How to Measure Warehouse Performance

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How to Measure and Benchmark Warehouse Performance

Warehouse Performance, Cost, and Value Measures

1. Principles of Performance Measurement 2. Workforce Facing Metrics 3. Customer Facing Metrics 4. Shareholder Facing Metrics 5. Warehouse Performance Gap Analysis 6. Performance Based Warehousing

Warehouse Performance, Cost, and Value Measures

In our RightChain™ methodology, a warehouse is accountable to the same competitive indicators a business is held to. Businesses compete on the basis of financial, productivity, utilization, quality, and cycle time performance. They are also accountable to serve their employees with a great place to work, their customers with excellent customer service, and their shareholders with excellent returns relative to risk. It is critical to hold the warehouse accountable to these business performance measures, since even private warehouses are in effect in business competition with third-party warehousers who are in the sole and literal business of warehousing. If a private warehousing enterprise is not competitive with potential third-party providers, then the private operator should reconsider its justification for being in the warehousing business. The flip side, though rare, is that if a private operator is a world-class warehouse operator, then the opportunity is available to turn their warehousing operations into profit-generating third-party operations for their industry and/or other industries. As an example, one of our telecommunications clients has become so dominant in their logistics practices, that they are creating a third-party logistidcs subsidiary to serve their industry. 1. Principles of Performance Measurement RightChain™Metrics is our proprietary performance measurement model. The model is based upon seven key principles of performance measurement. I will explain those briefly, and then we will apply them to warehousing. 1. Servant Leadership . The heart of the RightChain™ methodology is service. Our model encourages serving employees with a great place to work, serving customers with excellent customer service, and serving shareholders with excellent financial performance and high returns relative to their risk. Accordingly, RightChain™ Metrics work in three facings – employee facing metrics, customer facing metrics, and shareholder facing metrics. Employee facing metrics include safety and turnover. Customer facing metrics include accuracy, cycle times, and on-time performance. Shareholder facing metrics include cost, productivity, and utilization.

World Class Warehousing™

Warehouse Performance, Cost & Value Measures

2. Span the Flow . In a supply chain, the flow of material, information, and money connects suppliers and customers through production, purchasing, inbound transportation, warehousing, outbound transportation, and customer delivery. In warehousing, the flow of material and information moves from receiving, to putaway, to storage, to picking, to shipping. That flow of connected activities organizes the columns of metrics in our RightChain™ Warehousing Scoreboard. 3. Red, Yellow, Green . We recently completed a warehouse performance and practices assessment for an element of the United States Army. They were pleased with the all the aspects of the assessment except one – RYG. To be honest, I didn’t know what they meant by the acronym; so I asked. They explained that “RYG” means “red-yellow-green”; a critical aspect of the presentation of their indicators. When I pressed further, they explained that in battle they may be trying to understand an assessment with little to no sleep, little to no food, and with bullets flying around. In trying to make good, quick decisions under those circumstances it is helpful to know if things are simply and clearly OK (green), in trouble (red), or somewhere in between (yellow). 4. For Better or Worse . Another very helpful feature in the presentation of metrics is the portrayal of the direction of the performance - getting better, getting worse, or remaining constant. 5. Down and down we go . Metrics should be available for all levels of granularity of warehouse activity including all the warehouses in a supply chain, a specific warehouse in a supply chain, a specific activity in a specific warehouse, a specific operator in a specific activity in a specific warehouse; all filtered by time horizon, location, and channel of business. 6. Practice makes perfect . Like sports teams, warehouses perform the way they practice; it’s that simple. Accordingly, our RightChain™ Warehousing Scoreboard reports a practice score for each warehouse activity. 7. Sum the whole . The performance indicators either add or multiply across the activities to indicate the overall performance of the warehouse.

