Closing the gap

While the economy continues to hobble along, distribution professionals are taking advantage of the lull to work out any kinks in their DC operations. That much was clear from the results of our 11th annual metrics survey, which showed continuous year-over-year improvements in performance across a majority of measures. What was interesting this year was that it wasn't necessarily the top-performing organizations that were making the gains. In many cases, it was the lowest-performing operations that recorded the greatest strides.

The annual research, launched via an online survey in early January, was conducted among DC Velocity readers and members of the Warehousing Education and Research Council (WERC). Respondents were asked what metrics they use and how well their organizations performed against 47 key DC and warehousing metrics in 2013. (For purposes of analysis, the measures have been grouped into five categories: customer, operational, financial, capacity/quality, and employee/safety.) More than 400 respondents participated in the study, which is jointly sponsored by DC Velocity and WERC with support from Kronos and Kenco Group.

The survey aims not only to determine which metrics are important to DC and warehousing professionals, but also to understand the underlying trends and changes in performance from year to year. In addition, the study provides valuable benchmarks against which managers can more accurately gauge their performance within the company and against their competitors. (The full survey results will be incorporated into a report by Tillman, Manrodt, and Williams and will be available at www.werc.org after the annual WERC conference in Chicago April 27-30.)

WHICH METRICS MATTER MOST?
When it comes to the performance metrics used by DC professionals, the survey once again showed that the top choices don't vary much from year to year. In fact, this year's list of the Top 12 metrics pretty much mirrors last year's list, with minor changes in the rankings. (See Exhibit 1.)

However, there's a longer-term trend taking shape here that's a little worrisome. Research has shown that companies that use a balanced set of measures—financial as well as customer-, employee-, and process-centric metrics—outperform those that use a more limited set of measures. Unfortunately, our research indicates that where the 12 most popular metrics are concerned, the mix has become less balanced over the years—a trend first noted in 2011. This year's study showed that nothing had changed on that front—in both the 2013 and 2014 surveys, nine of the Top 12 metrics were either customer or operational measures.

In fact, since 2011, there's been a marked shift toward the use of operations-focused metrics. (Operational metrics measure internal performance, such as order fill rates and lines received and put away per hour.) While those are undeniably important to DCs, companies should be aware that focusing too much of their attention on operations could lead to adverse effects in other areas, such as costs. For instance, an operation that's intent on achieving a 99-percent order fill rate might be tempted to expedite shipments. While that would go a long way toward keeping customers happy, such a move could send the cost per unit shipped through the roof.

HOLDING THEIR OWN—MOSTLY
As for how facilities are performing against those metrics, the news is generally good. The results from our 11th annual survey show continuous improvements in operational performance across a majority of measures when compared with the 2013 study.

However, there were also some disappointing findings. With three of the Top 12 metrics focused on supplier performance, we expected to see big gains here. But that didn't happen. Performance against supplier-related metrics has either slipped or remained flat. As for why that would be, we have some thoughts. Having spent the past seven years researching supplier and buyer relationships, we believe the root cause of the stagnant performance is "status quo" practices in supplier management. In particular, we think the problems can be traced to a lack of the kind of collaboration necessary to tackle the problems and issues that DCs and their suppliers face.

On a brighter note, "best-in-class" (top 20 percent) and "median" (middle 20 percent) performers showed improvement against more than 70 percent of the metrics. However, even that wasn't enough to earn them a place in the sun. It's the "major opportunity" performers that deserve a standing ovation this year. "Major opportunity" performers—those whose facilities' performance ranked in the bottom 20 percent of survey respondents, and therefore have the most to gain—improved and/or maintained performance against 86 percent of the metrics in this year's study. The biggest gains for that group came in financial and productivity-related measures.

The net result of these strides was to narrow the performance gap between themselves and the best-in-class performers. Exhibit 2 identifies the metrics against which "major opportunity" respondents showed the greatest gains over the 2013 study. As it turned out, when it came to the same four metrics, the best-in-class respondents showed only incremental improvements or actually saw performance slip, further eroding their lead.

FOR EVERY TO, THERE IS A FRO
Although we've come to expect overall performance improvements from year to year, it's important to note that those gains sometimes come at a cost. As companies focus in on a new area, it's all too easy to let performance in another area slide. If managers don't intervene, performance tends to erode ever so slowly over time. And in some cases, the slippage can be significant.

For that reason, the study also looked at areas where performance has slipped the most—the so-called "points of pain." As mentioned earlier, supplier-related metrics took a big hit this year, with performance against the majority of these measures either remaining largely unchanged or dropping. In fact, of all the metrics studied, performance against the "supplier orders received per hour" metric deteriorated the most, with performance by best-in-class respondents dropping over 60 percent from 2013 levels.

Other "points of pain" identified this year were annual workforce turnover, inventory shrinkage as a percentage of sales, and days of finished-goods inventory on hand. (See Exhibit 3.)

IT'S A TOSS-UP
Overall, it appears that while warehouses and DCs at all levels are making performance gains, the race to the top is getting tighter. The "major opportunity" respondents continue to make great strides in closing the performance gap. However, best-in-class respondents are still able to do a better job of managing drops in their performance compared with other respondents. Whether the momentum can be sustained or not, only time will tell.

In the meantime, we invite you to send us your comments, suggestions, and insights into the research and your own use of measures. We can be reached by e-mail: Joe Tillman at joseph.tillman@tsquaredlogistics.com, Karl Manrodt at karl@manrodt.com, and Donnie Williams at donnie.williams@gcsu.edu.