Six Effective Measures to Reduce Your Storage Costs

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Many companies want lower storage costs but at the same time want to achieve higher availability of their products. 

Both goals are in a classic conflict: on the one hand, a high stock level leads to high availability and readiness to deliver. On the other hand, it also entails high storage costs. The latter has a strong influence on the liquidity of your company.

So what are the ways to reduce your storage costs? This post gives you six tips on how to do it.

Definition and composition of the storage costs 

Manufacturing companies or trading companies have a warehouse, which ensures the optimal availability of the required goods.

Storage costs include all costs that arise with the storage of preliminary products, the provision of intermediate products, and the finished goods.

The costs incurred in the warehouse can be divided as follows:

• Personnel costs (wages, salaries, and social security contributions for the staff working in the warehouse)
• Price for the storage rooms (rent, maintenance costs, electricity, interest, etc.)
• Prices for stored goods (divided into capital commitment costs, insurance costs, and costs of the storage risk) 
• Subsidy costs (depreciation, maintenance costs, repair costs, operating costs such as electricity or oil, insurance premiums)
• Material costs (packaging material, office supplies)

Furthermore, storage costs can also be divided into fixed and variable costs according to their type. There are fixed costs for salaries and rent, while variable expenses cover stored goods, material costs, and costs for subsidies.

1. Inventory

Create transparency in your warehouse! The first step is your stocks and the capital commitment costs. To do this, determine the current supplies. Carried out an inventory beforehand; you can use this data. In addition to the quantitative recording, a monetary valuation of the stock is also essential.

After taking stock, you should unmask any slow sellers taking up valuable storage space. Please get rid of no-movers, because they don't generate any sales.

Next, comprehensive inventory optimization can be carried out. You want to create optimal availability for all regularly required materials without keeping excessive stocks. Consider the following inventory optimization strategies to create optimal inventory levels.

2. Capital commitment costs

As a rule, the capital commitment costs represent the largest share of storage costs. These opportunity costs arise from tying up capital in inventories, which cannot yet use profitably. The capital costs are calculated by multiplying the average inventory value by the previously defined imputed interest rate.

If you buy goods and raw materials in advance or if your customers are granted long payment terms, you tie up working capital unnecessarily. Shorter payment periods help.

3. Reduce storage risk

Articles in the warehouse can become obsolete, spoil, or even be stolen and can be partially or not at all covered by insurance. An ERP system can help prevent food from damaging by managing batch numbers. It monitors your goods and determines their maximum storage period (even for non-perishable goods).

4. Optimized processes

First of all, we can adjust the delivery system. With the just-in-time concept, the required goods are delivered on time and in the exact quantity to keep storage costs as low as possible. 

Theoretically, the storage costs are lowest with a lot size of 1. On the other hand, this lot size would increase the costs that are fixed for the order and the edition. Since this is not practically feasible, you should carry out a demand forecast to be able to define a suitable lot size for the order quantities of your business.

5. Buffer storage and dropshipping 

Setting up a buffer storage facility has clear advantages: You save costs for your storage capacities and call up the required goods from your supplier when needed. The replenishment lead time is thus reduced to a minimum since it only consists of handling and transport time.

You also save storage costs with the intelligent concept of dropshipping. With dropshipping, you offer products in your webshop without having them in stock yourself or without a warehouse. When your customer submits an order, it is shared with dropshipping wholesalers. It takes over the direct dispatch to the customer.

6. Framework agreements

Also, check whether you can improve the conditions with your suppliers. Can achieve one possibility of cost savings with framework agreements regarding prices, terms of payment, and delivery.

The framework agreement primarily serves to reduce your purchase price. In addition, however, it is often possible to agree on significantly shorter replacement times than with individual orders because the supplier can plan his materials with his sub-suppliers with foresight.

Recommended action to reduce storage costs

The strategies presented can help you to reduce your storage costs. However, you can only achieve optimal warehouse management with software support from a specific size of your company. 

An ERP or ERP system can help here and support you with the following processes:

• The inventory system evaluates and monitors stock
• Simple calculation of the optimal order quantities
• Automatic notification when minimum stores in the raw material or shipping warehouse are reached
• Optimized processes 
• Precise planning of warehouse processes
• Efficient Processes for distribution and warehousing
• Critical supply chain key figures at a glance
• Reduce storage risk 

Protection against spoilage of food/raw materials, etc. Through the administration of batch numbers with the help of an ERP solution or an ERP system, those responsible for the warehouse can make well-founded, number-based decisions to make well-founded, number-based decisions keep storage costs low in the long term.

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