The 5 Most Important KPIs for Warehouses

What are KPIs?

KPIs are measurements that allow business leaders to assess their company’s performance, determine goals and pinpoint areas for improvement. Tracking KPIs allows companies to narrow their focus on what needs attention. According to Amanda Russo, founder and CEO of Cornerstone Paradigm Consulting, LLC, these metrics are also crucial for compliance and competitiveness.

Warehouse KPIs can help managers make more informed decisions to improve performance and efficiency, thus providing these benefits:

• Optimized warehouse costs: KPIs track the costs of various operations based on time, orders packed and picked, the costs of products and resources and order cycle times. This data can help business leaders decide how to use money more effectively and reduce operational costs.
• Increased operational efficiency: Managers can use KPIs to assess progress toward warehouse goals and use them to tweak operations that are not succeeding. 
• Improved workplace safety: Tracking equipment breakdowns, injury rates and other safety-related measures is imperative. This can help minimize the chances of workers getting hurt on the job.
• Strengthened customer experience: Using KPIs to track orders and shipping times can boost customer satisfaction. Providing this information to customers can help solve issues or identify mistakes within orders early in the process.

The most important KPIs for warehouses

Warehouses should focus the most attention on these vital KPIs.

1. Inventory accuracy

Inventory accuracy is a crucial KPI for warehouses, as it ensures stock levels can meet demand without overstocking, explained Christina Dube, director of marketing at Kardex.  If your inventory tracking is incorrect, your costs will skyrocket and your customer satisfaction levels will plummet. If you are relying on Excel or manual processes, your inventory accuracy will be far too low and there’s a good chance you’ll end up reordering or manufacturing parts you already have. The costs of carrying excess inventory — or of angering customers when you don’t have inventory you say is in stock — will hurt not just your bottom line but also your reputation. 

One solution for inaccurate inventory is to choose a system that uses barcodes to track inventory. Some warehouses find that barcoding systems integrate with their current computerized maintenance management systems (CMMS). These systems improve inventory control by providing a framework for managing inventory, supplies and other warehouse materials. 

2. Efficiency of receiving

One of the most important operations of a warehouse is receiving stock, so the efficiency of receiving is an essential KPI for warehouses. It should take into account received volume, customer returns, missing and broken stock and return-to-vendor stock. It is imperative for warehouse managers to organize data by source and time, which allows them to pinpoint any issues with vendors, timing and return rates. 

The efficiency of your receiving area has a big impact on warehouse operations. You should know the rate at which inventory is counted and be able to identify deficiencies in receiving that you can address to eliminate a chain reaction of inefficiencies across your warehouse. KPIs for receiving should include the cost of receiving per receiving line, the volume received per person-hour, the receiving dock door utilization percentage, the accurate receipts percentage and the time taken to process a receipt.

It is easy for warehouse managers to overlook receiving for picking and shipping KPIs. However, improperly designed and poorly run receiving areas have a damaging impact across the warehouse. 

3. Picking and packing costs

Most warehouse managers point to order picking as one of their most expensive and difficult processes because it requires the most labor. Picking and packing processes are often more complex than other operations. They are crucial to an organization’s bottom line because they are tied directly to customer satisfaction. KPIs for picking and packing should include the cost per line item picked, orders picked per hour, picking labor costs, consumables usage and cycle times per order. You can measure for accuracy and the speed of picking and packing and one metric to consider is your percentage of perfect pick lines.

4. Inventory turnover 

Having a high inventory turnover is good for your warehouse. Narrowing down inventory turnover to a KPI that gives you visibility into your inventory rate is useful because it will help you gauge buying practices and product demand. Your warehouse management system may provide a solution for gaining visibility into your inventory turnover and enabling forecasting to keep your inventory moving. Keep in mind that inventory turnover measures the number of times per year your warehouse goes through its entire inventory. You should compare this rate with industry averages to see how your warehouse is performing.

5. Customer cycle order time

Don’t get so caught up in KPIs for your facility that you forget about your customer-facing metrics. While customer feedback certainly is useful, you need to forecast overall customer satisfaction using metrics such as customer cycle order time. Customers do not want to wait too long for their orders and the warehouse is on the front lines when it comes to warding off customer frustration and impatience. Your delivery windows should be in line with those of your industry. Keep reverse logistics in mind and ensure that your return process and timeline are up to par with your ordering process.

6. Net profit margin

Measuring the amount of money your company has earned once you have factored in all your operating costs — or net profit — is a crucial KPI for warehouse management. “As with any business, [by] understanding profitability and the things we can do to improve it — [such as] reduction of time and resources [or] increasing stock and flow — we can relate the operational metrics back to business outcomes,” said Michael Schwabe, director of market intelligence at Surgere.

