Is your business one that operates distribution centres and other warehouse facilities to maintain control of inventory? If so, you’re probably engaged in the eternal search to make warehouse processes faster, easier, less expensive, and safer.
Indeed, such continuous improvement is a staple requirement for successful warehouse operations, but to improve continuously, you need the right key performance indicators (KPIs) to provide quantifiable visibility of performance.
As I’ve mentioned in other KPI articles that I’ve written, we come across a surprising number of businesses that struggle to choose and use KPIs effectively in our consulting work.
So now and then, I like to publish an article to help demystify the topic. This time I’m going to share some warehouse-specific insights into KPI selection and use.
What Can KPIs Do for My Warehouse Operations?
Let’s begin with this, a typical question to those unfamiliar with KPIs and their use in warehouse performance improvement.
I’m sure you don’t need me to spell out the general benefits of key performance indicators, but it’s not always easy to see the specifics of how they can help you manage your warehouse.
Indeed, there is something of an art to using KPIs effectively, and it’s primarily in the appropriate selection of the right combination of metrics.
KPIs become an invaluable tool for companies that get this right, guiding improvements to productivity, efficiency, cost, service, and safety. Of course, you will need KPIs that cover each of these elements, so to help you select the right ones, the following sections provide overviews of some of the most useful KPIs in each category.
1) Speed up the Warehouse
If you want goods and materials to flow through your warehouses or distribution centres at a faster rate, you’ll need to monitor productivity KPIs. For example, a picking rate of 100 cases per hour (CPH) indicates that your warehouse is working faster than if you pick 75 cases per hour and exponentially faster than at 50 CPH.
Picking is just one of the warehouse tasks that burn time, though, and you will need KPIs that monitor the speed at which you execute all your other activities.
The following paragraphs highlight some effective productivity KPIs that help you see the speed of your warehouse processes and work towards increasing the pace.
For Goods Receiving
- Receiving cycle time – You calculate this KPI by taking the total time required to process inbound deliveries and dividing it by the number of deliveries. That will give you the receiving cycle time, which you can then start looking for ways to reduce.
- Receiving efficiency – To arrive at your warehouse’s receiving efficiency, you must have some way to measure the volume of goods that pass through your receiving processes. You must then divide that volume by the number of man-hours required to process it.
Both of the above KPIs are of value in monitoring receiving performance. They each help to highlight inefficiencies in delivery management, checking goods in, and preparing them for storage.
Given that issues in these processes can have a knock-on effect on other warehousing activities, it’s crucial to try and eliminate them to get those receiving cycle times down and efficiency heading upward.
Putaway is the next step for goods received into your warehouse and forms another repetitive cycle of activities. Perhaps the most effective measure of speed here, then, is the putaway cycle time.
To calculate putaway cycle time, you will need to take the total number of man-hours used for putaway and divide it by the total number of man-hours used for the entire warehousing operation.
Again, the aim should be to reduce the cycle time, which might typically mean revisiting warehouse operative’s training to improve their skills or perhaps changing the warehouse layout to gain efficiencies.
Picking is probably the most voluminous and time-consuming activity in the warehouse, and the secret to speeding it up is to minimise the travel time consumed by your pickers.
First, of course, you will need some way to measure the rate at which your workforce is picking orders. Otherwise, you won’t know if your efforts to reduce travel time are yielding results.
The best KPI for this is probably a straightforward calculation of pick rate, using units per hour. The units might be single items, cases, or even pallets, and you will be looking for the number of picked units per hour to increase as you implement steps to increase picking speed.
2) Drive Warehouse Efficiencies
Efficiency is the Holy Grail of warehouse operations, since an efficient warehouse operates smoothly, quickly, and at optimal cost—and often delivers superior service. A well-selected set of efficiency-focused KPIs will help you identify bottlenecks and pain points in your warehouse, so that you can target them for remedial action.
To that end, you may want to consider the following key metrics for measuring warehouse efficiency:
For Goods Receiving
- Receiving efficiency, described in more detail in the previous section of this article, is the most suitable KPI for driving efficiency improvements and increasing speed in the goods receiving process.
- Receiving cost per line – Cost, as well as accuracy and speed, is a telling factor when assessing efficiency, which is why we can start to include cost-based KPIs for efficiency measurement. For example, you can calculate the cost to receive each line item on your purchase orders. A reduction in the cost per line indicates that your receiving process is becoming more efficient.
