HOW TO MEASURE WAREHOUSE PERFORMANCE

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WAREHOUSE PERFORMANCE MEASUREMENT How to Measure and Benchmark Warehouse Performance

Edward H. Frazelle, Ph.D. Executive Director, RightChain™ Institute

“You must have accurate and honest weights and measures, so that you may live long in the land.” - God

PART I PRINCIPLES OF PERFORMANCE MEASUREMENT

Principles of Metrics Principles of Targets Principles of Presentations

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• Another thing I have learned in thirty years of assisting organizations with operations performance is that the methods of performance measurement matters; and it matters a lot, to ourselves, to people under our influence, and even to God. • One of the principles of human nature I have observed, in the hundreds of operations I have been blessed to visit, is that people behave based on the way they are measured. That said, if we are given a healthy mission, definition of success, and accompanying metrics, we will make a lot of healthy decisions. Unfortunately, the reverse is also true. • The culture of an organization, an operation, a team, or a family, is primarily expressed through what if values. Explicitly or implicitly, what it values gets measured. • I believe this dynamic is why God cares so much about measurement. Accordingly, I recently came across the following quote from Him. • “You shall do no wrong in judgment, in measures of length or weight or quantity. With what measure you measure, it will be measured to you. You must have accurate and honest weights and measures, so that you may live long in the land the LORD your God is giving you.” • To a large degree, the way we measure defines our success and longevity of life. Measurement matters! A lot!

MEASURMENT MATTERS

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1. “You can’t control what you don’t measure; and you can’t manage what you can’t control.” 2. As soon as you start measuring something, the something improves. 3. It’s hard to win a game without a scoreboard.

MOTIVATIONS TO MEASURE

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Section 1 Performance Measurement Principles

a. Principles of Metrics b. Principles of Targets c. Principles of Presentations

Course Outline

Section 2 Warehouse Performance Measures a. Warehouse Financial Performance b. Warehouse Productivity Performance c. Warehouse Utilization Performance d. Warehouse Quality Performance e. Warehouse Cycle Time Performance f. Warehouse Workforce Performance Section 3 Warehouse Project Justification a. Warehouse Performance Benchmarking b. Warehouse Project Justification

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Ten Traits of World-Class Performance Metrics

1. Relevant When the metric changes, it means something 2. Data Supportable There is timely, reliable data available for the metric 3. Actionable Metric movements are tied to process adjustments 4. Quantifiable Numerical, data-based, logical, formulas are used 5. Benchmarkable Units of measure are consistent with industry norms

6. Comprehensible Common sense is inherent in metric construction 7. Memorable The number and names of the metrics are memorize-able 8. Aligned The metrics align vertically and horizontally 9. Balanced The metrics address cost, service, and workplace 10. Spanning The metrics cover the full range of the activity

Placeholder Text Ten Traits of World-Class Performance Metrics

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Labor Space/Facilities Material Handling Equipment Warehouse Management Systems Elapsed Time

RESOURCES

INPUTS

WAREHOUSE INPUT OUTPUT MODELING

COST SALES

VALUE ADDED

OUTPUT

Perfect Orders Storage Capacity

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It pays to measure…. to a point.

We monitor the number of performance measures our clients and research participants track in various categories of metrics including finance, productivity, quality, cycle time, and safety. We recently correlated the number of metrics monitored with the performance of the warehouse relative to the other warehouses. In each case, the categories the correlation was the same; the greater the number of metrics monitored, the better the performance ; up until the monitoring itself yielded too many and therefore meaningless metrics. The “ideal” number of metrics for any category of metrics seems to be SEVEN ; which, like pre-area code phone numbers, is not coincidentally the number of numbers that humans can remember about anything.

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WAREHOUSE PERFORMANCE TARGET SETTING Warehouse performance target setting is much more challenging than meets the eye. The ease gives yield to many performance targets masquerading as management. When carefully and wisely contemplated, healthy performance targets are characterized as follows. First, they are reasonably achievable in a reasonable timeframe. Second, they are achieved in collaboration with, not at the expense of others. Third, they reflect steady progress and momentum. Lastly, their achievement is celebrated in a healthy manner.

