Warehousing is often seen as the "unsexy" part of the supply chain and is treated as a low value function. However, it’s actually a pivotal aspect to consider when optimizing your supply chain.
Everything from incorrect order fulfilment (leading to complaints, returns and missed sales), to high inventory carrying costs and inefficient deliveries can start from, or be influenced by, warehousing.
So why aren’t businesses putting warehousing at the forefront of their supply chain strategies? Efficient and effective warehouse operations can provide businesses with a real competitive advantage by reducing the total cost of the supply chain and driving increased customer satisfaction. In our experience, there are five common pitfalls preventing businesses from focusing on and delivering real improvements from this aspect of their supply chains.
1. Misunderstood Costs
General warehouse costs, including labor, utilities, waste, equipment etc. can be easy to categorize and understand at a high level. Labor is consistently one of the most significant and visible costs contributing to this part of the supply chain and should be a key focus area to improve EBIT performance; however, businesses often see this as a single bundled cost without a real understanding of the underlying contributions. High costs can rapidly creep up without visibility of the split between time spent on value-adding (picking, packing, quality) and non-value-adding activities (e.g. a cumbersome returns process for low value items).
Without insight into exactly how labor contributes to warehouse performance, it can be very challenging to identify where to improve and can lead to the perception that more labor or even a CAPEX investment is required.
Avoid the pitfall
All financial losses in a warehouse can be measured and converted into a “common currency” for evaluation. This will allow average labor rate, waste of materials, cost of missed sales, etc. to be directly compared. By measuring and mapping costs, and defining the best possible performance in each area, businesses can start to prioritize based on value and complexity, rather than the common pitfall of pursuing highly visible issues which may not drive much value overall.
2. Measuring the wrong KPIs
Even where costs are reasonably well-understood, another common pitfall occurs when businesses define (and reward for) KPIs that drive the wrong behaviors, the wrong focus, or inefficiency. For example, if a business’s competitive advantage stems from an ability to guarantee OTIF next-day deliveries, warehouse leadership should be focusing on that service guarantee with KPIs for quality, order response times, etc. and optimizing cost around those commitments. Pinching pennies to keep costs as low as possible won’t do the business any favors if the service performance isn’t guaranteed.
Avoid the pitfall
All implemented KPIs must serve at least one of two purposes: either to provide visibility of a function’s contribution to the overall business performance e.g. EBIT, Customer Satisfaction, market penetration or to provide insight into opportunities to improve daily function performance e.g. pick accuracy, pick rate, waste.
Existing KPIs should be reviewed quarterly to ensure each one is fulfilling one of these two purposes, and that they are driving behaviors in line with the overall priorities of the business. An additional check should be that the targets are still achievable but challenging – targets seen as impossible are often ignored.
3. Fixing symptoms, not root causes
With costs understood and the right performance measures in place, businesses should know exactly where to prioritize improvements to deliver value – the next question becomes how. In many warehouse operations, there is a tendency to either "know" where the issues are, or to do "guessing" exercises (especially in brainstorming sessions) to try to identify root causes.
The most common example in warehousing is “5s fever”. This is the belief that sorting, shining, and setting in order will drive rapid improvements in efficiency and quality. While 5s is a valuable methodology if applied suitably unless it’s applied to fix a specific, known problem, it’s unlikely to drive any measurable value.
Rigorous, data-driven root cause analysis is the foundation of any function’s ability to drive rapid improvement in areas that will truly matter. Without this rigor, we see three common challenges:
- The “solution” put in place is ineffective because it’s addressing a symptom rather than a cause
- Time and effort wasted looking in the wrong areas
- Site-wide belief that improvements can be achieved wanes, and operations reverts to the status quo
Avoid the pitfall
To avoid this pitfall, start by ensuring all analysis is underpinned by data (if you haven’t addressed pitfalls 1 and 2, it’s unlikely you’ll be looking in the right place) as well as ensuring the process is structured and MECE (mutually exclusive, collectively exhaustive).
4. Assuming digital solutions will fix everything
Digitalization can seem to be the holy grail when it comes to optimizing simple repetitive activities, but there can be challenges and high costs to implement. While buying something off the shelf is often advertised as solving all problems, the reality is that every warehouse is subtly different in its requirements and objectives.
Before implementing new systems, there first needs to be a real understanding of the current processes and requirements. These processes also need to be fully optimized (or at least the optimization requirements understood) before locking-in the current state – otherwise inefficiencies, which are much harder to resolve after a new system is installed, can be baked in.
Avoid the pitfall
Before jumping headfirst into a multi-million-pound investment in a new system, businesses need to ensure they understand what must be fixed before implementing new systems and what will be fixed by the new systems. Rigorous process mapping with cross-functional teams can prevent significant frustration, hassle, and over-spend down the line, especially where processes are poorly documented and adhered to.
5. Overlooking the people factor
While automation is becoming more common, many facilities are still very manually operated in areas such as picking, packing and put-away. As with any process reliant on individual people to perform, there can be a huge untapped opportunity in helping everyone achieve the levels of the highest performers - however, this is not something that can only be achieved by chasing a metric or applying a new system. For example, it is not unusual to see the top performer in a warehouse in terms of pick speed to be capable of more than double the rate of the lowest performers.
Mandating that everyone adhere to the top rate without any support and coaching on how to get there is more likely to result in labor complaints, poor morale, and higher sickness rates than it is to drive a step change in behavior. Management should rather consider the best balance between motivating staff and encouraging top performers, to supporting those struggling.
Avoid the pitfall
It is not uncommon for warehouse operations leadership to have started out on the shop floor and to have been promoted based on capabilities as an operator. This is an excellent way to retain talent and knowledge of the business, but needs to be coupled with top down support for the “people” factor of an operating model including: Performance metrics and targets, training and tools, and reward and recognition.
The best improvements look at these elements on an individual or team level and ensure they are suitable for the people involved, including their motivations, challenges and support.
Build a continuous improvement program
There is often a huge amount of value in both efficiencies, and in customer satisfaction, that can be unlocked through building a continuous improvement program into a warehouse. These historically often do not deliver the expected value, which can damage people’s perceptions of the program at all levels, especially where high spend in time or money is not seen to deliver significant change.
However, by avoiding the five common pitfalls described above, the maximum value can be driven from each improvement, without needing a lot of people or investment in place to get the program going. This is especially the case where improvement is believed to be difficult as the issues are complex, and there are many views of the right approach.
Once the right KPIs are in place, the root causes for issues rigorously understood, and the workforce is supported and recognized, you have the best chance at effective delivery.