Setting up a warehouse is one thing; knowing that you’ve set it up in the most optimal way possible is quite another. This is where having the right warehouse metrics and KPIs (Key Performance Indicators) comes in.
Gathering the right data and calculating the right KPIs is a no-brainer when it comes to improving warehouse operations. KPIs help to identify bottlenecks, plan out warehouse operations, and measure overall customer satisfaction (which highly correlates with repeat purchases).
But there’s another reason to get the right KPIs in place: all that warehouse data boasts a fair amount of business intelligence. Your warehouse or fulfillment center can be the “canary in the coal mine,” warning you when trends are changing or problems are developing in your business.
“Big data” has been a buzzword for a decade now. “Business analytics” has buzzed for even longer. Isn’t it time we took all this data talk seriously?
Organizing Key Warehouse Metrics and KPIs
One note before we get started: there are many, many articles out there describing key warehouse metrics. (We’ve probably read them all). While many are good, few of them do the one important thing: Organize those metrics in a way that is meaningful.
Let’s be honest: It would be great if you tracked all of these metrics. But you probably won’t—at least, not at first. So it would be helpful to outline not just which metrics to use but also why you need each one and how those metrics line up with your warehouse layout.
With that in mind, we’ll break up the 20 most common metrics into general metrics for the warehouse as a whole, and the metrics for the main areas of a warehouse: receiving, storage, picking, and packing and shipping.
General KPIs and Metrics for the Warehouse as a Whole
Some general metrics you keep aren’t tied to any particular area of the warehouse. But they do tell us something important about how the warehouse is running (or how it needs to change). We’ll cover those here.
Carrying cost of inventory. This is the total cost of having items in inventory. While it’s useful to have this broken down into stages (cost of receiving, cost of storage, cost of packing, etc.), you should also have an overall measure of how much the entire process costs, from receiving to shipping back out the door. The higher this total cost, the more your margin is eaten away.
Rate of return(s). Your customer service department should be keeping track of returns meticulously. They need to record not just the number but also the reason for return. Was the wrong item sent? That’s a picking problem. Was it damaged? That could be carelessness at the packing station. Did it arrive too late? You’ll need to dive into other metrics to see if it was a carrier issue or an issue internal to your warehouse. Was the item not what the customer expected? You might need to talk to the sales team.
Backorder rate. This is the rate at which incoming orders come for out-of-stock items. It usually indicates a failure to accurately forecast sales and plan ahead. Backorder rates can spike with seasonal demand, rise and fall with consumer trends, or slowly creep up if forecasts consistently underestimate sales. All are bad, as backorders break the first rule of inventory.
Order lead time. The total time it takes to fulfill an order, including picking, packing, and shipping. Some warehouses include shipping time in this metric as well. But since the shipment itself is usually out of your hands, it makes sense to focus on a KPI that you can do something about.
Transportation cost per package. Moving inventory around your warehouse costs money. There’s the labor needed to move it, the handling equipment needed, and, depending on the item, possibly safety equipment as well. You should calculate these costs in terms of the total number of feet an item moves—for example, a pallet of a given item might cost X cents to move per 10 feet. Once you do this, it will become obvious how important both an efficient warehouse layout and efficient picking procedures are.
Revenue per employee. Tracking labor costs is important, as they are often the highest non-inventory cost for a warehouse. Each employee will generate revenue through activities that keep the other KPIs where they need to be. That revenue should exceed the total amount that employee is paid (including benefits). If revenue per employee drops too low, it means your overall warehouse efficiency is at dangerous levels.
Metrics for receiving are often the most overlooked. That's a big mistake. All other warehouse operations happen downstream from receiving, which means that if you have problems here, they will cascade down to the rest of the warehouse. In short, good fulfillment starts with great receiving.
Let’s discuss the metrics you should track for this area.
Order accuracy. Employees in receiving should match what was ordered with what arrives. If there is a problem, they should flag it on the spot. You order accuracy is the percentage of incorrect orders that are not flagged. If your percentage drops, you might need to upgrade your ordering system or consider switching vendors.
Order damage. Damaged goods should be noted the same way as inaccurate orders. There is usually some acceptable level of breakage for items (usually about 1%); if you’re going over this, you might need to discuss other carrier options with your vendor.
Receiving cycle time. This is the average time taken for received stock to be counted, booked, and prepared for storage. If this is taking too long, it could be throwing off other key metrics.
Storage might seem like a fairly passive activity in a warehouse. After all, goods are just sitting there on their shelves or pallets. But knowing what, exactly, is sitting there and for how long is essential for making purchasing decisions. There are several factors to measure.
