Skip to content Skip to sidebar Skip to footer

Reduce Storage Costs in 10 Steps

storage-warehouse

High storage costs due to high stock levels no longer have to be. Initially, reducing storage costs and maintaining good delivery readiness sounds like a conflict of objectives.

A high stock level inevitably leads to higher storage costs. In addition, you tie up Capital that you lack elsewhere than liquid funds. Another unfortunate side effect of increased inventories is the increased risk of lagging and losses.

With optimized warehouse management, costs can be reduced, bottlenecks avoided, and liquidity ensured. In our warehouse costs guide, we explain step by step and clearly how you can keep track of the warehouse and have storage costs under control. To do this, let's start with the basics of storage costs:

What is the definition of storage costs?

Regardless of size, almost every company or service provider has a warehouse. Manufacturing or processing companies must ensure the availability of the various goods and goods.:

  • Raw materials
  • Auxiliary materials
  • Spare parts
  • Operating supplies
  • Merchandise
  • Finished and semi-finished products

The following costs are incurred:

  • Storage space
  • Material
  • Personnel
  • Subsidies and the value of the stored goods

This results in two blocks of costs:

  • Block - Storage costs: Material, goods, rooms, personnel
  • Block - Interest incurred for the Capital tied up by inventory

A further distinction between fixed costs and variable costs is also possible. These differ as follows:

a. Ongoing costs

Ongoing costs, the amount of which is almost constant

b. Variable costs

Amount of which depends mainly on the degree of warehouse use

What types of storage costs exist?

Before you start trying to save everywhere using the lawnmower method, it is better to determine all storage costs first.

These are divided into:

  • Storage costs: Most important examples
  • Personnel: Wages, salaries, social security contributions 
  • Room costs: Rent/lease, depreciation (building and storage facilities), if the applicable interest on invested Capital, maintenance, energy, cleaning, insurance
  • Cost of the goods: Interest on the tied-up Capital, insurance, demolition or obsolescence, shrinkage, damage, if necessary, conservation
  • Costs for subsidies and aids value (depreciation) of contributions, maintenance, repairs, operating expenses, insurance
  • Material: packaging, office supplies

Storage costs – how are these calculated?

Unfortunately, there is no simple formula for calculating storage costs.

Must add the individual elements together. A robust ERP system can help keep track of things by assigning cost centers. Combining this with a clever merchandise management system will always receive critical information about the storage costs incurred. 

The prerequisite for this is always the correct posting of the documents. If you have to do without cost centers, you will receive a rough overview in the income statement, profit, and loss account. Save yourself the trouble of creating a separate account for each area instead of cost centers.

Storage Cost Rate - What is it?

If you have your warehouse management software under control, you can determine your storage cost rate using your storage costs and the average storage value. It is a powerful metric that you should pay attention to.

How do I calculate the storage cost rate?

Let's assume that your storage costs were determined to be $200,000 per year and that you have an average inventory value of $1,500,000 in your warehouse.

Formula Storage = storage costs / average storage value * 100%

Example Calculate storage cost rate:

$200,000  / $1,500,000 * 100% = 13.33%

Your storage cost rate (LCS) is, therefore, 13.33%

How do I calculate the storage costs per item (item)?

If you want to calculate the storage costs per item, the following formula applies.

Formula storage cost rate per article (piece)

Your storage cost rate LKS was determined with a proud 30%. The article microtech01 is currently still in stock and has a cost price of $100 per piece.

Example of calculating the storage cost rate per article:

Storage costs = 30% storage cost rate of $100 cost price/piece = $33.33 storage costs per piece of the article per year.

It is a flat-rate storage cost allocation directly related to the stored goods and proportional to the material value.

If you deal in goods for which the sales price plays a decisive role, you should include the storage costs in the calculation. Strictly speaking, this should always be the case.

If you then notice that you cannot keep up with your competitors, the storage costs are a possible way of reducing costs.

Storage costs and their significance in companies

According to statista.com, 16% of the total costs in German industrial and commercial companies are attributable to logistics. About 8% of this relates purely to storage costs. These values ​​are noticeably higher at around 60 to 80 percent in the balance sheets in the retail sector. 

It is not surprising that a lot of savings potential is assumed here in practice. It is assumed that liquidity increases with falling storage costs. 

With the liquid funds you have gained, you as an entrepreneur can make investments or repay existing credits or loans, which again ensures better liquidity. With lower fixed costs, you can set your sales prices differently and improve your competitiveness.

