Understanding Warehouse Costs and Risks - …

1 VOLUME 24 NUMBER 7 jUNE 20092009 VOLUME24 NUMBER7 JUNE2009 UnderstandingWarehouseCosts andRisksBy ThomasW. Speh, s Note:Presentedhere isarevisionof an articlewrit-tennearlytwodecadesagoby professorTom Speh,of MiamiUniversity, Oxford, ,thepurposeof thisworkwasto makecertainthatthispricingwouldyieldapro fit,andthebuyerwantedto be sure thatno moneywaslefton revisingthiswork,we recognizetheneedto createamechanismthatis usefulforwholesaledistributors,as wellaslogistics serviceproviderswhoare notusingunit understandtheprocess,in or-derto compare priceto actualvalueof ,storage,hasacostpermonth.

2 Handlingmaterialsas theymovein andoutof youarebuyingor sellingwarehouseservices,or simplyprovidingwarehousingservicesforyou rownorganization,themodelsthatarepresent edin thisarticlewillenableyouto isolateandana-lyzethecostsof cost ,buttheycompilethemdifferently. Thegoalof thisarticleis to conveyacostingsystemthatcanbeusedto comparecostsof onewarehousewithanother, oronecompanyto , anycostingsystem,allocationofoverheadcos tsisamatterof judgment,andno specificformulawillbe correctforeveryuser. Thecostmodelsshownherehavebeendesignedto ensurethatno assumethateachuserwillcustomizethemodels ,andmakeindividualjudgmentsregardingallo ca-tionof WarehouseCosts1.

3 Handling. Allexpensesassociatedwithmovingproductin or outof thewarehouseshouldbe thela-borusedto includesreceiving,put-away,orderse-lecti on, alsomayincludelabortore- Warehouse ,repack age,or handleproductin thewarehouse,suchas thedepreciationof equipmentcost,andthecostof fuel,or electricityto truckorrailcars,operatingsupplies, effect,handlingincludesallthosecoststhat areassociatedwith goodsin motion. 2. Storage. Storageexpensesarecostsassociatedwith goodsat rest. Thesecostswouldbe thecostof occupyinga facility, andthesecostsarenormallyaccumulatedeachm onth,storageis an entirebuildingis dedi-catedto an operation, supporttheoperationof ,clericaleffort,informationtechnology, supplies,insurance, Generaladministrativeexpenses.

4 Expensesnotin-curredforaspecificdistribu tioncenterareincludedinthiscategory. Generalmanagement,nonoperatingstaff, ,particularlystorageandhan-dling,canbe influencedby improvementsin increasethenumberof unitsmovedwithoutincreas-inglabor, resultinginahighernumberof unitshandledperhour. Changesin inventory, storagelayoutor equipmentmayenabletheoperatorto expandthenumberof unitsstoredin thesamenumberof cubicfeetof influencedbytherateof ,suchas labor, neverWhatOnlytheCEOCanDoBy Lafley,HarvardBusiness Review, May 09,pg. 54 Mostpeopleconsiderthechiefexecutiveto be acoachand/oraproblemsolver.

5 Theauthor, of thisar-ticle,CEOof Procter&Gamble,viewsthejobdiffer-ently. OnlytheCEOcanlinktheexternalworldwiththe internalorganization,andthatmustbe done, theCEO:Definethe meaningfuloutside. Howdo weconnectwiththeultimateconsumer? thesametime,determinewhatbusinessesyoush ouldnotbe :ABlueprintForSuccessBy Chri s Werling ,Parcel, March2009, pg. an independentconsultant,thisarticleservesa sausefulprimerforimplementationof testing,ensuringthateveryaspectof thesystemfunctionsas , andincludethoseon thewarehouseflooras wellas theofficestaff conversion,theprocessof movingdatato thenewsystem,maybe confirmthateverythingis on implementationresultfrompoorplanning,imp ropertraining, J.

