6 Warehouse Performance Metrics & Tips for Choosing Them

Warehouse managers need to understand the importance of measuring warehouse performance. It is crucial to measure performance because it helps companies keep track of trends, assess efficiency, and identify any problems that may arise.

When it comes to measuring warehouse performance, there are different approaches you can take. You can begin with the traditional method or utilize specific metrics or Key Performance Indicators (KPIs) tailored for warehouses. In this section, we will describe alternative methods for measuring warehouse performance.

The importance of measuring warehouse performance

Measuring warehouse performance is essential for companies to understand how well their warehouses operate. It helps them in a few key ways:

1. Ensuring customer satisfaction.
2. Encouraging continuous improvement.
3. Spotting and fixing potential problems early on.
4. Training staff effectively.

When warehouse managers can identify issues, evaluating and fixing them becomes more manageable. There are many ways to measure warehouse performance, all aimed at objectively assessing and evaluating warehouse activities.

Read more: Understanding Warehouses: Definition and its Importance

Key Considerations for Measuring Warehouse Performance

According to Ackerman (2003), measuring warehouse performance involves focusing on four key areas:

• Reliability: This means ensuring on-time delivery, high fill rates, and accurate order fulfillment.
• Flexibility: The best way to measure flexibility is by looking at the time to complete an order cycle. It includes everything from how we handle the order, the availability of stock, the speed of order processing in the warehouse, to how quickly we can deliver the order to the customer.
• Cost: Measuring costs involves calculating the percentage of sales spent on warehouse operations and evaluating productivity to the hours worked.
• Utilization of assets: This area focuses on efficiently using warehouse space, material handling equipment (MHE), and storage equipment. The goal is to optimize the use of these assets to improve overall performance.

Performance management effectively manages various aspects of a company’s operations and economic performance. According to Slack et al. (2001), high-performance procedures can be described as follows:

1. High-quality operation: This means avoiding mistakes or errors that require redoing tasks and ensuring that customers are not frustrated by poor service quality.
2. Quick turnaround: It involves swiftly processing and fulfilling customer orders without unnecessary delays.
3. Reliable operation: The focus is consistently delivering products or services precisely as planned, without any deviations.
4. Flexible operation: This entails adapting promptly to changing circumstances without causing disruptions to the overall function.
5. Low-cost operations: By minimizing costs, companies can generate higher profits and offer their products at competitive prices.

To effectively measure performance, it’s essential to monitor how well you meet the criteria that matter to your customers and how well you manage costs.

The figure below shows that different industries have different ideas about what matters most in measuring performance. It illustrates the Key Performance Indicators (KPIs) that retailers find essential and the ones that their third-party logistics service providers prioritize.

To effectively measure performance management, it is crucial to record and analyze the time it takes to complete various tasks in the warehouse. Consider the following factors when measuring these activities:

• Preparation time (such as gathering items, getting equipment ready, arranging pallets, and handling documents).
• Human factors (including skills, motivation, and burnout).
• Mechanical factors (like replacing batteries, changing attachments, and refueling).
• Operational aspects (such as location systems, organizing product placement, and identifying bottlenecks).

Choosing an Effective Warehouse Performance Measurement Method

There are several ways to measure warehouse performance management, and each method has its benefits. Different companies have different priorities, customers, and ways of doing things. To choose the best approach, you should follow these steps:

• Understand your business and its strategy.
• Set clear goals.
• Identify which Key Performance Indicators (KPIs) can help you achieve those goals.
• Make sure the selected KPIs align with your employees’ roles.
• Ensure that everyone is working towards the targets.
• If targets are unmet, figure out why and introduce processes to help meet them.
• If a target is unrealistic, change it.

The first step in creating a sound performance measurement system is understanding the company’s vision and how your department can help achieve its goals. Sometimes, department heads develop performance measures they find comfortable and easy to achieve. Still, these measures don’t match the company’s vision and don’t interest senior managers.

