STORAGE AND WAREHOUSING:WAREHOUSE OPERATIONS AUDIT

WAREHOUSE OPERATIONS AUDIT

Critical to the ongoing success of storage and warehousing operations is the continuous analysis and evaluation of the day-to-day operations to identify opportunities for improvement. A formal, periodic audit of the existing operations, conducted in a systematic manner, can be an effective tool for achieving continuous improvements. While a number of specific methodologies can be utilized to conduct such an audit, the following discussion will define one approach that has been successfully used.

7.1. Operations Audit Performance Categories

The operations audit is a process that evaluates 10 categories of performance in the warehouse. Utilizing information on the performance of the warehouse in these categories, a quantitative overall performance measure is determined. The 10 categories assessed by the operations audit are:

1. Customer service

2. Control systems

3. Inventory accuracy

4. Space utilization

5. Labor productivity

6. Layout

7. Equipment methods

8. Equipment utilization

9. Building facilities

10. Housekeeping and safety

The first category, customer service, is a primary concern to the warehouse management and upper management. Rating of customer service is based on how well the warehouse performs against its corporate service goals. These goals may include order-to-delivery cycle, order-to-ship cycle, and out-of-stock occurrences.

Control systems is the second category to be evaluated. This is by definition not just computer controls. Evaluation of controls looks at what paperwork is used, how data integrity is used, what duplication of efforts and paperwork exists, how special requests are serviced, and how effective is the use of computer controls, if available. The assessed need for increased computer control is based on the ability of existing manual or computer-controlled operations to adequately control the ware- house. Some indicators that enhanced computer control is needed are the inability to find material, excessive time required to find material, increased obsolescence, and inefficient labor utilization. In most cases a top-rated warehouse has a real-time, online, order entry system that develops truck loads, batches items for picking, preroutes and preposts picking, and manages labor with real-time instructions via data terminals in the warehouse.

Inventory accuracy is critical because many other categories can be affected by poor inventory control. The rating assigned is based on performance against corporate goals. The accuracy of in- ventory count for all items in total should be considered, as well as the percentage of different items (SKUs, stock-keeping units) found to be accurate in counting. Lack of accuracy on small, inexpensive items can have as big an impact on customer service as on the larger, more expensive items. Item count, dollars on hand, and total part count are all 99% or better, and cycle counting is performed in a top-rated warehouse. Initially, though, the rating assigned should be against the corporate goal, with the goal being improved as consistency is achieved.

Space utilization is calculated for the entire warehouse, based on the storage method being used. The quantity of positions occupied vs. the total available positions is used to calculate the utilization for each type of storage in the warehouse. The utilization of each area, the square footage of the area, and the total square footage of the warehouse are then used to calculate the overall utilization. This overall utilization is compared to the maximum efficient utilization, usually 80–90%, to deter- mine the operating utilization. A review of the projected growth can then be utilized to determine the life expectancy of the warehouse. This life expectancy, the time until operationally full, is used to determine the rating. Typically, a new warehouse takes between 12 and 24 months to design, construct, and occupy. If the life expectancy is less than this time, a low rating is assigned. Also, if the life expectancy is beyond five to six years and growing, a low rating is assigned. Also, if the life expectancy exists, the warehouse space should be reviewed for use by other functions, or for sale.

Labor productivity, category 5, means different things to many warehouse managers. The rating is based on a review of the operating procedures for the warehouse. Each of the major functions in the warehouse—receive, store, pick, and ship—are evaluated. The procedures are reviewed to deter- mine how effectively they support high labor productivity. The existence and use of labor standards is also considered. Effective procedures and proper use of standards is needed for a top rating.

Category 6, layout, is integral to the successful performance of other categories. The objectives of a proper warehouse layout are:

1. To use space effectively

2. To allow the most efficient material handling

3. To provide the most economical storage in relation to costs of equipment, use of space, damage to material, and handling labor

Rating the layout of the warehouse is based on how well these objectives are met. Effective use of space for storage, operational, and support functions is considered here. The transport and storage of material is analyzed to determine how well the layout supports reduced handling costs and in- creased labor productivity.

Equipment methods refer to the appropriateness of the types of equipment and the use of this equipment in the warehouse. At least two major types of equipment exist in every warehouse: storage equipment and handling equipment. Rating is based not on how much each is utilized, but how well. For example, storage equipment should contain the proper items based on physical characteristics (e.g., size, weight, fragility) and activity level. Handling equipment is also evaluated based on these same characteristics, as well as how the equipment interfaces with storage and delivery points.