Warehouse Performance, Cost, and Value Measures

Figure 1. RightChain™ Warehousing Scoreboard Summary Screen

2. Workforce Facing Metrics: A Great Place to Work One of the most important features of our RightChain™ Metrics model is to encourage and serve the warehouse workforce with a great place to work. A great place to work is safe, naturally well lit, operates with a high cross functional percentage, operates with a healthy operator to supervisor ratio, and is evidenced by a high retention rate of high-performance workers. 2.1 Safety There are two basic reasons why workers leave for another workplace; they feel unsafe and/or under-valued. Physical safety is the most basic provision organizations should provide for their warehouse workforce. Two very simple measures of warehouse safety are the man-hours worked between each accident, and the man- hours worked between each lost-time accident. We monitor both for each warehouse activity and for the warehouse as a whole. 2.2 Cross Functionalism Another reason workers leave warehouse operations is boredom and injury due to repetitive tasks. By educating and encouraging workers to qualify for and work in multiple functions boredom and repetitive tasks are mitigated and overall staffing requirements are reduced. Cross functionalism measures the percent of operators in a given area that are trained to work in multiple functions.

World Class Warehousing™

Warehouse Performance, Cost & Value Measures

2.3 Operator to Supervisor Ratio Several years ago the crazy idea called “self-directed work teams” crept into business culture. The implementers quickly discovered that all teams need direction. The reason I bring this up is that there is an optimal level of direction for any activity, including each warehouse activity. In our benchmarking research we have found that an operator to supervisor ratio between 8 and 12 yields optimal performance.

Figure 2. RightChain™ Warehousing Scoreboard Workforce Screen

2.4 Retention In our annual survey on concerns for warehouse managers for the last 20+ years the two primary concerns have always been the same – turnover and aging. The impact of turnover on warehouse productivity and quality is grossly under estimated. In our recent survey we correlated turnover rates with our Warehouse Quality Index (WQI). The correlation is strong and unmistakable. Retaining high-performing warehouse operators is one of the common denominators in world-class warehousing operations.

Warehouse Performance, Cost, and Value Measures

Figure 3 Warehouse manager’s primary workforce concerns. Worker retention has been the number one indicator for as long as we have been conducting this survey.

Figure 4. Warehouse workforce turnover vs. Warehouse Quality Index™. The Warehouse Quality Index™, the product of inventory and shipping accuracy, is one of our overall indicators of warehouse quality performance. There is a dramatic drop off in the WQI as turnover increases. When we compare the cost of poor quality to the cost retaining a high-quality workforce we have yet to come across a situation where the warehouse was not significantly better off investing in the workforce. 3. Customer Facing Metrics The ultimate service goal for a warehouse is to provide customers with timely, perfect accuracy and availability. Doing so requires us to develop and maintain near perfect accuracy in the pre-requisite elements including putaway accuracy, inventory accuracy, and picking accuracy. Our RightChain™ Warehousing Scoreboard

World Class Warehousing™

Warehouse Performance, Cost & Value Measures

assimilates all the warehousing accuracies in a single accuracy perspective. The example of from one of the world’s largest food and beverage companies.

Figure 5. Customer Facing Metrics Screen from the RightChain™ Warehousing Scoreboard.

3.1 Accuracy Our RightChain™ Warehousing Scoreboard tracks at least one accuracy indicator for each warehouse activity and summarizes those into four accuracy indicators; two for inbound handling and two for outbound handling: 3.1.1 Inbound Accuracy Inbound accuracy, for better or worse, sets up the warehouse for outbound accuracy. Along those lines, we recommend two inbound indicators; putaway accuracy and inventory accuracy. Putaway accuracy measures the portion of putaway transactions that are executed to the correct, system directed putaway location. It is difficult if not impossible to recover from an inaccurate putaway. Warehouse inventory accuracy should measure the portion of inventory locations that hold the system recorded level of inventory. High levels of inventory accuracy are achieved through high putaway accuracy, ABC cycle counting, disciplined housekeeping, and real time transactions. Under the drag of poor warehouse inventory accuracy trust in the supply chain breaks down. No inventory

Warehouse Performance, Cost, and Value Measures

strategy can properly operate without high degrees of trust in the numbers used to support it.

Figure 6. Inventory accuracy benchmarks. We recently surveyed organizations with uniquely high requirements for warehouse inventory accuracy. Their location, item, and financial inventory accuracies are depicted in the figure.

Figure 7. Inventory counting methods. In the same survey we asked the participants what methods of inventory counting they employ in various stages of the supply chain.

