January 2010 | Commentary | IT Matters

Warehouse Metrics: Measure What Matters

Tags: Warehousing, Warehouse Management Systems (WMS)

Eric Allais is the president and CEO of PathGuide Technologies. 888-627-9797

Today's warehouse managers often accrue massive amounts of performance data, but sometimes find they can apply little of it toward making productivity gains or customer service improvements. Instead of becoming overwhelmed with data, managers should identify and focus on the most useful metrics to gather, report, and apply.

Tools or modules often found in warehouse management systems (WMS) can automatically capture key data over a specified time period (such as one month) and display and report it as graphs and trends supported by the underlying data. This capability should make it easy to quickly identify problems.

When implementing new measurement tools and best practices, consider starting with what your customers care about most—the Perfect Order. Every warehouse strives for Perfect Orders, in which customers consistently receive the right product, on time, undamaged, and with the correct documentation. With virtually error-free shipments, customer satisfaction increases and customer support costs decrease.

The Perfect Order is a calculation of the error-free rate of each stage of a purchase order. When customers have a problem with an order received, they notify their distributor. The distributor then tracks the error in the WMS with "reason codes" assigned to categories such as warehouse pick accuracy, on-time delivery, and invoice accuracy.

This data is then calculated to determine the Perfect Order metric. If, for example, five warehouse pick accuracy errors are flagged on 10,000 lines, total warehouse pick accuracy rate is 99.95 percent. If on-time delivery rate is 99.2 percent, invoice accuracy rate is 96 percent, shipped without damage rate is 99 percent, and order entry accuracy rate is 99.2 percent, then the total Perfect Order metric is 94.04 percent.

MADE TO ORDER

Additional recommended metrics to consider when evaluating a warehouse's order performance include the following:

  • Fill rate.This data measures lines shipped versus lines ordered by a customer. Fill rate encompasses more than just warehouse performance because it also depends on ordered items being in stock and available. From the customer's perspective, fill rate represents the service level a distributor can provide.
  • Ship to promise.This figure measures the timeliness of order filling, while the shipping accuracy rate measures the accuracy of order filling as viewed by the customer.
  • Customer retention.This metric charts the number and percentage of customers during the prior time period who are also customers in the current period. Depending on the frequency of purchase, longer time periods, such as six months or one year, provide a more meaningful measurement. Over several years, you can chart the trend of increasing or decreasing retention.
  • New customers.This record charts the number and percentage of new customers in each time period, where a new customer is one who bought in the current period but not in any preceding time period.

WHAT'S IN STOCK

Once these order metrics are well in place, consider key metrics for tracking and managing inventory. With the right inventory tools, distributors and wholesalers know at all times exactly what product is in the warehouse, where it's located, and when it needs to be replenished. Greater inventory accuracy and control results in less overstock/deadstock, higher turnover, and better data for financial planning.

Key inventory metrics include:

  • Inventory accuracy.Used to identify product discrepancies, this measurement is typically derived from cycle counts, a function within a WMS that automatically counts a subset of inventory on a daily demand or on a scheduled basis.
  • Inventory turnover.This figure measures purchasing management and timeliness of vendor returns. It is the number of times that inventory cycles or turns over per year.

The next recommended area of measurement, and the one that matters most to CFOs, is expense control. Specifically, this data looks at total warehouse costs as a percent of company sales. Warehouse costs typically include direct and indirect labor, employee benefits, supplies, operating equipment and maintenance, rent, utilities, and depreciation.

Expense control also measures transportation and logistics costs as a percent of sales, as well as sales and lines shipped by each warehouse employee per hour.

ADDING IT ALL UP

Once enough warehouse transaction data points have been accrued, it is easy to establish some realistic productivity standards. Consider benchmarking the warehouse cost structure and productivity per person against other distributors. Or, benchmark against industry survey results such as the annual research survey conducted by Georgia Southern University and consultancy Supply Chain Visions.

Measuring progress against the warehouse's own targets is more useful, however, because performance depends on a variety of unique factors such as processes, specific customer expectations, and automated materials handling infrastructure.

Over time, consider leveraging these key metrics by applying new variables. For example, a warehouse employee incentive might spark a dramatic improvement in Perfect Order numbers. Chart the impact. And continue to seek only those key data points that truly demonstrate the warehouse's contribution to the company.