Warehousing costs: how are they made up?
Many companies struggle to consistently size and plan the dimensions of their warehouse. After all, the storage capacity defined therein represents something like the benchmark for future adjustments. The space requirement must be calculated in relation to the number of rack locations required - which in turn is based on calculations of stocking ranges, storage capacities and the respective parts volume. Accordingly, inventory costs vary from company to company.
proLogistik explains the aspects that together characterize warehousing costs and discusses factors that can be used to reduce them.
Warehousing costs (LHK): What all counts?
Operational warehouses are not "just another component" of the corporate structure, but often the heart of the entire business. This is where goods and other commodities are stored, processed and otherwise used. All this influences the calculation of prices and billing costs, which in turn determines the margin. The lower the inventory costs, the more economically the company can operate.
But what exactly is depicted in it? Typical inventory costs include:
- Fixed costs for rent and lease, energy costs, depreciation and amortization, and warehouse and administrative staff
- Variable costs such as consumables (packaging, auxiliary materials, pallets, etc.), insurance, rejects, transport expenses, interest for goods tied up in the warehouse
- Overhead costs, i.e. costs to be allocated proportionately for the vehicle fleet, software, administration or maintenance
In short, warehousing costs do not only include the expenses directly incurred there, but also, to a significant extent, pro rata cost items. It therefore makes sense to allocate total costs in a way that produces hard business ratios. More about this in the following paragraph.
Inventory costs as KPI: inventory cost rate and inventory intensity
In order to be able to calculate prices transparently and taking into account all relevant factors, a solid internal cost allocation system is required. It enables specific naming of storage costs that can be allocated to unit numbers - and thus become quantifiable. The two most important key performance indicators (KPIs) in this context are explained below:
Storage cost rate
How much does it cost to store the goods? An answer to this question is provided by the so-called inventory cost rate, an essential element of inventory costs. Typically, this is derived from the storage costs, for example by making a reference to one pallet space per month. The unit in the company that is responsible for this as the "requirement bearer" assumes these costs. This makes it possible to allocate inventory costs by originator.
The inventory cost rate is therefore used to calculate average inventory costs per unit. This creates transparency and a better sense of how prices need to be realistically calculated.
Formula for calculating the warehouse cost rate: total warehouse costs x 100 / average warehouse value = warehouse cost rate (in %)
Another, albeit equally significant, aspect in the calculation of inventory costs is the inventory intensity. It provides information about the value of the goods in the warehouse. In plain language: How much capital is tied up in the warehouse? Inventories are measured in relation to total assets. The larger a warehouse as well as the number of products, the more likely this will result in opportunities for optimization.
Inventory intensity is significant as a KPI of inventory costs because it shows how large the capital commitment actually is. Based on a percentage value, a comparison can be made over periods.
Formula for calculating inventory intensity: Assets in stock x 100 / Total assets = Inventory intensity (in %)
How to reduce inventory costs
Now that we have presented the basics of the composition of inventory costs, it is necessary to go through possibilities of cost reduction. Often it is a mixture of individual measures that is appropriate here. We would like to present important steps in more detail below:
Regular stock clearing
What in the retail trade are so-called "shopkeepers", in the case of storage costs form so-called "stock keepers". This refers to goods that have been in storage for a very long time and whose sales or utilization value is continuously decreasing as a result. Changes in the industry and in demand have an influence on this.
Continuous determination of the stock level
The more and the more specific you prepare information, the better a warehouse can be managed. Either by means of an efficient merchandise management or ERP system, or optionally on the basis of an inventory for smaller scales. Inventory costs are thus a fixed value part of the calculation.
Establishment of maximum stock levels
Experience within the company is valuable in reducing inventory costs. The higher the value of the goods, the more capital is thus tied up. It therefore makes sense to calculate maximum stocks and derive optimum procurement quantities from them.