MOTIVATIONAL TARGETS

WAREHOUSE PERFORMANCE DISPLAYS Clearly, accurately, and proportionately reflect success and failure (Red-Yellow-Green) Clearly, accurately, and proportionately reflect trending progress and momentum Hierarchical, drill-down access to deep dives on specific metrics Simple, non-overwhelming Presents tradeoffs and tensions Includes owner and data sources Visualizations linked to decisions and actions

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RightChain™ Warehousing Scoreboard

Our RightChain™ Warehousing Scoreboard presents a comprehensive view of performance across and within all warehouse activities. Employee service is addressed via satisfaction, safety, and development indicators. Customer service is addressed with quality, cycle time, and on-time indicators. Shareholder service is addressed with financial (cost, capital, and ROIC), productivity (labor and space), and utilization (labor, capital, and space) indicators. The Scoreboard covers receiving, putaway, storage, replenishment, picking, shipping, loading, returns, and the warehouse as a whole. Red-Yellow-Green conditional formatting is used to indicate the performance of the activity relative to target performance. Up and down arrows are used to indicate whether or not performance is improving or declining.

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RightChain ™ Scoreboard

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Caterpillar Corrective Action with Follow Up, Accountability and Influence

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Controllable vs Uncontrollable Costs

One of the most detrimental phenomena in management is holding people accountable for metrics that they cannot influence. Unfortunately, in supply chain logistics, many and influence of those being held accountable for them. performance metrics are out of the control

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Metrics Due Diligence

SG-CS-AC1¹

KPI ID

KPI Name KPI Owner

On Time Delivery / Arrival

Basics

Supply Group

% of total orders delivered on time (or within time window)

Definition

To be defined

What is the collection method?

Delivery information captured in JDE (need to further investigate what is captured and where)

What is the source?

Supply Group

Business Unit measured?

[# of orders delivered within service level]/[Total orders] (Calculated as orders where [Order delivery time]-[Order receipt time]<=[Service promise time]

Data Collection

What is the formula, scale, assessment used?

Weekly, monthly, quarterly End of the month Recurring

Frequency of collection, when and how long for?

To be defined

Who collects the data?

Tolerance levels are recommended to differentiate between based on criticality, costs and volume shipped. A decision is also required to decide what should carry a higher weighting; OT or IF

What are the performance tolerance levels?

Target

What are the reason codes and attributability per "misses"?

Order is delayed at customer receiving location due to customer fault Non-controllable circumstances lead to order being delayed (e.g. floods, etc.)

Monthly Recurring

Reporting frequency (when and how long for?) 1

Reporting

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PART II WAREHOUSE PERFORMANCE MEASURES

a. Warehouse Financial Performance b. Warehouse Productivity Performance c. Warehouse Utilization Performance d. Warehouse Quality Performance e. Warehouse Cycle Time Performance f. Warehouse Workforce Performance

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WAREHOUSE FINANCIAL PERFORMANCE

1. Warehouse Cost Computations 2. Warehouse Cost to Sales 3. Warehouse Gross Margin Analysis 4. Warehouse Activity Based Costing

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Warehouse Cost Computations

Rates

Costs

Resources

Man Hours (Hours/Year)

Wage Rate ($/hour)

WORKFORCE COST ($/year)

Wages Occupancy Capital

OPERATING COST ($s/year)

Footprint (SF)

Rent/Lease Rate ($/SF)

OCCUPANCY COST ($/year)

MHE, WMS and Facility Investment ($s)

TOTAL COST ($s/year)

Capitilization Rate (%/year)

CAPITAL COST ($s/year)

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Warehousing Cost to Sales Ratio

RightChain™ Research’s survey participants, were asked to record their best estimate, of their warehouse cost to sales ratio. Among our survey participants, the median warehousing cost to sales ratio, is 3.0%. The average is 3.4%. In our experience, warehousing cost to sales ratios, range between 1% and 5%. However, any cost to sales ratio, must be taken with a grain of salt, and communicated with care, since sales prices and volumes are out of the control, of the warehouse managers being evaluated by the metric. In a recent client engagement, the director of warehouse operations, was being dissed by the head of sales, because the warehousing cost to sales ratio was so high. The director of warehousing wisely responded back, "If you could increase sales volumes, and prices, the way you promised, we'd look pretty good."