To determine your business’s net profit, use this formula:

Operating profit – taxes and interest = net profit

This number can give you a realistic picture of how your business is doing financially.

7. Order accuracy

Order accuracy is just as important as inventory accuracy. The former ensures that the correct items are shipped every time. A perfect inventory accuracy measure is “1,” indicating that inventory picking is correct and customers receive their desired orders every time. “Mistakes can lead to production downtime for our clients’ customers, costing them money and damaging trust,” warned Eric Muhlenbruch, director of contract logistics at Gebrüder Weiss. “By prioritizing this KPI, we enhance client satisfaction and reduce costly returns or corrections.”

Your business’s order accuracy can be determined by evaluating the number of returns customers make due to receiving the wrong items.

8.  Dock-to-stock cycle time

Tracking the time it takes for a shipment that has arrived at your warehouse to be fully stocked and ready for picking, also known as the dock-to-stock cycle time, can indicate the efficiency of moving goods from receiving to storage. According to Russo, this is a key area where many warehouses face delays. 

“This process is often driven by a manual process of receiving and [inputting] inventory manually into [a] WMS/ERP/MRP or, more commonly, a spreadsheet,” explained Russo. “Investing in the right tools for the business will play a key role in the success of this process.” [Read our review on Zoho Books, which includes an inventory tracking feature.]

9. Perfect order rate (POR)

POR is a supply chain management metric that broadly measures a company’s performance in fulfilling orders because it encompasses other essential KPIs. “[POR] gives an overall view of how well a warehouse is doing, including order accuracy, timeliness and [fulfillment] completeness,” explained Dani Mechlowitz, managing director at Delta Fulfilment. “Tracking POR keeps customer satisfaction high and helps spot inefficiencies.”

10. Returned inventory feedback

When a customer sends an order back, it’s likely due to one of the following factors:

• The wrong item was received.
• The product is defective.
• The product was damaged during shipping.
• The item does not match the product description.
• They changed their mind and no longer need/want the product.

The myriad of factors make customer feedback on returns a highly valuable KPI. With this information, businesses can identify recurring return issues and take action to improve the product, shipping method or other factors causing an influx of returns.

Best practices for measuring warehouse KPIs

Keep in mind that you cannot improve or change what you cannot measure. These practices will guide you in collecting the right KPIs for your warehouse and in using collected data effectively: 

• Define goals for your warehouse: Without setting goals, you are likely to track unnecessary KPIs, which can waste time and decrease efficiency. Set quantifiable goals and then determine how you will assess achievement toward these goals.
• Identify the most relevant KPIs to meet those goals: If your goal is to improve receiving operations, you might track receiving costs, productivity and accuracy. Dube recommended benchmarking performance against industry standards, with consideration to your warehouse’s operational scale and scope. Once you’ve met your initial goal and your established KPIs are no longer relevant, replace them with those you need to meet current goals. 
• Take it one step at a time: Schwabe noted that, when it comes to setting goals and KPIs, there will always be more — “more to measure and track, more to do to improve those metrics, more to implement and optimize.” Introducing too much at once can lead to overwhelm; Schwabe recommended starting small to build a use case and buy-in.
• Spend more time “on the floor”: Expertise in warehouse management isn’t built inside the office, according to Muhlenbruch. He said leaders should perform warehouse processes themselves to gain a better understanding and to help troubleshoot efficiency issues more effectively.
• Start and end with governance: Governance structures exist to ensure proper planning and consideration across teams and disciplines, according to Schwabe. A governance team and process can provide guardrails that keep the scope of operations in perspective and do not grow beyond what your systems, people and budget can handle.
• Leverage AI to streamline processes: Using technology like an AI-driven inventory management system is essential for improving inventory and warehouse operations, explained Russo. She noted that AI tools can enhance demand forecasting and planning, reduce waste and ensure the warehouse operates efficiently.
• Partner with a third-party logistics provider: A third-party logistics provider has the expertise and resources to manage and measure your KPIs. According to Mechlowitz, these providers have advanced systems and experienced staff who can optimize your operations, reduce complexities and give you the flexibility to focus on other business priorities.
• Ensure education and visibility across the organization: Inform staff of the KPIs that are relevant to their operation and help them understand what the data represents. You can send out weekly reports, use mobile apps or hold frequent meetings to keep staff up to date.
• Analyze results and adjust as necessary: KPIs give you analytics from past and current performance, which can be used to highlight areas in need of improvement and growth. Use the results to review overall processes, identify issues and take actions to improve.
• Prioritize continual improvement and auditing: There is always something that can be improved within the warehouse to make things run more smoothly, better satisfy customers or streamline production. Regular audits can help managers gauge safety, efficiency and accuracy of operations as they continue to strive for growth.

Danielle Fallon-O’Leary and Nicole Pontius contributed to this article.