14 essential warehouse KPIs to enhance your operations

Warehouse KPIs (key performance indicators) are some of the most powerful tools to help warehouse managers like you track operational efficiency, address weaknesses and make ongoing improvements.

According to Aberdeen Group research, businesses that monitor warehousing KPIs reduce picking errors by 30% and warehouse operating costs by 15%. Meanwhile, McKinsey research shows that warehouses using KPIs can fulfil orders 20% quicker than those who don’t use them.  

A big reason for these enhancements is because KPIs help you benchmark performance so you can monitor trends, spot inefficiencies and manage risks.

They provide a broad overview of your order fulfilment process, or they can give you a snapshot of how specific areas of your warehouse are performing, for instance, the accuracy of your pickers.

And, to see how you're performing against the competition, you can compare your warehouse metrics against industry benchmarks like those from the Warehousing Education and Research Council.

In this guide, we explain some of the most important KPIs for monitoring the performance of inventory management, receiving, putaway and order management.

Warehouse inventory KPIs give you insight into how efficiently and effectively your business is managing stock within your warehouse. Let’s look at four of the most essential warehouse metrics for inventory:

1. Inventory turnover rate

This warehouse KPI tells you how often your inventory is sold and dispatched to customers. The higher your inventory turnover rate, the quicker your stock is being sold. On the flip side, a lower rate indicates slower moving stock and weaker sales.

This warehouse performance indicator also provides a snapshot of which items are selling the fastest or slowest – which is critical data to inform your purchase decisions going forward.

How to calculate the inventory turnover rate

You can quickly and easily calculate this KPI with the help of order fulfilment software that features inventory management functionality. Otherwise, there are two ways you can manually calculate your inventory turnover rate:

• Method 1: Divide number of sales made by average inventory
• Method 2: Divide cost of goods sold (COGS) by average inventory.

How can you improve inventory turnover rate?

Of course, your goal should be to ensure a high inventory turnover and to work towards increasing it. Selling stock rapidly will mean decreased storage costs and therefore more profit.

One way to increase your inventory turnover rate is to run promotions or discounts on slow-moving items, or if they’re performing particularly badly, consider discontinuing them altogether.

Performing inventory forecasting can also help you see which items will sell fast or slowly, so you can adjust your stock levels accordingly.

2. Inventory to sales ratio

Otherwise known as the stock-to-sales ratio, this critical warehouse KPI can help you anticipate cash flow issues caused by storing surplus stock and or low sales.

The inventory sales ratio indicates the amount of inventory remaining at the end of a particular period relative to the sales you made during that same period. The ratio can warn you about increasing stock levels and declining sales.

With that information, you can adjust the amount of stock you need to match anticipated sales volumes, and therefore decrease the chance of customers ordering out-of-stock items.  

How to calculate the inventory to sales ratio KPI?

The formula to use to calculate this warehousing KPI is:

Inventory to sales ratio = end of month inventory balance / sales for the month

As an example, let’s say you have an inventory balance of $40,000 remaining at the end of July, and in that month, you generated $100,000 in sales. You would therefore calculate:

$40,000 / $100,000 = 0.4

This means that inventory is 40% of monthly sales. 

How can you improve your inventory to sales ratio?

Much like with improving inventory turnover, discounting slow-moving items, running promotions or discontinuing them altogether could help.

Demand forecasting, which is often a feature in smart warehouse management software, can also help you order just the right amount of stock to service predicted sales.

3. Carrying cost of inventory

The longer stock is stored in your warehouse, the more your costs. This warehouse KPI, otherwise known as the holding cost, lets you know exactly how much it costs to store and maintain your inventory over a given period. 

How to calculate the carrying cost of inventory KPI

For this warehousing KPI, you’ll need to find out two values:

a. Total carrying costs 

These are the costs incurred to hold your inventory over a given period. These can include costs related to:

• Capital – The cost of money tied up in stock, like interest or financing
• Storage – Like rent, equipment or staff salaries
• Service – Software, insurance or taxes
• Risk – Shrinkage stock damage or obsolescence. 

b. Average inventory value

You can get this value by adding your inventory value at the beginning of the period with the value at the end of the period, then divide the sum by two. 

Once you have these two values, you can calculate the carrying cost of inventory KPI with the following formula:

Carrying cost of inventory = (total carrying costs / average inventory value) x 100

How can you improve your carrying cost of inventory?

One of the most effective ways to improve this and other inventory warehouse metrics is to use smart warehouse technology that can automate key processes, drive down costs and reduce how long stock is stored in your warehouse. 

Innovative warehouse management solutions can simplify stock audits, helping you identify overstocked or obsolete items, as well as forecast future demand for particular items, so you can order the right amount of stock.

4. Inventory shrinkage metric

The inventory shrinkage metric KPI shows how much excess inventory is recorded in your accounting, but is no longer actually physically stored in your warehouse.

