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4 Essential Warehouse Management KPIs to Keep an Eye On

By Ruthie Bowles logiwa-blog-author | Tags: Inventory Management Warehouse Management

Data is king in today’s warehouses. You’re likely gathering more data than you know what to do with. Even as a consumer, we’re bombarded with more data than we can process during every moment we spend awake. You have no choice but to prioritize certain data over others.

By prioritizing KPIs that are most relevant to your warehouse operations, you can get a sense of your operational efficiency. Then you can dive even deeper into the relevant areas of your supply chain and assess subordinate KPIs.

BONUS: Before you read further, download our Warehouse Management Software Whitepaper to see how Logiwa tracks the following KPIs to help you get up to 100% inventory accuracy and execute advanced fulfillment strategies like wave planning.

Top Receiving KPI: Dock-to-Stock Cycle Time

Most warehouses go through a similar process when receiving new inventory. Your inventory clerk will speak to the delivery driver to confirm which shipment they are delivering. Once your clerk confirms this order is expected, they’ll sign the delivery notice.

Next, your employees will unload the order from the truck, and count the crates and boxes. They’ll open each box to confirm the exact number of inventory, and inspect for damage. The delivery driver remains at the warehouse for this process to confirm any reported damage.

Finally, your employees will assign inventory numbers to your products before shelving them. Your inventory clerk will input the information into the warehouse management software(WMS). Depending on your system, you may be able to scan received inventory directly into your WMS.

Dock-to-stock cycle time is considered the chief of receiving KPIs. The cycle time starts the moment inbound shipments arrive, and stops once that inventory is stocked in your warehouse.

Warehouses with a high dock-to-stock time spend more hours on each of these tasks, impacting downstream tasks and operations.

Dock-to-stock covers a wide range of operations in your warehouse. Understanding other receiving related KPIs can help you see where your receiving process is doing well and where it needs some help.

In order to improve your dock-to-stock time, you’ll have to track all of the associated tasks. Task tracking can be easier when you incorporate mobile devices that integrate with a WMS. You’ll be able to review exactly which tasks happened at a precise time, allowing you to hone in on any areas that take longer than expected.

Receiving Efficiency

Receiving efficiency is a KPI that relates to dock-to-stock cycle time. It seems simple until you delve into what your warehouse actually receives on a weekly basis besides new stock deliveries. Your warehouse likely also receives return-to-vendor stock and returned inventory (both good and damaged) from customers.

You can calculate your receiving efficiency by taking your volume of received goods and dividing it by the number of labor hours for the same timeframe. Your receiving efficiency should continue to rise over time as your warehouse staff gain experience.

If your numbers trend lower over time, you’ll have to examine the receiving process firsthand to assess where you can gain efficiency in your process.

Put-Away Efficiency

Once you’ve received inventory, your employees must put them away. This particular KPI looks at how accurately your employees execute this process. Your warehouse should aim for 100% in terms of how well your employees put inventory away the first time.

If you’re consistently not making that 100% mark, you need to check for patterns in your employees' put-away errors. Patterns suggest a learned mistake, or even something small, like an employee who consistently mixes up two products. The pattern may be that the same few employees misplace inventory, suggesting that retraining is in order.

Top Order Fulfillment KPI: Cost Per Order

The order fulfillment process looks different based on the type of business you have.

  • Is your business B2B or B2C?
  • Do you satisfy dropshipping orders?
  • Does product manufacturing begin with a customer order?

For our description, we’re assuming that the warehouse stocks all inventory prior to customer orders.

  1. Your customer places an order online.
  2. Your warehouse receives the order, and an pick list for the order is generated.
  3. Your employees walk the pick face, selecting the necessary inventory to satisfy the order.
  4. The items are delivered to the order packing area.
  5. Your packing employees will inspect each item and pack them appropriately.
  6. They’ll seal the box and move it to the shipping area.
  7. At the shipping area, the box will be weighed, and the best shipping carrier will be selected.

You can calculate your warehouse's cost per order in a variety of ways depending on your operations. For a simple calculation, you would take:

Cost Per Order = Total Fulfillment Cost / Total Orders

Your goal is to lower your cost per order over time. If this number increases, it may reflect growing inefficiencies in your fulfillment processes.

