As the dust settles on the 2022 peak season and the new year begins it’s time to evaluate the performance of fulfillment operations. Almost every brand or third-party logistics (3PL) provider needs to improve efficiency, increase savings, and better serve customers. With the right data and key performance indicators (KPIs) you can measure the performance of business and the impact on profit margin.
A warehouse management system (WMS) is a critical tool in running an efficient digital fulfillment network. An intelligent WMS provides a vast amount of data that unlocks valuable insights into your operations so it’s important to determine which metrics to track closely. Otherwise, business may never reap the benefit of your data’s insights.
Why track WMS KPIs?
Knowing what information to measure is essential to run a business effectively. When thinking about warehouse KPIs it’s all about products and stock. KPIs can include inventory accuracy, shrinkage, carrying cost of inventory, inventory turnover and inventory-to-sales ratio. Keeping an eye on supply chain KPIs relevant to your operations can help you understand and improve your warehouse efficiency
Here’s a look at a few key metrics and how they benefit warehouse operations:
- Receiving and putaway KPIs. Time is the top receiving KPI in the industry. “Dock-to-stock” time is a critical component to track closely. The length of time it takes to get items off a truck and onto a shelf affects the entire supply chain. Understanding receiving and putaway KPIs highlights where receiving processes are strong and where improvements are needed.
Within the receiving and putaway categories, these are also important to track:
- Receiving efficiency. Receiving efficiency tracks the health of the receiving area. As warehouse staff becomes more experienced, receiving efficiency will increase. If your numbers are on a downward trend, it may be time to re-examine the receiving process. You can calculate this metric by dividing inventory received by the number of staff hours worked.
- Receiving cycle time. This metric measures the processing time of newly received merchandise into the warehouse. If your receiving cycle time is lengthy this can signal that your receiving process needs improving. Receiving cycle time can be calculated as total time spent on processing newly received stock divided by total number of received items.
- Putaway accuracy. The putaway KPI tracks how accurately employees get items on the shelf by measuring the ratio of correct putaways to total putaways. The goal is to have inventory put away correctly the first time, every time. If this KPI isn’t consistently measuring at 100%, search for patterns in putaway errors that could indicate learned mistakes or product mix-ups
- Putaway cycle time. The average amount of time needed to store one item from inventory is known as the putaway cycle time. The typical format for this metric is dividing the time spent on putaway by the total number of items in a putaway task.
- Shipping KPIs. This category measures order cycle time or how long it takes an order to ship once it has been placed. The less time spent on this process, the better. If order cycle times are on the higher end, there may be issues with picking, packing or shipping workflows.
Within the shipping category, these are important to track:
- On-time shipping rate. On-time shipping rate indicates performance on sending out orders on time or in advance. This KPI can be a good gauge to look at when assessing SLAs and planning labor for a given day. Calculate this metric by dividing the number of orders that have been shipped on time or in advance by the total number of orders shipped.
- Total order cycle time. Total order cycle time calculates the time it takes a customer to place an order until the time it ships. This includes all intermediate steps, such as downloading the order, picking items, packing them and preparing them for shipping.
- Storage. Storage KPIs give insights into the costs of keeping products on shelves. These KPIs are necessary to monitor especially inventory carrying cost which indicates how much it costs to store inventory. Storing inventory ties up capital, so you want to keep this metric as low as possible. Calculate it by dividing your total carrying costs by overall inventory costs.
Another important storage related KPI is backorder rate which measures unfulfilled warehouse orders. In a perfect world this number would be zero but this metric depends on how quickly shelves can be restocked. This is calculated by total backorders divided by total number of orders:
- Inventory turnover. Inventory turnover measures how frequently inventory is sold in a given period and can be calculated by dividing total sales by average inventory. Higher values indicate stronger sales, while lower values highlight weaker sales.
- Shrinkage. Shrinkage inventory is a KPI used to track inventory losses from human error, misplaced items, theft, supplier fraud and receiving inaccuracy. Shrinkage is calculated by identifying any discrepancies between recorded inventory and actual physical inventory.
- Picking KPIs. Many customers order items online because they’re searching for a particular product and know precisely what they want. Receiving the wrong item is not only frustrating for customers, but also expensive for the business. Improving order picking productivity and accuracy will lower costs and create happier customers.
WMS solutions help organize and accurately keep track of inventory by improving picking and packing processes. An intelligent WMS can reduce fulfillment issues caused by human error and provide better insights into available inventory, replenishment, fulfillment needs and potential inventory issues.
The following are key metrics related to picking performance:
- Picking accuracy measures how accurately items are picked for orders.
- Picking efficiency averages how many items are picked per hour for a given period. The higher the number the better.
- Picking cycle time indicates how long it takes for an order to be picked on average.
- Fulfillment accuracy rate is one of the most important KPIs as it shows how accurate operations are to fulfill orders received.
- Return process KPIs. Product returns are a reality of direct to consumer sales. Whether someone orders the wrong item, receives incorrect or damaged merchandise or the item is simply not to their liking efficiently managing the returns processes minimizes the cost impact to your business.
Within returns the primary KPI to track is the rate of order returns, which is calculated by dividing items returned by items sold, then multiplying by 100. It’s also important to determine how quickly returned items can be put back on shelves and how quickly the correct product can be delivered to a customer.
Data is your friend, not foe
By embracing WMS data you gain rich insights into your fulfillment operations and the ability to measure, monitor, analyze, improve efficiency and costs across the business. All of this is critical to e-commerce success. In today’s competitive landscape high customer expectations and razor thin profit margins require systems that keep supply chain operations highly functional and efficient to meet growing demand. Measuring KPIs enables you to quickly adjust and improve where it is necessary to optimize your business performance.