Last Updated on April 14, 2021 by Madelein Wolfaardt
Warehouse managers constantly are told to do more with less. Lean practices are forcing warehouse managers’ hands. The goal, of course, is to keep costs low while getting the right inventory to the right people at the right time to ensure high customer satisfaction. If only it were that easy! Inventory control, shrinkage, excess inventory, lagging worker productivity, and stockouts plague your days.
The solution is tracking the right inventory metrics. While you won’t be able to eliminate every inventory challenge and put your warehouse on autopilot, you will be able to make better decisions by spotting trends and gaining insight from your data. But, which metrics should you prioritize? The most important metrics warehouse managers should track include
- Inventory Accuracy
- Inventory Turnover
- Days on Hand
- Fill Rate
- Inventory Carrying Costs
- Time from Receiving to Pick Location
- Warehouse Productivity
Read on to learn more about each of the inventory management metrics you should be tracking and why.
1. Inventory Accuracy
Warehouse managers must know how much inventory you have in stock and how much passes through your warehouse. Completing regular cycle counts will give you the data you need to measure inventory accuracy, whether you base them on demand or complete them at a scheduled time. Put simply, inventory accuracy is the difference between physical goods and the inventory items as reported by the accounting department. Companies measure inventory accuracy to determine how well inventory processes work.
One solution for determining inventory accuracy is to create an inventory report based on the information in the accounting system by listing inventory number, quantity, and location for all items stored in the warehouse. Next, conduct a physical count of each item listed in the inventory report. Then, divide the actual inventory counted by the inventory listed. The resulting percentage indicates the accuracy of inventory transactions. Finally, review the percentages in the report to determine which percentage of accuracy is too low; then, complete additional review for those items that have a low accuracy rate.
Determining inventory accuracy metrics can be time-consuming if you don’t use automated processes. Companies that adopt warehouse management systems with inventory management modules and barcodes and scanners simplify the process by eliminating manual data entry and reducing human error.
2. Inventory Turnover
Inventory turnover measures how often inventory is sold and leaves the warehouse in a given period. Warehouse managers need to know which items they sell, and which just take up shelf space. Determine your inventory turnover rate by dividing the cost of goods by the average inventory or dividing your sales by your inventory. The inventory turnover ratio is a key metric for determining how efficiently you manage your inventory and generate sales from it. Typically, warehouse managers want a higher inventory turnover ratio because it indicates that more ales are being generated given a particular amount of inventory.
3. Days on Hand
Each item you store carries a cost. When you have an excess amount of inventory, you overhead affects other warehouse costs; the more inventory you have, the more storage and systems you need to manage it, and the more time it takes your workers to locate, pack, and ship your items. Days on hand is an inventory metric that considers how much time items spend in the warehouse. Measuring days-on-hand helps you uncover which inventory practices you can tighten; in fact, some warehouse managers hope to implement a just-in-time inventory system to lower the costs of having excessive inventory on hand.
4. Fill Rate
Fill rate metrics measure lines shipped versus lines ordered by customers. Warehouse managers must keep items in stock to have them available for orders. Customers expect to receive their items quickly, and when warehouses have optimal fill rates, they improve customer satisfaction. It all comes to down shipping perfect orders on time to customers.
Specifically, fill rate is the percentage of orders that are shipped in full and on time for the first shipment as a percentage of your total orders. In short, fill rate is the chance that you will accurately serve your customers. Ultimately, warehouse managers strive to meet 100% fill rate.
5. Inventory Carrying Costs
Warehouse managers rely on the inventory carrying cost metric to determine how much it costs to store inventory for a given amount of time. Typically, managers calculate the carrying cost by multiplying the inventory carrying rate by the average inventory value. The inventory carrying cost metric helps you understand how much profit you can make with your current inventory; it also is useful in helping suppliers determine their production cycles. Generally, carrying costs equal approximately 20 – 30% of your inventory value, which makes this metric a significant cost factor.
6. Time from Receiving to Pick Location
You cannot create income or add value when it takes too long for your inventory to get from receiving to picking. This dead zone for inventory, the location of inventory that has arrived but is not yet in an accessible area to be picked, packed, and shipped, significantly decreases your warehouse efficiency and productivity. Minimizing the time from receiving to pick location streamlines your warehouse and helps turn inventory into profits. Many warehouse managers turn to material handling equipment such as conveyors, sorting systems, and AS/RS systems to optimize receiving to pick location time.
7. Warehouse Productivity
To keep costs low and customer satisfaction high, your workers must be as productive as possible; thus, measuring the performance of your warehouse operations is a key metric. It is essential for you to measure warehouse productivity by applying standard measurements for operations occurring across the warehouse because warehouse workers do not perform the same repetitive tasks each shift. For example, you need to be able to measure how long it takes staff to perform physical inventory in the same way that you measure placing goods in a picking area. While an enterprise resource planning (ERP) system can calculate the length of time it takes to perform an operation, you must use standard measurements using a sampling method or time study to get an accurate measurement or warehouse performance and productivity.
There are so many data tools available for warehouse managers today that it can be a daunting task to track all your available metrics. To gain a complete view of your warehouse and key in on areas that you can improve and streamline to lower costs and increase customer satisfaction, focus on measuring inventory accuracy, inventory turnover, days on hand, fill rate, inventory carrying costs, time from receiving to pick location, and warehouse productivity.