21 KPIs for Measuring & Improving Warehouse Performance
As a financial executive or warehouse manager, you no doubt know how vital it is to measure the performance of your company’s warehouse or distribution center on an ongoing basis to track trends, gauge how efficiently you’re operating, and uncover potential problems and risks.
One of the most effective ways to do this is to employ Key Performance Indicators (KPIs) that measure how effectively your warehouse processes are performing by comparing them to past numbers and benchmarks.
Warehouse KPIs ensure that the warehousing team meets its efficiency objectives while allowing top-level executives to see the overall impact of warehouse and inventory management on the business. Metrics that track receiving and putaway efficiencies, picking and packing stock on pallets for delivery, and inventory accuracy are used as benchmarks to measure month-on-month improvements.
In this article, we discuss the warehouse metrics and KPIs used most often by Silvon’s clients and what these KPIs can do for you, too. While warehouse KPIs can be applied to most businesses, you more than likely will not need to use everyone discussed below to reach your company’s own goals – simply the ones that are most relevant to your business.
Inventory KPIs relate specifically to the stock that’s stored in your warehouse, and they monitor how well your inventory is moving overall. Popular KPIs include inventory accuracy, inventory shrinkage, inventory carrying cost, inventory turnover, and inventory to sales ratio.
Inventory accuracy measures the actual amount of inventory that’s tracked by your operational system to the amount that’s stored in the warehouse(s). Inaccuracies between these numbers could be due to theft, damage, miscalculations, supply-side shortages, and more. The closer the number is to 1 using the formula below, the more accurate your inventory tracking is.
Inventory Accuracy =
Stock as tracked by inventory management (operational) system /
physical inventory count
Like inventory accuracy, monitoring inventory shrinkage is when actual inventory levels are less than what’s recorded on the balance sheet. Calculating inventory shrinkage is key to minimizing it in the future by gaining a clearer picture of its cause. For example, if your inventory shrinkage percentage is consistently low, a sudden spike is probably just the result of a miscalculation. However, if it is always high, it could be related to shoplifting, employee theft, or supplier fraud.
Inventory Shrinkage Rate =
(Recorded Inventory value – Actual Inventory value) / Recorded Inventory value
Inventory Carrying Cost
The carrying cost of inventory is the total amount of money spent on owning, storing and holding unsold finished goods. It represents how long your business can continue storing its inventory before you begin to lose money and need to determine a way to deal with slow-moving products and dead stock.
Inventory Carrying Cost = Total carrying costs / Overall inventory costs
The inventory turnover ratio is used to identify how often and how soon a stock item is received, ordered, processed and delivered within a given time period. This is an important measure of a company’s sales performance and order processes.
Inventory Turnover =
Number of sales made / Average inventory … OR …
Cost of goods sold / Average inventory
Inventory to Sales Ratio
The inventory to sales KPI provides a ratio of inventory remaining at the end of the month to sales made during the same month. This value is very beneficial to anyone managing a warehouse because it helps predict potential cash flow issues and can help you calculate how much stock you need to purchase to fulfill sales and prevent backorders.
Inventory to Sales Ratio = End of month inventory balance / Sales for the month
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Receiving activities do not impact service delivery specifically, but they definitely have an indirect influence on it. The objective is to make sure your process is fast, efficient, and as free from mistakes as possible.
- Receiving Efficiency
Receiving efficiency calculates the productivity of the work being done by your employees in the receiving area of your warehouse to determine if additional training or better processes are required.
Receiving Efficiency = Volume of inventory received /
Number of staff hours worked
- Cost of Receiving Per Line
The cost of receiving per line relates to the amount of money spent on receiving each line item on a purchase order. This also includes the tasks that take place while receiving, such as handling and accounting for each item.
Cost of Receiving Per Line = Total cost of receiving /
Total number of line items
- Receiving Cycle Time
Receiving cycle time measures the average time taken to process received stock, including accounting for it, sorting it according to category, and storing it.
Receiving Cycle Time = Total time spent on sorting received stock /
Total number of received items
Putaway is the process of storing received products. If the steps associated with this process are not well defined, it can lead to a backup of material on the receiving dock or inventory stock-outs on the warehouse floor. Putaway KPIs like accuracy rate, putaway cost per line, and putaway cycle time can help you measure how these processes are performing.
