10 ways to improve efficiency and reduce costs in your warehouse operations
Absolute productivity has declined in many companies.
Indeed, in conducting our benchmarking surveys (which we’ve done since 1996), we’ve discovered that many metrics, such as orders processed per full-time warehouse worker, remained flat, while dollars of sales processed per warehouse square foot have declined. In turn, labor rates have increased from an average of $5.50 to $10.50 per direct labor hour. To help you boost productivity at your catalog, I’ll focus on the warehouse audit process and the application of a few key warehouse success factors.
An Operations Audit
When trying to reduce costs and boost customer satisfaction and profits, first measure and analyze what’s currently being done. To determine if your warehouse operation in particular is as efficient as it can be, start with a warehouse operations audit. Such an audit takes a quantitative and qualitative look at your fulfillment operation’s productivity and accuracy, and does so in a systematic way.
A good operations audit enables you to measure warehouse productivity and other important metrics to identify patterns and trends. It also allows you to complete both internal and external comparisons. Once you gather the data and make comparisons, you’ll be able to draft an action plan for improvement.
Unfortunately, there isn’t a fail-safe, textbook approach to the operations audit. Many companies employ an independent resource to conduct the audit for an unbiased and independent perspective. (See sidebar: How To Select a Fulfillment Consultant).
The audit should consist of a method for evaluating your own operation against a set of internal expectations, as well as external, industry-accepted, best practices and averages (outlined below). Remember, you can’t improve something if you don’t measure it.
Using a template – that is, a list of predetermined key evaluation points – for each area of the warehouse can aid in the audit’s organization. Focus on labor, facilities, systems and workflow procedures. By analyzing your operation against your existing expectations, you can develop a basis of measurement for future actions.
10 Critical Success Factors
The following is a list of key factors common to successful warehouse operations.
1. Use the cube.
Our studies show that occupancy (cost of space and utilities) ranges from 25 percent to 35 percent of the cost per order.
One of the single biggest culprits in optimization of your warehouse asset is not adequately using available cubic space. Your first look as you walk through the facility should be up.
Inefficient use of the available cube can translate into increased costs for additional warehouse space that you may not actually need. Typically, receiving, picking, packing and shipping generally use 40 percent to 50 percent of your space; product storage the remainder. Use racking, mezzanines, multilevel order-picking concepts and powered conveyor placement to increase your facility’s utilization.
In addition, look at the cube use in your picking slots and reserve locations to determine if a space reconfiguration can boost the amount of products stored.
2. Ensure that sufficient product is available when a picker needs it.
Use a combination of scheduled replenishment of the primary pick slot utilizing the min-max and demand-replenishment concepts. Most warehouse management systems and some catalog order management systems support these concepts. However, a shortcoming of many catalog management systems is that the picking-ticket process assumes that the pick face has been restocked and product is available. This frequently can hinder picker’s productivity.
3. Develop appropriate pick locations.
As much as 70 percent of a picker’s work hours may be spent walking. Consider product velocity (sales movement) and size (cube) when selecting the picking slots sizes and location. Many operations replenish forward picking too often. Set up a system in which you can store at least one week’s average unit movement in the pick slot and a “hot pick” area for extremely fast movers. Provide various slot sizes.
4. Take advantage of bar code technology -
from the receiving through the shipping functions. Among the many reasons to employ bar codes: You can track products and orders, verify accuracy, speed processes, gain early visibility, and eliminate paperwork. Develop an ROI study to show where savings can be gained.
5. Keep it clean and organized.
Generally, you can tell a lot about the type of warehouse operation in place just by looking at the facility’s overall organization and appearance.
6. Plan for flexibility and scalability.
Any warehouse facility or system should be designed to maximize flexibility and be as scalable as possible. With increasing uncertainty about future business plans, it’s mandatory that you remain flexible and able to respond to changing requirements, such as when merchants add SKUs or change the type of items and product profiles (sizes) they offer.
One of our clients recently gave us planned future operating metrics, which we used in our efforts to size a new warehouse for them. After studying the metrics, and the new facility’s design, we realized they would be out of room in just six months. What happened? They had underestimated their future inventory levels by more than 100 percent.