Equipment utilization is calculated for each group of equipment in the warehouse. This may include forklift trucks, storage / retrieval systems, conveyors, carousels, and automatic guided vehicles. The utilization, together with the variation in demand, is considered to assign a rating. Too high a utilization can be as detrimental as too low. The operational utilization must be considered with the actual run time for a vehicle. A forklift should travel with a load the majority of the time. High use of vehicles traveling empty is not acceptable. In a top-rated warehouse, the utilization is at or just below the operational maximum with the growth to meet the life expectancy considered.

Building facilities are often overlooked areas of the warehouse. Building facilities include:

Dock capacity Lighting

Personnel services (offices, restrooms, break areas, etc.) Fire protection Outside space (truck aprons, service areas, etc.)

The utilization of docks depends on two factors: the turnaround time to load or unload and the arrival pattern of trucks at the docks. Typically, the dock utilization should be 70–80%. Also, the use of proper dock equipment is evaluated. Dock locks or chocks, levelers, and light should be available. Lighting should not only be sufficient to support operations but also be located properly to avoid equipment interferences. Personnel services should be properly located and of sufficient size and quantity to support the staff. Fire protection is rated based on the type of facility, the equipment methods used, and the type of material stored. Outside space is most often overlooked in building facilities. Proper allowances for truck access, personnel access, and other services can affect safety and efficiency.

The last category is housekeeping and safety. There is a strong relationship between housekeeping and safety. Poor safety conditions do not necessarily mean housekeeping is poor, but poor house- keeping always impacts negatively on safety. Housekeeping is reviewed in several specific areas. Material should be put away, not lying on the floor and in aisles. Empty pallets, cartons, or tools should be stored neatly. The warehouse should be clean; the rack should be aligned properly on working aisles. The issue of safety in the warehouse is a direct function of professionalism. The equipment operators should be trained, certified, and periodically recertified. The equipment should be in proper working order. Lighting and other environmental conditions should be proper for the work. Personnel access to high-traffic areas for equipment should be limited. All material must be stored properly. Bulk materials should be stacked properly, not exceeding allowable load heights. Pallets in racks should have the proper amount of overhang and be loaded within the capacity limits. The rating is based on these rules being followed throughout the warehouse.

7.2. Operations Audit Methodology

Each performance category is rated on a scale of 1 to 5, with 5 being the highest. The rating is based on both quantitative and qualitative assessments. The auditor should record specific factors or indi-

cators used to obtain the assigned rating. After rating of each category, determination of overall performance is straightforward. Before the results of the audit are calculated, two additional actions must be performed. The first is to assign weights to the performance categories. Each category varies in importance to a particular warehouse operation. To account for this, a weight is assigned to each category, reflecting its relative importance. The total of all weights is 200, which together with the maximum rating of each category (5) yields a maximum possible score of 1000 points. Second, for a particular warehouse the realistic maximum rating for a category may be less than 5. Due to the warehouse size or activity level, for instance, a computer control system may not be practical. There- fore, a target rating is assigned to each category. In future audits of the same warehouse, this target rating may change to reflect consistent high levels of performance or changes in activity and size.

The category rating and target ratings are multiplied by the category weight to obtain a category score and target score. The total of the category scores is then divided by the total target scores to obtain a performance index (PI). Table 4 shows the results of a typical audit and calculation of the PI. In this particular example, a performance index of 84% is achieved. The performance index is one part of the analysis to determine the warehouse class. The other part of the analysis needed to determine the class is based on the consistency of ratings. The number of categories with a rating of 3 or less is obtained. In the example, this is equal to 3. Table 5 shows how the warehouse class is determined for the example in Table 4.

The first step is to identify a class based on the performance index. In each class, there is a limit to the number of ratings that are less than or equal to 3. In the example, the performance index is 84%, which is a class C, which has a limit of three ratings less than or equal to 3. This warehouse has three ratings less than or equal to three, so the class does not change. Exceeding the number of ratings less than or equal to three causes a drop in class, but the inverse is not true. Class cannot improve over the performance index level achieved.

The results of the audit show warehouse management how well the warehouse is doing and provide a tool to communicate this performance. The breakdown of ratings for each category can be used as a road map to plan improvements. The operations audit should be performed on an annual or semiannual basis to track the results of improvement efforts. Following each audit, new goals for improvement in each category must be set, and plans made to implement required operations changes.