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Benchmarking& Best Practices Increasing Productivity & Warehouse Efficiency Consumer Goods Supply Chain Officer Summit 2012 Shanghai, China1 www.werc.org

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In this session…Learn a step‐by‐step description of an ideal approach to benchmarking.• Why qualitative and quantitative benchmarking go hand‐ in‐hand• Steps to setting up a benchmarking program • Key benchmarking resources in the supply chain industry www.werc.org

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“If you can’t measure it, you can’t manage it.” ~ Peter Drucker3 www.werc.org

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Benchmarking is…“The process of improving performance by continuouslyidentifying, understanding, and adapting outstanding practices and processes found inside and outside the organization. Benchmarking (seeks) to improve any given business process by exploiting "best practices" rather than merely measuring the best performance. Best practices are the cause of best performance. Studying best practices provides the greatest opportunity for gaining a strategic, operational, and financial advantage.” The American Productivity and Quality Center (APQC) www.werc.org

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What we know… Improve Bottom Line Improve Metrics Improve Processes5 www.werc.org

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How do we know? Percentage of Company Revenue Spent on Distribution Activities 0.72% Retail 1.80% 0.90% Consumer Products 4.40% 1.46% Life Sciences 3% 2% Third Party Warehouses 6% 2.46% Wholesale Distribution 4.40% 2.60% Manufacturing ‐ General 6.50% 0% 1% 2% 3% 4% 5% 6% 7% Best in Class MedianSource: 8th Annual DC Measures Study, 2011. www.werc.org

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Quantitative Benchmarking Data is Good… but it is not Good Enough Quantitative Qualitative 7 www.werc.org

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Limitations of Traditional Financial Measures Financial measures tend to be lagging indicators.Leading Indicators (Performance Drivers) Lagging Indicators (Outcome) www.werc.org

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Leading Indicators…• On‐time Shipments• Perfect Order Completion• Dock‐to‐Stock Cycle Time, in Hours• Order Fill Rate• Pallets Picked & Shipped per Hour• Distribution Costs per Unit Shipped• Peak Warehouse Capacity Used• Material Handling Damage• Percent of Orders with On‐time DeliveryThere are hundreds of metrics referenced across industry associations 9 www.werc.org

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The most popular metrics are… Metric In Order of Popularity – 2012 2011 Rank 2010 Rank 1. On Time Shipments ‐ Customer 1 1 2. Order Picking Accuracy – Quality 3 2 3. Average Warehouse Capacity Used – Capacity 2 4 4. Dock to Stock Cycle Time, in Hours ‐ Inbound Operations 5 6 5. Internal Order Cycle Time – Customer 6 10 6. Total Order Cycle Time – Customer 7 Not in Top 12 7. Peak Warehouse Capacity Used – Capacity 4 9 8. Lines Picked and Shipped per Hour – Outbound Operations 8 11 9. Annual Workforce Turnover – Employee 12 8 10. Fill Rate – Line – Outbound Operations 11 3 11. Lines Received and Put Away per Hour – Inbound Operations 9 Not in Top 12 12. Percent of Supplier Orders Received Damage Free – Inbound Operations 10 Not in Top 12 Source: 9th Annual DC Measures Study, 2012. www.werc.org

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Seven Steps to “Successful Benchmarking”… Step 1: Set benchmarking priorities Plan Step 2: Identify the key processes to be assessed Measure Step 3: Collect data ‐ operational and managerial Step 4: Research and compare best‐in‐class performance to internal and external standardsCompare Step 5: Identify gaps and reasons for low performance Step 6: Develop an improvement roadmap and set priorities Act Step 7: Close gaps and improve/refine processes© Supply Chain Visions ‐ Source: WERC’s “Warehouse Manager’s Guide to Benchmarking”, 2nd Edition (2010) 11 www.werc.org

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Plan – Step 1: Set Benchmarking Priorities The best place to start is with a vision statement and values. 12 www.werc.org

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Plan – Step 2: Identify Key ProcessesConsider narrowing down your list of what you would like to benchmark against 13 www.werc.org

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Measure –Step 3: Collect Data – Operational & Managerial • Yourself (other locations) • Customers • Formal benchmarking services • Industry Associations 14 www.werc.org

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Measure Trade Associations Networks Governments www.werc.org

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Compare QuantitativeStep 4: Research & Compare Best‐in‐Class Performance2012 WERC DC Measure Report… 16 www.werc.org

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Compare Qualitative17 www.werc.org

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Compare – Step 5: Identify GapsWith process standards you can rank selected processes against the standard and identify the process changes required to achieve the target • Scoring of the Receiving Inspection Process is Assessed as Inadequate Practice • Review Process Attributes and Score Each Process Group Source: WERC’s “Warehouse Manager’s Guide to Benchmarking”, 18 2nd Edition (2010)

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Compare Step 5: Identify Improvement RoadmapWarehouse & Fulfillment: Gap Analysis Process Poor Practice Inadequate Practice Common Practice Good Practice Best Practice Gap Rank 1 2 3 4 5Receiving & InspectionMaterial Handling & PutawaySlottingStorage & Inventory ControlWarehouse Management SystemsShipping & DocumentationPicking & PackingLoad Consolidation & ShippingSource: WERC’s “Warehouse Manager’s Guide to Benchmarking”, 2nd Edition (2010) 19 www.werc.org

