While delivery fleets are more evident since we frequently encounter them on the road, warehousing is an integral part of logistics and supply chain management we often overlook. In fact, the global warehouse sector was expected to grow at a CAGR of 6% and exceed USD 449 billion by 2022. Statista also indicates that the e-commerce boom could bring the number of warehouses worldwide to nearly 180,000 by 2025, up from roughly 151,000 in 2020.
Unfortunately, many business leaders focus on warehouse storage capacity and neglect other important metrics that show how well a warehouse performs. Accordingly, let’s discuss warehouse management comprehensively and highlight how best-in-class warehouses score on Key Performance Indicators (KPIs), courtesy of the WERC study by Karl Manrodt and Kate Vitasek:
Measuring warehouse performance can enlighten you on some inefficiencies in your business. For example, you can discover and address the following:
Whether you own the entire physical structure or have some lease/rent agreement, there's money spent on simply having goods occupying space for a specific period. By noting the average number of goods you keep in a given time, the space taken up by different items and other straightforward metrics, you can eventually understand what a particular product costs you in storage.
And by paying attention to the other resources dedicated to handling an item, you start to see where you need to cut back, and how much money you lose when a task isn’t done right.
By paying attention to the resources dedicated to handling an item, you start to see where you need to cut back, and how much money you lose when a task isn’t done right
Depending on how your workflow is set up, it's often likely that you're deploying too many workers on a particular process or that the process is taking more time than it should. As you measure performance, you can decide whether to run multiple processes concurrently, reduce the number of people on a certain task or introduce technologies that simplify a process.
Whenever a business promises to deliver an item within a given time, a customer builds expectations around that promise. For example, they might get home earlier or take a break from work to receive the parcel, invite people for some activities involving the product, or delegate the reception to someone else.
If your warehouse keeps getting returns, it may not necessarily be because of some other aspect of the business. Maybe your workers mix up outbound items that resemble each other, and they end up on the wrong route for last-mile delivery or incorrectly sort what they receive before storing it. That said, warehouse KPI measurement helps you know what you can refine to make customers happier.
Warehouse KPI measurement helps you know what you can refine to make customers happier
For businesses intending to expand their operations, one warehouse is more than just a hub that contributes to storage, distribution and fulfillment. It's also a data mine that can clue you in on what you need to do to serve other regions properly.
You can learn more about how large the new warehouses should be, the size of their teams, possible ways to subsidize warehouse amenities/reduce utility bills, ideal locations for easy access by delivery fleets and more.
And even if you’re not planning on expanding, you may have seasonal influxes in order volumes, like during Black Friday and other holiday shopping sales. In that case, the data you extract from a warehouse and analyze can provide better insight that helps you prepare for these hectic times.
It’s no secret that climate change needs to be tackled zealously. In that sense, measuring warehouse performance can tell you whether your operations result in very high carbon emissions. However, sustainability isn't restricted to environment-friendly practices. There's also the socio-economic side of providing equitable opportunities that consistently benefit many people over time.
For example, if you offer a shuttle for workers, you can reduce their carbon footprint since fewer cars are driven to work, and those without cars are helped too. Additionally, you minimize worker lateness, and their consistent availability helps you comfortably handle a larger inbound flow. This could also mean fewer trips for inbound fleets, further reducing emissions tied to your operations.
While you can track numerous warehouse KPIs, many involve factors beyond your warehouse operations. For example, your warehouse could get outbound units ready for delivery in the shortest time, but a truck driver may make an unscheduled stop and delay delivery.
This doesn't mean the warehouse has a problem. On that note, let's focus on KPIs specific to operations on warehouse premises:
Inventory accuracy is a metric that shows whether the amount of inventory tracked is equal to the amount physically present in the warehouse. Sometimes, these numbers don't match because of theft, miscommunication, miscalculation, data entry errors and supply shortages.
It is calculated by dividing the amount of inventory tracked by the amount physically present, and the result should be one or very close. The further away it is from one, the higher the discrepancy, and this could end in a scenario where you don't have enough stock to fulfill the number of orders you're receiving.
The typical inventory accuracy score ranges from 98% to just under 99.3%, while best-in-class warehouses score 99.9% and above.
Also known as receipt performance, it refers to how fast the items that arrive change hands from those dropping them off to your workers who are organizing them and ensuring that everything they were expecting has been brought. You can calculate it by dividing the volume of items received by the number of staff hours worked.