In our planning, additional space was allocated for future expansions. This scalability permitted the warehouse to meet actual inventory needs without major difficulty. If the idea of scalability had not considered in the design, the lack of space would’ve been a critical issue.
7. Get an efficient stock-locator system.
This sounds like an elementary question, but do you know where all of your inventory is located? One shortcoming of some catalog management systems is that their warehouse inventory systems can show product inventory in only one location. Manual systems have to be used to record other locations for the same SKU. For efficient operations, your warehouse inventory system must be able to identify what product is stored in each location, as well as the quantity of each product in every location.
8. Devise a vendor-compliance program.
Everything starts at your warehouse’s receiving door. Moreover, every function, from put-away to shipping, is impacted in some way by your vendors. That’s why it’s a good idea to devise and enforce a vendor-compliance program that defines the detailed expectations and specifications required of every vendor. The program also should include corrective processes to be used and ramifications for non-compliance.
Take vendor packaging. If a vendor fails to comply with acceptable and agreed upon packaging specifications, the following situations may occur:
- Products designated as shipalones (i.e., items reshipped in the original packaging) may have to be repacked, creating increased labor costs for you.
- Bar code labels on the vendor packaging may not be reusable (readable) in the warehouse, thereby decreasing accuracy and increasing handling costs.
- You could incur actual damage to your warehouse from products arriving improperly packaged.
9. Measure and report performance metrics to your workers.
The old axiom, “You can’t improve what you don’t measure,” still is true in warehouse operations. The simple act of measuring operating metrics and reporting the results to your employees will result in an improvement — even if you do nothing else with the data. Why? Most employees just want to know how they’re doing. By setting expectations and then telling everyone how they’re measuring up, you can improve overall productivity.
Takeaway tip: Set up productivity measurements in units and cost for all major departments (e.g., receiving, stocking, replenishment).
10. Maximize what you have before investing in a new solution.
If you attribute savings or improvements to a new investment when those same improvements could’ve been obtained with a review/modification of your existing process, the payback or justification for the investment is inflated
Some Operational Averages
Once you’ve completed your existing operational analysis, compare yourself to some industry averages. Here are a few key metrics from a cross section of some of the better-run companies in the direct-to-customer industry. Keep in mind these averages come from different-sized merchants selling apparel and/or hard-goods product lines.
Warehouse cost per order:
Good productivity is around $4 per order (which includes direct and indirect labor, occupancy costs and packaging). Highly efficient businesses may be as low as $2.25. However, we’ve seen highly automated facilities that don’t yield low cost per order when the systems investment wasn’t well planned or when product type varied widely.
Order processing turnaround times:
The time to pick, pack and ship an order is 24 hours or less. Since the dot-com revolution, however, many businesses are processing 50 percent or more of orders the same day.
Returns and receiving processing turnaround times:
within 24 hours.
Functional area productivity:
Picking averages 115 units per man-hour, and packing is 36 boxes per man-hour for conventional warehouses. But small-product picking rates may range from 275 to 800 units per hour. Highly automated facilities may achieve picking of 150 to 175 units per hour, and packing of 75 to 90 boxes per hour. Of course, compare your business and those that are similar to yours.
Orders per square foot:
6.5 is the average.
Net sales per square foot of warehouse space:
$750 is the average, and varies by product size and value. This is down from $1,000 net sales per square foot 10 years ago, even though most companies’ average order sizes have increased.
Orders per full-time equivalent employee:
15 to 17.
Conclusion
An operational audit is an ongoing initiative that can help continuously improve your company’s productivity. Process the audit’s results and the corresponding ideas and opportunities for change. Compare your business to those that are similar in size and type. Then prioritize and schedule your anticipated changes in a manageable way.
Curt Barry is president of F. Curtis Barry & Company, a fulfillment consulting firm for catalog, e-commerce, and retail businesses. We offer clients expertise in business process and order management systems, inventory management systems, warehouse management systems; warehousing and distribution; call center services; inventory management and forecasting solutions; and strategic, financial, and operational planning for all business channels.
He can be reached at 1897 Billingsgate Circle, Suite 102, Richmond, VA 23238, phone: 804-740-8743; email: cbarry@fcbco.com; website: http://www.fcbco.com.