It’s essential to follow the SMART approach to achieve success. Your actions should meet the following criteria:

• Specific: Clearly state what you want to achieve.
• Measurable: Make sure you can track and measure your progress.
• Achievable: Set targets that are realistic and attainable.
• Realistic: Consider your resources and ensure your goals are within reach.
• Timely: Set a realistic timeline and establish regular check-ins to provide accurate data collection.

Moseley (2004) and Vitasek (2004) suggest the following tips for introducing KPIs:

• Use words that your staff understands and finds meaningful.
• Based on the KPIs, determine what your team needs to do to improve services or save money.
• Consider using common industry KPIs to compare your operations with others.
• Look at the data regularly and watch for patterns.
• Don’t get too worked up about individual data points.
• Only introduce actions that you can do and measure.
• Ensure the metrics you use are cost-effective, meaning they don’t cost more to manage than you might save.
• Focus on actions that you can change.
• Don’t measure things that you can’t or won’t change.
• Use the data you collect — it’s frustrating to collect information and then not do anything with it.

6 Methods for Measuring Warehouse Performance

Companies can choose from six different methods to measure warehouse management performance. Let’s take a look at each type of measurement method:

Traditional productivity measurement

In today’s warehouses, we use several traditional ways to measure productivity. These measures fall into four main types:

1. Traditional measurements based on labor hours, space, and equipment

• The utilization of working hours examines how labor hours are used in the warehouse. It measures the proportion of actual working hours to the available hours for a specific shift, day, or week. This measurement does not include breaks.

Hours worked: (Hours worked × 100) ÷ hours worked available

• To gauge warehouse area utilization, you can measure it in different ways. One method is to calculate the total cubic capacity of the warehouse. Alternatively, you can determine the number of pallet locations used compared to the total number of available sites.

Warehouse area utilization:  (Used space × 100) ÷ available space

• Utilization of Material Handling Equipment (MHE)

MHE utilization: (used MHE hours × 100) ÷ available MHE hours

2. Traditional measurement based on cost

In financial terms, a cost measure represents a percentage of sales and the cost incurred per order shipped. To calculate this measure, follow these steps:

• Cost as a percentage of sales

Percentage cost of sales: (Total warehousing costs × 100) ÷ total sales revenue

• Cost per order shipped

Order costs shipped: Total warehouse cost ÷ total number of orders shipped

3. Traditional measurement based on productivity

• Picked units per hour

Picked units per hour: Units picked ÷ total available hours

• The dock-to-stock time represents the time it takes for the vehicle to arrive at the receiving bay and for the system to display the stock.

4. Traditional measurement based on customer service

• Delivery accuracy

Delivery accuracy : Unit selected ÷ total hours available

• Timely delivery

Timely delivery: Orders shipped according to customer requests ÷ total orders received

New performance metrics

OTIF (on time and in full) is one of the most commonly used metrics in the UK today. It combines with the perfect order metric, the most popular measure of customer service. To meet the OTIF standard, we must deliver items on time, without any damage, and ensure they have the correct documentation and labeling. Moreover, accurate invoicing is crucial.

Let’s break down the calculation for the perfect sort percentage. We measure four metrics individually and then multiply them:

• We measure on-time delivery, which stands at 97%.
• We calculate delivery in total, which is at 98.5%.
• We measure damage-free deliveries, which reach 99.5%.
• We measure accurate documentation, labeling, and billing, which is at 98%.

To find the perfect order metric, we multiply these percentages: 97% × 98.5% × 99.5% × 98% = 93.2%.Now, let’s focus on the OTIF (On-Time-In-Full) measurement. It considers two metrics: on-time delivery and delivery in full. The yield for OTIF is calculated as 97% × 98.5% = 95.5%.

Additionally, our latest warehouse measurements include inventory evaluations. When assessing inventory, we should measure the following aspects:

Stock cover in days

To calculate the stock turnover, divide the current stock level by the total annual sales and multiply the result by 365. You can calculate this using the actual number of units in stock or the stock value. This calculation helps us determine how many days’ worth of stock we have.

For example, let’s look at the table below. It shows that product code 99172100 has been in stock at the warehouse for two and a half years. On the other hand, product code 90152100 has only been in store for five days.

