Requirements of Modern-Day Warehouses
The rise of eCommerce-based business models has introduced dramatic changes to the strategic significance and operational capabilities of warehouses and fulfilment centres. In other words, warehouses can no longer be managed and operated in traditional ways. Five of these evolving requirements are explained ahead. In this blog, warehouses and fulfilment centres are treated in the same context.
Extended Strategic Significance
Today, warehouses have extended strategic relevance in the fruition of business decisions.
Let us take the example of the location of warehouses. When the location is strategically chosen, it enables businesses to shrink the distance between source and destination. Given the heightened need for speed in order fulfilment and delivery, strategic positioning of warehouses helps businesses remain competitive as well as optimise logistics and carrying costs.
In the present-day marketing landscape, business decisions have a higher dependency on warehousing, logistics, and inventory management. Today, companies can carry out mass publicity campaigns in a matter of hours over digital platforms. But if such campaigns require the availability of newly-launched products in physical or online markets, they must be also backed by readiness in the supply chains, warehouse operations, inventory management, and logistical capabilities. This is to ensure that when customers see those ads, they should have the option to buy or book from physical or online stores.
Maintaining Inventory Levels for an Extensive Mix
Today, warehouses need capabilities to receive, store, and dispatch extensive volumes of inventory both in terms of quantity and variety. This is driven by swelling demand in many product categories like CPG and the emergence of a large number of brands with extensive product mixes and variants. And given that customers today have plenty of buying options, no retailer or distributor wants to miss out on orders or fail to meet customers’ demands. They need a continuously flowing chain of supplies. If a business is not in good control over its warehouse operations, it also loses its ability to maintain the required stock levels.
Space Optimisation Amidst Space Crisis
As the availability of space for setting up warehouses continues to dwindle and soaring real estate rates show no signs of stopping, it has become challenging for businesses to find suitable warehouse sites and then cover up for the rental or leasing or acquisition costs. The way out for businesses is to go for space optimisation, layout planning, increase inventory turnover rates, and improve the overall efficiency and effectiveness of their warehouse operations. Improved warehouse operations help businesses maintain inventory at optimised levels, better utilise warehouse resources, and process inventory quicker.
Many experts from professional warehouse consulting companies keep reiterating that warehousing can no longer remain isolated from speedy and precise runs. This is one of the demands of doing business in the contemporary environment. The obvious answer to this need is lending modern capabilities to warehousing operations by incorporating process orientation and suitable process automation solutions. A simple example of warehouse automation in action would be mechanised warehouse automation that uses industrial robotic gears and systems for carrying out bulky and repetitive warehouse activities aiding human efforts. This affects stowing and pickup performance in warehouses.
With an increasing number of businesses going the omnichannel way, warehouse management cannot thrive with the capabilities of the past. Lending omnichannel capabilities to warehouses necessitates adaptations in areas like space management, operations planning (warehouse SOPs), process automation, staffing, logistics, and budgeting.
For instance, if a retail store goes omnichannel and begins to treat the store itself as a warehouse for keeping the additional stock for online order fulfilment, it would end up hurting its physical store operations and eventually its online sales as well. Making omnichannel a success at the ground level requires robust operational planning and the use of relevant digitisation and automation tools and technologies.
Oftentimes the expertise required for automating warehouse operations is not internally available to organisations. In such cases, taking external assistance from expert warehouse automation consultants is always an option. Like BPX, there are many warehouse consulting companies that offer services and solutions focused on building these capabilities.
What is a KPI (Key Performance Indicator)?
When we set out on a journey by car, we keep referring to the GPS from time to time to check if we are headed in the right direction. If we keep crossing the right points along the road and we project that our trajectory also points towards the destination, it indicates that we are performing (moving) as planned. These points along the journey qualify as KPIs. KPIs are predetermined metrics to help us tell that we are moving in the right direction and towards the intended results or output.
Key – Critical to achieving the intended results
Performance – Action course to achieve the intended results
Indicator – Marks for measuring the performance-goal trajectory
What are Warehouse KPIs? Six Types of Warehouse KPIs
KPIs are applicable to all areas of business including for better warehouse management. Why and how the concept of KPIs is used in warehouse management is explained next.
Warehouse KPIs are broadly divided into six categories:
1. Inventory KPIs
2. Receiving KPIs
3. Put-away KPIs
4. Order Picking KPIs
5. Order Management KPIs
6. Safety KPIs
#1 Inventory KPIs
The loss of inventory is a very common phenomenon in warehouses. This loss occurs when the actual stock is less than what the books say. It can happen because of omissions in making software entries, misplacement, damage, mistakes in physical calculation, etc. Irrespective of the reason, this difference can lead to wrong decision-making in business. Keeping track of this KPI helps businesses keep their inventory records straight which in turn prevents certain mistakes in inventory-related decision-making (e.g. reordering).