It’s an essential warehouse metric because it lets you know the value of stock lost due to things like miscalculations, misplacement, damage or theft.

How to calculate your inventory shrinkage

You can work out this warehouse performance indicator by using the formula:

Shrinkage = (cost of recorded inventory – cost of physically present inventory) / cost of recorded inventory

How can you reduce shrinkage? 

The key value of the shrinkage KPI is that it alerts you to critical operational or security issues in your warehouse.

For instance, if the discrepancy between your records and physical stock was caused by misplacement, you may look at ways to reduce human error during the picking and packing process, like implementing RFID or barcode scanning.

If it’s due to theft, it may be wise to look into implementing additional security in your warehouse, like CCTV cameras or restricting access to certain areas storing high value items.

As the first step in fulfilling orders, receiving covers the steps involved with receiving, unloading, sorting and storing stock delivered to your warehouse. Here, we explain two of the most important KPIs to track efficiency and help you improve this process.

1. Receiving cycle time

Receiving stock at your warehouse sounds like a straightforward process. But it can quickly become complicated if you’re contending with several deliveries per week, not to mention customer returns.

The receiving time cycle KPI gives you a vital insight into the efficiency of your warehouse receiving process. It shows the amount of time it takes for your warehouse team to receive, check, unload, record and store stock.

A shorter receiving time cycle can indicate that your warehouse is efficiently receiving and dispatching orders, while a longer time could mean there are bottlenecks in your process.

How to calculate receiving cycle time

To work out this warehouse KPI, you’ll need to track the times that specific steps in the receiving process took place. This includes when:

• Order entry was completed
• Goods arrived at your warehouse
• Goods were checked and unloaded
• Goods were stored
• The customer picked up their order

You can then calculate the total time spent on sorting received stock, before working out the receiving cycle time KPI using this formula:

Receiving cycle time = total time spent on sorting received stock / total number of received items

This will give you the average amount of time it takes to process a received item – from order entry to customer pickup.

How can you improve your receiving cycle time?

Using warehouse management software is one way to shorten your receiving cycle time, as it can automate tasks like tracking inventory levels, reordering stock and calculating optimal storage layouts.

With real-time visibility of your inventory, including when items are scanned, you can see if your team is working to capacity or pinpoint specific steps in the receiving process that are slowing things down.

2. Receiving efficiency rate

This warehouse KPI provides another view of the efficiency of your receiving process. It measures the productivity of your team, telling you how many items they process per hour. Like the receiving cycle time KPI, receiving efficiency can help you spot bottlenecks in your process.

How to calculate your receiving efficiency KPI

To work out this warehousing KPI, you need to record the exact time stock was delivered as well as when it was ready for putaway. If you record these timestamps during a given month, for instance, you can then calculate the average number of items received per hour in that month.

To do this, use the following formula:

Receiving efficiency = volume of inventory received / number of staff hours worked

How can you improve your receiving efficiency rate?

Ensuring deliveries take place at optimal times so you can avoid congestion can help make receiving easier. It may also be a good idea to designate specific areas of your warehouse for different kinds of goods, like pallets, perishables or small parcels, and placing receiving docks closer to storage zones.

Training your team on the latest techniques for unloading, inspection and putaway, and equipping them with mobile barcode or RFID scanning technology, can also improve efficiency.  

Putaway is the sequence of steps required to store received goods in their assigned warehouse storage locations. Getting this process right is essential to ensure stock is stored quickly and accurately, while also being easily accessible for pickers and packers.

Let’s look at two warehouse KPIs that can give you insight into both the efficiency and accuracy of your putaway process.

1. Putaway cycle time

The putaway cycle time KPI gives you insight into how efficiently your team is storing received goods, as well as the order accuracy and space utilisation of your warehouse.

It measures how long it takes to move a single item of stock to its final storage location. This KPI helps you understand how efficient your putaway process is, where bottlenecks are and where you might need to reallocate staff or equipment.

The formula for putaway cycle time is:

Putaway cycle time = total putaway time / total number of items put away

2. Putaway accuracy rate

Putaway accuracy rate helps you understand the accuracy and reliability of your warehouse staff. It measures how often goods were stored in the correct location, and in the correct quantity, when they were first put away.

The ideal accuracy rate of 1 means that goods were stored correctly, with no errors. To calculate your putaway accuracy rate, use the formula:

Putaway accuracy rate = inventory put away correctly / total inventory put away

Order management covers the entire process from receiving a customer order to final delivery, as well as returns. It encompasses the full spectrum of warehouse operations, including validating orders, picking and packing, and shipping.

With so many moving parts and opportunities for things to go wrong, it’s critical to track warehouse order management KPIs to spot areas of improvement.

1. Order picking accuracy

The picking and packing process is one of the more complex within a warehouse, accounting for up to 70% of warehouse costs, according to some sources. Customer returns caused by incorrectly picked orders is of course a significant driver of these costs.

