Performance indicators are measures of a company’s strengths and weaknesses of the business. They should be used in comparison to the external competition and internal customers to improve company’s economic standing.  In Supply Chain the warehouse is a critical function.  Should products not move effortlessly within the warehouse a business could come to face serious challenges to its welfare.  The warehouse must be continually measured by key performance indicators.  In this age of continuous improvements, it is vital to compare against industry standards, and if none to set the tone.

This narrative of a company’s well being is called benchmarking. It is the process by which to measure a business’s internal processes against the competition. The narrative includes productivity, quality, time and cost. The idea is to discover weaknesses, learn from them and to execute better and more cost effective manner.

Warehouse costs are driven by people, cost, space and systems.  Thus KPI’s in a warehouse are based on these drivers and supposed to be tied directly to these usual activities:

1.      Receiving

2.      Put-Away

3.      Storage

4.      Pick-n-pack

5.      Shipping

We shall discuss each activity in detail below.

The receiving activity is basic to any warehousing function. If the merchandise is not properly received, it will be difficult to handle subsequent operations. Merchandise is received against a purchase order and posted to the Warehouse Management System (WMS) through Electronic Data Interchange (EDI).  The most important performance indicators to be ascertained are: cost of receiving per receiving line, volume received per man hour, receiving dock utilization expressed in a percentage, accurate receipts expressed in percentages and time taken to process a receipt.

After properly receiving the goods, it has to be stored in a location that is convenient for retrieval.  This is the put-away process.  The following indicators are needed at this stage: cost per put away line, put-away per man hour, utilization of labor and equipment, quality of the put-away and cycle time for put-away.

At this point is becomes a bit more complex as there are two possible storage systems a warehouse can use: manual storage or automated storage / retrieval system.  If use a manual type of system there are a number of types.

1.      Block Stacking – Units’ loads stacked on top of each other and stored in the lanes.

2.      Stacking frames – self contained units made up of decks and posts. These are portable and can stack several layers upon each other.

3.      Single-deep selective pallet rack – a combination of metal uprights and cross bars allowing for quick picks.

4.      Drive-in racks – merely extend the reduction of aisle space

5.      Drive-thru racks – rack accessible from either side.

The key performance indicators for measuring shipping process are: storage cost per item, inventory per square feet, percentage location without inventory discrepancies and inventory days on hand.

Order picking is the most expensive part of warehouse operations as it is very labor intensive and it is estimated to be 50% of all warehouse costs.  Not to mention this is tied directly to customer satisfaction.  Usually broken into two parts – case picking and then small item picking.  Relevant key performance indicators for Pick-n-Pack operations are cost of picking per line order, order lines picked per hour, picking labor and equipment usage shown as a percentage, the percentage of perfect picking lines and cycle time per order.  Remember, any incorrect pick could lead to an unhappy customer – something we want to avoid if at all possible.

Shipping is not just the goods to the customer. It can be internal shipping between departments, functions, workstations and stock transfers.  The latter being the origin for moving product from point to point to point.  Important performance indicators, but by no means all of them, are cost of each shipping order, labor or man hour for each order, utilization of shipping docks, percentage of perfect shipping and the time order is picked till it actually leaves the dock.

These are general guidelines. The volume of labor used the costs of the operations and equipment earmarked for warehouse activity depends upon the products handled.  Therefore, key performance indicators should be adapted to the product type. The warehouse is the busiest place in any business and the potential in productivity, costs and safety improvements is huge.

To most of us involved in Inventory and or Warehouse operations these may seem obvious measurements to engage.  However, too often they are seen as superfluous to the overall business operation.  This is an error organizations can ill afford (dollar value and inventory issues) to make.

VALUE STREAM COSTING

Viable Alternative to Standard Costing

In the past few years there has been a drive to move the cost methodology of manufacturing from standard costing to other more viable alternatives which lends itself to a more detail, layered and truer picture of the costs of making a product. Prior to the continuous improvement ‘revolution’ where the standard cost of a product would not be outdated in an extremely short period of time standard costing was a viable method. 

However, since this revolution took hold and with the advent of other manufacturing theories – Just-in-Time, Kanban, Theory of Constraints and Lean Manufacturing – a standard cost can be invalid in a month’s time.  Then ensues the time consuming formulation of another short lived standard. 

In many circles the consensus has been that standard costing has too many weaknesses which finally can not be overlooked.   Below is a list of those drawbacks:

1- Useless in a continuous improvement environment:  Standard costs were designed to be the expected cost of a product for a period of time into the future, usually one year.  But in this rapidly and ever changing environment a standard cost becomes outdated and irrelevant within a very short time span.

2- Does not result in rapid feedback of cost information: Accumulating data for standard cost is time consuming and could take an entire month before this information is fed back to production supervisors.  With many manufacturers who implemented one of the above manufacturing theories or methodologies the timing is much too slow.  This information is needed before their production runs are completed.  To first review standard cost variance a month or more after the fact is a waste of time.

3- Does not yield information at the batch level:  Most, if not all, standard costing systems accumulate costs and issue variances based on the total manufacturing process.  This yields little or no information at the batch production level where most of the process issues arise.

4. Contrary purchasing behavior:  One of the month end variance that is a result of standard costing is the price variance.  This is the amount of excess materials cost a company incurred in producing the product.  Through the presence of this variance the purchasing department is charged with lowering the price of materials.  This unto itself is a logical next step but it can and has been taken too far – purchasing does not wish to show an unfavorable purchase price variance.

5. Labor standards are inaccurate:  The inaccuracy of labor costs/variances is worse than those of material costs/variances.  In too many instances the designer of the standards – the engineer – fails to include several pertinent and much too often overlooked factors such as; downtime, break time and training.

6. Contrary production scheduling behavior:  The labor efficiency variances are another outgrowth of standard costing.  Prior to continuous improvement this was closely watched variance for it provided production managers incentives to push for long operating runs that were cost-effective on a per unit basis.  Post continuous improvement era production operations tend to follow just-in-time principles which are all about short production operations.  Thus, improving labor efficiency should no longer be an organization target.

These are in my opinion the six major faults of using standard cost systems.  There are others which are on the surface more benign but once uncovered contribute to standard cost problems – contrary labor scheduling behavior, shifts focus to labor variances, short product lives and perpetuates inefficiencies. 

However, many companies still employ standard costing.  Their argument is that it creates a benchmark against which comparisons can be made even if the standard has the possibility of inaccuracies.