13 Warehouse and Supply Chain Formulas You Need to Know
A critical step in determining how effective your order fulfillment operation is performing is to determine the key performance indicators (KPIs) that matter most to your business. Once you know the metrics that are most important to your operation, you can benchmark your current performance and monitor improvements and progress towards your goals.
While most seasoned supply chain professionals can rattle off the formulas used to calculate these KPIs in their sleep, every so often we all need a refresher. Below, we have gathered the formulas for key supply chain and order fulfillment KPIs for your quick reference.
Key Warehouse and Supply Chain Formulas
1. Inventory Accuracy
Inventory accuracy is used to calculate the accuracy of your inventory. It works by taking a count of items in stock and comparing that number against what’s recorded in your database. Bench-marking and monitoring your inventory accuracy can help ensure that your bookkeeping and data management practices are in order.
Formula: (# of items counted) / (# of items books count)
2. Storage Utilization Rate
Storage utilization rate reflects how efficiently you are utilizing the amount of available space in your warehouse or distribution center. Operations with suboptimal storage utilization can leverage a number of options to reclaim lost space.
Formula: (inventory cube) / (total warehouse cube)
You are likely to find that your utilization rate is low—often between 22 and 27 percent. This is because you must maintain enough space around the inventory for machinery and personnel to operate. A systems integrator can help you determine the appropriate level of utilization for you.
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3. Inventory Days of Supply
Inventory days of supply (IDS) measures how much inventory you have on hand within your operation to cover a number of days of projected use. For most operations, a lower IDS is ideal, but should only be measured within the content of the operation. It can vary widely between industries, product lines, business models, and even warehousing strategies.
Formula: (on-hand finished goods inventory value) / (total annual COGS / 365)
4. Total Order Cycle Time
Total order cycle time reflects the average length of time that passes between a customer placing an order and the order being shipped. Because the velocity and efficiency in which orders move throughout the fulfillment process impacts profitability and customer service, monitoring and improving total order cycle time is critical for most order fulfillment operations.
Formula: (time order received by customer – time order placed) / (total number of orders shipped)
5. Internal Order Cycle Time
Internal order cycle time reflects the average amount of time that it takes from the moment that a customer order is released into the warehouse for processing and the moment that the order is shipped. It is a key reflection of all of the order fulfillment aspects that a warehouse/DC has control over.
Formula: (time order shipped – time order received) / (number of orders shipped)
6. Perfect Order Percentage
Perfect order percentage measures what percentage of orders ship on-time, complete, damage-free, and with correct documentation. It is a measurement of whether or not an order fulfillment operation is meeting customer expectations.
Formula: (% orders on time) X (% orders shipped complete) X (% orders shipped no damage) X (% orders with correct documentation)
7. On-Time Shipping Percentage
On-time shipping measures the percentage of orders that are shipped on time from an order fulfillment operation. Like perfect order percentage is a critical KPI used to monitor whether or not an operation is meeting customer expectations.
Formula: (number of orders shipped on time) / (number of orders shipped)
8. Order Fill Rate
Order fill rate reflects the percentage of orders filled 100 percent complete to the total number of orders filled. It can be used as a broad indicator of the accuracy and efficiency of an operation.
Formula: (total orders filled to customer request) / (total orders filled)
9. Line Item Fill Rate
Like order fill rate above, line item fill rate is another way that an operation can measure their overall efficiency and identify room for improvement. It reflects a ratio of order lines filled 100 percent to the total number of lines.
Formula: (total order lines filled complete) / (total order lines filled)
10. Orders Picked Per Hour
Orders picked per hour is a metric that measures order fulfillment and shipping productivity in lines per hour per person. This is a bottom line benchmark that allows an operation to compare their performance against others in the industry. It should include all functions within the operation and the total hours worked across shifts.
Formula: (total orders picked and successfully shipped) / (total hours worked in picking and shipping)
11. Lines Picked and Shipped Per Hour
Lines picked and shipped per hour measures the productivity of picking and shipping operations in lines per person per hour. By determining the total lines processed throughout your operation, it is possible to gain an accurate representation of your operational efficiency.
Formula: (total order lines picked and successfully shipped) / (total hours worked in picking and shipping)
12. Distribution Costs (As a Percentage of Sales)
Distribution costs as a percentage of sales reflects the cost to run distributions relative to total sales. It offers a high-level overview of the financial health of an operation. As revenues accelerate, any change in quality or a sudden increase in the distribution cost can indicate the need to take corrective action.
Formula: (total of distribution costs) / (total sales)
13. Distribution Costs (Per Unit Shipped)
Distribution costs as a percentage of sales measures the cost to run distributions relative to the total number of units shipped through the operation. It offers operations an additional layer of financial measurement that can offer insights into which areas of a facility may benefit most from optimization efforts.
Formula: (total distribution costs) / (total units shipped)
The Bottom Line
Once you have bench-marked your key performance indicators, it is possible to track your performance over time and identify which areas of your business and operation might benefit from added attention. Once you know what component of your operation you would like to optimize, a trusted systems integrator can help you consider your options, whether that includes adjustments to your internal workflows, deployment of automation technologies, or something else altogether.
- Romaine has spent over 30 years involved with organizations looking to optimize their distribution, manufacturing, and warehousing operations. Focusing on the customer’s processes, automation and business model, Romaine has helped dozens of organizations improve profitability by reducing labor, floor space, errors and inventory while improving accuracy, inventory turns and cut-off times.
Within the industry trade association, MHI, Romaine has taken numerous leadership positions including: Chairman of the Automated Storage & Retrieval (AS/RS) Group, Chairman of the Order Fulfillment Council of America, Chairman of the Warehouse Execution Systems Group and was one of the originators of the Carousel and VLM Product Section Group. He has also spearheaded the efforts to create the first ANSI industry safety standards for horizontal carousels.
Romaine is a frequent editorial and information contributor to hundreds of publications, blogs and online publications and has been a speaker at dozens of Supply Chain, Logistics, Lean and Facility organizations and functions. Just a few include the Parcel Forum, Institute of Industrial Engineers (IIE), Promat, North American Material Handling, Modex, National Mfg Week, Southern California Plant Operations, NJ Material Handling Assoc., Applied Ergonomics, Warehousing Education & Research Council (WERC), Lean Manufacturing Conference, Council of Supply Chain Management Professionals (CSCMP), NeoCon, Health Information Distribution Association (HIDA), National Catalog & Operations (NCOF), CSCMP and more.
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