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How to Measure Warehouse Efficiency: Detailed KPIs to Watch

14 minute read


Part 1: Warehouse KPIs

Warehouse efficiency is more than ensuring a smooth flow of products into and out of the warehouse - it's about achieving and maintaining optimal performance.  Key Performance Indicators (KPIs) are a measurable value tied to key business objectives and are important for setting long-term profit and production goals.  Tracking warehouse KPIs allows you to find and prioritize problems within your warehouse or distribution center.

 In this post, you will learn about the significance of KPIs as they relate to warehouse performance metrics and why they are valuable to your business.

 

What Are Key Performance Indicators (KPIs)?

When discussing warehouse performance metrics, KPIs are vital. KPIs, or key performance indicators, are measurable values typically used to highlight strengths and weaknesses of a warehouse or distribution center. KPIs typically focus on external performances such as on-time shipments but can focus on receiving, putaway, storage, order picking/packing, and shipping. You’ll learn about a specific KPIs soon, but for the time being, we’ll investigate the benefits of KPIs.

Receiving

Maintaining an efficient, well-run receiving area is a crucial asset and it’s important that new inventory is process quickly, efficiently, and error-free. Receiving problems can have significant consequences which can ripple down the road, affecting an entire operation and jeopardizing potential revenue.

Receiving KPIs look at the costs per line item receives, volume of goods received per labor hour, truck time at dock and purchase order accuracy.  

Let's examine these warehouse receiving metrics in detail:

 

Cost of Receiving Per Line:

Expenses the warehouse incurs on the receiving line (including handling costs).

Formula: Total cost of receiving/Total line items

Interpretation: Higher numbers equal a less efficient operation.  The Cost of Receiving should trend lower over time.

 

Receiving Efficiency (or Productivity):

Volume of goods received per warehouse operator per hour.

Formula: Volume/Total labor hours

Interpretation: Higher scores show a more efficient receiving operation while lower scores shows potential problems with receiving that should be investigated.  Receiving Efficiency should trend higher over time.

 

Receiving Accuracy:

The portion of correctly received orders

Formula: Correct Items/Total number of items Included in purchase order

Interpretation: Higher scores indicate more accurate purchase orders.  Receiving accuracy should be very high.  If the score drops, there is a problem with the vendor and that needs to be addressed.

 

 

 

Dock to Door Utilization

 

Total percentage of dock doors usage

Formula: Utilized dock doors/Total dock doors

Interpretation: Higher scores indicate more door dock utilization in the receiving area of the warehouse or distribution center. Underutilization of dock doors could lead to inefficient receiving operations, but utilizing more doc doors may require more employees and resources.

 

 

These warehouse KPIs can highlight receiving problems or bottlenecks, allowing you to fix issues before they spread to other areas of the supply chain and affect the company's bottom line.  

 

 

Putaway KPIs

 

Once inventory has been received, it needs to be put into the correct location so it can be picked, packed, and shipped quickly and accurately. Putaway delays lead to longer cycle times and putting inventory in the wrong location leads to expensive picking errors.  

Here are some putaway KPIs that will help you ensure a smooth picking process:

 

 

Putaway Cost Per Line 

Total cost to put away stock per line (includes labor, handling, and equipment costs)

Formula: Total Cost of Put Away / Total Line Items

Interpretation: The putaway cost per line metric is typically measured in labor-hours per dollar and can highlight inefficiencies in the putaway process.  Lower numbers indicate a more efficient and productive putaway operation.

 

 

Putaway Productivity: 

Volume of stock put away per labor hour.

Formula: Total Cost of Put Away / Total Line Items

Interpretation: The putaway cost per line metric is typically measured in labor-hours per dollar and can highlight inefficiencies in the putaway process.  Lower numbers indicate a more efficient and productive putaway operation.

 

 

Putaway Accuracy: 

Percentage of inventory accurately put into the correct locations.

Formula: Total Inventory Putaway Correctly / Total Inventory Putaway

Interpretation: Putaway accuracy can highlight problems with putting away newly received inventory.  This should be close to 100%.  If it is not, you might consider measuring accuracy per employee or look at the process as a whole, and identify the source of the inaccuracy.

 

 

Labor and Equipment Utilization: 

Total percentage of material handling equipment and labor utilized during the putaway process.