Here are additional order fulfillment KPIs that will help you identify where these inefficiencies are.

Order Cycle Time

Your order cycle time KPI will tell you, on average, how long it takes a customer’s order to ship once they place an order. You want as short an average time as possible. Your warehouse should be very responsive to your customers’ wants and needs. In this era of fast and free shipping, your customers don’t like waiting for their products.

A high average tells you that you have some issues to address in your picking, packing, or shipping workflows.

Order Picking Accuracy

Around half of customers say they’ve returned an online order because they received the wrong item. With online returns around 20% (and going to 30% around the holidays), you have to do what you can to decrease these costs. Increasing your order picking accuracy is an internal way of decreasing returns.

To calculate this KPI, you’ll take the total number of orders and subtract the number of incorrect item returns. Then you’ll divide that result by the total number of orders, and multiply it by 100 (for the percentage).

Order Picking Accuracy Percentage =

100 * (Total Orders - Incorrect Item Returns) / (Total Orders)

Top Inventory KPI: Inventory Accuracy

The work doesn’t stop once your inventory is on your warehouse shelves. Ideally, your inventory won’t be at rest for long, but while it is, it has to be maintained. Inventory counting is key for keeping track of stock inventory.

One of the top inventory management trends of 2019 is having a dedicated person for inventory control. This person would conduct or oversee inventory audits, and ensure the data is updated to reflect the reality in your warehouse.

This KPI will tell you how closely your inventory levels align with the actual inventory numbers in your warehouse. This KPI is important for warehouses that have high rates of incoming and outgoing inventory since more orders mean more opportunities for mistakes.

You can calculate this number by taking what system says is on hand and dividing that number by what you actually have on hand. Then you multiply it by 100. Your goal is 100% inventory accuracy.

Inventory Accuracy Percentage = 

100 * (Total Inventory Recorded in System / Actual Total Inventory)

Most companies have a set tolerance for discrepancy. After all, we’re only human. But inventory inaccuracy due to theft or poor fulfillment tracking should be dealt with as quickly as possible.

If you’re concerned about your inventory accuracy, then these other inventory KPI’s may be able to help you identify your warehouse’s inefficient work flows.

Inventory Turnover

Your inventory turnover rate is how many times you’ve sold your entire inventory in a specified time frame. This number can help you make strategic decisions regarding pricing, marketing, and new purchase orders. The inventory turnover formula is your cost of goods sold divided by your average inventory.

Inventory Turnover = 

Cost of Goods Sold / Cost of Current Inventory

Inventory Carrying Cost

Inventory carrying costs tell you how much you will spend to store your inventory. Companies seek to keep carrying costs low since stored inventory represents tied up capital. You can lower carrying costs by consistently removing obsolete or dead stock. There are a few ways you can get rid of obsolete stock:

  • Write-off the inventory at the end of the year
  • Donate it for a tax deduction
  • Bundle the inventory with similar items
  • Sell the inventory at a discount
  • Sell the inventory to a liquidation company

Take your carrying costs, and divide it by your overall inventory costs to find out this KPI for your warehouse.

Inventory Carrying Costs = 

Carrying Costs / Inventory Costs

Backorder Rate

The backorder rate KPI measures how much of the total customer orders a warehouse can’t fulfill. This is a KPI all companies would like to keep at 0%. It typically varies depending on how quickly you can replenish out of stock inventory. This KPI impacts customer satisfaction, and depending on your customers, may also increase the number of requested refunds. Backorders test customer loyalty in a time where many customers aren’t loyal.

To calculate your backorder rate, divide the number of delayed customer orders by the number of total customer orders for a specific time period. Multiply the result by 100 for the percentage.

Backorder Rate = 

100 * (Delayed Customer Orders / Total Customer Orders)

Return Related KPI’s

According to the National Retail Federation, Americans returned $260 billion dollars worth of merchandise in 2015. 8-10% of all purchases are returned, but online purchases typically see return rates of 30% or higher.

The primary return KPI you should be concerned with is the rate of return. You calculate this number by taking the number of returned items and dividing it by your total shipped items. You can play with this number further by using a specific return characteristic.

