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Improving warehouse efficiency is an important step towards enhancing profitability, but it’s more than just shaving off a few steps in order fulfillment or ensuring stock is rotated. The so-called “Amazon effect,” whereby big retailers like Amazon have set the bar high for customer expectations in the consumer market is hitting the business-to-business sector, too, so that manufacturers must continually improve in all areas of order fulfillment. Enhancing warehouse efficiency is a big step in the overall process of improving fulfillment.
Establishing Key Performance Indicators (KPIs) to Measure Warehouse Efficiency
Key performance indicators (KPIs) can be used to measure warehouse efficiency in several areas. This includes:
Receiving KPIs – Processing New Inventory
The first step in measuring warehouse efficiency is to establish and measure receiving KPIs. Receiving deals with the costs of processing new inventory. Ask yourself:
- Receiving cost: What is the cost of receiving per line? Calculate the cost by dividing the total line items by the total cost of receiving. The higher the number, the less efficient your receiving area.
- Receiving productivity: How productive is my receiving area? KPIs that measure receiving productivity or efficiency look at the volume of goods received by each warehouse operator per hour. The higher the number, the greater the efficiency.
- Receiving accuracy: How accurate are my stock counts in the receiving area? Look at the proportion of correctly received orders to the total number of orders. The number should be close to 100%, or as close as possible.
These receiving KPIs can be measured at set intervals and tracked using warehouse inventory software, along with an ERP system to monitor your receiving area.
Putaway KPIs – Measuring Accuracy
Putaway refers to what happens to the goods once they move from receiving to the warehouse floor. Accurate putaway helps ensure accurate picking later. If items are in the correct location, they can be found quickly and easily by the picking team and set into the packing and shipping area quickly. Sloppy putaway ends up costing time and money as delays mount while teams search for missing items.
To measure putaway efficiency, the following KPIs may be helpful:
- Putaway cost: Measures how long it takes to put items away. The longer it takes, the greater the cost in labor.
- Putaway productivity: Identifies the putaway cost per line item. The lower the cost, the more efficient your warehouse team.
- Putaway accuracy: Examines total amount of items putaway compared to the total putaway correctly.
Storage KPIs – Measures How Well You Use Your Warehouse Space
Storage KPIs help you assess how well you’re using all available warehouse space. Are you maximizing warehouse capabilities or wasting square footage?
KPIs that measure storage include:
- Carrying cost of inventory: Measures the total cost of inventory storage, including the inventory itself, capital, servicing existing inventory, obsolescence, and damages.
- Storage productivity: Measures warehouse efficiency by how well you use the storage space. Warehouses with automated storage and retrieval systems tend to use their space more efficiently than human teams.
- Storage utilization: How much of your warehouse is actually covered with salable goods? This KPI not only tells you how well you’re packing goods into the warehouse but also warn of times when a warehouse is too densely packet. Too many items stored in one space may make it difficult for people to maneuver around the warehouse or find items.
- Inventory turnover: This is a classic measurement of warehouse efficiency that helps you assess how well items are selling. It looks at how many times you’ve shipped items and replaced them in the warehouse.
- Inventory sales ratio: Examines the relationship between the number of items stored and the number of items being shipped to customers.
How Many KPIs Should Be Set and Measured?
When it comes to assessing warehouse efficiency, there seems to be an almost overwhelming number of possible KPIs that can be set and measured. How much is enough and how many are too much?
Consider your own business needs and the numbers you consider most important when assessing warehouse efficiency and shipping success. Some companies may find the inventory turnover and inventory sales ratios are critical but putaway costs aren’t of great interest.
Generally speaking, warehouse managers may wish to establish KPIs around the following:
- Inventory levels
- Cost of goods sold (COGS)
- Gross profit
- Logistics cost
These four areas tend to have the greatest impact upon a company’s bottom line. Measuring each can lead to insights that can be used to decrease the costs of maintaining, carrying, and moving inventory.
Top Warehouse Trends to Watch in 2020
As you review and revise your KPIs, keep in mind the following warehouse trends to watch for in 2020. Technology plays an important role in the smooth operation and management of warehouses.
- Autonomous mobile robots (AMRs): AMRs are currently only used by the “heavy hitters” in retail because they are both complex and costly to implement in the warehouse. However, they have the potential for truly revolutionizing the entire picking and packing system if companies are able to implement them. As demand for improvements to remain competitive with Amazon, Target, and Walmart increases, companies providing AMR systems may develop solutions that can be rolled out in smaller warehouses. Smaller, however, is relative; they probably won’t be cost effective for truly “small” business owners for a long time to come but are likely to expand beyond the handful of gigantic corporations currently using them.
- Smarter warehouses powered by AI: AI integrated with AMR can result in an incredibly data-rich environment that utilizes information to power innovation. AI-powered warehouses coupled with IoT data will end up being incredibly efficient and save money and time for companies.
- Pre-fulfillment: Amazon’s two-day and sometimes 24-hour shipping turnaround times has set customer expectations so high that companies are rushing to figure out how they, too, can get orders filled as quickly. Pre-fulfillment may be one such method by which companies can pre-order products, so as soon as they roll off the assembly line, they can be out the door.
- Green warehouses: Look for companies to increasingly find ways to cut energy costs, lower their environment impact, reuse and recycle, and add green initiatives to their business model. Steps as simple as adding motion-activated light systems to warehouses can cut electric bills and solar panels may be another step to use the often large roof space on top of warehouses to offset some of their environmental impact.
Warehouse Inventory Software: Measure Today, Track Tomorrow’s Progress
Adding AMRs and AI-driven warehouse products may seem a step too far for your business. Small and mid-sized manufacturers can, however, add warehouse inventory software that includes AI to improve their processes. They can certainly set and measure KPIs to evaluate productivity. More importantly, they can take simple, determined, and consistent steps to speed up order fulfillment and reduce the costs of receiving, putaway, and storage.
Acumatica or Sage 300 with WMS offer powerful ERP software with warehouse and supply chain management tools that fully integrate into the base ERP. Set and measure KPIs, track progress towards goals, and utilize the cloud-based system for instant access to important data. With Sage 100 and Sage WMS, you can measure every aspect of your supply chain and warehouse operation to ensure warehouse efficiency continually improves.
Warehouse inventory software offers an excellent tool to measure warehouse efficiency. From establishing KPIs to measuring labor and time costs, once you know your numbers, you can take steps to improve them. To get started, speak with a representative of Mindover Software today. We offer ERP software from Sage and Acumatica that includes many warehouse and inventory management tools that can help your business thrive.
For more information, contact us or call 512-990-3994.