3.1.2 Outbound Accuracy Our RightChain™ Warehousing Scoreboard monitors two indicators of outbound accuracy: picking accuracy and shipping accuracy. Picking accuracy is the portion of order lines picked with the correct SKU in the correct quantity. Shipping accuracy is

World Class Warehousing™

Warehouse Performance, Cost & Value Measures

the portion of shipping line transactions executed with the correct SKU in the correct quantity O . ur best warehouse clients in the U.S. have shipping accuracy at or near 99.97%. Our best warehouse clients in Japan have shipping accuracy at or near 99.997%, an order of magnitude improvement. Learning these gaps and experiencing the sense of urgency to close the gap are two of the most valuable results of an external benchmarking process.

Figure 8. Accuracy performance screen from the RightChain™ Warehousing Scoreboard. Inventory accuracy is along the X axis. Shipping accuracy is along the Y axis. Each bubble represents a DC in a supply chain network. The size of the bubble corresponds to the transaction volume in the DC.

Figure 9. Accuracy and damage indicators monitored in survey warehouses.

Warehouse Performance, Cost, and Value Measures

Figure 10. Means of determining picking and shipping accuracy in RightChain™ Institute survey warehouses.

Figure 11. RightChain’s Warehouse Quality Index™ is the product of a warehouse’s inventory accuracy and its shipping accuracy.

3.2 Damage If accurate orders arrive on-time to the right location but are damaged in some form, all the production, procurement, and logistics work in the world is for naught. Accordingly, the RightChain™ Warehousing Scoreboard tracks damage rates for each warehouse activity and for the warehouse as a whole.

World Class Warehousing™

Warehouse Performance, Cost & Value Measures

Figure 12. RightChain™ Warehousing Scoreboard Damage Performance Screen.

3.3 On-Times The RightChain™ Warehousing Scoreboard monitors three key on-time performance indicators: supplier on-time arrivals, on-time putaways, and on-time departures. Supplier on-time arrivals are measured as the percentage of inbound product that arrives on time. If suppliers arrive late, it is very difficult to keep a warehouse or supply chain on time. On time putaways measure the portion of putaway lines that are executed on time. Again, if putaways are late, it is very difficult to keep the warehouse on time. Lastly, on-time departures measure the percent of loads that depart the warehouse on time.

Warehouse Performance, Cost, and Value Measures

Figure 13. RightChain™ Warehousing Scoreboard On-Time Performance Screen

3.4 Cycle Times The RightChain™ Warehousing Scoreboard includes two cycle time indicators: dock to stock time (DTST) and warehouse order cycle time (WOCT). Dock-to-Stock Time (DTS) is the elapsed time from when a receipt arrives on the warehouse premises until it is ready for picking or shipping. Warehouse Order Cycle Time (WOCT) is the elapsed time from when an order is released to the warehouse floor until it is picked, packed, and ready for shipping. A few years ago we were asked to assist a large apparel retailer with their supply chain strategy. We toured their main distribution center during one of the initial visits. I noticed their receiving dock looked especially full. I asked them what their dock-to-stock time was. They shared proudly that it was 96 hours. I shared that our benchmarking showed that 24 hours was a norm; 8 hours was above average, and a few hours was world class. They were somewhat defensive and said they had looked into systems required to reduce dock-to-stock time, but they could never produce an acceptable return on investment. I asked them how much inventory was sitting on the dock. It was $8,000,000 worth of inventory. I asked them what range of investment proposals they received for the material handling systems required to help them reduce their DTST to 24 hours. Quotes were in the range of $2,000,000. I did some quick math and calculated that by reducing their dock-to-stock time by 75% they could reduce their inventory by $6,000,000. I asked them, “Wouldn’t it make

World Class Warehousing™

Warehouse Performance, Cost & Value Measures

sense to spend $2,000,000 to take $6,000,000 out of inventory or to reduce inventory carrying costs by $2,000,000 per year at their 33% inventory carrying rate?” They shared that they had only tried to compute an ROI based on labor savings alone and had not considered inventory savings. That re-consideration launched one of the nation’s most successful retail supply chain strategies. 4. Shareholder Facing Metrics Our recommended categories of shareholder facing metrics are cost, productivity and utilization. 4.1 Warehouse Cost Performance The main cost categories to operate a warehouse are labor, space, material handling equipment, and warehouse management systems. Those add up to between 2% and 5% of sales for most companies. Ideally those cost categories will be analyzed across the activities of the warehouse in a warehouse activity-based costing program. In the example, a cost for each warehousing activity (receipt, putaway, store, pick, ship, load) is established. The activity costs become the basis for comparing third-party warehousing proposals; budgeting; measuring improvement; and menu-based pricing for warehousing services.

