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KPIs or Key Performance Indicators, are tools that allow you to monitor the success of a company in specific areas, using relevant metrics.
In short, they are formulas that allow you to mathematically measure and evaluate the progress of a business, focusing on the performance of every necessary process.
In this article, we will focus on warehouse KPIs, to measure and improve logistics processes.
What are warehouse KPIs?
Warehouse KPIs are performance indicators connected to the management of a storage site. They measure the progress and performance of the various sectors of a warehouse.
They therefore allow you to monitor different areas or activities, such as receiving goods, the turnover rate, or the return rate of an e-commerce site.
Knowing all these metrics allows you to plan activities and accurately check all the processes related to warehouse management.
In particular, the management of warehouse KPIs is part of a larger category which is that of logistics KPIs, where activities related to transport of goods and procurement are monitored, including all the necessary operations for the entire management of a storage site.
Warehouse management KPIs and SMART objectives
When a company sets its own objectives, it is important to have metrics that measure their progress, intervene in case of errors or - if necessary - completely change strategy. Objectives and KPIs are therefore closely linked.
To focus on the right objectives, and consequently use the right metrics, it is useful to refer to the SMART method, according to which each objective must be:
- Specific.
- Measurable.
- Achievable.
- Realistic.
- Time-bound = to have a time limit.
Let's use an example to better illustrate the concept. One objective could be to improve the warehouse turnover rate, i.e., the number of times a warehouse's inventory is sold and replaced by new items. But an objective of this type is impossible to achieve, precisely because it is too generic.
Let's see how the definition of this objective changes using the SMART method:
Increase warehouse inventory turnover by 20% by the end of the year.
Specific, measurable, achievable, realistic and time bound.
By following these guidelines, it will be easier to have an objective, build your strategy and identify the most suitable warehouse KPIs to monitor its success.
Once you have established the right KPIs to analyse, you can define more objectives based on these.
14 examples of warehouse KPIs for 2024
Let's explore the formulas used for calculating warehouse KPIs and examine some examples.
- Inventory accuracy
- Turnover ratio
- Productivity of the collection area
- Collection area cost
- Reception time
- Storage accuracy rate
- Picking accuracy rate
- Total order cycle time
- On-time shipping rate
- Backorder rate
- Inventory to sales ratio
- Returns rate
- Cost per order
- Safety KPIs
Inventory accuracy
Nowadays, it is very simple to obtain a complete overview of the items stored in a warehouse, thanks to a series of technologies that allow for real warehouse automation. In this way, every product that enters the warehouse is recorded and located within the storage site, through an electronic reading system, thereby minimising the margins of error to the greatest extent possible.
But periodic inventory monitoring becomes necessary when some products are missing for one reason or another. This could be due to supply shortage or theft, as well as item damage. For this reason, it is advisable to carry out a periodic check to detect any deficiencies, in order to have all stocks under control.
The formula to calculate warehouse management KPIs related to inventory is the following:
Inventory Accuracy = Inventory tracked by system / Inventory physically present
The closer this value is to 1, the more accurate the inventory tracking is.
Turnover ratio
It is the frequency with which a product in inventory is sold. A high value indicates heavy sales, while a low value signals declining sales.
To calculate the turnover ratio you can apply the following formula:
Turnover ratio = Cost of Goods Sold / average stock
Productivity of the collection area
It is one of the most important areas within the warehouse, representing the moment in which the items arrive at the warehouse to be catalogued and stored, waiting to be shipped.
Periodically checking that all these procedures are efficient and quick is important to improve warehouse performance.
The formula to calculate the warehouse KPIs related to the efficiency of the collection area is the following:
Pickup area productivity = volume of inventory received / number of hours worked by staff
This calculates the productivity of employees and is useful for determining whether training sessions or process improvements are necessary.
Cost of collection area
Another important parameter to consider in the collection area is the costs of receiving and collecting each product line.
The calculation of this KPI is possible using the formula:
Pickup area cost = total receiving cost / total number of items per product line
This cost should ideally decrease over time, meaning that operators are performing better and more efficiently.
Reception time
In today’s fast-paced market, the collection area is, as mentioned before, among the main departments involved in the management of items that must be registered, positioned, catalogued before they are picked and shipped. Here, as in all other departments, execution speed is of utmost importance.
This indicator includes the average time necessary to receive the product, catalogue it and store it. It is calculated using the following formula:
Reception time = total time necessary to store inventory / total number of items
Storage accuracy rate
It is the key indicator of storage performance and determines the level of precision with which storage activities are carried out. The formula is the following:
Storage accuracy rate = Inventory stored correctly/Total inventory stored
This KPI indicates the percentage of items that have been stored correctly; the closer the value is to 1, the more the storage is accurate.
