Wednesday, November 11, 2009

Measuring Warehouse Efficiencies

Warehouses are one of the most labor intensive nodes in a supply chains. While there have been major innovations towards increasing warehouse productivity through process and mechanical automation, they still constitute a substantial part of the supply chain costs.

Warehouses generally measure their effectiveness through various metrics that can be grouped in one of the following categories:

1. Operations: The operational metrics measures the efficiency of warehouse operations. This is primarily focused on the number of activities performed. The examples of the metrics in this category would be number of cases received and shipped, number of picks and put-away tasks completed, units handled, dollar value of the handled merchandise, and so on. The main focus of the operational metrics is to measure the efficiency of the material handling operations within the warehouse, whether they are handled through labor, automation or a combination of the two. Equipment like the conveyors, forklifts, automated carousel systems, diverters, bar code scanners, sorters, label applicators, dimensioning systems, automated guided vehicles, and so on can help enhance operational efficiency in a warehouse.

Measuring Warehousing Efficiencies

2. Fulfillment: The second set of metrics at the warehouses measures their ability to fulfill orders on time and in full. Response time and perfect order metrics fall in this category and consist of measuring fill-rates, on-time fulfillment, and pick and ship accuracy (right product in right quantity for right customer) at the warehouse. Other metrics contributing towards perfect orders, like correct invoicing and order entry is generally outside the scope of warehouse functions. Fulfillment metrics measure the efficacy of the inventory planning and replenishment systems for the warehouse. While these functions are generally centralized, they directly affect the warehouse’s ability to fulfill demand. More and more companies are realizing this and providing inventory planning visibility to the warehouse managers. Since the inventory and replenishment planning systems can project future build-up of inventories, such data can be used directly by the warehouses to enhance their labor and stocking efficiencies as well.

3. Stocking Efficiency (Slotting): This set of metrics primarily measures the efficacy of the warehouse space usage. How does the warehouse make use of its space, horizontally and vertically? These metrics show how racking and slotting needs are being fulfilled and how these decisions affect the operations by affecting picking, put-away, and replenishment task efficiencies, active and reserve locations. How efficiently are item volume, density and orientation, demand patterns, and handling patterns used in deciding the stocking locations of the items in the warehouse? Incidentally, the metrics that measure these (stocking) efficiencies are reflected directly in the operational metrics: a well slotted warehouse maximizes the warehouse cube and simultaneously enhances the operational efficiency by saving the overall distance traveled in the warehouse, work balancing to avoid congestion, enhanced ergonomics by making it easier to handle products through optimally stocking them by location, height, and handling characteristics, and finally the order fulfillment accuracy by considering demand patterns.

There could be a fourth category of warehouse metrics as the financial metrics that measure the costs of labor, operations, utilities, depreciation of capitalized assets, and fixed costs. I have skipped these metrics; however, since they directly depend on one of the others mentioned above and will improve directly in response to the improvements in the other metrics.

In a following post, I will go over the supply chain levers available to managers to control the above measures to achieve better distribution efficiencies.

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

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