Warehouse Performance, Cost, and Value Measures

Figure 14. Warehouse activity-based costing allocates the cost of personnel, space, systems, supplies and fees to each warehouse activity. Activity costs may then be allocated to product lines and/or business units.

Figure 15. RightChain™ Warehousing Scoreboard Activity Based Costing Example In this particular analysis the cost of storing and handling an item in the warehouse for a year was estimated to be $340.37. This warehouse managed over 70,000 items; 40,000 of which did not yield $340.37 in sales per year; not even enough to cover their storage and handling costs. Needless to say the finding was taken up with the marketing area and a SKU reduction ensued. Once a warehouse activity based costing analysis has been completed it is not unusual to find that a majority of the warehousing costs are labor costs and that

World Class Warehousing™

Warehouse Performance, Cost & Value Measures

outbound activities make up the majority costs by activity. The outbound activities usually make up the majority of the outbound activity costs because a single pallet putaway may require many trips to that pallet to deplete its contents in case picking or a single carton putaway may require many trips to deplete its contents in broken case picking.

Figure 16. Typical warehouse cost allocation by cost category (RightChain™ Warehousing Scoreboard)

Figure 17. Typical warehouse cost breakdown by activity. (RightChain™ Warehousing Scoreboard)

Warehouse Performance, Cost, and Value Measures

4.2 Warehouse Productivity Performance The most popular and traditional warehouse performance measure is productivity. The formal definition of productivity is the ratio of the output of an entity to to the resources consumed achieving that output. We recommend that our clients monitor the productivity and utilization of the key resources in the warehouse – labor, space, material handling systems, and warehouse management systems. We typically measure overall labor productivity as the ratio of units, orders, lines, and/or weight shipped out of the warehouse to the number of man-hours spent in operating, supervising, and managing the warehouse. We typically measure overall space productivity as storage density, the ratio of the amount of inventory storage capacity to the square footage in the warehouse. It is normally expressed as the value, cube, pieces, or positions of inventory that can be accommodated per square foot.

Figure 18. RightChain™ Warehousing Scoreboard Facility Productivity Screen

World Class Warehousing™

Warehouse Performance, Cost & Value Measures

Figure 19. RightChain™ Warehousing Scoreboard Productivity Performance vs Targets

Figure 20 Missing minutes by operator.

© Dr. Ed Frazelle, Author, World Class Warehousing | ALL RIGHTS RESERVED 4.3 Warehouse Asset Utilization Where the productivity of any resource is the ratio of output to consumption, the utilization of any resource is the ratio of the consumption of the resource to the capacity of the resource. One typical warehouse resource utilization measure is labor utilization, usually expressed as the ratio of the actual units per hour processed (in

Warehouse Performance, Cost, and Value Measures

the warehouse as a whole or in any activity) to the estimated maximum capacity units per hour. Another common utilization measure is the storage location utilization, expressed as the ratio of the number of occupied warehouse locations to the available warehouse locations. Equally important to monitor is the warehouse cube utilization, expressed as the ratio of the occupied cube to the total available cube. A major difference between productivity and utilization is that we always want to maximize productivity, whereas there are appropriate control limits for utilization. For example, we always want to maximize storage density, the number of storage positions available per square foot, but the utilization of storage space should range between 70% and 90% on a consistent basis. Storage location utilization higher than 90% leads to productivity decreases and potential safety problems. Utilization lower than 70% suggests excessive storage capacity.

