What are opportunity costs in logistics?
The distribution of individual components of goods is associated with a high logistical effort. Especially in industrial manufacturing or e-commerce, there are often countless auxiliary or raw materials that need to be kept on hand and used efficiently. In principle, there are several ways of arriving at a decision - so-called opportunity costs refer to a fictitious benefit that is calculated as a computational "expense" as a result of this decision. However, such opportunity costs are explicitly not part of operational cost and activity accounting.
proLogistik explains the background of various opportunity costs and how they can be reduced in the course of warehousing.
Definition of opportunity costs: A not insignificant aspect in inventory management
Any cost that is given by the fact that time or capital can also be used elsewhere is called an opportunity cost. One also speaks of alternative costs, because opportunity costs arise in any case. However, they differ depending on the consideration or decision that is made. The difficult part is to precisely delineate and name them.
For example, a company's warehousing costs are characterized by various types of costs, such as space rental, IT infrastructure and the like. However, so-called capital commitment costs usually account for a significant share. These are opportunity costs, which are given solely by the fact that the capital expressed in the inventories is tied up here. A common formula for calculating such opportunity costs is: cost of capital = average inventory value x imputed interest.
What types of opportunity costs exist in relation to inventory management?
A primary goal of warehouse management is, of course, to reduce operating costs and, concomitantly, to increase operational efficiency. A company managed in this way, in which intralogistics is designed according to modern standards, minimizes costs and other risks associated with warehousing. Before we proceed to reduce costs of warehousing, it is first necessary to present the main components of logistics:
All work steps relating to purchasing, supplier selection and order management are included. Depending on the scope of the cooperation, there is the possibility of granting suppliers access to warehouse stocks in order to ensure a continuous flow of goods on the basis of constantly exchanged status messages. Typical opportunity costs in this context are, for example, higher unit prices due to insufficient purchase quantities from the supplier.
All aspects that are necessary for the smooth functioning of inventory management are summarized as inventory costs. In particular, small or inadequately managed warehouses are associated with high opportunity costs, since, for example, slow-moving items tie up valuable space and capital, inventories are not regularly optimized, or ordering processes are not adapted to real demand situations.
There are frequent price fluctuations along the entire transport chain, i.e. in the handling of raw materials, supplies and other elements. Caused, for example, by external factors such as raw material prices, changing logistics chains or inadequately planned transport routes.
In short, many aspects can be considered as more or less relevant opportunity costs. Depending on the design of the warehouse, it is therefore important to focus on reducing this theoretical cost block. In the following paragraph you will find selected tips for reducing inventory costs.
Finally: Three tips that can significantly reduce inventory costs
Due to the complexity of the topic, it is difficult to give generalized tips on how to reduce opportunity costs. We therefore limit ourselves to inventory costs, which have a noticeable effect due to certain switch settings.
The picker is the link in the warehouse, this is where the efficiency of warehouse handling is decided. Intelligent systems, including pick-by-light or pick-by-voice, can increase throughput per picker - while reducing opportunity costs by choosing a picking method.
Stock Keeping Units (SKU) to control the stock level
Barcodes are used to enable precise stock control at any time. They are scanned and thus documented as part of the stock movement. SKU numbers, on the other hand, are alphanumeric, allow colors, sizes and other features to be integrated and can be used particularly in intralogistics. With powerful warehouse management software, the requirements for higher minimum stock levels and area-wide availability can be met.
Analyze space requirements continuously
Depending on the distribution of small parts, pallets and co., tools are needed to handle them properly. The more standardized these stored goods are, the more efficiently storage space can be used.