Warehouse indicators in the supply chain

Indicadores de almacén_indicadores en logística

 

Measuring KPIs (key performance indicators) is a common practice in the supply chain of many businesses. The advantages of measuring indicators in logistics —and in any business process— include improved communication between project members, informed decision-making, and greater visibility of activities, among others.

However, measuring KPIs isn’t entirely straightforward. Since KPIs tend to oversimplify the effort involved in carrying out tasks, they are prone to misinterpretation and are easily falsifiable. To counteract these risks, there is a methodology for the implementation and measurement of KPIs that consists of the following steps:

  1. Identify relevant indicators

  2. Classify metrics, work standards, and KPIs

  3. Implement a process for continuous improvement

What is the warehouse in logistics?

The warehouse is the part of the supply chain that stores products between the point of origin and the point of consumption. Warehouse operations provide Management with relevant information on the status, condition and arrangement of stored products. Warehousing is focused on minimizing operating costs to meet shipping needs.

Inventory storage has different purposes:

  • Comply with economies of transport and production

  • Take advantage of discounts on wholesale purchases and advance purchases

  • Maintain a source of supply

  • Support the customer service policies of a company

  • Adapt to changing market conditions

  • Overcome the barriers of time and distance that exist between manufacturers and consumers

  • Achieve a minimum total logistics cost and the desired level of customer service

  • Support the Just-In-Time schemes of suppliers and customers

Warehouse operations encompass several processes that must be properly interconnected to fulfill the above-mentioned purposes; these processes are:

In today’s ever-changing, globalized world, where technology increases the speed of logistics operations every day and consumers become more demanding, sustaining a simplified and efficient operation can be what drives the success of a company.

In order for warehouse operations to serve their purpose, it takes much more than a supply chain with functional processes. During every operation, companies must generate value by integrating all their logistics activities. When any given activity has low levels of productivity or a high percentage of errors, it will ultimately cause a domino effect that will impact the rest of the processes. As the supply chain is simplified and integrated on a solid infrastructure, the higher its productivity is, the lower its costs will become. Measuring KPIs is crucial in order to reach this goal.

 

What are KPIs in logistics?

 

KPIs consist in measuring and observing the progress and setbacks of a project over a given period of time. Measuring indicators is an efficient method to obtain visibility of the performance of the supply chain: by monitoring each activity it is possible to know which work modalities are functional and which aren't. The KPIs in logistics can provide valuable information to help identify if warehouse objectives are being met or not, how and why.

One possible way of organizing indicators is as follows:

  1. "Hard" or quantitative indicators: data focused, numerical results of the processes.

  2. "Soft" or qualitative indicators: they depend on customer satisfaction.

Both are equally valuable to an organization, in spite of measuring different ends of the supply chain. Quantitative indicators are focused on internal processes, any activity that has to be carried out to deliver a product to the consumer. Qualitative indicators measure the result of internal processes, anything that belongs to the end of the supply chain.

Measuring “soft” or qualitative KPIs can shine a light on the opportunities in the logistics operation; however, that is not enough to understand exactly what activities need to be optimized. On the other hand, “hard” or quantitative indicators serve to identify which processes require more attention, but they do not offer the information necessary to know if the end customer is satisfied with the service or not, since this depends on several different factors. Therefore, both types of indicators are complementary and neither of them should be ignored.

 

Indicators in the warehouse

 

The first step in implementing KPI measurement in a warehouse —and anywhere in the supply chain— is to prioritize processes based on their relevance to the operation. In this way, the focus is on solidifying the structures that serve as the basis for secondary activities. Each warehouse can have different indicators, depending on the type of business, the size of the company, and the model of the warehouse.

Some warehouse indicators are:

  1. Warehouse occupation percentage: consider the number of available storage spaces in proportion to the total warehouse spaces. This is an indicator of the quality of warehouse management.

  2. Warehouse cost recovery rate: calculated based on sales revenue and warehouse operating costs.

  3. Parts per million defects: considers the number of defects or errors that occur in a given number of repetitions of a process. This indicator is measured for each inspection point and critical quality characteristic.

  4. Annual inventory carrying costs: these are the annual costs per unit related to maintaining inventory within the warehouse. They include the cost of capital, cost of storage, cost of services, and cost of risk.

  5. Percentage of pending orders: it is the number of orders that were not filled at the end of each day, in relation to the number of orders that should have been completed.

  6. Days on hand per product: the average number of days of inventory available for sale in a warehouse or point of sale. This inventory includes raw materials, work in process, and finished products.

  7. Percentage of the operating expense: it is the percentage of the sale price to the final consumer represented by the operating expense; consider each of the warehouse processes.

  8. Inventroy accuracy: expressed as a percentage, it is the degree of accuracy with which the inventory is recorded, compared to the inventory that is actually in stock in the warehouse.

  9. Service level: equivalent to the percentage of demand fulfillment in time and quantity; depends on the availability of products to fulfill each order.

  10. Picking accuracy: this is the number of correctly picked lines in relation to the picking lists.

  11. Precision in shipment: it is the number of lines correctly shipped with respect to the shipment order for each client.

  12. Warehouse productivity per hour: it is the hourly capacity of warehouse operators to complete the tasks that each process entitles. It is measurable by independent process or as a general indicator of the operation.

  13. Percentage of perfect orders: evaluates the fulfillment of deliveries of the suppliers. This indicator considers the percentage of deliveries correctly completed, documented, on time, and without product shortages.

  14. Percentage of unavailability of time: it is the amount of time that the processes were stopped due to lack of the necessary equipment (forklifts, skids, radiofrequency equipment, etc.).

These are a few examples of warehouse indicators; however; there are many more and each indicator applies to specific types of operations. In order to successfully measure logistics indicators, we recommend understanding which processes are the most relevant to the operation of the business and implementing a continuous improvement project consisting of the following steps:

  1. Select a process

  2. Identify key factors

  3. Set indicators (KPIs)

  4. Design how it will be measured

  5. Agree on goals

  6. Propose improvement projects

  7. Measure and compare results

  8. Take action

By following this proven methodology and getting the entire workforce involved, organizations can simplify their processes and generate value through their supply chain. These are key elements to outperform the competition and adapt to market changes.