Figure.21 RightChain™ Warehousing Scoreboard Utilization 360 Screen Displays the Utilization of All Key Warehouse Resources Including Workforce, Vehicles, Storage, and Docks

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Warehouse Performance, Cost & Value Measures

Figure 22. RightChain™ Warehousing Scoreboard. Storage Location Utilization, Storage Cube Utilization, and Facility Size

Figure 23 RightChain™ Warehousing Scoreboard Storage Utilization 360 Storage utilization helps enforce healthy inventory management. In our early work with Honda their warehouse space utilization was in excess of 98%. When it came time to implement a new warehouse management system, the warehouses were so full that there was no room to move product to create the space needed to re label and reconfigure racking to accommodate the new system. I suggested they delay

Warehouse Performance, Cost, and Value Measures

implementation and re-set the storage utilization capacities to 85%; what it should be for most warehouses. They asked me what they would do with their excess inventory. I half-jokingly suggested they rent a warehouse in a remote location where space was especially cheap. Any product occupying space over and above 85%should be shipped to that remote location. When the 85% occupancy had been established, they could install the WMS. I was a bit surprised to learn later that they had accepted my recommendation. The remote warehouse occupied more than 500,000 square feet. The Japanese president received the monthly bill and dispatched an associate to look at the operation. It turned out the material was essentially excess safety stock generated by their forecasting system. The excess had previously been stuffed into their facing distribution centers. Pulling the material out of the forward DCs helped them see and experience just how much excess safety stock their inventory plan was producing. The visualization and the bill from the third-party helped to motivate a highly successful makeover of their forecasting process and system. 5. Warehouse Performance Gap Analysis We often assess our client’s performance in the form of a warehouse performance gap analysis indicating to the client their standing vs. world-class norms in the key performance indicators and the cost savings that are available if the gaps can be closed. The radials (or spokes) represent the key performance indicators for the operations. The outer ring defines world-class performance.

World Class Warehousing™

Warehouse Performance, Cost & Value Measures

Productivity

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Safety

Storage Density

Warehouse Order Cycle Time

Inventory Accuracy

Current World-Class

Dock-to-Stock Time

Shipping Accuracy

Figure 24. Example Warehouse Performance Gap Analysis In the example, the warehouse performance indicators are productivity (lines per hour), storage density (case storage capacity per square foot), inventory accuracy, shipping accuracy (% lines shipped in error), dock-to-stock time, warehouse order cycle time, and safety. In the example the annual savings opportunity for attaining world-class warehousing is $3.7 million per year, leading to a justifiable investment in a RightChain™ Warehousing initiative of $7.4 million.

Warehouse Performance, Cost, and Value Measures

Figure.25. RightChain™ Warehousing Financial Opportunities Assessment

Figure 26. RightChain™ Warehousing Performance Simulation Screen. The value in the gap analysis is the single-page, graphical presentation of the performance profile. The analysis quickly points out weak and strong points in the performance of the operation. The gap chart can also be used to establish project goals. For example, in the figure, the inner ring may represent the current performance of an operation. Another ring may represent the goals of a reengineering project. The goal ring should be at or near world-class performance.

World Class Warehousing™

Warehouse Performance, Cost & Value Measures

If the goals of a project are not set high enough, since the definition of world-class performance is improving over time, at the completion of the project the operation will not be improved relative to world-class performance. Another use for the gap chart is in comparing operations in a potential benchmarking partnership. For the partnership to work effectively, the partners should not have overlapping, but offsetting strengths and weaknesses. If the strengths and weaknesses overlap, little learning can take place. Finally, the gap analysis can also be used in justifying capital expenditures for new information and/or material handling systems. Since the chart quantifies the gap relative toworld-class metrics, we can compute the annual $ benefit (cost savings, cost avoidance, and/or revenue increases) of closing the gap in each performance area. The estimated annual benefit in relation to corporate payback goals suggests an appropriate investment available to close the gap. 6. Performance Based Warehousing I have been fortunate to influence the supply chains and warehouse operations of hundreds of companies. The client who has probably gone the furthest with warehouse performance measurement is Caterpillar. They recently blended our RightChain™ Metrics methodology with their Caterpillar Production System precepts and developed perhaps the world’s most advanced and comprehensive warehouse performance management system. In addition to the global daily updates of each of the key indicators in each of the Caterpillar DCs, a balanced presentation of the indicators is presented on scoreboards throughout each DC, and it is used as the basis for each day’s and each shift’s discussion of challenges and opportunities for improvement.