MEDIAN

AVERAGE

Source: RightChain™ Research

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Gross Margin per Case 360

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Warehouse Activity Based Costing

Personnel Operating Management

Space Rent, Lease, Own, Utilities

Systems MHS WMS

Supplies Packaging Other

Fees Housekeeping Maintenance

Allocation to Activities

Order Picking

Receiving

Putaway

Storage

Shipping

Allocation to Product Lines

Product Line A

Product Line B

Product Line C

Product Line D

Product Line E

Allocation to Business Units

Business Unit I

Business Unit II

Business Unit III

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Warehouse Activity Based Costing Example

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Warehouse Activity Based Costing Analysis

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Warehouse Activity Based Costing Example

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EXAMPLE INDICATORS

WAREHOUSE PRODUCTIVITY

LABOR PRODUCTIVITY METRICS Orders per Man-Hour Lines per Man-Hour Pallets per Man-Hour Cases per Man-Hour Eaches per Man-Hour Pounds per Man-Hour Cube per Man-Hour

The productivity of any resource is the ratio of the output of the resource to the consumption of that resource.

Productivity(r) = Output(r)/Consumption(r)

Example

Productivity(labor) = Output(labor)/Consumption(labor) = Units/Person-Hour

Productivity Metrics in Survey Warehouses

Cases per Man-Hour

Lines per Man-Hour

Pallets per Man-Hour

Pieces per Man-Hour

Pounds per Man-Hour

Our survey participants were asked to report the types of overall warehouse productivity performance indicators in place. • 54.6% track total cases shipped per man-hour • 46.9% track total lines shipped per man-hour • 36.9% track total pallets shipped per man-hour • 34.6% track total pieces shipped per man-hour • 11.5% track total pounds shipped per man-hour Most Common Productivity Measures

54.6% 46.9%

36.9% 34.6%

11.5%

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Productivity 360

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Activity Based Productivity by Activity

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Warehouse Productivity Trending

Better than target & declining.

Better than target and improving.

Worse than target and improving.

Worse than target and declining.

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PRODUCTIVITY The productivity of any resource, r , is the ratio of the output of the resource, r , to the consumption of the resource. P r = Output r /Consumption r UTILIZATION The utilization of any resource, r, is the ratio of the consumption of the resource, r, to the capacity of the resource. U r = Consumption r /Capacity r

Productivity vs Utilization

Warehouse Location Utilization Metrics

In our warehouse metrics methodology we recommend that storage location utilization be tracked in two ways – Location Facings Utilization AND Location Cube Utilization. Location Facing Utilization is measured as the portion of location (facings) that are occupied at all. For example, if there are 10,000 Pallet locations in a warehouse, and 8,700 of them are occupied, then measured as the portion of the cube capacity of a location that is occupied. For example, if a storage location has a cube capacity of 64 cubic feet, and 32 cubic feet are occupied, then the Location Cube Utilization is 50%. The Location Facing Utilization is 87%. Location Cube Utilization is

Location Facings Utilization and Location Cube Utilization in the Reserve Storage and Forward Picking areas in the DCs of a large food and beverage company.

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Warehouse Resource Utilization 360

Operator Utilization

Lift Truck Utilization

Storage Location Utilization

Dock Door Utilization

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WAREHOUSE QUALITY PERFORMANCE Putaway Accuracy Inventory Accuracy Picking Accuracy Shipping Accuracy The Perfect Order Costs of Poor Quality

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• Putaway Accuracy = % Lines Putaway in Correct Location

• Storage Location Inventory Accuracy = % Locations without Discrepancies

Warehouse Quality Performance Measures

• Order Picking Accuracy = % Lines Picked without Errors

• Shipping Accuracy = % Lines Shipped without Errors

• Damage Percentage = % Product Value Damaged in Warehousing

A perfect order ...

• has the right amount • of the right products

Perfect Order Percentage

• is damage free • arrives on-time • arrives at the right location • is filled completely on the first call • is entered correctly • has no invoicing/collections errors

Perfect Order Percentage • has the right amount of the right products • is damage free • arrives on-time • arrives at the right location • is filled completely on the first call • is entered correctly • has no invoice/collections errors

• 97% • 98% • 93% • 96% • 72% • 94% • 93% 48%

IS PERFECT:

There are many lessons in this little exercise. First, you may not even track performance in the nine activities described above. It is difficult to improve something that you don’t measure. Second, you may not recognize the interdependence of these activities. They all contribute to the ultimate logistics objective of filling a customer order. Revenues flow from filling customer orders. An integrated view and assessment of these activities is one step on the path to world-class logistics. Third, you may not believe how low the number is. Though there is not a published industry standard for perfect order performance, most companies fill 50% or less of their orders perfectly. If you want to know why your customers always seem dissatisfied, here’s the reason.

