It seems that everywhere you look these days, people are talking about the supply chain crisis, both in the economy overall, and in the beauty industry more specifically. I won’t rehash those analyses, but you can check out some of my favorite ones here and here and here and here. Personally, my best guess is that the beauty business will be back to some semblance of ‘normal’ by the 2nd half of 2022, though shipping costs and plastics availability may take even longer to fully normalize.
I checked in with Dr. Akemi Ooka, who runs Supply Chain & Sustainability at the Independent Beauty Association (disclosure: I am a member of the Board of Directors) and she felt it might be a bit longer, saying,
“With this level of supply-demand imbalance, most organizations are forecasting a protracted supply chain recovery, perhaps seeing some relief closer to Q4 2022, but there are a lot of caveats for Covid.
The heavy reliance on labor throughout the global supply chain remains a challenge, as countries’ pandemic responses can shut down operations unexpectedly, and worker training and capital investment offsets will take time to implement. It may be possible to make up some ground over the Lunar New Year (as the shutdowns in the region traditionally create a little breathing room), but there is also underlying concern about the Winter Olympics in Beijing beginning on the heels of the holiday in China, especially with ongoing virus resurgence and energy availability issues.”
So what Supply Chain & Ops Metrics should a Brand Track?
Assuming you are an ‘asset light’ beauty brand (meaning you outsource manufacturing and fulfillment), what metrics should you be using to measure the effectiveness of your operations?
First let me share my philosophy on KPI (key performance indicator) tracking in general:
- Keep it simple – you could track a million things but try to reduce it to the few key metrics in a given area that tell the big picture story and then conduct ad hoc analysis to go deeper if you want;
- Stay consistent – track your KPIs on a weekly or monthly basis and the key is that you will start to see trends over time that will give you great insights into your business; and,
- Benchmark against a gold standard – sometimes these are hard to come by, but look at public company earnings reports or consult with industry experts.
What we Track at Rare Beauty Brands
OK, now for some details. Below are the three (keep it simple) key Supply Chain & Ops metrics we track on a regular basis (stay consistent) at Rare Beauty Brands:
Inventory Months on Hand (MoH)
Inventory Months on Hand (note: could be Days instead of Months if you want) is a metric used to determine how quickly a company utilizes the average inventory available at its disposal. In general, you want less money tied up in inventory and more in cash, so the lower the better. But you also want to make sure you have enough inventory on hand to fulfill demand (see OTIF below).
There are many ways to calculate MoH but we’ve settled on the following:
By using average COGS of the previous two months and the next two months we feel that the metric takes annual seasonality into account while also factoring in our rapid growth rate. Some companies take the average of the previous 3-6 months and some use the next 3-6 months. They key is picking a calculation that makes sense for your business and sticking with it.
Fulfillment % of Net Revenue
This one is pretty simple. Just divide your total fulfillment costs (we include outbound shipping) by your net revenue in a given period (note that Net Revenue is Gross Revenue less returns, discounts & deductions).
The key is benchmarking against comparable businesses. The website MultiChannel Merchant outlines that for Ecommerce businesses, “Efficient companies have a metric of 5% to 8% of net sales. Small- to medium-sized businesses may be between 10% and 15%. This ratio can be misleading because average ecommerce orders can vary widely.”
But if you are an omni-channel brand the percentages will be somewhat different depending on your average order size for your retail partners. Right now I don’t know of a good benchmark in beauty (for DTC and/or Omni), but please leave one in the comments if you do.
On Time, In Full (OTIF)
The OTIF metric is a great way to measure the service levels that your company provides to its customers. In general, the formula is:
Expected service levels will vary by retailer, but in general you want to be holding yourself to at least a 95% rate, if not 98%. The power in the metric is that you can use it to monitor service at a high level, and if you see a drop you can dig deeper to determine whether this issue stems from your company’s inability to:
- Deliver the expected product to the customer (the correct product),
- Deliver the correct quantity ordered,
- Deliver to the customer’s correct location, and
- Deliver it by the customer’s expected date.
Hope these help and please leave any questions or suggestions in the comments!