How do you measure success in your warehouse? Every business has their own “dashboard” of KPIs (at least we ASSUME they do by now). Your KPIs could be as granular – and basic - as “Picks Per Hour”, “Receiving Wait Time”, “Packages Shipped” or “Fulfillment Rate”. Or they could be at a more macro level to measure “Inventory Turnover”, “Average Order Value” (or “Average Items per Order”) and “Forecast Accuracy” (along with basic tracking forecast elements).
One thing we know from the range of clients in different industries we work with, some are more “measured” than others. Typically, the smaller the operation the fewer the KPIs (which is not always a bad thing) and some of the biggest companies will have dashboards with dozens of KPIs, many of which are negotiated onto the dashboard year-to-year by departments or functions anxious to be seen by upper management.
In a world with hundreds of potential KPIs, which are the ones you should care most about?
The Fewer the Better, But…
If there is one thing we’ve learned over time is that the more KPIs you are tracking the more likely you will be to see the bigger picture going on in your business. Likewise, teams working in a specific function or area need to be focused on the few that really matter to their job performance and goals.
For example, your Picking team absolutely must have performance goals and an ability to see them. i.e. “600 items per hour”, “99.999% accuracy” or other specific metric that might apply to your industry. Having them absorb and see KPIs like “Fulfillment Rate”, “Forecast Accuracy” or “Receiving Wait Time” isn’t relevant for them – on a DAILY basis. But sharing the bigger KPI Dashboard across different teams on a regular basis is also important for them to understand the role their function plays in the big picture and educates them better about the business.
If your management team is looking at a big dashboard every day of 30-40 different KPIs, then some observers would probably bet that they are only really acting on the 5-10 they are most familiar with and are directly connected to with their own functions objectives and goals.
Warehouse Metrics That Matter
We’re not going to walk through the most typical metrics that you may have already been looking at or using, but rather focus on those that have become much more relevant in the last two years.
Return Rate – has become VERY relevant recently as a result of all the newcomers to the Ecommerce world. This specific KPI is also one of the most important ones for your ENTIRE business, not just your DC, because it is interconnected to customer satisfaction, your P&L, management policy and even staff morale. Your target return rate will vary by industry and by the specifics of your return policy. Here’s why:
- Return rates BY PRODUCT are a great way to identify problems in quality, which can then be addressed with the manufacturer or by doing better quality control during Receiving.
- By including forecasts for returns in your budgeting and P&L, you create a lever by which you can improve customer service, quality, etc. that is reflected directly in your bottom line.
In fact, the secret sauce so many successful Ecommerce businesses have is a result of their generous return policies, not the avoidance of one. By offering a “guarantee” the returns process forces management to pay closer attention to customer service, product quality and efficiency because the cost of NOT doing so is reflected much more quickly in the Returns Dept than it would otherwise be if you were left just wondering how many buyers would return next year or not.
Finally, as part of making this process work, specialized training in Returns handling is a key to making an investment in this space work better. Depending on your industry, the ability to determine if a returned product can go back to stock or not is a valuable skill that requires training.
Space Utilization – All of the data we’ve seen over the last ten years has always indicated “space” as one of the key challenges facing facility managers, and as labor shortages and rents have increased, is not easily solved just by “adding more”. However, there are now software options – both standalone and modules in your WMS – that can help you plan space allocation right down to each individual picking bin and make it easy to know how much space you have or don’t have – or how much is being wasted.
Having only 5% of your space available might be a terrible threat if you are in a seasonal business taking container after container as part of preparation for a holiday season crush. But it might be a perfect number if you are in the grocery distribution business knowing that most of it could all be gone the next morning as part of the daily process of re-distributing hundreds of pallets into thousands of cases.
Space Utilization also becomes a key KPI when connected to your forecasting work. Setting a target for your ideal availability that covers you for peaks but doesn’t leave you looking overly empty during slow periods will also save unwanted excess labor costs from moving things around as well as lost sales due to misplaced inventory.
Forecast Accuracy – Forecast accuracy – and other elements of your forecasting - is an important KPI for planning. If you’ve not put a lot of effort into forecasting to date, you will not see the “accuracy” part of this one right away. History matters, so start by collecting your historical data:
- Sales Data – Gross/Net/Lost Sales, etc.
- Order Data – online orders, phone orders, walk-ins, etc.
- Warehouse Data – daily shipments, returns, etc.
- Fulfillment rate
You can create a simple forecasting model in Excel, though there are software products that can do this as well. The goal here is to be able to translate the forecasts that are being made by product managers and marketers into forecasts for your DC that can become staffing schedules. More data over longer times will lead to more accurate forecasting, but understanding how accurate you are and focusing on improving that will have positive impacts through the whole business.
The formula for this is simple:
1-(actual sales – forecast)/actual sales = Forecast Accuracy
A quick look at this will show you that the perfect forecast will lead to a result of “1”, so your accuracy in direction of another will be greater than or lesser than one.
Which KPIs Are You Missing?
Have you implemented something new, or still lacking a KPI that you think might help? Let us know what works for you, what doesn’t, or what you think you’re missing and our team would be happy to hear about your challenges and successes with measurement.