Measure What Matters

It's a common scenario: A disgruntled customer calls stating his order was botched and the complaint gets forwarded to (or should we say the finger gets pointed at) the warehouse. It's easy to blame the warehouse, especially when it does not have an efficient way to isolate the cause of a shipping error. And it's easy to blast those who last touched the shipment before it left the building, unless there is a trusted audit trail.

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

By using tools or modules often found in many of today's leading warehouse management systems, key data are automatically captured over a specified time period (such as one month) and displayed and reported as graphs and trends supported by the underlying data. This should make it easy to quickly identify problems — if the right things are being measured.

When taking on the task of implementing new measurement tools and best practices, consider starting first 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 typically considered to be a calculation of the error-free rate of each stage of a purchase order. When a customer has a problem with an order received, they notify their distributor. The distributor then tracks the error with “reason codes” and assigns the reason codes to categories such as Warehouse Pick Accuracy, On-time Delivery and Invoice Accuracy. For example, Warehouse Pick Accuracy might have five errors out of 10,000 lines, therefore accuracy is 99.95 percent. If On-time Delivery is 99.2 percent, Invoice Accuracy is 96 percent, Shipped without Damage is 99 percent and Order Entry is 99.8 percent, then the total Perfect Order metric is 94.04 percent.

Several additional recommended metrics to consider when evaluating a warehouse's order performance include:

  • Fill Rate 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 customers' perspective, Fill Rate is the service level a distributor can provide.
  • Ship-to-promise measures the timeliness of order filling, while Shipping Accuracy measures the accuracy of order filling as viewed by the customer.
  • Customer Retention charts the number and percentage of customers during the prior time period that are also customers in the current period. Depending on the frequency of purchase, longer time periods such as six months or a year will provide a more meaningful measurement. Over several years the trend of increasing or decreasing retention can be charted.
  • New Customers 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.

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's in the warehouse, where it's located and when it needs to be replenished. With greater inventory accuracy and control there is less overstock/deadstock, higher turnover and better data for financial planning.

Key inventory measurements include:

  • Inventory Accuracy to identify product discrepancies. This measurement is typically derived from cycle counts, a function within a warehouse management system (WMS) that automatically counts a subset of inventory on a daily demand or on a scheduled basis.
  • Inventory Turnover measures the management of purchasing 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 the chief financial officer, is expense control. Specifically, these data look at the total cost of the warehouse 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 the cost of logistics (transportation) as a percent of sales, as well as sales and lines shipped per warehouse employee per hour.

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 survey conducted by Georgia Southern University and the consultancy Supply Chain Visions.

As a practical matter though, measuring progress against the targets a warehouse manager has set for his/her own operation is most useful. This is because performance is dependant on a variety of unique factors. It varies depending on processes, specific customer expectations, type of items (weight and cube) and automated material 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 the “perfect order” numbers. Chart the impact. And continue to seek only those key data points that truly demonstrate the contribution of the warehouse to the company.

About the Author: Eric Allais is the president and CEO of PathGuide Technologies, a provider of warehouse management solutions for wholesale and industrial distributors across North America. For more information visit www.pathguide.com.

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