Stock run

To calculate stock turnover, divide the total units sold by the average number of units available. For example, product 90132100 sold eight units in the past, which is considered reasonable. However, product code 99172100 only had a stock turnover of 0.4, meaning the stock turnover was less than once yearly.

This calculation helps determine stock ordering policies and decide whether to return stock to producers, discard it, or launch sales campaigns.

Stock/inventory accuracy

Inventory measurement includes assessing stock accuracy, which ensures efficient order fulfillment. Whether you count stock once a year, twice a year, or daily using cyclical or perpetual inventory counting methods, maintaining accurate stock levels is crucial. The more precise your stock records are, the better your chances of fulfilling orders correctly and increasing overall efficiency.

To measure stock accuracy, follow these steps:

• Calculate the percentage of accurate stock locations by dividing the number of correct sites by the total number of places you calculated, and then multiply the result by 100.
• Determine stock line accuracy by dividing the number of correctly counted lines by the total number of lines measured and multiplying the result by 100.
• Evaluate the accuracy of stock units by dividing the actual quantity per SKU by the expected amount per SKU and then multiplying the result by 100.

Damaged Inventory

To determine the extent of damage in the warehouse, you can measure it in two ways. First, divide the damaged goods by the total number of items processed through the warehouse. Second, assess the monetary value of the damage.

Percentage of damaged items = items found to be damaged ÷ items shipped per month

Hard and soft measures

The measurement forms mentioned earlier are known as hard measures. They are relatively easy to measure, concrete, and straightforward. In contrast, soft measures refer to intangible qualities.

For instance, consider customer satisfaction with prompt delivery as a soft measure. Soft measures effectively capture perceived changes and provide a more comprehensive understanding of success than narrow-focused strict measures.

Although it can be challenging, soft measurement can be defined and measured. For example, we can use a survey with a rating scale from 1 to 10 to assess user satisfaction. This survey can be repeated at appropriate intervals to track perceived changes in service.

Research conducted by Landrum et al. (2009) highlights reliability and responsiveness as the most critical factors for service quality. Reliability factors include:

• Delivering services as promised
• Addressing customer service issues reliably
• Getting the service right the first time
• Providing services at the promised time
• Maintaining accurate and error-free records

Integration model

The integrated performance model blends actual performance data and customer perceptions. We gather data from performance reports and send questionnaires to customers regularly.

We assign ratings based on survey results and actual performance, which produce scores. We use red, yellow, and green models to highlight poorly performing areas. Red areas require attention.

When measuring performance, make sure your actions match customer requirements and expectations. For example, delivering 100 percent of available warehouse items doesn’t always mean fulfilling the exact customer order quantity.

Benchmarking

Benchmarking is when a company compares its performance with other companies or operations. The goal is to discover what successful companies do to achieve high performance.

Companies use benchmarking to:

• Understand how well they’re doing.
• Identify areas where they need to improve.
• Learn from others who do things better.
• Set achievable goals.
• Speed up and manage changes.
• Make processes better.
• Learn about best practices.

When benchmarking, it’s important to collaborate, keep things confidential, provide value, be flexible, honest, open, and maintain a good reputation. One way to keep things hidden and anonymous is to involve outside parties like benchmarking groups, consultants, or universities.

Balance scorecard

Kaplan and Norton (1996) created the balanced scorecard, which tracks performance. It assesses aspects like finance, customer satisfaction, internal processes, staff development, and innovation.

We will set goals and targets for each measure and measure them against actual performance. By implementing a balanced scorecard approach, we aim to improve processes, motivate teams, increase customer satisfaction, and enhance communication.

Read more: Warehouse Manager: Roles and 10 Challenges to Overcome

Summary

To achieve efficient operations, measuring performance effectively by following SMART steps that align with the company’s strategic vision is essential.

It’s worth noting that traditional KPIs report the status of an operation or process at a specific time. While they help compare performance over time, adjusting targets and actions is crucial as the environment changes quickly.

There are many performance measures related to warehouse operations. However, it’s best to measure only the areas that matter to your customers and your company.

References

Richard G. 2011. Warehouse Management. Great Britain: Kogan Page Limited.