Introduction: Why to Conduct an Operations Assessment
Is your fulfillment operation as productive and effective as you want it to be? Is it meeting your expectations and those of your customers? Can you prove it? If you’re not regularly assessing your fulfillment operations, how can you know for sure? In today’s challenging and competitive world, not knowing where you stand on these important questions can be fatal to your future success.
One way to gauge how effective both sides of your fulfillment operations—the warehouse and call center—are in meeting your customer’s expectations and your business objectives is to conduct an operations assessment. An operations assessment or assessment is a systematic review of the warehouse and call center functions looking for possible improvements in efficiency and service.
An operations assessment takes a quantitative and qualitative look at the productivity and service levels of your fulfillment operation. If your goals are to reduce costs, better satisfy customers and boost profits, you have to measure the various components of the operation before you can begin to make meaningful improvements. Combining this measurement with a structured approach to develop improvements is the key to successfully acting on the assessment findings.
A good operations assessment enables you to measure productivity and service and identify patterns and trends. (Have you made progress in some areas? Fallen back in others?) It also allows you to compare your measurements with your own in-house goals as well as industry benchmarks. (How do you stack up against comparable companies? Are you in the ballpark? Are you meeting your company goals and objectives?) Once you gather the information and make the comparisons, you’ll be able to draft an action plan. Remember, if you can’t measure something, it is difficult if not impossible to improve it.
I. Five Basic Components of an Assessment
The operations assessment is a way to take your operational pulse. The process enables you to identify areas where you can improve operational performance. The five basic components of the assessment or assessment are:
1. Walkthrough and observations of the operation;
2. Data gathering of necessary information and metrics;
3. Interviews with key staff members;
4. Report analysis to determine current productivity and service levels;
5. External benchmarking to look for areas of potential improvement
An operational assessment is a thorough analysis of operations that tells you exactly where you are and what you need to do to meet your goals. The assessment is ideal for all sorts of fact-finding assignments; the question of whether the operations side is keeping your marketing promises is just one application. Operational assessments also can help you improve productivity; use distribution center space more efficiently; improve throughput and capacity of orders processed in the call center and warehouse; streamline work-flow by reducing steps; improve service levels, processes and costs; and generally achieve higher profits and lower costs. The assessment considers the service levels you are providing to both internal and external customers. You can tailor your assessment to analyze any one of these issues—or tackle a combination of areas at once.
One of the first steps in the assessment is to take time to walk through the facility and observe general operating conditions and effectiveness of the processes being used. It is not a detailed analysis but rather one of developing overall impressions that can guide the more detailed steps of the assessment to be completed later. Many times the initial walkthrough and observations help focus and direct the assessment process. After you have seen enough facilities, it is possible to form initial opinions as to the current level of productivity and service very quickly. The general cleanliness of the facility, employee attitude and morale, overall work pace, information posting for employees, congestion, appropriate use of automation, bar code applications, space and cube utilization, etc. are all issues that can be observed during the walkthrough that can provide clues as to the appropriate focus for the assessment. Using all of the tools available can provide valuable information for the direction of the detailed assessment.
The assessment will involve some new research, but chances are you’ve already been collecting a lot of the data for other purposes. Designing an assessment is a matter of putting it all together. Most assessments are a combination of research analysis, report review and on-site fact-finding.
Regardless of the specific goals of the assessment, the first step is to gather all the research you already have and collect any that you are missing. It is always necessary to establish expectations or standards as the baseline for any comparisons to be made. Measurement against these standards as part of the assessment process identifies areas where expectations are not being met and action is required.
Among the type of reports you should consider are basic operations performance reporting. These internal reports cover the major performance metrics in all departments—including call center representatives; customer service representatives; service levels such as abandonment rate, time to answer, order shipping accuracy, order turnaround time, etc.; receiving; quality assurance; stock putaway; returns; inventory control; replenishment; and picking, packing and shipping. Examining these reports can help reveal which departments are reaching desired levels and which ones need some attention. The reports usually will include information relating to budgets or expectations compared to actual results in key areas of the business covering productivity as well as service metrics.