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Cost of Poor Quality

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Quality Metrics in Survey Warehouses

Survey participants were asked to report the types of quality metrics tracked in their warehouses. The most popular warehouse quality indicator is location inventory accuracy. 78.8% of the survey warehouses track location inventory accuracy. The next most popular warehouse quality indicator is line item picking accuracy. 67.3% of survey warehouses track line item picking accuracy.

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Warehouse Quality Scoreboard

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Location Inventory Accuracy in Survey Warehouses

Average = 94.9% Median = 98.0%

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Warehouse Inventory Accuracy

Shipping Accuracy Determination

Customer complaints are the most common but least reliable source of shipping accuracy information.

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Inventory Accuracy vs. Shipping Accuracy

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Warehouse Quality Index = Shipping Accuracy x Inventory Accuracy

Average = 93.2% Median = 97.1%

Average for Top Quartile = 99.65% Median for Top Quartile = 99.76%

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Warehouse Return Rates

Source: Going Backwards: Reverse Logistics Trends and Practices

Dock-to-Stock (DTS) Time

The elapsed time from receipt-on-premises to the time the receipt is available for picking or shipping in aggregate and for each load. Warehouse Order Cycle Time (WOCT) The elapsed time from order release to the warehouse floor to the time the order is picked, packed, labeled, staged, and ready for shipping in aggregate and for each order.

Warehouse Response Time Indicators

Dock-to-Stock Time

Average = 12.3 Median = 4.0

On-Time Arrival and Departure Percentage

It is very difficult to arrive on-time if you depart late, unless you travel dangerously. We monitor both on time departure percentage (OTDP) and on-time arrival percentage (OTAP).

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Operator to Supervisor Ratio Working Hour Profile Full-Time vs Part-Time vs Overtime Warehouse Accident Rate Hours Between Recordable Accidents Hours Between Lost-Time Accidents Warehouse Workforce Turnover

Warehouse Workforce Indicators

Operator to Supervisor Ratio

A key indicator of management philosophy is the ratio of operators to supervisors. Some warehouses try to cut corners by cutting back on supervision and management. Those results can be devastating. The average operator to supervisor ratio among survey warehouses was 11.3; the median 10.2. The ratio yielding the best productivity performance was 12. The ratio yielding the best quality performance was 8.

Warehouse Staffing by Activity

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Warehouse Working Hours Profile

Part-Time Staff - Overtime Hours 4%

Part-Time Staff - Regular Hours 14%

Full-Time Staff - Overtime Hours 18%

Full-Time Staff - Regular Hours 64%

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Warehouse Workforce Challenges

Warehouse Workforce Turnover

Workforce turnover is a key indicator of workforce morale, working conditions, and management capability. The average workforce turnover among survey warehouse was 15%; the median was 9%. Workforce turnover in warehouses in general is much higher that that experienced by survey warehouses. That suggests that the warehouses in the survey have high workforce morale, working conditions, and management capability.

Average = 15% Median = 9%

Workforce Turnover %

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Warehouse Workforce Turnover vs Warehouse Quality

● Recommend seven warehouse key performance indicators that will represent the financial, productivity, quality, and cycle time interests of shareholders, customers, suppliers, and employees. Put them on a dashboard. Assign weights to them such that they add to 100. ● What are the implications and costs of a picking error? ● What are the implications and costs of an inventory location discrepancy?

Exercises

Consider a warehouse with the following performance characteristics… • 58 operators paid an average of $40,000 per year • 175,000 square feet with an occupancy cost of $12.50 per square foot per year What is the total annual labor cost? What is the total annual occupancy cost? If the warehouse ships 4,289 orders per year, what is the total annual labor and occupancy cost per order?

Total Warehousing Cost Computation Exercise

References Frazelle, E.H. and S.T. Hackman, "The Warehouse Performance Index: A Single-Point Metric for Benchmarking Warehouse Performance," Material Handling Research Center, Georgia Institute of Technology, Atlanta, Georgia, 1993. Hackman, S.T., E.H. Frazelle, P.M. Griffin, S.O. Griffin, and D.A. Vlatsa, “Benchmarking Warehouse Operations: An Input-Output Approach,” Journal of Productivity Analysis , Volume 16, pages 79-100, 2001. The visual display of quantitative information

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