Storage costs

Storage costs: How are they made up?

Many companies find it difficult to consistently dimension and plan the size and dimensions of their warehouse. After all, the storage capacity defined represents something of a 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 volumes. The warehousing costs in individual companies vary accordingly.

proLogistik explains the aspects that characterize storage costs and discusses factors that can be used to reduce them.

Storage costs : What is included?

Operational warehouses are not “just another component” of the company structure, but often the heart of the entire business activity. Goods and other products are stored, processed and otherwise used here. All of this has an influence on the calculation of prices and allocation costs, which in turn determines the margin. The lower the storage costs, the more economically the company can operate.

But what exactly does it show? Typical storage costs include

• Fixed costs for rent and lease, energy costs, depreciation and warehouse and administrative staff
• Variable costs such as consumables (packaging, aids, pallets, etc.), insurance, rejected goods, transportation costs, interest on goods tied up in the warehouse
• Overhead costs, i.e. proportionate costs for the vehicle fleet, software, administration or maintenance

In short, storage costs do not only include the expenses directly incurred there, but also a significant amount of pro rata cost items. It therefore makes sense to allocate the total costs in such a way that hard business figures are produced. More on this in the following paragraph.

Inventory costs as a KPI: inventory cost rate and inventory intensity

In order to be able to calculate prices transparently and taking all relevant factors into account, you need a solid internal cost allocation system. It enables specific designation of storage costs that can be allocated to quantities – 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? One 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 establishing a reference to one pallet space per month. The department in the company that is responsible for this as the “requisitioner” bears these costs. This makes it possible to allocate warehousing costs by originator.

The storage cost rate is therefore used to calculate average storage costs per individual item. This creates transparency and a better feeling for how prices should be realistically calculated.

Formula for calculating the storage cost rate: total storage costs x 100 / average storage value = storage cost rate (in %)

Storage intensity

Another, if equally important, aspect in the calculation of inventory costs is storage intensity. It provides information on the value of the goods in the warehouse. In plain language: How much capital is tied up in the warehouse? Inventories are set in relation to total assets. The larger a warehouse and the greater the number of products, the greater the potential for optimization.

Inventory intensity is an important KPI for inventory costs because it shows how much capital is actually tied up. A comparison can be made over periods using a percentage value.

Formula for calculating inventory intensity: Assets in stock x 100 / total assets = inventory intensity (in %)

How to reduce warehousing costs

Now that we have outlined the basics of the composition of inventory costs, we need to look at ways of reducing costs. It is often a mixture of individual measures that makes sense here. We would like to describe important steps in more detail below:

Regular stock clearance

“Slow sellers” are known from the retail trade. However, they also exist in storage costs. The term then 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. This is influenced by changes in the sector and demand.

Continuous determination of stock levels

The more specific the information you have prepared, 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 therefore a fixed value in the calculation.

Determination of maximum stocks

Experience within the company is valuable when it comes to reducing storage costs. The higher the value of the goods, the more capital is tied up. As a result, it is reasonable to calculate maximum stocks and derive optimum procurement quantities from this.