Rate of Return = 

Total Returned Items / Total Shipped Items

Do you want to know the number of items returned because of damage because you ship fragile inventory? You can take the number of returns marked as damaged, and divide that by your total number of shipped inventory. Now you know that X% of all of your shipments were returned due to damage.

Sometimes orders are returned and it’s unavoidable. Other times, a little innovation can go along way. ASOS created an app called Virtusize that lets clothing shoppers compare the fit of new clothing to items they already own. They reduced fit-related returns by as much as 50%.

You can dig even deeper to see if most of these damaged orders are linked to a specific shipping carrier. If so, you now have the information to place responsibility for this damaged inventory.

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How to Use Your KPI Data to Improve Performance and Plan Ahead

KPIs help you identify where your operations perform well and where there is room for improvement. Let’s say you see your cost per order has been steadily rising over the last few months. You take a look at the other fulfillment related KPIs and see that your order cycle time has also risen.

So now you know that the issue is in your picking, packing, and shipping process. An evaluation of this process in your warehouse will give you the information you need to lower your cost per order.

With an understanding of your warehouse performance, you can avoid implementing tech to solve a problem too early, and only implement new tech in areas that are as optimized as possible. More supply chains are adding robots and other smart equipment to their warehouses. However, 43% of companies admit to not having a strategy for implementing AI in their supply chains.

So when you’re looking at your company’s future, understanding your current performance KPIs will help you innovate and optimize in the areas that will provide the most return on investment. That leads us to benchmarking your KPIs.

Better KPI Benchmarking = Better Warehouse Performance = Higher Profit Margins: Logiwa syncs accurate data across your entire interface so the inventory numbers you see on your dashboard are what your employees see on their devices. Learn how Logiwa uses real-time data to help you get up to 100% inventory accuracy and 2.5x shipments.

Warehouse KPI Benchmarking

Best-in-class supply chains operate at half the cost of their competitors, and they all have one thing in common. They benchmark their performance. Benchmarking can consume a lot of resources, but you have to know where you are in order to plan your course ahead.

Types of Benchmarking

Businesses normally engage in a few different types of benchmarking: internal, external, and strategic. All types of benchmarking have their uses, but you’ll have to plan out which type your business needs to engage in the most at the time.

Internal Benchmarking

If your company has data records, you can use that historical data to create some internal benchmarks for your warehouse KPIs. Having these benchmarks from internal data can show progress, even if your KPIs aren’t quite where you want them to be. If your inventory accuracy is at 95% now, but according to your historical data, 3 years ago it was at 80%, you still have some good news.

Internal benchmarking can be a great way to determine high and low performing warehouses as well. If you have a warehouse performing above or below the standard, then you can take a closer look to see what you can do to either duplicate or eliminate processes.

External Benchmarking

With external benchmarking, you examine other companies within your industry. This involves partnering to share information. Many times companies will bring in a third party to conduct an external benchmark to allow for safe sharing of information without leaving themselves open to corporate espionage.

Benchmarking Success is one of the premier benchmarking organizations, and they specialize in supply chain benchmarking. They’ve compiled a database of over 800 supply chains, and if you provide your data to them, they can provide an external benchmarking analysis. This particular method offers incredible information security.

Strategic

Strategic benchmarking is the hardest form of benchmarking to execute and analyze. When you strategically benchmark your organization, you look outside of your industry. You must be very careful which KPIs you select for comparison.

When you look across different industries, there are some comparisons that just can’t be made. However, looking outside your organization and comparing performance may reveal innovative solutions for your challenges.

What Are Your KPIs Telling You About Your Warehouse?

Remember, most KPIs give a snapshot in time. You have to benchmark and regularly recalculate these numbers to get the most from your data. Data is the first step to optimizing your warehouse, and changes in how we use and understand that data happen every day. Assessing your KPIs routinely will help you better understand your warehouse performance and make well-informed executive decisions.

An well-integrated WMS will be able to provide KPIs quickly, compared to calculating each one manually. A WMS provides a central repository for your data, ensuring that when you do run the numbers for KPI assessment, you’re doing so with the latest information.

Schedule a free demo of Logiwa today by clicking here.

Ruthie Bowles

Written by Ruthie Bowles

Ruthie is a content marketing consultant for Logiwa. Her specialties include small business development and inventory management.