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

2. Warehouse Costs
Section 9

3. Logistics – Cost factors
Copyright D.G. Richards 2015

4. 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 %
LABOUR 48-60%
SPACE %
Copyright D.G. Richards 2015

5. Cost of Service improvement
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

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

7. 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

8. 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

9. 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

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

11. 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

12. 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

13. 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

14. 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

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

16. 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

17. 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