Very close to stock reconciliation KPI, inventory contraction KPI sheds light on inventory is no longer available.
Excessive carrying costs can be construed in many different ways. These include excess investments in inventory, slow turnover, slow order processing, ineffective demand forecasting, inaccuracy in calculations of reorder levels, and inconsistencies in supply chains. When carrying costs are anything higher than reasonable or accepted limits is a financial burden on businesses. Keeping an eye on this KPI helps businesses improve their working capital and also improve their inventory and supply chain management.
Remaining Inventory to Sales (RIS)
If a business bought 1000 units and sold 700 units in a given period, then its ratio of RIS KPI is 3:7 for the given period. When this ratio begins to increase, it is not considered a red flag in business. An increasing RIS ratio means that less inventory is getting sold in relation to the inventory available for distribution and sale. It can stem from inaccurate demand projections, excess purchases without supporting sales, low sales, etc. It can lead to an increase in carrying costs, excess investments in inventory, hampered cash flows, etc. This KPI helps gain a snapshot of the inventory-sales scenario.
If a business is able to sell 100 units of a product and the average stock level of that product is 80 then it indicates that for every one unit always held in stock, 1.8 units are sold in the market. If this ratio is 1, it means the business is always retaining as much stock as it is selling. It is not a health sign because consumption (sales) is as much as retention (stocking). For example, if you are consuming 1 kilogram of tea at home in a month, you are also keeping the same quantity in backup during the entire month. This ratio is called inventory turnover ratio but understand it as consumption-backup ratio as in the tea example used above. This ratio (KPI) can tell us how well we are maintaining the consumption levels (sales) vis-à-vis the backup levels (stock). And this must be maintained so that we do not overstock (selling is not bad).
#2 Receiving KPIs
How quickly and accurately are the goods-receiving activities carried out in a business? That is the Receiving Efficacy KPI. It is a measure of the productivity of employees and the policies, processes, and systems in place governing the receiving operations. Different businesses may use different metrics to calculate this KPI. Two standard norms of calculation are in terms of cost (Cost of Receiving per Line) or time (Receiving Cycle Time).
The goal of measuring this KPI is to reduce the time and cost of carrying out the receiving operations. Other objectives are reduced human efforts, identifying the scope of process automation, and creating appropriate space for QC and QA measures.
#3 Put-Away KPIs
Put-away efficacy is an indication of how quickly and accurately incoming goods are stowed in warehouses. Stowing means putting things in particular, designated places. This is measured in terms of time taken and correctness. There is no point in being fast if a good is stowed in the wrong area. And doing it right must come at a reasonable cost. The objectives of this KPI are almost the same as for Receiving KPIs – reduce the time and cost of operations, reduce human efforts, identify the scope of process automation, etc.
#4 Order Picking KPIs
Order-picking activities begin when an order is received at a warehouse. This process plays a vital role in order fulfilment which in turn affects how quickly and accurately orders are dispatched from warehouses. If picking time and costs are increasing or accuracy levels are falling within a warehouse, something must be wrong with the operations or the operations planning. It could be a process-related issue, something to do with tools and technologies in use, or discrepancies in team and task management. The objectives of measuring this KPI are to keep the performance of picking operations in check and improvise them wherever possible.
#5 Order Management KPIs
Order Lead Time
Lead time is the time between the placement of an order and delivery and receipt of that order. For example, lead time is reflected in the promised delivery date when a customer places an order on any eCommerce shopping site. Lead time is also applicable between organisations (e.g. between retailer and distributor). A lot of activities are involved in the calculation of lead times. It involves order receiving, order processing, picking up, quality check, packing, labelling, scanning, making it ready for dispatch by logistics, and finally, last-mile delivery. Each of these activities can have a separate KPI. This is a crucial KPI for businesses carrying impact that goes beyond the boundaries of warehouses.
Product Return/Exchange/Refund KPI
Keeping a tab on product return metrics helps businesses make improvements in many areas including those that lie within the ambit of warehouse and warehouse operations. There could be many reasons for product returns, exchanges, or refunds. Is the reason lying in a warehouse? This KPI helps answer this question and bring improvements in warehouse operations. For example, if the return rate of a particular product is high and the reason cited by customers is traced back to the warehouse, it becomes easier to pinpoint the specific area in warehouse operations where the fault is generated.
Fulfilment Accuracy Rate
Every time a customer or client receives an order without any issues and within the promised timeline, it tells that the fulfilment was successful. Fulfilment accuracy is a measure of how many orders were successfully fulfilled as against the total number of orders received. An order can miss the mark of success if it misses the delivery timeline, a wrong product/size was delivered, the delivery address could not be located, etc. When this KPI is higher than prevailing standards, it speaks of the speed and precision of an order fulfilment process. For better analysis and process improvisation, different warehouse KPIs can be used at different stages in the order fulfilment process.