There are all kinds of fact-finding source materials you can pull together for your operations assessment. I’ve written about them in detail in the past (“Conducting a Catalog Operations Assessment,” Catalog Age, May 1999), but to summarize briefly, your source materials should include, among others, internal operations reports, returns reports, customer satisfaction cards, secret shopper studies, quality assurance sampling, and where applicable, call center customer reports and call center monitoring reports.
Another important step in the assessment process is to talk to those staff members directly involved in the activity being assessed. Interview key management staff to gauge their perspective on the operation and any future plans for growth, product changes, or planned process changes. Then talk to the workers on the floor doing the work in the call center and warehouse. If anyone knows where the problems and opportunities lie, it is the people who live with the issues day in and day out. They are many times the best resource for information. Most companies view them as the key resource in new project planning but interestingly enough, very few actually follow through with involving them to the level they deserve. Don’t miss this important resource.
II. Why Benchmarking Is Important
Your assessment should compare your desired standards of service and productivity with your actual performance. Comparing your own figures—both actual and goals—to that of other catalog and multi-channel marketing companies can help you evaluate your performance, too. Just be careful to compare “apples to apples” and pick companies that are as much like yours as possible. External comparisons can lead you to certain areas or processes within your operation that are candidates for further study. Remember that you cannot take someone else’s standards or performance expectations and make them your own. There are always too many differences in operations to do this.
For example, consider differences in catalog apparel pack rates. Packing of apparel merchandise on the hangar, wrapping it in tissue paper and giving extra care and attention might allow for completion of only 15 orders per hour, while flat-storage merchandise that is packed in plastic and inserted in envelopes for shipping allows for the movement of 100 orders per hour. Our opinion is that it is always better to compare your results against yourself and against a set of standards or expectations over an established time period. This permits the identification of trends as well as snapshot evaluations. It is really desirable to combine both internal and external benchmarks to evaluate where you stand.
It is very important to make sure you measure activities and costs that are relevant and actionable. Reviewing true productivity metrics in terms of work units and man-hours is better than looking at a percent to sales measure. The percent measure is dramatically affected by price points and labor market conditions, which usually are out of the operations control. Emphasis should be placed on comparable benchmarks, which can lead to some action steps by the operations group. The following list is an example of the type of metrics commonly found in a warehouse benchmark assessment:
- Total warehouse cost per order/line/unit
(includes direct labor, indirect labor, occupancy costs, and packaging) - Units per man hour
Receiving
Putaway
Replenishment - Units and lines per man hour
Picking - Boxes per man hour
Packing
Shipping - Outbound Shipping costs
- Orders and Net Sales $’s per square foot of warehouse space
- Orders per FTE (Full Time Equivalent)
- Average base pay
- Cost factors as a % of Net Sales
- Service Level
Order turnaround time
Order and inventory
Accuracy - % utilization of available space
- Seasonality - % of business by quarter
Call Center Benchmarks. Many of the same techniques employed in a warehouse assessment apply to an operations assessment in the Call Center. Conducting the walkthrough, data gathering and interviewing are part of this process also. One difference may be in the specific metrics considered in the assessment. Attention in these call centers would be on the operating reports makeup, key benchmarks being measured, staffing policies and procedures, customer service levels, and potential areas for improvement. The key areas measured and compared would include:
- Abandonment rates;
- Service levels (fill rates);
- Average call length;
- Staffing plan effectiveness;
- Call to order ratio;
- Rep utilization (2 methods);
- Avg. order amounts by rep;
- Incentive programs;
- Cost per call and per order
- Labor rates per call and per order;
- Telephone expenses;
- Credit card expenses;
- Upsell success and measurement;
- Mail and Fax productivity;
- Internet order processing;
- E-mail management issues;
- Third party/overflow cost analysis;
- Miscellaneous contingent benchmarks per client; and
- Review of Daily and Weekly ACD reports.