Formula: Total Labor and Material Used During Putaway / Total Labor and Material

Interpretation: The total labor and materials utilized to put inventory away indicates how labor and resource-intensive the inventory putaway process is.  This number should be reviewed in relation to other putaway KPIs.

 

 

Putaway Cycle Time: 

The total average amount of time it takes to putaway an inventory item

Formula: Total Time for Put Away / Total Time

Interpretation: The Putaway Cycle Time measure the average time it takes to put away a single inventory item.  Lower cycle time by rearranging the warehouse according to the 80/20 rule so that faster moving items are easier to putway and also easier to pick.  Employee efficiency training can also lower the putaway cycle time metric.

 

 

Proper evaluation of putaway through these KPIs gives you a clear picture of possible inefficiencies in the process. Recognizing possible errors will help you to optimize and streamline the process, which will have an impact on the rest of the warehouse/DC.

 

 

Storage KPIs 

Measurable key indicators for storage depend on the type of storage system you use. If you use manual systems, you would want to use block stacking and rack storage indicators for your KPIs. A typical AS/RS can include carrying cost of inventory, storage productivity, space utilization, inventory turnover, and inventory to sales ratio.

 

 

Carrying Cost of Inventory  

Total cost to of inventory storage over time, including inventory, capital, service, damage and obsolescence)

Formula: Total Cost of Put Away / Total Line Items

Interpretation: The putaway cost per line metric is typically measured in labor-hours per dollar and can highlight inefficiencies in the putaway process.  Lower numbers indicate a more efficient and productive putaway operation.  Investopedia has an excellent article breaking down the carrying cost of inventory.

 

Storage Productivity:   

Inventory volume per square foot of warehouse/DC space

Formula: Total number of inventory items / Volume of Warehouse/DC Space

Interpretation: Storage productivity KPIs indicate how efficiently your warehouse or distribution center is in terms of inventory storage.  This KPI is more relevant to some operations than others.  Warehouses utilizing Automatic Storage and Retrieval Systems (ASRS) will have denser storage figures than one using manual pickers.  

 

Storage Utilization:   

Percentage of storage space covered by inventory

Formula: Storage Space Covered by Inventory / Warehouse/DC Space

Interpretation: Storage utilization indicates how efficiently your warehouse or distribution center is in terms of storage space.  There may be available space that can be allocated to inventory storage or if the warehouse is too dense, it can impede the ability for workers to quickly putaway inventory and pick orders.

 

Inventory Turnover:   

Number of times inventory has been sold and replaced during a given period of time.

Formula: Sales / Average Inventory (or Cost of Goods Sold (COGS) / Average Inventory)

Interpretation: High turnover can indicate strong sales or insufficient inventory to meet demand.  Low turnover indicates weak sales or overstocking (excess inventory).  

 

Inventory Sales Ratio:   

The relationship between the amount of inventory stored and the number of orders being filled.

Formula: Inventory Value / Sales Value

Interpretation: The inventory to sales ratio should trend lower over time, indicating that you have enough inventory to meet sales expectations without overstocking.

 

These storage and inventory management KPIs are significant in terms of maximizing storage utilization and reducing cost of inventory.

 

 

Order Picking & Packing KPIs 

Order picking is arguably the most expensive and difficult part of running a warehouse, accounting for up to 55% of the costs. Order picking is more diverse and complex than the rest of the operation and is directly connected to customer satisfaction.  

 

Picking and Packing Costs  

Cost incurred per order line, including picking, handling, labeling, relabeling, and packing.

Formula: Cost of picking and packing / Order line

Interpretation: Slow picking speed and errors are prohibitively expensive and negatively impact the bottom line as well as customer satisfaction/retention.

 

Picking Productivity  

Lines picked per hour compared with historical numbers.

Formula: Employee or Team Hourly Production (orders, lines, cartons) / Time (usually in hours)

Interpretation: Optimizing picking productivity reduces labor costs and extends facility capacity.  Multi-Channel Merchant does a great job of detailing the complexities that are involved in measuring and improving picking productivity.  You can significantly increase picking speed with pick-to-light technology, which helps warehouses, distribution centers, and manufacturing facilities pick, pack and ship more orders, in less time, with fewer errors.

 

Picking Accuracy  

Indicator of picking accuracy to ensure customers receive the correct order.

