As warehousing undergoes a fundamental shift with the onslaught of e-commerce, it’s imperative that organizations identify the specific drivers that impact performance, establish e-commerce-relevant metrics, and continually monitor performance to navigate this transition successfully.
Why should organizations expend the effort required to identify the input, design, and operational drivers impacting DC performance?
Never before have distribution centers played such a pivotal role in meeting rising customer service requirements while at the same time facing extreme cost pressures due to a profoundly different order fulfillment process. As a result, distribution center operators and supply chain managers need to rethink their DC operating model due to changes to their original demand and order profiles. They also need to consider if they measure performance adequately enough to meet new customer service expectations. Identifying the key drivers of DC operations and corresponding performance is a great place to start before scaling your facilities to handle e-commerce orders better.
How do you prepare to meet e-commerce demands?
Are your DCs prepared for this transition? First of all, supply chain professionals clearly need to understand their existing operations and performance levels. Then, performing a driver assessment and evaluation will help determine where on the maturity scale each of your DCs is and what it will take to improve their performance. The overall process follows five steps:
- The data to collect and at what level of detail to establish a unified database for analysis.
The first step in the process is to collect, aggregate, and cleanse relevant data. This is critical to the overall success of your program, and you should not overlook the amount of effort and the time it typically takes. Chainalytics recommends collecting at least 12 months’ worth of transaction-level data, including inbound receipts, intercompany transfer shipments, outbound shipments, and return shipments. Additionally, you should also collect detailed DC financials, DC labor hours, and month-end inventory levels (at a SKU level) for the same period. Given the sheer quantities of data that are now available, you should house the data on a server database (such as SQL Server or Microsoft Access) to process it efficiently. The transaction-level data should include detailed date/time stamps for crucial process steps from customer order to delivery to measure and compare service levels and various DC cycle times. - Develop order, inventory, and demand profiles to establish a baseline understanding of DC operations.
With the data prepared, you will need to develop order, inventory, and demand profiles. As traditional warehousing shifts away from wholesale and retail channels towards D2C, order attributes such as units per order, lines per order, and shipments per order change significantly. It is not uncommon to see units per order move from 70 to less than two. In addition to order profiles, understanding a DC’s inventory and demand profiles is critical to the fair comparison of DCs and establishing appropriate metrics and targets. These metrics are essential as e-commerce demands lead to changes in the inventory profile and annual demand patterns. These make carrying a higher number of SKUs and flexing warehouse staff necessary to meet higher peak demand. - Measure metrics relevant to meeting the new e-commerce needs.
Analyze and evaluate your DC’s performance against internal or external benchmarks (such as those offered by the Warehousing Education and Research Council) on key metrics. We recommend starting with service and cost performance metrics due to the e-commerce order fulfillment shift.
Service performance metrics look at how well an organization can meet customer service expectations. These include lead-time metrics like “click-to-delivered” or percentage of orders delivered on-time, in-full (% OTIF). It is equally important to measure internal cycle times within the overall click-to-delivered lead time. Metrics such as click-to-DC, DC-to-pick, pick-to-pack, pack-to-ship, and ship-to-delivered – these highlight bottlenecks that hinder overall service performance.
There is a wide range of cost performance metrics that could be measured and benchmarked. However, the two key metrics to evaluate are labor productivity and cost per unit (CPU).
Given that direct and indirect labor costs tend to be some of the most significant cost drivers in many DCs, understanding the productivity of your workforce will help identify areas that warrant further analysis or investment. Most companies measure “gross productivity” (e.g., total outbound shipments per total direct labor hours), but we recommend a surgical approach. You accomplish this by measuring department productivity – inbound receiving, putaway, picking, packing, and shipping – and separating indirect (i.e., supervisors, sanitation, maintenance) from direct labor hours. This level of detail can be challenging to achieve as many companies do not track labor hours or activities in such a detailed fashion, but the benefits outweigh the costs.Unfortunately, the second cost performance metric, cost per unit (CPU), tends to be only measured at a high level in many organizations. That’s unfortunate because best-in-class DC operators perform detailed activity-based costing to provide performance visibility and aid management decisions. This allows these organizations to understand the handling, storage, operations administration support, and general administration overhead costs per processed unit – highlighting where the highest cost opportunities may be. - Set up consistent metrics across DCs aligned with e-commerce customer needs.
Executing a DC driver assessment and evaluation is only the first step in a more comprehensive performance management program and culture that organizations need to develop and disseminate across their teams. To accomplish this, a company must establish consistently defined and measured metrics. Start first with high-impact metrics (like those mentioned above) and gradually add or modify metrics over time, based on the goals you’re driving the organization towards. - Develop an implementation plan and a performance improvement program.
This effort will kick start your performance management program. Still, to obtain meaningful operational and financial results, you must have an implementation plan to deploy the new metrics and mindset across the organization. You should report on these new metrics regularly and use performance gains to highlight best practices. Be sure to share these across the organization, and don’t use them to discipline poor-performing DCs.
Accurate measurement and benchmarking of your DCs helps you raise your game and keep up with burgeoning e-commerce demand. Reach out to us and see how Chainalytics can help quickly ramp up your D2C fulfillment operations. Our top supply chain talent, enabled by our proven innovative digital assets – methods, tools, and content – deliver actionable insights and measurable outcomes to some of the world’s largest and most complex enterprises.
Stu Jerke is a Sr. Manager in the Supply Chain Operations practice at Chainalytics, where he leads engagements focused on helping clients turn their supply chains into a competitive advantage in the areas of warehousing, logistics, and overall network optimization.
Yeashwant Murali is an Analyst in the Supply Chain Operations practice at Chainalytics, where he performs detailed data analysis and modeling to support the delivery of supply chain operations projects.
