Key performance indicators (KPIs) are quantifiable measures of performance, and they are essential to good warehouse management. They allow businesses to gauge how well they’re actually doing, and to identify areas that need improvement. An indispensable tool, they help a company make the best use of its processes and, ultimately, increase productivity and profit margins.
While no two warehouses are exactly alike, the same KPIs can usually apply to them all. That’s because, essentially, all warehouse management follows the same steps.
We’ve compiled the 15 KPIs we think are most important to good warehouse management. Tracking them should improve the operation of your facility, making it more efficient and cost effective.
To try and simplify the KPI list, we’ve broken it up into the five different segments of the warehousing process. They’re labeled A to E.
The first warehousing step happens when the goods come into the facility; it’s called Receiving. Any shortcoming in the system here can have ripple effects through the entire fulfillment process.
KPIs that evaluate the receiving process are:
1. The cost for accepting each receiving line
Like lines on a page, each receiving line identifies a particular item that’s being brought into the warehouse. This metric, KPI, calculates the total expense incurred by the warehouse for each line item, including both handling and accounting costs. The lower the value, the more efficient this initial stage is.
Formula: Total cost of receiving / Total quantity of items in each receiving line
2. The level of productivity in the receiving process
For this KPI, the quantity of goods received in a particular order is divided by the hours needed to process the order. If this number is extremely low, either you need to hire more employees in Receiving or the system needs to be improved by creating better receiving schedules, label receiving lanes, etc.
Formula: Total volume of inventory received / Number of hours worked to process the order
3. Accuracy of the receiving process
It’s important for a warehouse to know if they’re receiving all the items they ordered, and that they’ve been delivered in the right quantities. Use this KPI to measure supplier performance in percentage, as a higher percentage means that you are receiving stock accurately.
Formula: (Total number of correct stock received in full / Total orders placed) X 100
After Receiving, goods are checked for quality and placed in their assigned storage bins or areas. It’s accurately named Putaway, and it’s as crucial a process as any other in the fulfillment cycle.
There are several KPIs for evaluating how well Putaway is working:
1. The cost efficiency of Putaway
Here, the KPI tells you how cost efficient your Putaway section is. It does this by measuring the dollar amount you spend on placing items that are in a particular line in their storage area – a figure that includes labor costs, handling charges and running equipment like a forklift truck – against the number of items in that line. The lower the KPI number you end up with, the more efficient this operation of your warehousing is.
Formula: Total cost of putaway for items in a line / Total items in that line
2. The accuracy of your putaway
This is about storing products where they’re supposed to be. When items are stored in their assigned areas, they’re easy to find, and the whole process of retrieving them for an order is speedy and cost efficient. This KPI, then, is an indicator of how well the warehouse is running. It tracks the percentage of items stored accurately.
Formula: Total number of items put away correctly / Total number of items put away
3. Efficient use of equipment
Equipment like forklift trucks and vehicles to move large pallets around play a vital role in putaway. Therefore, it’s important that they are well-maintained. This not only prevents downtime if a piece of equipment breaks down, it also ensures safety for workers. Equipment KPI evaluates maintenance against time lost if equipment is out of use.
Formula: Availability × Performance × Quality
- Availability refers to the total run time against the planned production time.
- Availability = Run Time / Planned Production Time.
- Performance is the frequency of production slowdowns or interruptions.A perfect performance score indicates that your equipment is operating as optimally as feasible.
- Performance = (Ideal Cycle Time x Total Count) / Run Time.
- Quality refers to manufactured parts that are not upto standard
- Quality = Good Count / Total Count.
(Good count × Ideal cycle time) / Planned production time
- Good count refers to goods produced that meet quality-control standards
Keeping oversight on your inventory is, of course, essential. If you don’t do this diligently, you run the risk of running out of stock — stockouts — or ending up with too much of a particular item that’s not selling well. Using an inventory management system is a great help, and KPIs can help you see what you’re doing right and what you’re not.
The following are KPIs you’ll find helpful in evaluating how well your inventory is being managed:
1. The cost of having inventory in storage
With this one, you can evaluate the real cost of having inventory in storage. It measures the total cost of storing your products over a particular period against the actual cost of the inventory in question. Is it worth keeping a particular product in stock? Find out with this measurement.
Formula: Total carrying costs / Total inventory costs
2. Inventory shrinkage
Inventory shrinkage occurs when the stock you actually have in your warehouse is less than the amount listed in your records. The reasons for this discrepancy could be anything from bad record keeping to breakage to theft. Whatever it is, you need to be able to give a value to those missing items so you know how bad your loss is.
Formula: Cost of physically available inventory / Cost of inventory in your records
3. Inventory turnover
Inventory turnover refers to your stock having to be replaced. Assigning a value to the number of times this happens in a given period, say a year, gives a good picture of how well your company is doing and is a good tool for making financial decisions. For this KPI, the higher the number you get, the stronger your sales.
Formula: Number of sales made / Average inventory
D. Pick and pack
During this stage, items for an order are pulled from their storage location and boxed up for shipment.
Helpful KPIs here are:
1. Picking and packing cost for each order
This KPI is used to calculate the total amount spent per online order, and it includes handling charges, cost of packing material, packing, and labeling.
Formula: Total cost / Number of orders prepared for shipping
2. Picking efficiency
It stands to reason that the faster items are picked and packed, the quicker they’ll be shipped out. But fast doesn’t always mean accurate, and incorrect orders end up costing the company. This KPI, then, evaluates accuracy by figuring the number of returns due to incomplete or incorrect orders against the number of orders.
Formula: (Total number of orders – Incorrect item returns) / Total number of orders
3. Backorder rate
When an item is in backorder, it’s out of stock and customers are waiting for it. Backorders can occur because of a sudden spike in demand, suppliers have been slow, or stock hasn’t been ordered early enough. Whatever the reason, a backorder KPI can tell you if you have to take better care of managing your inventory and do better forecasting.
Formula: Total backorders / Total orders
E. The overall fulfillment process
It stands to reason that there will be KPIs to help you evaluate how well you’re doing for the entire fulfillment process. These metrics measure warehouse productivity and efficiency, and they can be used to great effect when you combine them with a cloud-based warehouse management system.
The KPIs to evaluate the overall performance of your system are:
1. Fulfillment accuracy rate
This KPI is a metric of the total orders successfully fulfilled against the total number of orders received. For an order to be successful, it has to be delivered accurately to the right customer on time.
Formula: Successfully completed orders / Total orders received
2. Cost per order
As the name suggests, this KPI calculates the average fulfillment cost for a single order. With it, you can judge if your prices are on target for a healthy profit margin.
Formula: Total fulfillment costs / Total number of orders
3. Percentage rate of returns
This number tells you what percentage of your items are being returned. There are several reasons for returns: late delivery, wrong item delivered, defective item, and a simple change of mind. Whatever the reason, if you have a high rate of returns, it’s a sign that your product needs adjustments.
Formula: (Items returns / Items sold) X 100
Warehouse KPIs, just like a report card, let you know how well your fulfillment is working. Where they show areas that need adjustment or improvement, you can step in and make changes. In the end, they not only help you achieve higher productivity, they pave the way for customer satisfaction.