At the very least, you want to make sure all units in your inbound flow in a week can be received within the total staff hours your workforce can give. However, your workforce may still be underperforming, but you’ll hardly know until you have a busier week in the receiving area.
Ultimately, you’ll need to strike a balance between your expenditure on work hours, training that refines receiving procedures, and a continuous conversation with workers about what they can handle and what slows them down.
Remember, it’s not always about receiving as much as you can. You don’t want end up with goods sitting in the warehouse for too long. Remain ambitious, but keep your order volumes and outbound flow capacity in mind.
Think of this as the average time it takes to store an item. To reduce this time, you can decide to put the bulkier items that need extra hands and machinery at the front/closer to the entrance. However, not every solution works properly.
For instance, one may argue that a bigger item should be on a lower shelf to avoid dropping it from a great height and damaging it. In contrast, others believe a forklift can handle it, and workers should be able to pick small items from lower shelves instead of climbing ladders and risking a fall.
Ultimately, the goal is to reduce instances of repositioning items that had already been put away. This is known as putaway accuracy, and you should always aim for 100% (have everything put away correctly on the first attempt).
This is about how often the people picking items for delivery are correct. Unfortunately, for small items like smartwatches, earphones and such, it's pretty easy to mistake one for another, even when there are some details on the packaging or label.
Warehouse managers ought to devise systems ensuring that items likely to be interchanged are separated as early as possible to reduce. That way, workers aren't always walking up and down aisles to return the wrong pick and select the right one. The formula for getting this accuracy is; (Total number of orders – incorrect item returns)/Total number of orders.
While the median picking accuracy is 99.5%, you need to score 99.9% and above to be in the top 20% of warehouses.
You need to score 99.9% and above in picking accuracy to be in the top 20% of warehouses
Different orders require varying levels of attention since they may include an assortment of products or a delicate product that requires special handling. So, order cycle time is an attempt at determining the average amount of time spent locating a product and getting it ready for shipping.
Warehouses should always strive to shorten this time so delivery agents can reach the customer on time. The average warehouse has an order cycle time ranging from 24 hours to under 36 hours, while those who excel keep it under 8 hours.
This is the amount of money spent on fulfilling an order, particularly the resources spent on warehouse activities like receiving the product, recording, storing, picking, packing and loading it onto a delivery vehicle. In many cases, this cost may also include the money spent on last-mile delivery.
To derive the cost per order, divide your total order fulfillment expenses by the number of orders fulfilled.
While there are several reasons customers may return products, it helps to differentiate between returns due to a warehouse operational blunder and returns for other reasons. Knowing how many products are returned because you sent out the wrong product or the product was damaged while at the warehouse is vital.
To get the rate of returns, divide the number of items returned by the number of items sent out, then multiply by 100. Honestly speaking, it's hard to control all the factors affecting returns, so try reducing item damage and picking errors. And if you get a return, provide the appropriate swap if the customer is willing to wait.
This metric is crucial for warehouse operations involving forklifts, pulleys, conveyor belts and other machines or maneuvers that are dangerous. The fewer accidents you have in a year, the less your work is slowed down, and you also spend little on treating injuries and substituting workers or paying overtime to those who pick up the slack.
Another associated KPI here is the time since the last accident. In August of 2014, General Motors' auto parts warehouse in Jebel Ali, Dubai, completed a 3000-day run without any significant accidents, despite dealing with heavy cargo and machinery.
General Motors' auto parts warehouse in Jebel Ali, Dubai, completed a 3000-day run without any significant accidents
As you can see, many of these KPIs have other related metrics, so there's plenty to keep tabs on, like inventory turnover, shrinkage, carrying cost of inventory, cost of receiving per line, receiving cycle time, backorder rate and more.
More importantly, you can see the relationship between these metrics and how underperforming in primary KPIs, like receiving efficiency or putaway accuracy, can lead to more problems later. This is why it’s crucial to adopt top-notch technologies like automated inventory management systems to speed up inbound processes, stocktaking and cycle counts while eliminating errors.
Tools like Powerhouse AI have even transcended industry standards, enabling you to take pictures of boxes and pallets, recognize and count every unit, then generate insightful reports. You can learn more about this technology by reaching out to us for a chat.