The picking accuracy KPI is therefore a critical metric to ensure orders are being fulfilled correctly and customer satisfaction is maintained.

How to calculate your picking accuracy rate

To work out this warehouse performance indicator, you need to use the below formula that will provide the percentage of orders that were picked correctly:

Picking accuracy = (total orders - incorrect item returns) / total orders x 100

How can you improve your order picking accuracy?

One way to improve picking and packing accuracy is to reassess the routes your team uses to source items or the layout of your warehouse, to make picking easier.

As we mentioned before, equipping pickers with mobile barcode or RFID scanners can not only help reduce errors but also suggest optimal picking routes for them.

Modern warehouse management solutions like Access Mintsoft can help facilitate this, offering a barcode scanning app that can help your team achieve 100% picking accuracy.

2. Backorder rate analysis

This warehouse KPI helps you track the percentage of orders that can’t be fulfilled due to out-of-stock items.

It’s therefore an important one to ensure customers are kept happy and prevent lost sales and delivery delays.
The backorder rate helps you plan ahead by seeing where demand is outstripping your supply of particular items, so you can adjust your purchase strategy accordingly.

How to perform a backorder rate analysis

You can use the below formula to work out this KPI:

Backorder rate = (total backorders / total orders) x 100

This will give you the percentage of total orders that were backorders.

How can you improve your backorder rate?

Demand forecasting, which takes into account historical trends, sales data and seasonality, can help you order the right amount of stock to fit customer demand.

Inventory management solutions like Mintsoft allow you to perform inventory forecasts to let you know how much stock you need to purchase from suppliers, helping you not only avoid stockouts but also overstocking.

3. Customer return rate

The rate of return warehouse KPI will give you the percentage of products you’ve sold that were returned by customers.

It allows you to track not only customer satisfaction but also product quality and order accuracy – three of the main reasons customers return items.

A high rate of return can indicate that orders are being fulfilled incorrectly, your website has misleading product descriptions, or that items are damaged en route to the customer.

How to calculate customer rate of return

When orders are returned, it’s a good idea to log the reason why. This, together with the rate of return KPI, can provide a full picture of any issues. You can work out your rate of return by using the formula:

Rate of return: (units returned / units sold) x 100

How can you improve your customer rate of return?

If the quality of certain items are causing returns, you could work with suppliers or implement your own checks to ensure what you dispatch to customers is exactly what they paid for.

Buyer’s remorse may also be a big reason for returns, and in that case, you might want to update the product descriptions on your website.

If damaged items are an issue, you could dispatch items with better packaging and review how they’re handled in your warehouse or en route to the customer.

4. Average order lead time

This warehousing KPI tells you how long on average it takes for an order to make its way to the customer, starting from when the order was placed.

It shows how quickly and reliably your warehouse is fulfilling orders, with a low average time generally indicating that customer satisfaction is high (provided orders contain all items).

How to calculate average order lead time

You can calculate the average order lead time for a given period. You first need to work out your order lead time for every order in that period using this formula:

Order lead time = delivery date - order placement date

You can then use the following formula to work out your average order lead time for the period:

Average order lead time = sum of lead times for all orders / number of orders

How can you improve your average order lead time?

If stock isn’t being delivered to your warehouse quickly enough, you could try to negotiate shorter lead times for inbound shipments. At the other end of the order process, you might want to reconsider your delivery partners if shipments are being delayed.

Another way to improve lead order time is to use picking and packing strategies like multi-order picking, which helps pickers minimise the amount of walking back and forth between picking locations.

5. Order cycle time metric

Average order cycle time is similar to the previous warehouse performance indicator. It measures how long it takes on average for your team to fulfil an order, starting from when the order was placed by the customer.
What makes average order cycle time different from average order lead time is that the latter can be longer if, for instance, a customer places an order but the item they ordered is not in stock. The time spent waiting for the stock to arrive factors into average order lead time.

Average order cycle time, on the other hand, only factors in the amount of time it takes to fulfil orders when stock is available. It’s therefore a measure of how quickly your warehouse team can pick and pack orders and prepare them for shipping.

How to calculate average order cycle time

You can calculate the average order cycle time for a given period. You first need to work out your order cycle time for every order in that period using this formula:

Order cycle time = delivery date - order placement date

You can use the following formula to work out your average order lead time for the period:

Average order cycle time = sum of cycle times for all orders / number of orders

6. Fulfilment accuracy rate

The fulfilment accuracy rate lets you know the percentage of customer orders that have been correctly fulfilled from placement of the order to delivery. A low rate can indicate issues in your warehouse or the inability of your team to accurately meet customer orders to specifications.

How to calculate fulfillment accuracy rate

You can figure out your rate by using the formula:

Fulfillment accuracy rate = orders completed without issues / total orders received