Storage Intensity: What is it?

Inventory intensity is another crucial key figure, also known as inventory intensity. 

It provides information on how much capital costs are tied up in the existing inventory of raw materials, additional supplies, and semi-finished and finished products. 

The formulas for calculating the storage intensity are divided into these two areas.

The formula for calculating the storage intensity

The stock ratio for raw materials, consumables, and supplies (RHB) = raw materials, consumables, supplies / total assets * 100%

The stock ratio for semi-finished and finished products = semi-finished and finished products / total assets +100%

Calculate storage intensity example:

Reserve ratio (RHB) $29 million / $1,163 billion  * 100% = $2.49

An industry comparison is helpful for the determined value of your storage intensity to have certain meaningfulness. A comparison with values ​​from the past can also show you savings potential. 

We can state that a high storage intensity represents a risk. On the one hand, financial resources are tied up; on the other hand, and goods can spoil or no longer be in demand.

How can storage costs be reduced?

storage-warehouse

To reduce your storage costs permanently and sustainably, we recommend that you use essential "tools." It includes an ERP system or a merchandise management program. In this way, you first determine the inventory and thus also the associated capital commitment costs. A specific systematic approach can't hurt.

Determine inventory and key figures:

  • Check whether there is a need for action
  • Eliminate slow seller
  • Optimize inventory management
  • Optimize ordering

Determine vital critical figures and your inventory

First, determine your current stocks. You can use the values ​​from the last inventory for this. Can't remember when this took place? Then it's time for a new list.

In addition to the purely quantitative recording, the monetary evaluation of the entire inventory must, of course, also be carried out. A manual assessment not only sounds complicated, but it is also. 

In addition, errors in the values ​​of the moving average price and the purchase price tend to creep in here. 

With the ERP system, you are always up to date and receive these values ​​at the touch of a button. To map the process, however, we remain in the manual are:

Storage costs

  • Purchased material: Purchase price for each existing element. Data provide you with price and supplier invoices.
  • Finished and semi-finished products: You can use your cost calculation here. Do you have a cost calculation?

Now you have all the relevant values ​​together. You can now calculate your total storage costs; here is the formula again:

Inventory ratio for raw materials, auxiliary materials, and supplies (RHB) = raw materials, auxiliary materials, supplies / total assets * 100%

and the storage intensity determines:

The stock quota for semi-finished and finished products = semi-finished and finished products / total assets +100%

Is there an acute need for action, or do you have your storage costs under control?

Since you calculated diligently and correctly in the first point, you now have valid data. You now have to put these in the proper proportions. Are the numbers above or below your calculation? Are the values ​​in line with the industry average? If you had to answer both questions because the values ​​are above, you have an acute need for action.

No sentimentality among slow-movers

Before optimizing your warehouse, you should get rid of legacy assets and slow-movers. It may sometimes be painful and expensive, but it provides the necessary overview. 

In your warehouse management software, you can quickly identify parts that have been with you for a long time or whose sell-by date has already passed. We hope you enjoy browsing if you still keep an analog goods receipt and goods issue ledger.

Status of the stored goods 

Possibilities for cleaning life exceeded

Scrapping (special depreciation)

Material with low demand (not moved for a long time), BHD almost reached

Special sale, return to the supplier, recycling in our production

There are different evaluations on the priority list. We believe that you should sell everything that is still for sale. However, it would help if you also considered the taboo subject of scrapping.

Carrying out an ABC analysis

The slow movers are gone; you have successfully created the basis for optimization. Congratulations, now it's slowly getting down to business. 

The optimization of your inventory management follows this. 

With this measure, you ensure that constantly required goods and goods are available at all times and that this does not degenerate into excessive stocks that cost you money again. 

You receive the reports necessary for the ABC analysis using ERP software or merchandise management software. In simplified terms, the process can be described as follows:

  • Class A: High-quality/high-sales (20% of the material = 80% of the total value)
  • Class B: Average/medium sales (30% of the material = 15% of the total value)
  • Class C: Low-value/low Sales strength (50% of the material = 5% of the total value)

The material is weighted differently by being divided into ABC classes. It gives you, as an entrepreneur, meaningful information about whether procurement or storage is economically favorable or uneconomical.

Once priorities are clear, you can focus on improving the inventory of Class A items. You can then take care of class B and C goods.

