Using a performance scorecard to measure your warehouse
Tuesday, April 19, 2016
When you embark on a project to measure warehouse performance, the first step should be to ask why you are taking these measurements. Regardless of the nature of your warehouse operation, you would probably agree that four objectives should be considered as the measuring process is designed.
1. Waste elimination
Elimination of waste is always measurable once the sources are identified. Damage is always a source of waste, particularly product that is damaged by warehouse handling. Ineffective handling of carrier damage can also waste time and space.
Duplication of effort is a waste, and in the warehouse this may consist of avoidable staging and shifting of product. Ineffective use of computer systems can create a waste of time. Errors in shipping or receiving are a source of waste, since it is costly to correct these errors. The damage to customer relations may be even more difficult to correct.
2. Reduction of order cycle time
Reduction of cycle time is frequently the reason for establishing the warehouse in the first place. The development of electronic communication and overnight package delivery has substantially raised the standards of customer service.
The consumer who mailed an order to Sears Roebuck in the early 1900s had different expectations about product delivery than today's buyer who orders items on the Internet.
Regional warehouses are established to provide better customer service than you can offer when shipments come directly from a factory. It is obviously essential to measure the success of those warehouses in controlling and reducing order cycle time.
3. Flexible response
Flexibility is not always easy to measure. However, a key factor for success is the ability of the operator to perform many other tasks besides shipping, receiving and storage.
Some call these extra jobs "value-added services." Others refer to "postponement," which is the delay of packaging, branding or sometimes even final assembly of products in the distribution center. In the computer industry, there are distribution centers that perform many of the final assembly and testing operations. The ability to handle such complex assignments separates the highly flexible warehouse operator from the average one.
Flexibility also is measured by the operator's ability to respond quickly to problems and requests for information. The ability to provide information in real time is one of the hallmarks of excellence in logistics services today. For example, when a delivery is behind schedule, how quickly can you tell where the product is at that minute and when delivery can be reasonably expected?
In today's dynamic economy, the warehouse operator must assume there will be substantial changes in order configuration, order size or even in the product line. Does your operation have the flexibility to easily adapt to these changes? If you are accustomed to handling product in full pallet quantities, how easily can you adapt to handling single cases or even less than case quantities?
4. Unit cost reduction
A first step in unit cost reduction is to identify the cost per unit to move product through your warehouse. Outside of third-party warehousing, relatively few operators know their actual unit cost.
One way to reduce unit costs is to increase the size of the average unit handled. If you currently move one pallet at a time across your warehouse floor, is there an attachment or a process change that would allow you to move two pallets per trip, or perhaps even four? What is the possibility of eliminating staging and moving direct from inbound truck to the storage location?
Ask a similar question about outbound staging. Have you separated the fastest moving items in a forward pick area that is close to shipping and receiving docks?
The cost of moving each unit through your warehouse can be readily reduced through a series of small, common-sense steps that reduce the amount of effort expended to receive, store and ship each item.
The scorecard approach
As you work on measurement tools, your prime focus should be on four questions:
1. What is the customer's perspective?
Since the ultimate goal of most warehouses is improvement of customer service, the feedback gained from your customer (or your customer's customer) is the most important of all. Keep in mind that most warehouses have more than one customer who must be pleased. The most critical one is the party that receives the freight shipped from your warehouse.
If warehouse shipments are not received on time, damage-free and in a clean and orderly condition, no other quality features of the warehouse will compensate for this service failure. The best way to gain knowledge of the customer's perspective is to ask customers how they feel about your performance.
Comparisons are always important. Ask how the performance of your warehouse compares with other providers who ship to you. If company X is doing a better job, in what ways is their service superior?
2. What is the business process perspective?
The business processes to be measured are the same four considered at the beginning of this article.
3. Does the organization encourage innovation and learning?
Any measurement of innovation and learning will be largely qualitative rather than quantitative. If your company has a suggestion system, how many valuable ideas were received from hourly workers last year? How does this compare with the previous year? What steps have you taken to make your warehouse distinctively different from competitive warehouses?
The world of warehousing always contains the threats of substitutes in the form of competitive suppliers. If your services are viewed as a mere commodity, the buyer will always be looking for the same services at a cheaper price. In contrast, if your company has the image of being a true innovator, the customer will usually consider quality before looking at price.
A healthy company typically has a high retention rate, and it attracts talented and ambitious people. One way to measure your success as a learning organization is to measure your retention rate. In a tight labor market, the ability to attract and hold good people can be absolutely critical to success in warehousing, and retention rates are readily measurable.
4. What is the financial perspective?
The financial perspective is one that has sobered e-commerce businesses in recent months. Growth is exciting, but eventually the people who provide the investment will demand reasonable profit performance.
A critical measure is the cash-to-cash cycle. That cycle measures the average time it takes to convert dollars expended on materials and labor into cash received from the customer. Warehouse performance can have a critical influence on the cash-to-cash cycle.
Performance measurement in the warehouse is not always accomplished easily. Some measures are necessarily qualitative rather than quantitative. Furthermore, perhaps the most critical measures must be taken outside the organization, and those are the attitudes of the customers and particularly the customer's customer who receives the shipments from your warehouse.
As a manager, it is important for you to be proactive in measuring your own operation. Measuring your own performance allows you to report on your successes. Warehousing has always been, and always will be, a business of high pressure.
When things go wrong, people look for a place to cast blame, and the warehouse is a frequent target. When you measure your performance, you have the ability to gain a perspective on the occasional error.
By keeping a record of the ratio of errors to successful deliveries, the occasional problem becomes part of the scorecard rather than a source of management hysteria.
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