Operating a Distribution Centre effectively and efficiently is one of the great ‘much harder than it might seem’ warehousing challenges.
It’s easy to lose track of the operation of your warehouse if your lead time is spent working ‘in the business instead of ‘on the business’. This is why having KPI’s is so important for the business.
KPI stands for Key Performance Indicator and is a specific number that sheds light upon an objective or result you’re trying to achieve.
These indicators can show both short-term and long-term changes in an organisation, allowing management to make good decisions about the future of the company. It’s critical to pick what KPI’s best represent what you want to achieve and then track them on a regular basis. KPI tracking regularly will be the most critical aspect of developing continual improvements.
Why measuring Distribution Centre success is so important
Nailing down the schema for your main productivity Key Performance Indicators (KPIs) is essential and a recommended fact-finding mission for any new Distribution Centre Manager to enable a real understanding of what’s happening in their shed.
Once you can measure what is happening today, you can more easily change to move forward and understand the new resources available to you once you free up productive hours.
For the purposes of the article, we will only refer to activities that occur inside a Distribution Centre. Supply Chain and Transport KPIs are a feature of their own.
What KPIs should your Distribution Centre track?
1. Labour Cost per Carton
This should be your Distribution Centre’s primary KPI, the Total Cost of Labour per carton picked.
Its key operating leverage point is often the most flexible element within your operation. You can easily reduce this cost by increasing productivity, reducing staff or replacing labour hours with cheaper substitute resources. Most importantly, labour cost per carton is directly linked to carton picking productivity.
To determine the average labour cost per hour, your Payroll can tell you:
(Total Payroll Cost ($) / Total Paid Hours )/ Total Cartons Picked
Divide one by the other, and you have a labour rate (let’s call this $25.00)
If you then have 1,000 Distribution Centre Labour Hours for the period, and over this time you have picked 100,000 Cartons, your Labour Cost per Carton is $0.25.
Total Cartons Despatched / Total Hours
This is a measure of your Distribution Centre’s overall existence.
How many cartons does the Distribution Centre output for all of the hours that it creates cost for? For every Operator, Manager, Supervisor and Cleaner, how many cartons per hour can be attributed to each person? This is key to identifying your most expensive suppliers and lines.
3. Carton Pick Rate
Total Cartons Picked / Total Hours for Pick Team
Similar to the Throughput measure, this cartons per hour measure is for hours on the Pick only. This will be much higher than the throughput measure, as it only accounts for hours where an operator selects cartons and excludes hours from support functions or other production functions.
Pick rate measures are key in understanding how productive your operators are. They provide key insight into the key levers that will drive productivity improvements within your overall throughput and labour costs.
Let’s say you have 90 Cartons picked per hour (360 cartons in 3 hours). You can now measure the Pick Rate for each operator by using the formula:
Cartons Picked per Hour / Labour Hours = Carton per Operator per Hour
4. Replenishment Rate
Total Replenishments / Total Hours for Replenishment Team
Replenishment is a function limited almost exclusively to high-reach Material Handling Equipment (or counterbalances in smaller Distribution Centre’s); ideally, it will be a function performed exclusively by a group of people across the Distribution Centre.
The hours for these functions can then be grouped and divided by the Total pallets they replenish in that period. This will show you how effective these operators are and how quickly pallets are replenished in pick locations. Ensuring this number is as high as possible will help ensure there’s always stock in pick locations, eliminating the need for return trips on the pick. This will help push up your pick-rate and throughput KPIs.
5. Putaway Rate
Total Pallets Putaway into reserve locations or bulk stacks / Total Hours for Putaway Team
Much like the Replenishment rate, but for the task of putting newly received pallets into racking or bulk reserves. This should be a similar ratio to your replenishment rate, as it will often be performed by the same staff on the same Material Handling Equipment.
Find a way to isolate only the time these operators spend putting away pallets, ensuring not capturing replenishment time.
6. Receiving Rate – Inbound Pallets per Hour
Total Pallets received from Suppliers / (Total Receiving + Total Putaway Team hours)
This measure of your receiving teams’ efficiency shouldn’t be underestimated, as a low productive receiving team can affect your entire shed’s productivity.
Easy wins to increase productivity in this area are:
- Long tines on receiving forks, enabling the removal of up to 4 pallets at a time
- Ensuring all inbound trucks from vendors adhere to an arrival roster, to smooth the peaks in the inbound volume.
7. Despatch Rate – Outbound Pallets per Hour
Total Pallets Despatched / Total Despatch Team Hours
Much like the Receiving Rate, this measures how many pallets are being loaded onto outbound trailers per hour.
A slow despatch is a bottleneck on the entire Distribution Centre. As new pallets arrive and picks are finished, a despatch area will grow to fill its area and bottleneck other Distribution Centre functions as it fights for floor space. Despatch per hour should be as efficient as receiving.
8. Support Hours %
The percentage of hours used on non-production tasks such as Admin, Cleaning, Management, Supervision, Training, Inventory etc.
Aim to keep this at a reasonable amount. For example, a novice may strip away all cleaning hours to realise short-term gains, but other productive tasks will become less efficient as the mess builds up. A target of 35% is a good start.
This rate gives us a great idea of our Distribution Centre’s efficiency and can be used to calculate how your Distribution Centre will respond to new regulations like AMS (Advance Manifesting). If you have 36% support hours, that will most likely translate into 36% extra labour on the logistics operations floor.
9. Service Standard
This can be measured in several ways; each business is different. A common measure is DIFOT (Delivered In Full On Time).
Cartons Ordered / Cartons Supplied On Time
Depending on how your supply chain business is structured, you may choose to include or exclude cartons that were not supplied due to non-replenishment. Some Distribution Centres have no control over their inbound volume and exclude cartons that were not deemed to have been inside the Distribution Centre.
Some Distribution Centres may choose to measure this by cartons ‘Unsupplied’, i.e. should have been in the Distribution Centre but were not supplied, and provide a separate DIFOT measure for replenishment.
The Key Performance Indicators (KPIs) above should have helped illustrate areas of your Distribution Centre that need tracking and give you an insight into how to measure KPI and improve these areas. Taking regular KPI measurements will allow you to identify where improvements can be made.
KPIs will vary by business, but it is unlikely another organisation will be performing key tasks in the same way yours does. There are many types of operations management and it’s important to thoroughly pick what KPIs suit your organisation.