Managing a warehouse can be a challenging assignment. Receiving stock, updating inventory, picking, packing, shipping, choosing a Warehouse Management System and a million other tasks in between need taking care of.
And it all culminates in the critical point of making sure customers receive their orders on time and in one piece.
This is why warehouse KPIs (Key Performance Indicators) are so important. Being able to measure key warehouse performance metrics over time helps identify areas for improvement.
And improvements in warehouse management have a direct result on both overall business costs and customer satisfaction.
Yet failing to correctly measure warehouse performance means it’s impossible to actively improve and achieve optimal efficiency. There could be costly weaknesses in play that you may not even know exist.
In this post, we go through seven of the most important warehouse KPIs. Use these to measure warehouse efficiency month-by-month and identify areas for improvement going forward.
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Warehouse KPI #1 – Receiving Efficiency
A warehouse operation all starts with actually receiving and booking in incoming stock.
This may seem a pretty mundane area at first thought. But it can get tricky when considering it can involve receiving:
- Multiple new stock deliveries each week.
- Customer returns of good items.
- Customer returns of damaged items.
- Return to vendor stock.
Such an important part of the warehouse operation needs to be tracked and measured with its own key performance indicators. This can be done by paying close attention to time taken for received stock to be counted, booked in and ready to put away.
It’s a good idea to record exact timestamps of all delivered stock. Then record another timestamp as soon as this stock is ready for putting away. You can then calculate an average for the month and compare to previous performance.
(Don’t forget, this is one of the warehouse KPIs a quality Warehouse Management System with integrated barcode scanner can help drastically improve.)
Warehouse KPI #2 – Picking accuracy
Another vital warehouse KPI is picking accuracy.
Order picking is one of the more complex of activities in a warehouse. An incorrectly picked order means returned items and paying to correct the mistake. So this is something that can again have a huge impact on costs, customer satisfaction and marketplace reviews.
Having your warehouse organized is one of the first steps to gaining control of this.
Making use of appropriate warehouse racking and shelving will help your workers to efficiently segregate products – resulting in less hassle and more productivity within the warehouse.
To calculate picking accuracy we can use some data taken from the ‘rate of return’ KPI and total order number in the following equation:
This then gives a percentage of the number of orders that were picked correctly.
Warehouse KPI #3 – Carrying cost of inventory
The longer inventory stays in the warehouse, the more it costs a business. But it’s essential to be able to put a quantifiable number in place here as one of your warehouse management KPIs.
Carrying cost of inventory is a warehouse KPI that shows exactly how much it costs a business to hold its stock over a certain timeframe.
This is a key performance metric that allows you to see how much profit current stock will truly bring. It also helps a warehouse manager make more informed buying and demand forecasting decisions as well as which inventory control methods to put into place.
Carrying cost of inventory consists of adding up all costs associated with storing inventory over a given time period. This includes things like insurance, taxes, storage space, personnel, equipment.
Once this is calculated, it’s then usually expressed as a percentage of the direct cost of the inventory items in that same period.
Warehouse KPI #4 – Inventory turnover
Inventory turnover is another vital warehouse management KPI and ties in quite closely with carrying cost of inventory.
It is basically the frequency at which you sell out your inventory. In other words, how quickly you sell and ship stock once it’s been put into storage.
Obviously, this is one of the warehouse KPIs you’re looking to keep high and increasing. The faster you move stock, the less it costs to store it and the more profit you can make on it.
Keeping track of this performance metric enables greater insight into the popularity of certain items to gauge future buying practices. It also allows you to see if stock isn’t moving and needs to have inventory reduction strategies put in place.
Your inventory management system will usually provide a figure on this for you. But you can calculate inventory turnover via the following formula:
WikiHow also offers some great further information on mastering inventory turnover.
Warehouse KPI #5 – Rate of return
Rate of return is a simple yet vital warehouse management KPI. As the term suggests, it determines how often items are being returned by customers.
This obviously gives a great insight into customer satisfaction as a whole. But the key to getting best use out of this warehouse management KPI is to segment by reason for return.
This way, the warehouse or operations manager can start looking at exact reasons why this KPI may be high and put into place strategies to resolve.
For example, a lot of returns due to incorrect item indicates the picking process needs looking at. Whereas a lot of buyer’s remorse returns may mean something in the sales channel product description needs addressing.
Determine several different return reasons and use the following following equation to analyse each one:
Warehouse KPI #6 – Backorder rate
Backorder rate is one of the warehouse management KPIs that allows deep analysis of forecasting success.
A high backorder rate means a lot of orders are coming in for items that aren’t in stock. Of course, sudden unexpected rises in demand can account for this. But if the backorder rate KPI is consistently high then it’s likely a result of poor planning and forecasting.
Keeping on track with other warehouse management KPIs like inventory turnover is a great way to help improve forecasting ability and reduce backorder rate. You could also consider something like vendor-managed inventory.
Backorder rate can be determined using the following equation:
Warehouse KPI #7 – Order lead time
Order lead time is a warehouse management KPI that feeds into backorder rate. This is simply the average length of time it takes for customers to receive orders once they are placed.
The lower you can get order lead time, the happier your customers are going to be.
As long as items also arrive in perfect condition, optimizing order lead time can also have a direct effect on a more general KPI – order cycle time. This is the amount of time between customer orders.
Just looking at the popularity of Amazon Prime illustrates this well. According to Business Insider, Prime members spend almost twice as much on Amazon as non-Prime customers.
No doubt the excellent order lead time Prime members experience has an impact on the frequent order cycle time they produce for those selling on Amazon’s platform via FBA or Seller Fulfilled Prime.
Of course, there are many more warehouse KPIs to keep in mind. But these are seven of the key ones we feel are vital to keep track of.
Are there any missing warehouse performance metrics from this list? Let us know your thoughts in the comments below.