Fill Rate

Fill Rate refers to the ability of a business's inventory levels to fulfill customer orders. This indirectly hints at how satisfied the customers are with the performance of the business, how effective the supply chain is, and how the sales levels are increasing.

This indicator is often used to determine the commitment of the business towards its clients and the efficiency of its operational processes to utilize the inventory and other resources to their optimum capacity. It is calculated in terms of percentage, and the higher the rate, the better. However, this cannot be used as a standalone indicator but in combination with other inventory-related metrics.

• Fill rate indicates how well the business is able to meet the demands of the customers on time by supplying them with their required products and services.
• It also explains the effectiveness and smooth working of the supply chain and various operational processes.
• It cannot be used as a standalone metric but has to be combined with others.
• The rate helps management determine and identify problems in manufacturing and delivery and handle the same on time so as to sustain the business in the competitive industrial environment.

Fill rate explains the arrangement made by a manufacturing unit to maintain the inventory levels in such a way that it can meet maximum customer requirements. The rate is explained in terms of percentage, and in simple words, it indicates the demand satisfaction levels of customers.

Primarily, the companies operating in the wholesale market or retail sector use this metric of order fill rate to a large extent because, in their business, it is vital to keep stock of goods all the time in such a way that there is no unnecessary stockpiling up in warehouses but at the same time consumers can get what they want as and when required.

This indicator helps management assess the ability to meet requirements, design strategies, and make plans to optimize the manufacturing and stock maintenance process at all times. If the percentage depicts a high figure, then it indicates that the production and delivery process is very efficient with minimum friction. There is no wastage of time or resources, leading to the conclusion that the customer base is strong and increasing. The company can maintain good relations with its clients, who are also faithful to the brand.

A low fill rate line will indicate that the business needs attention and scrutiny regarding the production and delivery process because it is not able to meet the order levels on time and has to go through a backlog. It shows that the strategies need urgent improvement so that the reputation and market of the company is maintained. 

The formula for calculating the order fill rate metric is explained below:

Fill rate = (Total orders shipped / Total orders filled) x 100

In the above formula, the orders shipped refer to the number of orders that the company could successfully meet or that are delivered or are in the process of being delivered to the clients.

The denominator refers to the orders filled or total orders that the clients have placed with the company for fulfillment during the period of calculation.

In the formula, one needs to divide the order shipped by the order filled and then multiply it by 100 to get the percentage rate. The formula may appear to be very simple and easy to understand. Still, for companies handling vast numbers of consumers, it is a complicated task to keep track of all the above data. A large number of orders are received daily and processed, which brings in the element of accuracy and fast processing of orders so that the information is constantly updated for calculation.

Let us understand the concept of fill rate line with the help of some suitable examples, as given below:

Example #1

Let us assume ABC Ltd is a retail outlet selling groceries and medicines. It has a massive store at the heart of the city, and thus, it caters to walk-in customers and online customers who are both within and outside the city. The store manager has noticed that many of the clients visiting the store are not getting some of the goods they are asking for.

After a thorough check, they found that the stocks were not getting replenished on time due to inventory shortage. They decide to calculate a fill rate to help understand approximately how many orders are met. Thus, from the 1-year data, they find that the order shipped is 55000 tons whereas the order filled is 1 L tons. The calculation of the rate will be as follows:

Fill rate = (55,000/100,000) x 100 = 55%

Thus, the above figure proves that the levels at which the orders are met are far from good. The management finally decided to replace the vendors handling the supply chain with a more efficient one and also automate specific processes that were manually done previously to reduce time lag and human error.

Example #2

According to a report published by the Institute of Supply Management, retail giants like Target and Walmart have faced terrible delays in processing orders due to the Coronavirus pandemic, resulting in low fill rates and piling up of inventory at alarming numbers. As a result, they have adopted measures like giving huge discounts to clients to clear their stock. In the healthcare sector, the picture was different. They, too, had a meager fill rate not due to low order processing but due to excessive demand for pharmaceutical goods during that time, making it difficult to bridge the gap between the time when the order was received, and the order was shipped.