III. A Look at the Numbers: Industry Benchmarks
Over the years, we have gathered the following list of industry benchmarks based on actual operating results from a wide cross section of the industry. As mentioned elsewhere, it is important to recognize that these are industry averages and to apply them to your business without additional research is a mistake. Selection of the particular companies to benchmark is a critical step to insure that the numbers have meaning to you. Even after selecting the right companies, it is imperative to recognize that each business has its own unique operating characteristics that make any comparison difficult. It is never possible to take someone else’s numbers and apply them directly to your operation.
Customer Service/Call Center Benchmarks
Phone Orders Per Hour productivity (for two-line order): 11 to 13 orders per hour
Mail Orders Per Hour productivity (for two-line order): 45 to 60 per hour
Catalog Requests Per Hour productivity: 60 to 80 per hour
Inquiry and Complaints Per Hour productivity: 8 to 11 per hour
Ratio of Orders to Contacts: good level = 1:1.5 (backorders will drive contact level higher)
Call Abandonment Rate (percentage of total calls abandoned by the customer): 2.0% to 2.5% good; < 2% very high service
Average Time to Answer (average time measured in seconds and number of rings to answer customer contact call): 90% in 20 seconds or 4 rings = good service
Distribution Center Benchmarks
Basic Functional Departmental Benchmarks (Industry Averages)
Receiving: 150-170 units/hour
Picking: 140-180 units/hour
Packing: 25-35 boxes/hour
Manifesting: 140-160 boxes/hour
Returns: Apparel 15-20 per hour
Hard Goods 35-50 per hour
General Benchmarks
Total cost per order: $8-13 per order
Includes: Call Center and Warehouse cost centers--Direct Labor, Indirect Labor, Occupancy Costs, Packaging Materials, Phone Costs, Credit Card Fees; excludes Shipping Costs
% to Net Sales
Very Efficient < 10%
Average 10-15%
Needs Attention >20%
(Note: It is very difficult for many small catalog companies to operate below 20%. These averages are dramatically affected by product price points and prevailing labor rates.)
Call Center and Warehouse costs are usually split on approximately a 50-50 basis. Some range to a 60-40 split
Direct Labor is approximately 50% of the total fulfillment cost in the warehouse
Warehouse orders per square foot = 6.5-7.5
Sales Dollars ($) per 1000 square feet (warehouse) = $650,000-$850,000
Accuracy: Controllable Pick and Pack Error rate: <0.5%
Inventory accuracy rate: Bar code inventory systems: <0.1% Conventional inventory 0.5%
Turnaround Times
Catalog Requests (processing customer catalog requests): in home 7 to 10 days
Order fill time: 24 hours for in stock items
Customer Service Response (resolution of customer inquiries/complaints: immediate (many catalogs have on-line, real-time customer service systems)
Dock-to-stock Time: 8 to 24 hours from dock receiving to stock putaway
Returns Processing: 8 to 24 hours from receipt (including customer file return entry, credit, refund or exchange, refurbishing and return to stock)
IV. Four Critical Areas to Assess
As part of your assessment, there are four key areas that should be evaluated in the call center and warehouse. They make up the most critical aspects of any fulfillment operation. They are:
• Labor;
• Facilities;
• Workflow and procedures; and
• Systems.
1. Labor.
Labor is incontestably the most expensive area on your profit and loss statement relating to fulfillment, so it’s important to get the most for your payroll dollar. There are four key areas to consider for the labor portion of your operations assessment. The first two can be easily quantified; the others are more difficult to quantify but should not be ignored.
Productivity: Productivity is simply a measure of the number of work units processed in a given amount of time, either by employee or by department. Work units can be orders, calls, shipments, lines, etc. as appropriate for each fulfillment function. Examples are the number of orders per man-hour, calls per man-hour, the average sales in dollars per FTE or orders or lines per man-hour for the various departments’ activities. The exact metric varies within companies and between functional areas based on what they deem critical to their particular business and function. Pickers may be measured on the basis of lines or units picked while packers may be held accountable for cartons packed.