Formula: Employee or Team Hourly Production (orders, lines, cartons) / Time (usually in hours)

Interpretation: A low picking accuracy rate indicates a lack of quality control, putaway errors, picklist problems, or training problems.  Picking inaccuracies increase cycle times, reduce customer satisfaction, and negatively affect the profit margin.  

You can significantly increase picking accuracy with pick-to-light technology, which helps warehouse operators pick, pack and ship more orders, in less time, with fewer errors.  

 

 

Shipping KPIs 

Shipping seems like the most simplistic of warehouse management, however it isn’t just a matter of putting goods on trucks and dispatching them to customers. Shipping isn’t reserved only to customers, but downstream to other departments or facilities as well. Regarding KPIs, some of the best metrics for shipping include order lead time, perfect order rate, and back order rate.

 

Order Lead Time   

Average time it takes for an order to get to the customer after it was placed.

 

Perfect Order Rate   

Total number of orders the warehouse delivered with not issues. This is how you keep up with the success rate of your warehouse or distribution center.

 

Back Order Rate   

The rate in which orders come in for items that are out of stock. Keeping up with this performance indicator can help indicate possible issues in planning and forecasting in your warehouse or distribution center.

 

 

These suggested KPI’s are only a few of what will be covered later. However, many of these more specific indicators are adaptations of basic ideas. Since the warehouse is often the busiest area of a thriving operation, it makes sense to measure and later review your indicators. As a business changes, certain indicators will become more important, some less.

 As you will soon see, there are a variety of ways you can utilize KPIs to improve your warehouse operation. These types of hard metrics also make it easier for logistics and warehousing management to demonstrate that their part of the overall business, which is often an afterthought with senior managers, can add tremendous value.

 

 

How to Measure Warehouse Efficiency

 

Part 2: Understanding Necessary KPIs

Last time we discussed how to measure warehouse efficiency. We even went through a few examples of warehouse KPI metrics that are recommended to be tracked. In the second part of ‘How to Measure Warehouse Efficiency’ you learn about necessary KPIs and the value of these KPIs to warehouse or disturbing center supervisors.

 

How Many KPIs Do You Need?

When measuring the effectiveness and cost of your supply chain, you’ll more than likely want to set up and monitor numerous KPIs to monitor supply chain components. But keep in mind there is such thing as using too many KPIs. When determining what KPIs to measure, it’s best to consider the following areas:

  • Order capture, Inventory management, Purchasing and supplier management, Production/manufacturing, Warehousing,
  • Cross-functional KPIs are likely to provide snapshots of the following end-to-end performance factors:
  • Perfect order (the degree of accuracy to which customers’ requirements are being met)
  • Inventory levels
  • Stock losses and/or damages
  • Gross profit
  • Cost of goods sold
  • Total logistics cost


Measuring KPIs in these areas are efficient enough for supply chain management. For some, identifying 8 areas for KPIs doesn’t seem like enough and they tend to excessively monitor more KPIs than necessary.

 

When You Have Too Many KPIs

 

A major reason why some companies invest in measuring too many KPIs is a lack of knowledge about what a KPI is. It’s understandable to wanting to capture as many metrics as you can, especially in this age with powerful analytics software solutions. But overtime, it’s going to be gradually unrealistic to expect anyone to monitor so many KPIs so closely on a day-to-day or weekly basis.

 

KPIs should consist of a handful of metrics that are realistically monitored and reacted to on a continuous basis. The KPI metrics don’t have to be small either. KPIs should instead track only the most vital elements of warehouse or distribution center performance. 

 
The difference between KPIs and metrics will vary based upon different levels of your organization. For example, a metric recording “receiving accuracy” in a warehouse would certainly be a beneficial KPI for a warehouse manager, yet at the same time a metric recording “receiving accuracy” wouldn’t be as relevant to an executive-level KPI.

 

A major key take-a-way is regardless of the level in a function or cross-function warehouse or distribution center, no one should need to closely monitor more than a few KPIs. As mentioned earlier, exactly how many KPIs you will need is hard to say and will vary from business to business based on numerous factors. Long story short, if you are tempted to ask if you have too many KPIs, more than likely, you probably do.

 

Structuring Your KPIs

 

Another reason not to have too many KPIs is to reduce the need to apply various levels of detail to each KPI. The result of attaching too many details to KPIs in development of even half a dozen logistics KPIs can result in doubling or tripling the total number of metrics in total. This can drastically skew your results and make your whole goal to measuring your metrics more difficult and needlessly complicated.

