Opportunity costs

What are opportunity costs in logistics?

The distribution of individual product components is associated with a high logistical effort. In industrial production or e-commerce in particular, there are often countless auxiliary or raw materials that need to be kept in stock 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 mathematical “cost” as a result of this decision. However, such opportunity costs are explicitly not part of operational cost and performance accounting.

proLogistik explains the background to various opportunity costs and explains how these can be reduced in the course of warehousing.

Definition of opportunity costs: a significant aspect of warehousing

Any type of cost that is caused by the fact that time or capital could be used for other purposes is referred to as an opportunity cost. This is also referred to as alternative costs, because opportunity costs arise in any case. However, they differ depending on the consideration or decision that is made. The difficulty lies in defining and naming them precisely.

For example, a company’s storage 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 proportion. These are opportunity costs that are incurred solely because the capital expressed in the inventories is tied up here. A common formula for calculating such opportunity costs is: capital costs = average inventory value x imputed interest.

What types of opportunity costs are there in relation to inventory management?

One of the primary goals of warehouse management is, of course, to reduce operating costs and 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 move on to reducing warehousing costs, the main components of logistics must first be outlined.

Procurement costs

All work steps relating to purchasing, supplier selection and order management are included. Depending on the scope of the collaboration, it is possible to grant suppliers access to warehouse stocks in order to ensure a continuous flow of goods based on constantly exchanged status reports. Typical opportunity costs in this context are, for example, higher unit prices due to insufficient purchase quantities from the supplier.

Storage costs

All aspects that are necessary for the smooth functioning of warehouse management are summarized as warehousing costs. Small or inadequately managed warehouses in particular are associated with high opportunity costs, for example because slow-moving items tie up valuable space and capital, inventories are not regularly optimized or ordering processes are not adapted to real demand situations.

Transportation costs

There are frequent price fluctuations along the entire transportation chain, i.e. in the handling of raw materials, supplies and other elements. Caused by external factors such as raw material prices, changing logistics chains or inadequately planned transportation routes.

In short, many aspects can be regarded as more or less relevant opportunity costs. Depending on the design of the warehouse, it is therefore important to focus on reducing these theoretical costs. In the following paragraph you will find selected tips for reducing inventory costs.

Three tips that can significantly reduce warehousing costs

Due to the complexity of the topic, it is difficult to give general tips on how to reduce opportunity costs. We are therefore focusing on warehousing costs, which have a noticeable effect as a result of certain decisions.

Optimize order picking

The order 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 the throughput per picker – and at the same time reduce opportunity costs by choosing one picking method.

Stock Keeping Units (SKU) for stock control

Barcodes are used to enable precise stock control at all times. They are scanned and documented as part of the stock movement. SKU numbers, on the other hand, have an alphanumeric structure, allow colors, sizes and other features to be integrated and can be used in intralogistics in particular. With high-performance warehouse management software, the requirements for higher minimum stock levels and comprehensive availability can be met.

Continuously analyze space requirements

Depending on the distribution of small parts, pallets and the like, tools are needed to handle them properly. The more extensively these warehouse goods are standardized, the more efficiently storage space can be used.