Warehouse Performance, Cost, and Value Measures

Figure 27. The operating performance and status for each activity is updated and presented in real time on digital scoreboards throughout Caterpillar’s DCs.

World Class Warehousing™

Warehouse Performance, Cost & Value Measures

Figure 28. The Caterpillar culture of serving employees, customers, and shareholders is reflected in their warehouse performance boards.

Warehouse Performance, Cost, and Value Measures

Figure 29. Caterpillar’s DC performance boards are posted throughout their DCs to openly communicate the current status of each DC’s safety, service, and financial performance.

World Class Warehousing™

Warehouse Performance, Cost & Value Measures

APPENDICES Appendix 1. Workforce Facing Metrics Appendix 2. Customer Facing Metrics Appendix 3. Shareholder Facing Metrics

Warehouse Performance, Cost, and Value Measures APPENDIX 1. WORKFORCE FACING METRICS

Category Definition Safety HBA Hours Between Accidents Total Man Hours Worked in 12 Months Divided by the Number of Accidents Incurred in that 12 Months HBLTA Hours Between Lost Time Accidents Total Man Hours Worked in 12 Months Divided by the Number of Lost-Time Accidents Incurred in that 12 Months Satisfaction WFT Workforce Turnover Number of Individuals Employed during the Course of 12 Months Divided by the Number of Positions Required XFW Cross Functionalism Portion of the Warehouse Workforce Trained for and Engaged in Multiple Warehouse Jobs Oversight OTS Operator to Supervisor Ratio The Ratio of the Number of Operators in the Warehouse to the Number of Supervisors Metric

World Class Warehousing™

Warehouse Performance, Cost & Value Measures APPENDIX 2. CUSTOMER FACING METRICS

Category Definition Accuracy LSA Line Shipping Accuracy Ratio of total order lines shipped without errors to the total number of order lines shipped. OSA Order Shipping Accuracy Ratio of total orders shipped without errors to the total number of orders shipped. LPA Line Picking Accuracy Ratio of total lines picked without errors to the total number of order lines picked. OPA Order Picking Accuracy Ratio of orders picked without errors to the total number of orders picked. LIA Location Inventory Accuracy Ratio of the number of locations without inventory discrepancies to the total number of warehouse locations. On Times OTAP On-Time Arrival Percentage Ratio of the total number of orders arriving on-time to the total number of orders shipped. Perfection WPOP Warehouse Perfect Order Percentage Ratio of the total number of orders shipped without defect (arriving on-time without errors) to the total number of orders shipped. Metric

Warehouse Performance, Cost, and Value Measures APPENDIX 3. SHAREHOLDER FACING METRICS

Category Definition Cost CPL Cost per Line Ratio of total cost of labor (operators, supervisors, and managers), occupancy, and equipment to the total number of order lines shipped. CPPL Cost per Perfect Line Ratio of total cost of labor (operators, supervisors, and managers), occupancy, and equipment to the total number of perfect (defect free) order lines shipped. CPO Cost per Order Ratio of total cost of labor (operators, supervisors, and managers), occupancy, and equipment to the total number of orders shipped. CPPO Cost per Perfect Order Ratio of total cost of labor (operators, supervisors, and managers), occupancy, and equipment to the total number of perfect (defect free) orders shipped. Productivity LPMH Lines per Man Hour Ratio of the total number of man hours spent (operators, supervisors, and managers) to the total order lines shipped. PLPMH Perfect Lines per Man Hour Ratio of the total number of man hours spent (operators, supervisors, and managers) to the total number of perfect (defect free) order lines shipped. Storage Density CDY Cube Density Ratio of the total storage cube capacity to the building footprint measured in square feet. DDY Dollar Density Ratio of the total value of the inventory storage capacity to the building footprint measured in square feet. SDY SKU Density Ratio of the total number of SKUs accommodatable to the building footprint measured in square feet. Resource Utilization WFU Workforce Utilization Ratio of the total non-idle working hours to the total number of working hours. DDU Dock Door Utilization Ratio of the hours dock doors are occupied to the number of hours of dock door time available. SLU Storage Location Utilization Ratio of the number of occupied storage locations to the total number of storage locations. VHU Vehicle Utilization Ratio of the number of non-idle vehicle working hours to the total number of available vehicle working hours. Metric

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