Why Warehouse Metrics Matter
Your metrics can tell you where you’re losing money, where you’re understaffed and where you should focus your improvement efforts. Bear in mind that only you can determine what a “good” number is. This will vary depending on what industry you’re in and what type of warehouse you have (an internal warehouse versus a third-party logistics warehouse, for example).
When you collect, calculate and track these metrics, you can see how you’re improving. You should also be comparing yourself to others in your niche. Though intangible, collected and interpreted data from your warehouse can join your list of biggest assets, but only if you’re looking at the right ones. Let’s take a look at which ones those are.
1. Inventory Turnover Rate
Inventory turnover indicates how frequently you clear your entire warehouse of inventory each year. In general, the higher the turnover, the better, because this means things are flowing in and out at a consistently high rate and nothing is sitting around waiting to be sold.
To calculate your inventory turnover rate, you first have to calculate your average inventory. (Your inventory management system will be able to help you with this.) To do that, add your beginning and ending inventory then divide it by 2. This average is a lot more accurate than your actual inventory at a given point in time, because it fluctuates so much throughout the year.
Calculating your inventory turnover rate takes just one more step: dividing your total cost of goods sold (you can find this in your annual income statement) by your average inventory.
Inventory turnover rate = COGS ÷ average inventory
Average inventory = (beginning inventory + ending inventory) ÷ 2
2. Days on Hand
While we’re on the topic of inventory turnover, days on hand is another great KPI to know and is invaluable when making purchasing decisions. It will give you greater insight on how long your inventory has been sitting in storage without being sold. Simply take the number of days in a year (365) and divide it by your inventory turnover rate. This will tell you how many days it takes to completely turn over your inventory.
Days on hand = 365 ÷ inventory turnover rate
3. Inventory Accuracy
Having an accurate read on your inventory is crucial for filling orders quickly and efficiently. The more your computer tells you that you have something but you don’t (or, equally bad, tells you that you don’t have something, and you do), the more disgruntled customers you’ll have and the more money you’ll lose. Warehouse workers must be trained to prioritize accuracy above all else for precisely this reason.
A simpler version of this metric assumes that all on-hand totals are correct, while the more complicated one also includes identification, location and serial numbers, if you use them. If you think about it, knowing that your totals are 92% accurate doesn’t mean anything if you can’t find 10% of them! However, for the sake of this article, we’ll cover the simpler formula. To find your inventory accuracy, take the number of items that match your record and divide it by the number of total items counted.
Inventory accuracy = items recorded ÷ items counted
4. Order-Picking Accuracy
Inaccurate orders: No one likes them. Not you, and certainly not your customers. Knowing your order-picking accuracy is the first step, and improving upon it is the second. To determine your order-picking accuracy, divide the number of orders your warehouse has accurately picked by the total number of orders picked over the same period. Multiplying that number by 100 will give you the percentage of orders picked accurately—and unless you’re at 100%, there’s room for improvement.
Order-picking accuracy = # of orders accurately picked ÷ total orders picked
5. Perfect Order Rate
Finally, we come to the perfect order rate. “Perfect order” has a nice ring to it, doesn’t it? But what does it mean? In short, it means that an order has gone through all of its stages without a hitch: from being received by you to being processed and then finally received by the customer. This may include intermediary steps such as leaving the warehouse on time and being delivered intact. Your perfect order rate is the total percentage of accuracy for the whole chain.
Determining this will be somewhat unique to your warehouse. First, decide how many steps you want to measure the accuracy of (order received, order picked, order leaves warehouse and so on). Once you’ve decided, calculate the accuracy of each of those metrics; divide the number of accurately received orders by the total number of orders received, for example. Multiply it by 100, and you’ll have your accuracy percentage for that metric. Repeat the process for each metric you’ve chosen.
The perfect order rate requires one more step: multiplying each one of these percentages together. This will tell you, overall, your rate of perfection along the entire order journey, from beginning to end.
Perfect order rate = (accurate # of metric ÷ total # of metric) x 100
Putting Your Findings Into Practice
Put simply, the numbers don’t mean anything if you don’t use them. After deciding what metrics you want to track and calculating them, you need to put them to good use. Figure out what the metrics are telling you: Is your order rate less than perfect?
Remember, in addition to measuring your KPIs against yourself, you should be measuring them against other warehouses that hold your inventory, especially if you have partially outsourced order fulfillment to a 3PL. Understanding how they compare will provide a much more accurate picture of how your inventory management is performing than measuring yourself against the industry as a whole.
About the Author
Jake Rheude is Director of Marketing for Red Stag Fulfillment, a fulfillment warehouse born out of eCommerce. An expert in eCommerce and business development, Jake enjoys reading about business in his free time and sharing his experience with others.
The content was brought to you by Cin7 Inventory Management.