Along with putaway cycle time, which we also covered in the previous section, the following two KPIs help to provide insights into putaway efficiency:
- Putaway accuracy – This KPI tracks the percentage of inventory correctly put away on the first attempt, and anything less than 100% should be considered unacceptable. To calculate the results, you take the total number of items put away correctly and divide it by the total number of items put away (and multiply the result by 100).
- Putaway cost per line – You calculate the results of this KPI in the same way as receiving cost per line. Essentially, you need to understand the variable expenses attached to each step in the putaway process. The higher the costs per line for putting products away, the less efficient the process is, and the more substantial are the opportunities for improvement.
Accuracy is one of the most effective barometers of picking efficiency. If your picking processes are streamlined and efficient, the likelihood of picking errors is reduced, and vice versa. Meanwhile, speed, as measured by productivity, can also indicate efficiency. However, it’s not a definitive measure.
For example, you can increase the number of units picked per hour by increasing the number of pickers you use, but that’s hardly an efficient solution.
On the other hand, introducing a process step that reduces the chance of errors will improve productivity and make picking an easier task for your warehouse operatives—and will also help to drive down costs. That’s why I recommend you include order picking accuracy as a KPI for warehouse performance monitoring.
Order Picking Accuracy: The Formula
To calculate order picking accuracy, you will need to have checking steps built into your picking process to catch errors before picked orders end up on the back of trucks. As part of the process, your checkers will need to record the number of inaccurate orders they catch (and, of course, they will need to ensure the errors are corrected).
The formula for order picking accuracy looks like this:
(Number of orders picked accurately / total number of orders picked) * 100
The closer you can get to that magic figure of 100% accurately picked orders, the more efficient your picking process is likely to be.
3) Reduce Costs and Improve Service
As mentioned in several of our other articles about KPIs, there is an intrinsic link between logistics costs and your company’s level of service to its customers—but it doesn’t work the way you probably think it does.
Quite simply, the more you improve service, the greater will be the cost savings you achieve. This service/cost relationship will be readily apparent when you apply a mix of KPIs focused on both, which in the warehouse, might comprise the following:
For Goods Receiving:
We’ve already covered cost monitoring in the goods receiving function, with our earlier explanation of the receiving cost per line KPI. While receiving activities do not directly impact service delivery, they certainly have an indirect influence on it.
The key is to make sure your receiving process is fast, efficient, and as free from mistakes as possible. To that end, all the receiving KPIs mentioned so far will help to highlight how well your receiving activities contribute to service performance.
Putaway cost per line, which we’ve already discussed, is the most appropriate cost-related KPI for the putaway activities in your warehouse.
However, concerning service, it will be the layout and setup of your inventory storage, rather than the putaway processes, which will have the most significant impact on service.
Putaway cycle time will be a helpful KPI to guide your approach to efficiency gains. After all, having all your inventory away from goods-in and stored in the correct locations as quickly as possible will help you to avoid pick-face replenishment delays and confusion over stock availability.
Picking is the warehouse activity that arguably, plays the most prominent role in service quality and operating cost. For that reason, visibility of performance is critical, requiring metrics to monitor productivity and accuracy.
To meet those needs, any of the following KPIs will be of value:
- Order picking accuracy – discussed earlier in this article, but worth mentioning again, as accuracy is essential to minimise rework costs and support perfect order performance.
- Units picked per hour (by operative) – This KPI can be controversial, because it will highlight the differences in productivity among individuals in the picking workforce. However, if performance is managed sensibly and your warehouse managers work with pickers to increase picking rates without coercion, it’s an excellent way to gain productivity without increasing warehouse headcount.
- Picking cycle time – is a measurement of the time taken to pick an order or a shipment. Reductions in cycle time can be achieved by building efficiencies into the picking regimen. These efficiencies, in turn, reduce costs and improve productivity.
- Picking and packing costs – This KPI complements your measurements of picking cycle time, productivity, and accuracy, since picking and packing cost transparency will help you to see the financial impact of changes in those metrics’ values.
- Perfect order – This is not a warehouse-specific KPI. Instead, it reflects performance across a range of functions, including the fulfillment activities conducted in the warehouse. Does your company track the perfect order KPI? If so, it will make sense for warehouse managers to monitor it, if only to be aware of exceptions arising from picking or dispatch errors or broken or damaged goods.
Of course, warehouse management responsibilities don’t end once an order is picked. The next step is to get your customers’ deliveries loaded onto vehicles and dispatched.