Cost of labor: The cost of labor can be divided into two major parts. Direct labor, or “touch labor,” as it’s called, is the part of your labor force that is directly involved in physically moving merchandise, and it accounts for a full 50 percent of your overall fulfillment costs. Indirect labor-- clerical workers, managers, supervisors, administrative staff, security, etc.--accounts for about 17 percent of your overall fulfillment costs. Both direct and indirect labor have to be evaluated in the assessment process. The relationship of labor cost and labor productivity is critical to understanding where to place your emphasis.
Turnover and training: The effect of your turnover rate is difficult to quantify, but rest assured, it is real. The turnover rate itself can be derived from a simple calculation, and should not be overlooked. If your work force changes frequently, productivity is likely to suffer, as group after group of new employees work through the learning curve to reach full competence. In addition, the cost of hiring--screening, drug testing, training, etc.--is escalating. By contrast, a stable work force that knows the system and processes can continually work toward new efficiencies. You should ask yourself what you can do to reduce the turnover rate in your operations. When you train employees--whether new hires or long-term employees learning new procedures--how efficient is your training process? Are your training procedures documented? Do you have enough training materials and manuals on hand? All of these factors will make a difference in the effectiveness of your training efforts.
Local labor market: Your local labor pool will also affect productivity and costs in a way that is likewise hard to measure but nevertheless real. A low unemployment rate may mean that in order to hire the quality of worker who can achieve the productivity levels you desire, you will have to pay higher wages (thereby increasing labor costs, already a hefty chunk of the cost column). A higher unemployment rate may have the opposite effect. The local economy is largely beyond your control, yet it can have a profound influence on your operations--all the more reason to get a handle on those factors that you control.
2. Facilities.
The next area to examine is the fulfillment facility itself, specifically, whether you have enough space and whether you are using the space you have efficiently and cost effectively.
The cube: First, evaluate the storage capacity of the facility. Are you using the whole “cube”--square footage and height --effectively? Or is there something you can do to optimize stacking height with racking or layout changes. Typically storage and picking and packing areas together account for 70 to 80 percent of the warehouse space. The focus of cube utilization should be on these areas. Does each department have enough space to function effectively? It is necessary to evaluate today’s needs and tomorrows planned requirements. One outgrowth of the assessment is the ability to maximize the use of the existing facility or resource before spending money and effort to add resources. By making sure that existing resources are utilized, any future justifications for expenditures will be valid and generate an accurate Return on Investment. If you justify expenditures using a sub-optimized current operating base, a false justification can result.
Costs: Typically, occupancy costs (lease or depreciation costs of building and equipment, utilities, maintenance, taxes and insurance) add up to 18 to 22 percent of the total fulfillment dollar. Beyond that, there are many ways to map your facility’s costs and compare the results to other companies. Calculating the occupancy cost per order or call is one way to chart the productivity of the facility.
You also can calculate cost per order using benchmarks based on different characteristics of the facility. Based on the size of your facility, the typical cost per order for facilities less than 150,000 square feet is $4.97. For facilities of more than 150,000 square feet, it’s $4.65. You can use the number of orders processed. The average cost per order for facilities that move fewer than 1 million orders per year is $5.43, while for facilities that move more than 1 million orders per year, it’s $3.22. You should also calculate costs based on conventional versus automated warehouse benchmarks; typical cost per order for a conventionally equipped facility is $5.17, while for an automated facility it is $4.50. The above costs per order typically include Direct labor, Indirect labor, Occupancy costs, and packaging supplies. For general facility planning and evaluation, you should chart average sales per thousand square feet of warehouse space. (The overall industry benchmark is $650,000 to $850,000 sales per 1000 square feet.) And average orders processed per square feet of the warehouse (The benchmark is 6.9 orders.) Comparing your own actual results with industry benchmarks will help you get an idea of whether your costs are in line. The difficult aspect of external benchmarking is to ensure the “apples to apples” comparison based on examining companies with like characteristics. Differences in product price points and characteristics can dramatically affect the benchmark metrics. The classic example is the Timex-Rolex example where the same amount of labor and expense is required to process either watch, while a comparison to the percent to sales or sales per square foot will yield dramatically different results. Make sure you do not reach false conclusions when you perform external benchmarking.