Needs-based inventory management

It is a real Herculean task, and not a few have failed. A sensible implementation is almost impossible without IT support. 

It would help if you had the following values:

Shortage

Replacement lead time 

Consumption, average, and a maximum possible stock depending on the weighting, space, or value

From the previous paragraph, you remembered that you primarily take care of class A parts. 

As described, the task is complex. For one thing, you must:

Avoid non-availability of the article

Also, prevent excess

stock And calculate the correct reorder level

The formula for reorder level:

Reorder level = daily consumption * delivery time + minimum stock

As a word exercise: A class, A article from your stock, has a consumption per day of 20 units. The report is on its way for ten days until it is put into storage and you have determined the required minimum stock with four teams.

Calculation of the reorder point:

20 units of the reorder point * 10 days delivery time + 4 units planned minimum stock = 204 Class A units

In daily work, you have to reorder as soon as the reorder point falls below 204 units. Please choose the minimum stock so that you can react to rapidly changing requests and bottlenecks or imponderables. An ERP system can also provide support here.

Inventory limit for Class A, high-priced items

It is where one of the most significant savings opportunities lies dormant—the reduction of goods that have a high purchase price. 

However, if these are in high demand, they can only guarantee permanent availability by short delivery times or needs-based delivery. The phrase "just in time" has also proven its worth here.

Improve your ordering processes

Up to this point, we have already done a lot. We determined the reorder point, carried out an ABC analysis, and set inventory limits for high-priced parts to reduce your storage costs permanently. The next issue revolves around your ordering processes. 

The fact is, every order generates costs at different points in the company. The same applies to delivery. Therefore, you have to ask, do you know your optimal procurement quantity?

It can be calculated using the following formula (a pocket calculator helps!):

The formula for calculating the optimal order quantity

Optimal order quantity = √(2*annual requirement*order costs) / (storage cost rate in % purchase price per item)

In practice, the calculation of the optimal order quantity looks like this follows from:

Your annual requirement for an article is 14,000 pieces. Each order placed costs you 100 euros according to accounting. You have calculated the storage cost rate to be estimated at 15%, and the purchase price per piece is 75 euros.

√(2*14,000 pieces*100 Dollars) / (15% * 75 Dollars) = 498.89 pieces

If you only look at the cost side, the optimal order quantity is 498.89 pieces. In practice, we can almost say goodbye to this ideal. Nevertheless, achieving goals is to be striven for and makes sense. 

What do you achieve with this measure? You reduce the process costs arising from the receipt of goods and purchasing. You can store the determined lot sizes in a clever ERP system and simplify the processes.

In the case of high-priced items, it is essential to note that the optimal order quantity can increase the inventory value involuntarily and contrary to your calculation.

Further measures to reduce storage costs

We have just turned the big wheels to make you and your storage fit in terms of costs. Now let's look at the low-hanging fruits.

Improve your purchasing conditions 

Tedious but effective: Check the prices regularly and actively ask about cost prices or special conditions. Don't wait for your suppliers to approach you here.

Agreeable framework agreements with your suppliers

Experience has shown that the framework agreement strengthens cooperation and lowers costs through improved delivery conditions. You can also benefit from shorter delivery times. Depending on your negotiating skills, you can also formulate the required date according to your wishes and thus keep the inventory low, saving money.

Reduce your insurance costs

With constantly low inventory values ​​and inventories, insurance companies are pretty inclined to adjust the premiums to be paid. It's worth asking. Changing providers might make sense.

Reduce your storage risk

With the first steps, you have optimized your inventory. As a result, you no longer risk items becoming obsolete, spoiling, or even being stolen. However, it would be best if you kept an eye on articles that are susceptible to these factors to react flexibly and in good time.

Optimize the processes in your warehouse – permanently.

It is not a project with a defined end but a process. Try to get a little bit better every day. Examine your transport and movement routes and take care of a logical storage space system. 

Away from the Excel spreadsheet and towards software for warehouse management. We've mentioned it a couple of times before. Above a specific size, nothing works without a powerful ERP and WaWi system.

Conclusion:

The reduction in storage costs offers enormous potential that lies dormant in every company but is often overslept. Can down the cost screw quickly and permanently with structured and standardized processes. 

The benefit, on the other hand, usually skyrockets. Try it out for yourself and tell us about your experiences.

Post a Comment for " Reduce Storage Costs in 10 Steps"