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CompareWarehouse & Fulfillment: Road Map Rating Tool Cost/Performance Process Strategic Impact Impact Total Rating GapReceiving & Inspection 6Material Handling & Putaway 6Slotting 4Storage & Inventory Control 5Warehouse Management Systems 5Shipping & Documentation 2Picking & Packing 6Load Consolidation & Shipping 4 High Impact High Gap Medium Impact Medium Gap Highest Priorities in Red Secondary Priorities in Green Low Impact Low Gap Source: WERC’s “Warehouse Manager’s Guide to Benchmarking”, 2nd Edition (2010)

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Compare Step 6: Identify Improvement TargetsWarehouse & Fulfillment: Gap Review Process Poor Practice Inadequate Practice Common Practice Good Practice Best Practice Gap Rank 1 2 3 4 5Receiving & InspectionMaterial Handling & PutawaySlottingStorage & Inventory ControlWarehouse Management SystemsShipping & DocumentationPicking & PackingLoad Consolidation & Shipping Source: WERC’s “Warehouse Manager’s Guide to Benchmarking”, 2nd Edition (2010) 21 www.werc.org

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CompareStep 6: Identify Improvement Targets Major Twelve Key Metrics Disadvantage Typical Advantage Best in Class Opportunity On time shipments Customer Metrics Internal Order Cycle Time Total Order Cycle Time Dock to Stock Cycle Time, in Hours Fill Rate ‐ Line Operations Metrics Lines Received and Put Away per Hour Percent of Supplier Orders Received Damage Free Lines Picked and Shipped Per Hour Average warehouse capacity used Capacity and Quality Order Picking Accuracy Metrics Peak Warehouse Capacity Used Annual work force turnover Employee Metrics Productive hours to total hours 22

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Act – Step 7: Close GapsWarehouse & Fulfillment: Final Initiatives Process Poor Practice Inadequate Practice Common Practice Good Practice Best Practice Gap Rank 1 2 3 4 5Receiving & InspectionMaterial Handling & PutawaySlottingStorage & Inventory ControlWarehouse Management SystemsShipping & DocumentationPicking & PackingLoad Consolidation & Shipping Highest Priorities in Red Interim Target 23 Secondary Priorities in Green www.werc.org

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Act – Step 7: Close GapsSetting Targets Benchmark 98% Half Life Theory Interim Goal 95% Current Performance 92% The half‐life theory suggests that an interim goal should be selected when there is a large gap to close Interim Target 24 www.werc.org

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Benchmarking Challenges A study by Penn State found several key challenges among companies trying to benchmark • Accurate/comparable data is the biggest barrier • Implementing results • Comparable processes • Available resources • Standard definitions • Clear Goals for benchmarking • Willingness to share • Finding the right partner • Senior management support www.werc.org

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Best‐in‐Class Companies Are Like Decathletes Top ranking athletes across a set of events will: Decathletes • Accumulate the most points among all events • Win some events, but not all • Know their own strengths and weaknesses • Know the strengths and weaknesses of competitors • Focus training first on events that match their relative strengths & events which they feel they can or must win • Spend remainder of training time and energy on the remaining events to assure they are minimally competitive in all events Top ranking companies across a process will: Best‐in‐Class • Beat competitors in most areas, not all Companies • Not be best‐in‐class in every performance category, but will win in areas that match their strategies and priorities • Know their own competencies, strengths, and weaknesses • Likewise, know the same about their competitors • Spend most of their resources in those areas which in which they must excel (in accordance with competitive knowledge, customer and stakeholder requirements, and business strategies) • Minimally competitive in every performance category Source: Performance Measurement Group www.werc.org

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Attributes of Good Performance MeasuresA Good Measure DescriptionMeasure only what is The measure focuses on key aspects of process important performanceCan be collected Processes and activities are designed to easily capture economically the relevant information The measure and its causal effects are readily available Is Visible to everyone who is measuredIs quantitative The measure provides an objective value of performance The measure conveys at a glance what it is measuring Is easy to understand and how it is derivedBeginner Mistakes: Companies starting to use metrics may leave out one or more of these attributes www.werc.org

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Attributes of Good Performance MeasuresA Good Measure Description The measure makes the proper trade‐offs among Is Process Orientated utilization, productivity and performanceIs defined and mutually The measure has been defined and mutually understood understood by all key parties (internal and external) The measure validates the participation among various Facilitates Trust parties and discourages “game playing” The measure is used to show progress and not data that Is Usable is collected; Indicates performance versus dataMore Advanced Mistakes: Failure to consider all of the above attributes will prevent a company from gaining success www.werc.org

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Going Back to School on MetricsGrammar, Math & History rule when it comes to setting up metrics!  Grammar… • What is the DEFINITION of your metric? Grammar  Do the Math… Math • A metric that does not require math is probably just data History  Know your History…  Past  Present  Future Back to School on Metrics www.dcvelocity.com/print/article/20100915back_to_school_on_metrics/ 29 www.werc.org

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Michael Mikitka, CEO Warehousing Education & Research Council P: 630.990.0001 / mmikitka@werc.org www.werc.orgPresentation Information: www.werc.org/cgsco2012