Seasonality: Your warehouse will operate differently in peak and off-peak seasons. Your assessment should take both into consideration. In fact, peak season is a good time to assessment; during this period of frenetic activity, you’ll see whether your space is sufficient and whether your systems hold up. Whenever you perform your assessment, keep your peak-season needs in mind: Do you have enough storage capacity? Do your procedures change during peak season? How long does it take to pick, pack and ship an order from in-stock merchandise in peak versus non-peak season? Will your overall productivity numbers change during peak periods?
Housekeeping/Maintenance: Maintenance and housekeeping should be part of your assessment, too. What are the overall conditions of the property? Is trash removed promptly? Is it clean? Are there areas of clutter that create bottlenecks? Is the lighting adequate? Is the floor in good condition? Your cost of occupancy goes up as housekeeping standards go down. Congestion, too-low lighting, floors in poor condition and lack of proper maintenance will slow work and put your work force at risk of costly accidents that drain profits. Dirty conditions can negatively affect product cleanliness, which in turn, can result in costly returns. Dirt and dust can also adversely affect the operation of bar coding equipment, automated conveyances, and mechanical sorting devices. Besides, cleanliness is next to godliness, as the saying goes; the attitude, productivity, morale and retention of your work force will be higher in a tidy workplace. Once you’ve considered the present, think about the future. Is your facility flexible enough to handle changes in your business? Can it accommodate growth? You might not need more space immediately, but it’s not a bad idea to have a contingency plan that allows room for growth.
3. Workflow and Procedures.
These areas are often the easiest in which to make improvements. Most applications of the assessment process to workflow occur in the warehouse. Your goal here is to minimize the number of times a product is handled, and the number of steps your crew has to take to move the product through the facility to be shipped. All processes should be assessed with the viewpoint of determining how much flexibility is provided for future changes. Few processes stay the same over extended time periods. Providing the potential to match future needs is critical.
Flow charts: Develop two flow charts: one detailing how product moves from receiving and returns through replenishment and the other detailing how customer orders move from pick ticket generation to shipment. These charts will help you identify problems. Create a checklist of items to consider as you trace the movement of goods through the facility. Take note of how its layout helps--or hinder--workflow. What is the “level of interference” in the flow of merchandise and what are its causes? Do departmental workflows contradict each other and impede progress? Are you using conveyors where you should or employing the right material handling equipment? Do you have the best storage methods (pallet rack, flow rack, floor or bin storage) for your product? Work paths should be designed to minimize travel time and merchandise movement. Departments should be situated logically in relation to one another to minimize travel between them.
Slotting systems: Your slotting program will determine how efficiently your staff can pick. You can choose from velocity slotting (based on how fast specific SKUs are moving), weight and volume slotting (based on SKUs’ size and heaviness) or other methods. But your choice of slotting method isn’t cast in stone. The ideal slotting system gives you flexibility. Do your primary pick areas have different sizes and types of slots? Are fast-moving items located near the shipping area? Can backorders be cross-docked directly to the packing station? How often do you re-profile your primary pick slots? This should be a dynamic process. Finally, is it easy to identify merchandise and locations quickly? The goal of slotting systems should be to insure product is available when the picker reaches the pick slot and to manage the number of replenishment of product to the pick slot. Proper slotting is a key to another key warehouse function, replenishment.
Packaging materials: For some companies, productivity suffers because they forget the obvious: they don’t keep enough materials on hand--right at the work station--for the warehouse crew to do their jobs (e.g., shipping cartons, dunnage, gift wrap, taping, picking tote boxes, labels in receiving area, paper, pencils, clipboards, etc.). Failure to do so will mean those workers lose valuable time gathering materials or waiting for them to be delivered.
