ARC Advisory Group surveyed 52 logistics executives and asked them if their companies were using any sort of warehousing costs per unit measurement, defined as “total warehousing costs/total units shipped.” Thirty-seven percent of the respondents were not using this this metric type, which is far too low. Ideally, if a company is doing pallet shipments, it would measure “cost per pallets shipped” to evaluate that zone of the warehouse; if it is building mixed-case pallets, it would also measure “cost per mixed cases pallet shipped” for that portion of the warehouse, and so forth.

Having such metrics in place, and actively monitoring them, helps companies ensure that the productivity benefits associated with their Warehouse Management System (WMS) implementation do not begin to slip. These metrics also allow a WMS to serve as a platform that can help companies measure the effectiveness of continuous improvement programs. Finally, and perhaps most importantly, such metrics are an important tool for protecting the job security of a warehouse manager.

The final point, cost per unit metrics as a form of job security, needs further explanation.

When logistics executives put together their annual budget, the simple approach is to begin by looking at warehousing costs as a percentage of total revenues. Then the distribution manager looks at the demand forecast for the coming year, factors in wage inflation, and produces the budget. The CFO will then generally pressure the executive to reduce the budget, and some back and forth takes place before the departmental budget is approved. If a manager does not hit his budget numbers, then at the very least he looks bad, but the manager may end up in a situation where he is looking for a new job.

This can be unfair. If the warehouse manager is not using cost per unit metrics, he can end up not hitting his budget, despite achieving targeted levels of labor productivity. It costs more to pick mixed-case pallets than pallets, and more to pick cartons or individual units than mixed-case pallets. If the company’s order profile changes, a warehouse manager that uses simplistic budgeting can look bad.

In contrast, visualize a manager that forecasts “We will do this many pallet picks, which will cost this amount, and we will pick this many mixed pallets, which will cost this amount, and we will do this many each picks, which will cost this amount.” At the end of the year, if the manager has exceeded his budget numbers, he can look at the actual number of pallet, mixed pallet, and carton shipments and justify his performance. Further, the trend is toward more frequent but smaller shipments. Order profiles are unlikely to change in ways that will make a warehouse manager look good.

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