Warehouse optimization is all about making your operation as efficient, productive, and profitable as possible — in other words, doing more with less to increase your bottom line.
It’s little wonder, then, that when many think about optimizing their warehouse, distribution center, or order fulfillment operation, their minds immediately go to upgrading or replacing old equipment with newer technologies that promise to do just that.
While it’s true that upgrades and/or new equipment and systems can have tremendous impacts on your operation’s efficiency and profitability, new systems, in and of themselves, are not a silver bullet. There is important preparatory work that must be done if you are going to realize ambitious goals.
One of the most important steps for you to take is understanding and recording your operation’s current performance as a benchmark so that you can accurately gauge the impact of every action you take moving forward. Understanding this impact will allow you to double down on what works, scale back on what doesn’t, and, simply put, use your capital and effort as efficiently as possible.
“If You Don’t Measure It, You Can’t Improve It”
While it might not be the sexiest business adage, this quote from Peter Drucker holds true even today. If your goal is to make your operation leaner, more efficient, and more profitable, then you’ve got to know what your baseline performance is.
Regardless of your industry, it’s nearly impossible to truly understand your strengths and limitations if you don’t undertake regular measurement and analysis. Doing so will help you:
- Identify the areas of your business that are lagging behind and holding you back, allowing you to focus your improvement efforts where they will have the greatest impact
- Identify the areas of your business that are outperforming others, allowing you to learn from your successes and implement similar processes elsewhere
- Identify trends over time, allowing you to plan appropriately for the future
Which Key Performance Indicators Should Form Your Benchmarks?
The exact key performance indicators (KPIs) that you should focus your efforts on understanding will, of course, depend on the specifics of your operation, your industry, and the goals that you are trying to realize with your optimization efforts.
That being said, there are a number of KPIs that all order fulfillment operations would benefit from regularly tracking and measuring — both before, during, and after any optimization work takes place.
Generally speaking, these can be broken into four large buckets: customer metrics, inbound and outbound metrics, and financial metrics.
This segment includes all factors that directly impact a customer’s satisfaction with your operation. These metrics are critical for you to understand because customer satisfaction determines whether someone becomes a repeat customer. Some of the most important customer-focused KPIs include:
- On-time shipping percentage
- Total order cycle time
- Internal order cycle time
- Perfect order percentage/order accuracy
A frequently overlooked area of most operations’ performance is the flow of products coming into the warehouse; more specifically, the time required to receive, reconcile, and make products available to the fulfillment operation. These inbound metrics are essential to understanding the limits and strengths of your operation:
- Dock-to-Stock Cycle Time
- Inbound Orders Received
- Lines Received and Put away
Within the outbound process, it is key to look at not only the velocity of orders, but also their completeness. Individual performance by function in the warehouse/DC can have a huge impact on the overall labor hours required to process a set number of orders or lines. When we look at the specific rates in order fulfillment, where most of those hours are consumed in many operations, we can identify areas for improvement.
Key areas to measure and understand in the outbound process include:
- Fill rate for orders and line items
- Orders picked per hour
- Lines picked and shipped per hour
Efficiency and accuracy are the most important staples of any business model for almost every industry. But at the end of the day, it always comes down to the bottom line.
The most important KPIs to measure the financial proficiency of an operation center around two crucial themes — distribution costs and inventory. The most important include:
- Distribution costs as a percentage of sales
- Distribution costs per unit shipped
- Inventory days of supply
In addition to these KPIs, you’d be wise to have some other data on hand before undertaking any kind of optimization work. The total number of SKUs housed and processed by your operation, your operation’s rate of SKU proliferation, a firm understanding of your item master and average order profile — they should all be taken into account.
Using This Data to Inform Your Optimization Efforts
Once you have a picture of how your operation is currently performing in each of these areas, it should be relatively easy for you to pinpoint areas of weakness that could benefit from an upgrade or other optimization efforts.
For example, if you find that your total order cycle time is not where you want it to be, you might try reducing travel time within your operation by leveraging goods-to-person or robotic solutions in your pick process.
Whatever the case, it’s critically important that you regularly track and measure these KPIs, especially as you go through the work of upgrading and optimizing your operation. Without this regular benchmarking, it’s impossible to know exactly what impact your efforts are having, and whether you should replicate them in other areas of your operation (or in your other facilities).
Ed Romaine is VP of Marketing & Business Development, Conveyco (www.conveyco.com). He has over 30 years in helping organizations improve their order fulfillment and warehouse systems and processes including order picking, software, and conveyance technologies. He is also the former chairman of the Automated Storage & Retrieval Systems (AS/RS) group, the Supply Chain Execution Group (SCE), and Order Fulfillment Solutions Group (OFS) of America. Ed can be reached at firstname.lastname@example.org or 215.512.2613.
This article originally appeared in the March/April, 2019 issue of PARCEL.