Quality control: Identifying errors early saves money and should be a part of your process. The cost of an undetected error is typically $25 to $50. Can you identify errors? How frequently do they occur? Where do errors most often take place? What is their cause? How can you reduce the incidence of errors? How easily can you correct them once they are identified (e.g., purchase orders, receiving product identification, pack verification, etc.). Don’t rely just on returns from customers to gauge your accuracy or quality performance. Make sure you are measuring and reporting internal quality checks and taking action as needed. The assessment should review both incoming quality as well as outgoing quality. Vendor compliance manuals should be reviewed as part of the assessment.
4. Systems.
The order management system used in the call center should provide the necessary functional components to permit easy and accurate entry of orders. Easy and timely access to customer, order, and inventory information should be provided. Examples of the types of attributes that should be functionally evaluated are:
Item availability and on order information; Back order management; Item searches; Kits and sets; Personalization requirements; Order status; Source code options; Upsell/cross-sell capabilities; FTC notices; and Gift certificates.
Your warehouse management system (WMS) should be the brains that guide your entire operation. Does your system give you the functionality and flexibility you need? Does it support your efforts to maximize space and labor efficiency? Is it easy to make adjustments? How fast and flexible are pick generations? Does your system provide reports that are adequate to monitor performance? Is your system compatible with the use of bar codes? Can it support the growth of the business? In most warehouse operations, the three key areas of concern are slotting, replenishment, and location control. Control these three and you will be well on the way to controlling your warehouse operation. Your basic WMS functionality should include:
Inventory: Inventory management is your WMS’s most important function. The WMS should track product by SKU, quantity, location and transactions against the location. It should ensure inventory accuracy.
Bar coding: Bar coding will help you track productivity in two areas: four-walls inventory tracking (receiving, stock putaway, pick, pack and ship) and productivity by individual, activity and/or department. Paperwork can be dramatically reduced through the use of bar codes.
Replenishment: Your WMS should control bulk-to-forward movement of goods, through the use of minimum and maximum inventory triggers. It should also monitor demand quantity in waves of pick tickets, to make sure sufficient quantities are in the forward pick location. Look for opportunities for cross-docking back orders.
Pick ticket selection: The WMS should enable you to print and sort pick tickets in a variety of ways, depending on order priorities and resource availability.
Pack verification: You should be able to scan items to check accuracy before shipping.
Tracking: Your WMS should track orders throughout the fulfillment process and integrate order status to your customer service department.
Returns: Your WMS should minimize steps for processing returns to keep costs low.
It is critical that all systems communicate with each other as needed and use common data as much as possible to maximize operations efficiency and productivity.
V. Final Steps: From Assessment to Action
Once you’ve gathered and analyzed all the information you can, patterns will emerge and you’ll have a quantifiable picture of what you do well and what needs to be improved. But your assessment isn’t over. The final step—the action plan—is what will make your assessment yield meaningful results. In creating your plan, remember the old saying that Rome wasn’t built in a day. Focus on areas that will yield the greatest benefit. Before you tally up a long list of changes that will leave your team feeling overwhelmed, recall that Pareto’s 80/20 Law usually works. Where can you get the biggest improvements from the smallest number of changes?
Finally, write your action plan so that it provides for continual improvements over time. It should include detail action steps, assignment of accountability, and expected completion dates. Manageable changes introduced gradually will be more effective and more readily accepted by your workforce than one massive overhaul. Gradual change helps make continual improvement a part of your corporate culture. Make sure any plans you develop include clear action steps, accountabilities, and timelines.
And don’t assume that one operational assessment is enough. Comprehensive assessments should be conducted on an ongoing basis to stay in touch with customer needs, accommodate your company’s growth, keep pace with your competition’s improvements — and to keep up with whatever promises your marketing department is dreaming up right now.