Picking accuracy rate
Similarly to the previous metric, this warehouse KPI indicates the precision with which items are picked from shelves, based on orders received from customers. Also in this case, the closer this value is to 1, the more likely it is that the picking operations have been carried out correctly.
The formula to calculate warehouse KPIs related to picking accuracy is the following:
Picking accuracy rate = (total number of orders – returns for incorrect items) / total number of orders
Total order cycle time
For this performance indicator there are no formulas to apply. The only necessary operation is to keep all phases of the order cycle under control, namely acceptance, picking, packaging, and shipping, up to the last mile logistics.
Monitoring the time needed to complete each process is essential to uncover problems that can slow down the procedures and identify solutions. The goal is to improve e-commerce shipments by fulfilling orders in the shortest time possible.
On-time shipping rate
It allows you to calculate the efficiency of the warehouse's shipping processes and its formula is very simple:
On-time shipping rate = number of orders shipped on time or early / total number of orders shipped
This is a very important metric because it allows you to monitor shipments, making them as precise as possible and to avoid customer dissatisfaction.
Backorder rate
These are orders that have not been completed yet. In case of backorders, there is some weak link in the warehouse management chain, like a transportation or inventory issue. In this case, it is necessary to focus on the weak link to improve procedures and prevent orders from piling up, ensuring that customers do not wait too long to have their item delivered.
The formula to calculate this warehouse KPI is very simple:
Backorder rate = total backorders / total orders
Inventory to sales ratio
The ratio between items in inventory and sales made is an interesting value to keep under control. To obtain it, simply divide the number of items remaining in inventory by the number of same items sold.
Inventory to sales ratio = monthly inventory balance / total monthly sales
This value allows you to understand the number of products sold during a specific timeframe, for example a month, which is useful for establishing the supply needed for the following month. In this way, you can avoid evaluation errors such as purchasing stock in excess or backorders due to lack of products.
This value is also useful for checking whether there are variations in market demand for certain products.
If, for example, in the month of March 100 items of a certain category were sold and 200 remained in the warehouse, the value of the ratio is equal to 2. If the following month 50 items were sold (instead of 100) and 250 remained, the value of this ratio rises to 5. Therefore, this suggests that the market demand for that particular product may be decreasing. The higher this value, the more necessary it becomes to change sales strategies, or possibly revise the procurement of that product.
Returns Rate
Returns are a painful note for every retailer but, in some cases, they can be reduced. For example, if the return reason is linked to the delivery of a damaged product, that product can be sent again, satisfying the customer, and recovering the order.
If, however, the problem is linked to an incorrect or late delivery, due to which the customer decides to return the order, then it is necessary to intervene on the on-time shipping rate that we examined above.
In other cases, some returns are out of your control. This is when, for example, a customer arbitrarily decides that they no longer want that product. You cannot intervene in any way, especially if the returns policy allows it.
This is why it becomes necessary to minimise errors that could lead to returns and to do so it is necessary to know how to measure this value.
Returns rate = (items returned / items sold) * 100
Cost per order
This warehouse management KPI is very important for monitoring average order costs. It allows you to better keep track of the costs of the various areas involved in product management, to improve efficiency and reduce expenses, like personnel costs, rent, bills, equipment, etc.
The formula is the following:
Cost per order = total fulfillment costs / total number of orders
Safety KPIs
While the machinery and equipment in the warehouse aid the staff in managing operations more quickly and efficiently, they also pose a multitude of risks.
Staff safety KPIs are the most important warehouse KPIs. Monitoring accidents and injuries that may occur during work operations is essential to identify management problems or issues in the machinery.
There is no specific formula to use, but you can simply track how many major incidents occurred over time, what the nature of the incidents was, where they occurred, and how much they cost in time and money over a year.
This will make it much easier to intervene to prevent other injuries from happening again in the future.
Warehouse management KPIs: conclusions
In this article we have seen some examples of warehouse KPIs. Even though the list could be much longer, KPIs and objectives are closely linked to each other, as we mentioned at the beginning.
To identify the right objectives, it is necessary to understand the performance of the various departments of a warehouse. In the same way, to identify which KPIs to track, it is important to establish measurable and achievable objectives.
The most important KPIs can therefore vary based on the activity carried out or the sector examined. The important thing is to recognize the validity of this tool, to put it into practice, and improve the efficiency of your warehouse.
Passionate freelance copywriter, with a niche in ecommerce and logistics. When collaborating with ShippyPro, she loves writing about trends, marketing and communication strategies to help brands gain an edge in an ever-evolving digital landscape.