that you got 50 orders from 50 customers but 3 of your customers ordered not 1 but 2 books. So you had to sell 53 books but only 45 were available in your stock. You already have to calculate this metric at a unit level and your case fill rate is 85% (50 orders, but 53 items: that makes a huge difference).
You should be careful with your numbers and figure out what type of demand satisfaction rate you actually calculate.
Why is the fill rate important?
No matter what niche you operate, you track some metrics and measure your success with actual numbers. In supply chain management, demand satisfaction rate comes as one of the most essential metrics to follow, pointing out how effectively you meet the consumer demand.
And that’s not by chance that this metric is also known as demand satisfaction rate. What are some other reasons to care about your fill rate? Find in the answers below:
- It affects the relationship between you and your consumer – Do you meet the needs of your consumers immediately or make them wait? Or even worse – make them go to your competitors? Or you have positioned yourself as a reliable partner who is all-set to satisfy market needs? Your trustworthiness and availability of your products are strong factors to build long-lasting relations with your partners/customers and increase their loyalty level.
- Shows how well you manage your inventory and use data – Are you a professional manager who is good at working with data and relying on it for long-term business gains? That’s all about your internal management activities that directly influence your sales opportunities. If you can make data-driven decisions instead of resting upon approximate calculations, you can expect stable business growth and a high reputation.
- Warns you that you are losing sales & money because of understock (if your rate is low) – Your fill rate is 50%. What does this mean? Your customers placed 100 orders and you shipped only 50 of them! You just left money on the table. With fill rate statistics at hand, you will become aware of missed opportunities and take steps to manage them immediately. What is the ideal fill rate and how to improve it?
The short answer is – the higher your order fill rate, the better. On average, companies manage to keep their FR at around 85-95% and the best-performing companies reach up to 98-99%. If you can provide 100% accuracy, that’s a great job but it’s not always that a high percentage is a positive sign and a low percentage – a negative one. Here’s why.
If your fill rate is above 95%, chances are you have reached a surplus of inventory and are not optimizing the number of stored goods. In this case, you may end up sacrificing revenue because of damaged or lost products.
And if your fill rate is low compared to the average numbers, you should consider which factors (mainly unforeseen circumstances) affected it. For example, the main cause may be public holidays in quick succession as a result of which you were unable to contact your suppliers and organize the replenishment process.
Another reason may become a product that has suddenly gained popularity and gone viral, not allowing you to make appropriate forecasting and get ready for a large sales volume. The ideal case is that you use advanced demand forecasting & inventory optimization tool and only after that shoot 100% FR (to avoid overstock and deceptive, misleading understanding of your service level).
Below are 3 practical ways on how to improve your demand satisfaction rate.
- Don’t forget about product alternatives – If you sell a product that is too specific and hard to replace with another option, that situation is usually hard to control and save. But in most cases, you can quickly offer alternatives based on your customer’s preferences and your resources available. Your customers probably wouldn’t like to wait for some time until you ship their desired order and will prefer to try an alternative (if you are a reliable provider and they are a loyal customer).
- Ask your sales reps not to sell goods that are out of stock – Whether your sales team members close a sale during a phone call or at a store, agree upon one simple point. If a prospect is asking for a recommendation, your team should check availability, avoid offering missing products and focus on other options. Or if a customer is asking for that particular product, not available at the moment, your team should at most try to implement point N1 – offer an alternative.
- Invest in demand forecasting & inventory optimization software – “What gets measured gets managed”. SaaS tools designed for these purposes are not a luxury but a necessity that brings valuable data to the table. And guides you throughout your data management journey. If you know which of your products sell quicker and easier, you know what’s the optimal time to place new orders with your suppliers and fill in the gaps. You can find all this information in an inventory management software, avoiding wrong guesses, unhappy clients, and missed sales opportunities.
Do you already use inventory management software? What’s your demand satisfaction rate and how are you going to improve it? Contact us and share your experience.