The speed and efficiency with which shipments are assembled and loaded will substantially impact operating costs and service levels, so these processes should not be left out of your KPI coverage.
One of the most valuable KPIs for dispatch is known as shipped on time or on-time shipment readiness. It essentially measures the percentage of orders that were dispatched or were ready for dispatch on or before the specified shipping date.
Why is this important? It’s because on-time delivery is a critical element of customer service, and there can be many reasons for late delivery. As a warehouse operator, you need to know if and when delays in your processes are the root cause of late deliveries.
Shipped on Time: What Does it Tell You?
A high percentage of orders shipped on time would indicate that warehouse issues are not causing late deliveries and that the problems lie with the carrier of the goods. On the other hand, poor performance indicated by this KPI would suggest bottlenecks somewhere in the picking, packing, and dispatch processes.
It could be that your company is achieving good on-time delivery results, even if orders are often late for shipping. In that case, your transportation team or your logistics partners could be taking up the slack unnecessarily, incurring higher than necessary logistics expenses due to the costly practice of expediting deliveries.
Again, such an issue would be exposed by measurement of the shipped on time KPI, enabling remedial steps to be taken, thus improving the cost and efficiency of your company’s logistics process as a whole.
Safety and Other Warehouse KPIs
I’ve deliberately left this final category of warehouse KPIs until last because, unlike those previously discussed, you’re not likely to measure them in a process-specific manner. Instead, you will typically gain more significant benefits by monitoring them over the entirety of your warehouse operation.
Keeping the Warehouse Safe
The first KPIs I want to talk about here relate to safety. Warehouses are inherently hazardous environments, combining heavy items stored at height with fast-moving mechanical equipment, pedestrians, trip hazards, manual lifting and handling, and perhaps other dangers, such as hazardous materials, thrown into the mix.
Safety KPIs, such as number of accidents (per day, week, month, or year), number of man-days lost through injury, and number of near misses reported, are essential for any manager serious about reducing the risk of workplace injuries and accidents in the warehouse, ensuring employee wellbeing, and keeping costs incurred through incidents to a minimum.
Indeed, your company has a moral and a legal obligation to improve workplace safety continuously, and these KPIs will aid immensely in that regard.
Other General Warehouse Performance KPIs
The list of possible KPIs you can deploy in your company’s warehouse(s) is almost endless. Still, as I have often asserted, it’s best to try not to monitor too many, and that is why I have provided details of a select few in this article, sticking to the ones I believe typically offer the best combination of visibility and value.
Before drawing this guide to a close, though, it’s worth listing a few other general warehouse KPIs that can help you keep tabs on performance, namely:
- Backorder rate – (Number of customer orders delayed due to backorder / total number of customer orders placed) * 100
- Backorder line percentage – (Number of order lines delayed in shipment / total number of order lines processed) * 100
- Inventory shrinkage – (Total value of pilfered, damaged, broken, spoiled, or otherwise lost inventory / total value of all inventory) * 100
- Warehouse capacity utilisation – (Amount of warehouse capacity used / total warehouse space available) * 100
- Warehouse costs as % of sales or revenue – (warehouse expense incurred / total sales or revenue generated by the company) * 100
- Warehouse labour costs as % of total warehouse operating costs
- Warehouse labour costs as % of total supply chain costs
With these KPIs, along with those outlined in the previous sections of this article, you should be able to equip your management team with a comprehensive but manageable dashboard for tracking and analysing warehouse performance.
Don’t Forget About Inventory Management
As I wanted to approach this warehouse KPI topic in some detail, I have deliberately focused on the fulfillment processes in this article.
You may have noticed that I didn’t cover inventory management KPIs to any great extent. Instead, I will follow this article with another one soon, written to a similar level of detail, but dedicated solely to KPIs for monitoring inventory management.
In the meantime, if you’d like some more advice, guidance, or hands-on assistance with any aspect of warehouse KPI selection, implementation, or use, our team is right here, waiting to help you.
It’s simple to book an initial consultation with one of our KPI specialists, and all you need to do is contact us by email or phone. So why not take that step right now?
Better still, book and schedule your 15-minute discovery call directly using our quick and effortless online form. It will take you just a moment, and it’s completely FREE OF CHARGE.
Editor’s Note: The content of this article was originally published on Logistics Bureau’s website dated November 16, 2021, under the title “KPIs for Your Warehouse: How to Choose and Use Them“.