 

To reduce the amount of clutter from having overly detailed KPIs, you and create a hierarchy of KPIs. Having a hierarchy of KPIs provides managers an appropriate level of measurable metrics suitable for one level of management. The goal is to make sure it isn’t too general, or too detailed, for managers to maintain. But again, you want to ensure your hierarchy of KPIs aren’t too high which would offset that balance. The highest you want your hierarchy to go is two or three levels.

 

Creating a Two-Level Hierarchy

 

Creating a two-level hierarchy is the most simplistic you can get. When you are looking to keep things as simple as possible, you’ll realize that two levels, or tiers, of logistics KPIs are sufficient. This also makes the naming easy too. You can call the highest level the “primary tier” and the second level the “secondary tier”.

Your primary tier KPIs will be the ones you monitor at the executive level in your company. Some of the metrics you might want to include could be:

 

  • Logistics costs as percentage of sales
  • Inventory turns
  • Total inventory days
  • Source-to-deliver cycle time (the time from sourcing raw materials to delivery of finished goods)
  • DIFOT


Moving on from the primary tier we look at the secondary tier. At the secondary tier, you will have KPIs that provide more detailed information with the intention to highlight possible causes of fluctuation within tier 1 metrics. Examples of these secondary tier KPIs could include:

  • Warehouse costs as % of sales
  • Transportation costs as % of sales
  • Finished goods inventory turns
  • Raw materials inventory turns
  • Inventory obsolescence
  • Work in progress days
  • Finished goods days
  • Raw materials days
  • Inbound delivery in full
  • Inbound delivery on time
  • Outbound delivery in full
  • Outbound delivery on time
  • Manufacturing cycle time

 

A Bit More Complexity: The Three-Tiered Hierarchy

 

Say a two-tiered KPI solution isn’t enough to maintain your warehouse or distribution center. You might want to consider a three-tiered hierarchy. A three-tier KPI hierarchy can be necessary to cover additional metrics but keep in mind it’s a little more complex.

 

You see with the top two-tier hierarchy; the primary hierarchy measures your metrics giving you an overall view while the secondary tier gives a more detailed view of the primary tier’s metrics giving you more complex information. But adding an additional third tier, can display KPIs that not only show performance at a functional level, but it’ll also show how each function’s primary activities are contributing to the overall end-to-end performance.

 

A three-tiered hierarchy can work if your business needs it but be sure to understand the additional complexities of maintained such a system. Remember, while it’s possible to continue to add further tiers for even more detailed metrics the more tiers you have, the more complex your KPI solution will be. If it can be helped, maintain a simple system in which your KPIs are working with you not against you.

 

Creating an Effective KPI Suite for Effective Warehouse Efficiency

 

We covered a lot of information about what KPIs are and how they can be utilized. We also covered two and three tiered hierarchies and how to structure our KPIs to present relevant metrics on a more surface and detailed manner. Having accurate metrics is crucial to warehouse efficiency as unmeasured metrics can result in inventory cost issues which can affect an outwardly healthy business.

 

Inbound, Internal and Outbound Warehouse KPIs

 

Inbound KPIs

Internal KPIs

Outbound KPIs

Inbound KPIs

Inventory Accuracy

Profitable Orders

Order Cost vs Value

Pick Rate Productivity

Sales Volume/Order Frequency

Deliveries on Time

Fill Rate

Order Cycles

Accurate Packing Slips

Cost of Service

Credit/Payment Issues

Order Turnaround

Outbound Order Turnaround

Business Viability

Order Refill Rate

Cycle Time

Orders Refunded

Returns Issues

Staff/Equipment Utilization

Breakage/Return Rate

Technology Pack and Ship Accuracy

 
Customer Service

   


An effective method to maintain an effective warehouse is through an effective Pick-to-Light process. A Pick-to-light process is beneficial for numerous factors. For one, it can be a big part of getting inventory in order and improving KPIs. Bringing in Voodoo Robotics’ Pick-to-Light is an economical and scalable alternative that is minimally disruptive. Pick-to-Light are versatile, battery operated devices which need no server, no wiring, and utilize cloud storage to produce proper metrics. See what Voodoo can do to boost your operational efficiency and watch your performance metrics improve.