Thus, from the above examples, it is clear that this rate is a metric for inventory and order management as well as cash flow evaluation.

There are a few ways to improve this inventory fill rate for businesses:

• Automation – This involves the use of the latest technology and innovative ideas and implements software or machinery that will convert some manual work to automated ones. This will ensure that the work is done within less time but with a lot more accuracy. This will also help divert the labor towards more valuable tasks that need manual help to run smoothly.
• Process review – The review conducted to assess the manufacturing and delivery process is very vital from time to time. This will ensure that the entire system is running smoothly, without any loopholes and glitches, and every department is doing its part well. This will also help the management point out any area that needs improvement or strategic planning.
• Experienced professionals – Companies should hire experienced and skilled professionals who can identify problem areas and develop quick solutions for them. They will also contribute good ideas and suggestions that will lead to the betterment of the rate over time. Such experts are confident enough to remain responsible and accountable for both positive and negative deviations and thus steer the company towards the correct path.

It is essential for businesses to calculate and compare the inventory fill rate from time to time due to the below-mentioned reasons:

1. Customer satisfaction – For any business to flourish, the satisfaction of customers is of utmost importance. They help in boosting sales and revenue, which leads to an increase in profitability. Therefore, levels of order fulfillment lead to the meeting of customer demand and satisfaction, which is important for the business to grow and expand.
2. Identification of loopholes – The metric is an excellent method to identify any loophole or discrepancy within the operational or organizational process, which should be immediately looked into and rectified. This will prevent a repetition of the same problems and control the inadequacy of the system.
3. Protecting company image – If the business can steadily and consistently meet the demands of customers, it successfully creates a good brand image in the market, being a business that understands the demand of the market and works to fulfill it with commitment and responsibility. For this, a lot of analysis is to be done to understand when the reorder has to be placed, which product is selling the most, at what time of the year, etc.
4. Survive competition – It helps the business survive competition because since a good brand name is created, the customer base increases. They keep coming back repeatedly to place orders, which they are sure will get fulfilled. This customer loyalty is critical to surviving the competition. Frequently, new entrants enter the market to grab market share, but a good brand will not lose its market once it has created a place for itself.
5. Track supply chain – This is a metric that can be effectively used to track the performance of the supply chain over some time. The supply chain plays an integral part in attaining a high rate of fulfilling orders because even though there might be enough stock or inventory if they do not reach the customers on time, it will bring down the fill rate in retail, resulting in degrading the reputation of the company. Therefore, supply chain management is possible by calculating this rate.

All the above said, this metric should be used only in combination with other critical indicators of order fulfillment because just a high rate does not necessarily mean that the sales are high. There might be goods returned afterward, or the order filled itself may be low, and most of them might be shipped, giving a high rate. Similarly, a low rate may not indicate problems because there may be problems in general for all companies in the market.

Both the metrics mentioned above aid in the measurement of customer need fulfillment, where they indicate the levels of safety stock. But the differences are as follows:

• The former signifies the percentage of demand that is met from the inventory, but the latter is the percentage of stock level that will complete the demand of customers.
• The fill rate in retail is a measure of the past performance of the business, while the latter measures the level of inventory required in the future to meet the demand.
• It often happens that the service level has been met, but the fill rate has not gone up. This will mainly happen when the number of orders filled itself is deficient or the demand of customers is deficient in the market.
• The former is a metric to identify the fulfillment from a product point of view, but the latter is the metric to identify the fulfillment from a customer point of view.

This article has been a guide to what is Fill Rate. We explain its formula, differences with service level, how to improve & calculate it, examples, & importance. You may also find some useful articles here –

• Strategic Fit
• Turnaround Strategy
• Brand Strategy