6 S. Millstein and Tim Rou ghton,CSCMP s Sup-ply-Chain Quarterly, Quarter 1/09, pg. thisarticlearelawyersin , enforcementofcontractualrights, , theystresstheimportanceof rec-ognizingthepriceof t askforor agreeto thesedifficulttimes,adisputeresolutionpr ovisionis an importantpartof renegotiatetermsthatwereacceptablepriort o TruckLeasing,By GeneScoggins,InboundLogistics, Apr il 2009,pg. , presidentof NationaLease,amajorproviderof leasedmotortrucks,focusedon transpor-tationequipmentin thisarticle;yetthesameargu-mentsapplyto lifttrucks,andothercapitalequipmentusedi n equipmentleasingincludethefollowing:PCon servecapitalto today s bankingclimate,fi-nancingof equipmentcanbe Chr is Gillis,AmericanShipper, March2009, pg.

7 , basedin NewJersey, avail-ableat JohnBrown,MaterialHandlingManagement,May 2009,pg. reducesalaryexpendituresby 20%,manage-mentelectedto adoptafour-dayworkweekratherthanresortto alayoff. At thesametime, , BattlingBurnoutandRegainingControl. Manyof thesessionswereforumdiscussionsthatper-m ittedworkersto , I waspleasantlysurprisedat howmuchtheyhelpedme copewiththestressof leadingacompanyduringthiseconomicstorm. LogisticsBrightSpotsAmericanShipper, May2009,pg. increasingnumberof logisticsserviceprovid-ersareusingsolare nergy to ge expansesof accessto theexamplesprovidedin thearticlearefromfacilitieson quiteas flexibleas they be re-luctantto eliminateexperiencedworkers,particularly whentheywill be true for forklifttrucksand ,the primaryrisk in control-ling costsis the rate of ,whichmay resultin productdamageand errors,or as the insuranceunderwriterfactorsin the risk ofloss.

8 The warehouseoperatormustmakearealisticesti -mateof risk be expressedasapercentageof shouldbe basedon past reducerisk shouldbe simplestwayto calculatethe risk factoris to in-cludeit in the size of the materialagreementshavealowpercentageof profit,but the unitpricingagreementmustfactorinahigherp rofitpercent-age that reflectsthe substantialrisk of you contemplatethe risk factor, considerthe posi -tion of the buyer. Withatimeand materialagreement,thebuyeragreesto pay for all spaceand labor that is used,whichoftenincludesthe rent forabuildingthat is dedi -catedfor the buyer s use.

9 In contrast,the buyerofaunitpriceagreementpaysonlyfor servicesthat constructioncan be challenging,aswellas the dif ferencebetweenahoteland stay inahotel,the priceper squarefoot of spaceoccupiedis higherthan the cost of pay the premiumbecauseyou wanttheflexibilityof occupyingthe spaceonlyon the daysyouneedit. Whilethe apartmentmaybe cheaper, you pay forit whetheror not it is in buildingblockapproach,usingthe categoriesofwarehousingcostsincludedin this article,can be usedtodevelopan ,all of the costslistedin sectionI, Handling,are ,aportionof thecostsin sectionIII, OperatingAdministrativeExpense,and in sectionIV, GeneralAdministrativeExpenseareaddedto directhandlingexpense,in orderto additionalpercentageofprofitis addedto fig -ure is dividedby the hoursbilled,to convertthe figuresintoahandlingfee per man-hour.

10 Whileyou maynot in-voiceyourcustomersby the hour , the hourlyfees can beusedto checkthe validityof StoragePriceA similarbuildingblockapproachis used,but the re-sult is expressedin squarefeet, ,this storagefee is firststepis to totalall costslistedin sectionII, handlingexampledescribedinthis article,aportionof operatingand generaladministra-tive expensesmustbe added,in orderto ,adesiredprofitmar gin per -centageis addedto createapriceper storagerate per InventoryTurnsBecausestoragecostsare calculatedonamonthlyba-sis, the totalcost of storingan itemdependson how longitwill be in the the past,eachunit receivedfor storagehad an anniversarydatewithrenewalstoragechar -temsweredesignedto simplifythe clericaltask by char g-ingahalfmonthfor itemsreceivedafterthe 15thof themonth,andafullmonthfor everythingin storageon thefirst day of the the sys -tem used.