Storage and Warehousing Techniques Warehouse Management, 3rd edition by Gwynne Richards Published November 2017 (Kogan Page) Copyright D.G. Richards 2015

Warehouse Costs Section 9

Logistics – Cost factors Copyright D.G. Richards 2015

Warehouse costs UK Chartered Institute of Logistics and Transport Survey stated that between 24% and 35% of Logistics costs relate to warehouse activity and can be between 2% and 5% of the cost of sales. EQUIPMENT 10 - 15% LABOUR 48-60% SPACE 25 - 42% Copyright D.G. Richards 2015

Cost of Service improvement 60 70 80 90 100 Level of Service (%) The cost of providing a given service is markedly higher the nearer it reaches the ‘perfect service’ (100%). Rushton, Croucher and Baker (2010) Copyright D.G. Richards 2015

Relationship between Inventory and Customer Service Level A basic concept … Copyright D.G. Richards 2015

Distribution Centre Costs Direct labour Operating support Management Admin Cleaning Fixed costs Space Utilities Rates Rent Security 56% 12% 13% 17% 1% Miscellaneous Indirect labour -supervision -hourly rate activities 11% 6% Order picking Replenishment Value added activity Promotions Labeling / Re-boxing 39% Order Receipt Despatch Copyright D.G. Richards 2015

Warehouse Costs Variable costs A Labour Salary, Overtime, NHI, Pension, insurance, PPE, holiday pay, sick pay, training Agency labour B Equipment Fork lift truck lease or rental, depreciation and interest, maintenance, energy Automated equipment depreciation and interest Cleaning equipment, stretch-wrap machines Scanners, voice units, pick to light systems depreciation and interest Pallets and packaging material C Storage Facility - lease, rent or depreciation and interest, rates, taxation, insurance, maintenance, landscaping, cleaning, security, sprinkler depreciation and maintenance, alarms, pest control, waste disposal Equipment – Rack and shelving depreciation, maintenance, inspection D Utilities Heat, air conditioning, lighting, water E Overheads Management, supervision, administration, office equipment depreciation and interest, IT hardware and software rental or depreciation and interest, maintenance, training, communication costs, legal and professional, taxation and licences, travel expenses, insurance and claims, claim losses due to damages, shortages, errors Variable costs Redo diagram Copyright D.G. Richards 2015

Third-party logistics charges Open book Cost transparency plus management fee Gain share Fee based on cost saving – Vested Outsourcing Closed book Storage Cost per pallet per week storage Cost per square foot Handling (RH & D) Cost per carton Cost per pallet Other costs Value adding services (cost per hour) Administration (cost per order) Copyright D.G. Richards 2015

Methods of allocating costs Traditional Overhead allocation by % Activity Based Costing Copyright D.G. Richards 2015

Traditional costing methods Traditional costing models tend to allocate overhead costs arbitrarily. The following table shows a typical warehouse cost structure. Space Costs  1,677,000 Space as a % of total warehouse cost 54% Direct Labour costs  1,200,000 Labour as a % of total warehouse cost 39% Equipment costs  215,000 Equipment as a % of total warehouse cost 7% Total Direct costs 3,092,000 Overheads costs 742,000  TOTAL COST 3,834,000 Overhead as a % of direct cost 24.00% Copyright D.G. Richards 2015

Activity based costing in the warehouse In activity-based costing, systems are designed so that any costs that cannot be attributed directly to a product, flow into the activities that make them necessary. The cost of each activity then flows to the product(s)/service(s) that make the activity necessary based on their respective consumption of that activity. Activity Based Costing looks to allocate indirect costs to processes which accurately reflect the way the costs are actually incurred. This is in contrast to traditional costing methods. When looking to introduce an ABC model you need to have a comprehensive knowledge of the company, its operations and the roles of each of the staff members. This is normally carried out by observing the operation for a period of time and recording how long it takes for each activity. Copyright D.G. Richards 2015

Return on Investment Calculation Gain from investment (or savings made) – cost of investment / Cost of investment x 100 A similar calculation is the payback period. This basically measures how long an investment takes to pay for itself. It does have drawbacks however as it does not properly take into account finance costs and opportunity costs. Opportunity cost being what must be given up (the next best alternative) as a result of the decision. Copyright D.G. Richards 2015

Payback period example During a recent voice picking trial a client calculated that their ROI, by replacing barcode scan picking was approximately 25.4% in the first year with a payback period of nine and a half months. The figures were as follows: Pick productivity savings - £52,800 Increased accuracy - £33,600 Total savings (TS) - £86,400 Investment in voice (I) - £68,900 Therefore (£86,400 - £68,900)/68,900% = 25.4% Payback period = £68,900/£86,400 x 12 months = 9.6 months. This isn’t a totally accurate picture as no account was taken of the extra training costs, effect on the business during the early stages of implementation etc. However this does give the company a reasonably accurate picture of the potential ROI for other similar investments. Example 2 – 50 staff - £120,000 total cost with payback in 8 months through productivity and accuracy Copyright D.G. Richards 2015

Automation v conventional Copyright D.G. Richards 2015 HK Systems 2013

Exercise – Calculation of rates Data Warehouse capacity – 2,000 pallets Average occupancy – 75% Stock turnover – Every 4 weeks Costs Storage costs - £46,800 per annum Handling costs - £140,400 per annum Overhead costs - £100,000 per annum Profit required – 10% per activity Calculate the average stockholding Calculate the average number of pallets received and despatched each week Calculate the handling charge per pallet inbound and outbound inc O/H and profit Calculate the storage charge per occupied pallet per week inc O/H and profit £0.60 storage and £3.60 handling cost. Copyright D.G. Richards 2015

Answer Stockholding - 75% of 2,000 = 1500 2. Stock throughput – 13 turns (52/4) = 19,500 Weekly despatch – 19,500/52 = 375 Total warehouse cost excl. Overhead and profit = £187,200 Overhead allocation – storage = £46,800/£187,200 = 25% Therefore overhead allocation - handling = 75% Handling charge = (£140,400 + £75,000) + 10% = £236,940 RH&D Charge per pallet = £236,940/19,500 = £12.15 Storage charge = (£46,800 + £25,000) + 10% = £78,980 Charge per pallet per week = £78,980/52/1500 = £1.01 Copyright D.G. Richards 2015