- Putaway Accuracy Rate
Your accuracy rate reflects the percentage of items that have been put away correctly the first time.
Putaway Accuracy Rate = Inventory put away correctly / Total inventory put away x 100
- Putaway Cost Per Line
This KPI refers to how much it costs to put away a line of items and can help you reduce how much you spend on your overall put away processes.
Put Away Cost Per Line = Total cost of put away / Total line items
- Putaway Cycle Time
The putaway cycle time is the average time it takes to put away a single item of your inventory. Of course, shorter putaway cycle times mean better warehouse efficiency.
Put Away Cycle Time = Total number of man-hours used for putaway /
total number of man-hours used for the entire warehousing operation
Order Management / Fulfillment KPIs
The order management (fulfillment) process consists of all the steps that take place from the time your business receives a customer order to the time your customer receives what they purchased. These include accepting the order, picking the right products for it, packing them, shipping them, and handling post-sales processes like returns and refunds.
- Picking Accuracy
The picking accuracy KPI tells you how accurately items are being picked for customer orders. Your picking accuracy should be as close as possible to 1, indicating a high level of accuracy.
Picking Accuracy = (Total number of orders – Incorrect item returns) / Total number of orders
- Picks Per Hour
This KPI can be controversial because it will highlight the differences in productivity among individuals in the picking workforce. However, if performance is managed sensibly and your warehouse managers can gain agreement among pickers to increase their picking rates, it’s a great way to gain productivity without increasing warehouse headcount.
- Total Order Cycle Time
Total order cycle time refers to the average time it takes for an order to be shipped from the moment the customer places the order. This includes all the processes that take place in between, such as accepting the order, picking the necessary items, packing them, and getting them ready to be shipped. Shorter times generally translate into greater customer retention rates.
- Order Lead Time
Order lead time is the average time it takes an order to reach a customer after they’ve placed it. As with total order cycle time, it’s better for your business if your order lead times are short.
Order Lead Time = Order cycle time + order shipping time
- Backorder Rate
Backorder rate compares the number of backorders you have placed to your total orders. A high backorder rate indicates that your forecasting, planning, and/or inventory tracking processes should be further assessed.
Backorder Rate = Total backorders / Total orders x 100
- Fulfillment Accuracy Rate
This KPI calculates the number of orders that have been successfully fulfilled from start to finish out of the total customer orders received. This includes orders that have been correctly delivered on time and consist of the right products. Typical On-Time In-Full (OTIF) shipments should be at least 98-99%.
Fulfillment Accuracy Rate =
Orders completed without issues / Total orders received x 100
- On-Time Shipping Rate
This indicator tells you how efficient your shipping processes are. It’s important to maintain a high on-time shipping rate in order to prevent customer dissatisfaction.
On-Time Shipping Rate =
Number of orders that have been shipped on time or in advance /
Total number of orders shipped x 100
- Fulfillment Cost Per Order
This KPI shows how much it costs to fulfill a customer order from the moment the order is placed to the time it reaches the customer. It includes all the warehousing expenses involved with shipping orders, including receiving, inventory put away, storage, picking, packing, shipping and reverse logistics or returns processing.
Fulfillment Cost Per Order = Total warehouse costs – total warehouse
costs per order /annual orders shipped
- Rate of Returns
The rate of returns tells you the percentage of customers that have returned their items, whether because of factors you can fix (like damaged products, incorrect item sent, or late delivery) or factors out of your control (such as fraud or problems with the product after delivery).
Rate of Returns = (Items returns / Items sold) x 100
- Overall Throughput
Warehouse throughput refers to the number of orders that are processed and moved on a daily basis. To calculate throughput rate, you should track the movement of goods through the warehouse for a given period of time. For example, if your warehouse processes 400 orders in eight hours (from receiving, to picking and packing), then workers are completing an average of 50 orders per hour.
Identifying, implementing, and tracking warehouse KPIs on a consistent basis is the first step towards increasing warehouse productivity, efficiency, and customer satisfaction. We hope you find this initial list of KPI metrics to consider of value in your own journey to measure and improve the performance of your company’s warehouse operations.
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