Inventory turnover. This is the frequency with which you sell out your entire inventory. Of course, your warehouse is shipping and receiving items all the time, so you will need to calculate turnover for a given number of orders received. The goal is to figure out which SKUs are moving slowly compared to the others. At the very least, slow-moving inventory will need to be shelved differently. At worst, slow-moving inventory takes up valuable shelf space and significantly decreases warehouse efficiency. It might also signal a downtrend in consumer buying behavior for those items.
Sales-to-inventory ratio. Inventory turnover measures your inventory’s velocity over the course of time. An alternative measure is to see how much value is tied up in inventory vs. moving out the door. To do this, you divide the cost of goods sold by the average value of your inventory. The closer this number is to 100%, the better. Too low? Items are not moving. Too high? Items are selling faster than you can restock them, which will lead to backorders.
Total cost of storage. This measures the amount of money “leaking out” as your items sit on the shelf or pallet. It includes things like warehouse space leased (if you are leasing), insurance costs, climate control costs, utilities, security, and so on.
Believe it or not, order picking is one of the more complex activities that occurs in a warehouse. The speed at which items are picked often determines the speed with which customers get their items, and picking accuracy can make or break the customer experience.
For those reasons, we’ve compiled several metrics you should keep a close eye on.
Picking accuracy. This is the number of orders picked completely accurately divided by the total number of orders. It’s usually expressed as a percentage. But wait—if an item was picked incorrectly, how would you know? After all, if you could detect incorrect picking, it would be fixed before packing and shipping, right?
Ideally, yes. But that doesn’t always happen. So the best way to measure order accuracy is to track the number of returns you have due to the wrong item being shipped. (See Rate of return above.) Subtract these returns from the total orders to get the number of accurate orders picked. A 100% pick accuracy means that there are no returns due to wrong orders being fulfilled. It’s the Nirvana of warehouse operations.
Orders picked per hour (picking productivity). Tracking orders picked per hour over time gives you a rough idea of how efficient your pickers are, which is useful for a number of things. Changes in this number from shift to shift can tell you, for example, when there are problems with a given team or manager. Recording this number before and after a new technology for picking is introduced and noting the change can justify that technology purchase by demonstrating its efficiency. And the list of perks goes on and on.
Order cycle times. This is the amount of time it takes to pick an order from the shelf and start the packing process. (Some warehouses include packing and shipping time in this number, but we recommend keeping each stage separate, as it is more informative to do so). This gives another view into picking efficiency. If your orders picked per hour are increasing but your order cycle time is steady, you might be overworking your warehouse staff. If so, you need to hire more labor. Or it could be that you’ve hired a bunch of new labor but the real problem is inefficiency in the pick process itself.
Cost per line item picked. This is the total cost of picking an item, including the cost of labor for picking and labeling. You might also want to include in this number a percentage of capital costs, such as the cost of any transportation equipment, safety equipment, inventory software, and so on.
Packing and Shipping
Packing costs. Packing any order requires packaging, boxes, and (not to be forgotten) filler. Inventory slips, ads, coupons, and other collateral might make their way into shipments, too. Add these to the overall labor cost of packing (and any assembly required) to get your full packing costs.
By tracking packing costs, a lot of warehouses make some startling discoveries. For example, carrying a bunch of box sizes, or fancy custom packaging, can be costly. Sometimes it’s better to have a set of plain boxes of predetermined standard sizes and fill any excess space with air packs or filler. Or perhaps the time it takes to add coupons and a catalog to each shipment is not justified by the increase in re-orders. But every situation is different: you can’t know what works until you actually measure.
Percentage on-time full delivery. Let’s be real for a second: Unless a customer’s entire order arrives on time in the right quantity, they are not going to be happy. So unless that happens, the order should be considered late. Percentage on-time full delivery is the percentage you get right (i.e., not late) over total number of orders delivered. If this is not close to 100%, there’s an issue somewhere in your warehouse.
Average days late. Percentage on-time delivery tells you that there’s a problem. Average days late helps you zero in on how big that problem is and where it might be happening. There is a vast difference between an order that’s one day late and one that’s a whole month late. Your troubleshooting will adjust accordingly.
Prioritizing Your Warehouse KPIs
So out of the 20 metrics above, which is most important? That all depends on where you suspect your warehouse could be doing better and what you need to prove to leadership. If you need to justify the purchase of a new warehouse inventory management system, it might be more important for you to track pick accuracy and items picked per hour. If you are just starting out, you might need to get a handle on your rate of return and total order cycle time. It all depends.
It also matters which metrics are easiest to measure. If you have warehouse management software that tracks inventory levels automatically, measuring backorder rate and inventory turnover will be easy. Integrate with your sales and ordering software and sales-to-inventory ratio could be just as easy. But if your software lacks these metrics or you don’t use software at all, getting these KPIs will be that much harder.
If you would like more advice on which KPIs are relevant to your operations and how to go about measuring them, contact us. We’d be happy to help you get set up.