Backorders are orders that cannot be fulfilled right away. Sometimes businesses cannot fulfil orders from clients or customers because of non-availability reasons at a given point in time. But they can fulfil it later at a given and agreed date. An increasing number of backorders over the total number of orders is not a good sign for many reasons. It shifts and concentrates operational stress on one time while keeping capabilities at less than optimal levels in others. Proper management of backorders can help businesses reduce carrying costs but it is a risky strategy. Backorder KPI is important for businesses that experience this phenomenon. It can also reveal deficiencies in the supply chains.
Per Order Processing Cost
Every time an order is placed, it is processed through a system of resources and capabilities. This includes shares of warehouse rentals, wages and salaries, maintenance of IT and other devices used in the order fulfilment process, logistics and delivery charges, administrative and legal costs, etc. This list can be an extensive one and the considerations and methods of calculations vary from business to business. The idea is to evaluate how much it costs a company to fulfil an order. A simple narrative is to divide the total costs of order fulfilment by the total number of orders. It can be also understood in reverse if we consider how we purchase groceries in our homes. How much does it cost you to place an order and successfully receive it? The considerations are the time used to plan what to buy, the use of a smartphone to browse and place orders, the time spent to receive the order, charges by the bank for online payment of the bill, etc.
#6 Safety KPIs
Safety is a crucial element of warehouse management and operations. Apart from in-house business standards, there could be regulatory norms as well governing the safety parameters to be maintained in warehouses as applicable. The tolerance limit for non-adherence to safety measures by design should be zero. The goal should be also to identify and patch loopholes in work practices and systems via observation, feedback, forming special teams, asset maintenance, and audits. The selection of Safety KPIs should be done in consultation with industry, medical, and legal experts.
Lagging KPIs & Leading KPIs
What is a Lagging KPI?
Lagging KPIs measure what was and sometimes also, what is. They are also called Result Indicators. It is mainly a measure of past performance, behaviour, and trends. For example, a retailer can look back at the sales records of the last year for a particular festive season and may conclude that sales went 25% higher during the assessed period. In the context of a warehouse, a warehouse manager could present a report on fulfilment accuracy in the last three months making it a lagging KPI. Lagging KPIs help identify areas to work on and bring process improvisations.
What is a Leading KPI?
Leading KPI is a projected measure for the future. They are front-view indicators and are predictive in nature. Demand forecasting is an example of a leading KPI. It can draw inputs from past trends and analytics but it will also be affected or defined by events and circumstances of the future. In the context of warehouse operations, having safety signs is a leading indicator because it denotes an incident prevention measure.
Lagging KPI vs. Leading KPI
The difference between a lagging and leading KPI goes beyond the simple distinction between past and future. For instance, the weight of a person could be both a lagging and leading indicator depending on how the information is used. As a lagging indicator, it may reveal whether the weight is within the normal and healthy range or not. Combined with other measures, many other health insights could be generated. But as a leading indicator, the same measure i.e. the weight could shed light on exposure to health risks or benefits.
This understanding of lagging and leading indicators applies to warehouse management and operations as well. Experienced warehouse management consultants would second that to avoid confusion it is very important to develop and define warehouse KPIs as to what purpose they are intended for because the distinction may not always be available by default. For instance, the fuel indicator could be both a leading and lagging indicator but a speedometer is always a lagging indicator.
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KPIs are predetermined metrics or measures of performance to check whether we are moving on the right tracks and towards the intended destination i.e. results or output. KPIs are applicable to all areas of business management including for better warehouse operations. Here are some of the vital warehouse KPIs to keep under consideration for monitoring warehouse operations which in turn also has business implications:
- Inventory KPIs
- Stock Reconciliation
- Carrying Cost
- Remaining Inventory to Sales (RIS)
- Inventory Turnover
- Receiving KPIs
- Receiving Efficacy
- Put-away KPIs
- Put-Away Efficacy
- Order Picking KPIs
- Picking Efficacy
- Order Management KPIs
- Order Lead Time
- Product Return/Exchange/Refund KPI
- Fulfilment Accuracy Rate
- Backorder Rate
- Per Order Processing Cost
6. Safety KPIs
Lagging KPIs are mainly measures of past performances, behaviour, and trends. They are also called Result Indicators. A Leading KPI is a projected measure for the future. Demand forecasting is an example of a leading KPI.
But drawing the line between a lagging and leading KPI goes beyond the simple marks of past and future. This is also where the two concepts become ever clearer. For instance, the fuel indicator could be both a leading and lagging indicator showing how much fuel was spent (record kept) and is now left but a speedometer is always a lagging indicator.
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