I received a question a while back from a client, a supply chain director at a process manufacturer. In the process manufacturing industry, storage often does not involve warehouses that store cases and pallets; it involves putting various types of liquids, at various temperatures and pressures, in storage tanks. These tanks might store raw materials at the front end of the manufacturing process, they might store products that are 95 percent complete but just need additives to meet a customer order, or they may contain the final products. My client wanted to understand what sort of asset benchmarking metrics might apply to their raw material tanks.
During the annual budget review, many supply chain executives need to review their assets. If they have bought a piece of capital equipment and have expensed it over ten years, they may be putting money aside so that at the end of ten years they can replace it. However, annually they go through an exercise where they ask themselves if they can get more years out of this equipment. This involves looking at whether maintenance and breakdown costs are rising, and taking into account the opportunity cost of replacing it with equipment that is more efficient. This is when supply chain executives become particularly interested in asset utilization benchmark data. My client made the point that if his company decided it needed a tank and built it, the company would fill the tank, whether this made supply chain sense or not.
This executive asked if there were metrics available that could help him understand whether they had too many or too few storage tanks. I had to think about this for a while. There are no off-the-shelf metrics in this area. But it struck me that a tank is a form of storage, so maybe metrics that are used to manage warehouse asset effectiveness could be useful.
The Warehouse Education Resource Council (WERC) has conducted a warehouse benchmarking survey for five years. In its last survey, of the top ten warehouse metrics that are utilized, three are known as “capacity metrics.” The sixth and seventh most frequently used metrics are “peak warehouse capacity used” and “average warehouse capacity used” (average capacity used/average capacity available over some period of time). Peak capacity is the amount of warehouse capacity used during designated peak seasons. Basically, the calculations reflect the percentage of total storage locations that have goods in them.
The other key capacity metric is the “honeycomb percentage”—i.e. the percentage of total cube space being utilized. So, for example, if you have a warehouse slot capable of holding 100 units and it only holds 20 units, that slot is only 20 percent utilized. When you sum all the slots across the warehouse over some period of time and determine how full they are on average, you get to this total metric. It seems to me that this metric could be adapted to tanks and it would be a particularly useful asset utilization metric for process manufacturers.
The WERC study also defines typical and peak performance. In a warehouse, for example, typical performance on average capacity is between 75 and 82 percent. Best-in-class performance is greater than 92 percent. However, these typical and best-in-class metrics are obviously not applicable to tanks. Process manufacturers need the kind of metrics and benchmark data that are so useful to managers of standard warehousing.
And, of course, when it comes to benchmarking, a company’s performance on a metric can be affected by its supply chain policy choices, and the types of automation it employs. For example, for raw material tanks, some companies might choose to have more tanks to get bulk discounts from suppliers with long lead times. They would not score well on the honeycomb metric. But if metrics are put into context, it is far better to have this data than to be operating blind.
This article is really a call to action. Are you a process industry logistics executive who would like industry-specific storage and warehousing benchmarking data similar to what WERC offers? ARC would like to explore putting together a low cost, industry-specific benchmarking consortium for tanks, factory pack warehouses, or downstream blending operations.
If interested, please contact my colleague John Wason (email@example.com). Also, John is attending ISA Expo 2009 in Houston (October 6th through the 8th) and can discuss this in person with those attending. Further, if you feel this endeavor might be of value, please feel free to forward this posting to your peers at other companies that would also find this of value.