How to improve efficiency with the right Route & Warehouse KPIs
In the previous article, “Improve your efficiency with the right Distribution KPIs”, I went over the importance of Key Performance Indexes to make your distribution operation more efficient and maximize your profits. As mentioned in that article, you do not need to monitor all possible KPIs. Too many of them make you lose focus on what is important. On the other hand, a few KPIs might not give you the real image of the company. In my experience 2 or 3 KPIs per process, properly combined, should be sufficient.
In this article I will explain how to select the most appropriate Warehouse KPIs and Route Accounting KPIs to optimize your operation.
How to choose the best Warehouse KPIs for my operation?
The first thing you need to do to select the best KPIs to control your operation is to clearly define your goals and determine the variables that have the strongest impact on your costs. Since we will be analyzing warehouse and route processes, I present two graphs below that show the average weight of warehouse processes in the overall warehouse expenses and the components of the delivery costs.
Since the picking costs represent 50% of the overall warehouse expenses and storage represents 18%, it is logical to focus on KPIs related to these two processes.
On the same token, we notice that 42% of the delivery costs are labor-related and 49% are truck-related, with fuel representing 50% of these expenses. Then it makes sense to focus on Route indexes that measure route and fuel efficiency.
Best Inventory and Warehouse KPIs
One Picking and two Storage warehouse KPIs can be used in a normal distribution B2B operation to optimize warehouse efficiency.
Returns Due to Improper Shipment (Return Rate)
A return occurs when an order already sold is returned by the customer. There are several types of returns:
- Returns due to picking errors (Warehouse returns)
- Returns due to products sold and not approved by the store manager (sales rep returns)
- Returns due to damaged goods during transportation (route returns)
- Products expired in the store (sales returns)
When discriminating the reason for the return, this is one of the top warehouse KPIs that can help the warehouse manager diagnose the exact reasons for rising warehousing costs and customer dissatisfaction.
Errors in picking might occur for different reasons: picking the wrong product or quantity (Picking Accuracy Index), incomplete orders (Back Order Index), wrong delivery schedules (On-time delivery Index), and wrong truck assignment. But whatever the reason, the result is the same: the order will be rejected and a Return will have to be processed. The impact of a Return is multifold: triple mileage runs (deliver-rejection-redeliver) that affect TC index, lost sales delivery (affects DS), reprocessing warehouse entry, and lower customer satisfaction. By monitoring the return ratio to sales you can make action plans to minimize them. For example, suppose a truck left with $10,000 in sales and returned with $1,500 in products. Of those, $800 were due to picking errors, $100 to products damaged in the truck, $100 to products expired, and $500 to products rejected by the store. The PICKING RETURN RATIO is:
PICKING RETURN RATIO = 800 / 10,000 = 8%
If your goal is < 2% then you know you need to take action. However, you also know that there are problems to address in sales and deliveries. Most of the errors associated with mistakes in storage and picking stem from inexperienced employees. Even more, the cost of turnover for warehouse workers can reach 25% of the salary. Salary.com data pinpoints the average salary for warehouse workers at $28,000.00. This would mean that the employers spend about $7,000 to replace every warehouse worker who resigns. So, when your Picking return ratio is consistently off the goal, you might look at the retention policies and the new employees training as part of the action plan.
This index measures the percentage of space occupied by inventory out of the total space available for storage. The proper use of storage space can significantly reduce the real state needed for an optimal wholesale operation. For example, if you have 10,000 bin positions and you have inventory occupying 7,500 of these positions, your SPACE UTILIZATION is:
SPACE UTILIZATION = 7,500 / 10,000 = 75%
If you are paying $30,000 per month for rent, then you are overpaying $7,500 for non-used space. If your goal is an average of 95% utilization, then you need to take action. It could be to boost sales or offer storage service, or any corrective action on what is causing the inefficiency.
Inventory Accuracy is one of those logistics metrics that can make or break your warehouse. Having a certain record of all your goods in your database that doesn’t match the actual physical inventory can harm your business considerably. If your inventory is inaccurate, you will have a high number of backorders and unsatisfied customers, lower Drop Size, and overall higher costs. A regular inventory checking of the existing discrepancies with your electronic inventory record ensures that bookkeeping practices are in order and your business is reliable, avoiding phantom inventory nightmares. For example, suppose that in this week’s cycle count you were to count 10 SKUs that, according to your system, should sum 1,000 units. But the count gave 950. Then the INVENTORY ACCURACY is:
INVENTORY ACCURACY = 950 / 1,000 = 95%
This ratio will help you pinpoint the problem and spot issues related to receiving, shipping, or accounting.
A suitable Warehouse Management System will provide all the information required to optimize both, labor and storage usage.
Improve Route efficiency
The efficiency of a delivery route will increase if the dollar value delivered increases and the trucking costs and usage are optimized. Three Route and Warehouse KPIs can be used to track these variables.
Cost per Stop (CPS)
This index averages the cost of the route among the number of stops. If the average cost of the truck is $12,000 per month (driver and truck costs) or $600 per day, and that day the route had 8 stops, then the Cost per Stop is:
CPS = $600 / 8 stops = $75 per stop
Drop Size (DS)
This index shows us the dollar volume delivered in a store. When combined with the Cost per Stop index, it lets us know how profitable each stop is and what the overall route was that day. Suppose a truck delivered 2 products worth $50 in a store on a specific day on a route with 8 stops. If the cost per stop that day was $75 as in the example above, it becomes clear that this route was unprofitable that day. This information is very important to set up sales and delivery constraints.
The minimum allowed Drop Size is one of the key goals a wholesaler must define and monitor via DS KPI.
Truck Costs / Sales Ratio (TC)
Truck expenses represent 49% of the Route costs and all of them increase as a function of the miles run; so, it makes sense to use any of the mile-related indexes, miles per route, truck cost/store, truck cost/sales, etc. I prefer to use the Truck Costs / Sales Ratio (TC) to monitor the efficiency of the route. This index compares trucking costs with associated sales at the route level and with the whole operation.
This index uses the fuel consumed, tire and maintenance costs plus truck insurance, and depreciation over time. Let us suppose the repair and variable costs of a truck were $7,000 this month with the delivery of $40,000. The TC is 25%, meaning that, for every 1$ delivered, we use $0.25 to keep the truck working. Imagine the impact it would have on the bottom line if we could increase that index to 50%. Several strategies can be combined to affect this index: increase in DS, reduction of miles per day, decrease in idle time, route planning to minimize travel time. These are all effective ways to increase the TC index. Good Route Management software gives you all the information needed to accomplish this.
I hope this article has been helpful. I also hope it will assist you in selecting the best Route and Warehouse KPIs and optimizing your operation. I will continue to publish information related to Warehouse Management, distribution practices, and the general economy. If you are interested in this article or want to learn more about Laceup Solutions, please register to keep you updated on future articles.
You can also watch this video about the most used indexes in the wholesale industry.