Cost Efficiency

Warehouse Management

Introduction -- Explanation

The automation of customer services and support operations

especially warehouse management is no longer an isolated subject

reserved for certain facilities managers. It is a general management necessity.

Compeitive pressures push organizations to make every aspect of operations more efficient --

faster, more accurate, and less expensive. Customer requirements are more demanding,

and customers expect that responses to those demands must be rapid and detailed.

Most companies understand, at least in theory, how warehouse management

systems can address these needs, quantifying the return on

investment has often been a problem. Operations, logistics and warehouse

managers usually face these requirements daily and directly; they are challenged by senior management

to prove the ROI for new management approaches and systems.

The calculations in this section help you to make cost analysis of warehouse operations more accessible

and easy. This module provides analysis to the areas where financial improvements occur:

Labor and equipment savings

Worker productivity

Labor savings in data entry, customer services, and management

Reductions in shipping errors

Reduced shipping errors

Reduced inventory

Reduced churn time

Just-in-Time Inventory Levels

Company Information

Install

Cost of

Warehouse Management System

Year

WMS

Warehouse management system implementation year and cost

2002

$450,000

Company Income and Product Volume

Annual Dollars

Returns Volume

Returns in $

Company sales from associated warehousing

$45,000,000

$2,250,000

Company volume of returns

Current

Annual

Company Inventory

Value

Write-off

Company system wide inventory valuation and annual inventory

$4,000,000

$250,000

After savings

10.00%

Inventory Savings

write-off due to factors that the warehousing system can improve.

$3,975,000

$25,000

Values include only those relevant to facilities in question

Warehouse Personnel

Max per

Average

Personnel involved in picking, receiving, putaway, shipping, etc.

Total

Shift

Wages

both total number and number per shift, with wage paid

$15.00

Yearly Total:

$1,050,000

After savings

30.00%

Warehouse hours savings

Material Handling Equipment

Average

$735,000

$315,000

Reduced costs

Average cost of material handling equipment per warehouse worker

Annual Cost

involved in picking, receiving, putaway, shipping, etc. Costs include

$15,000

lease or ownership payments, repairs and maintenance

Yearly Total:

$525,006

After savings

30.00%

Warehouse hours savings

$367,504

$157,502

Reduced costs

New warehouse personnel

Total

Average Wage

New personnel hired per year involved in pick, pack, ship, receive, putaway

$12.00

After savings

30.00%

Increased productivity

and average wage paid

Yearly Total:

$144,000

$100,800

$43,200

Reduced costs

Warehouse Data Entry

Daily

Average

Daily data entry hours spent on warehouse transactions and operations,

Hours

Wage

with average wage paid. Can be reduced with RF Scanners are implemented, etc.

$14.00

After savings

0.00%

Improved data entry

Yearly Total:

$644,000

Reduced costs

Customer Service

Daily

Average

Total personnel involved in customer service activities associated with

Hours

Wage

distribution or warehouse operations

$13.00

After savings

20.00%

Improved productivity

Yearly Total:

$390,000

$312,000

$78,000

Reduced costs

Warehouse Management

Total

Average Salary

Total personnel involved in cycle counting functions

45,000

After savings

25.00%

Improved productivity

Yearly Total:

$225,000

$168,750

$56,250

Reduced costs

Cycle Counting

Daily

Average

Total personnel involved in cycle counting functions

Hours

Wage

$16.00

After savings

25.00%

Improved productivity

Yearly Total:

$160,000

$120,000

$40,000

Reduced costs

Shipping Errors

Per Day or

Per Year

Cost of Error

Total number of shipping errors per day or per year.

500

$150

Also the estimated cost of correcting errors, including expedited

Yearly Total:

$75,000

After savings

75.00%

Improved productivity

shipping costs and personnel time, and customer service, management

$40,000

$120,000

Reduced costs

and accounting

Plus Burden Factor

Total Labor Costs:

$2,688,000

$3,763,200

40.00%

Total Labor Savings:

$2,120,550

Total Non-labor Costs:

$775,006

Total Non-labor Savings:

$182,502

Total Costs currently before changes:

$3,463,006

Total hours worked per day:

Weeks worked per year:

Derived total labor hours worked per year:

2,000

Days worked per week:

Days worked per year:

250

Assumptions

Burden Factor

Total employee costs (benefits, overhead, voluntary benefits, etc.)

140.00%

in additional to hourly wages. To use as a factor, 100% is added to the increase percentage.

Inventory counting hours saved

Expected percentage reduction in the number of hours required to perform cycle

25.00%

counting activities. Examples: reduction in travel time, no paperwork to fill out, ect.

Warehouse labor hours saved

Expected percentage reduction in the number of hours required to perform

warehouse activities: receiving, picking, putaway, replenishment, shipping, ect.

30.00%

Productivity increase for first year employees

Expected percentage increase in raining time and employee productivity within

30.00%

first year. Example: reduction in training time, reduced errors for new employees, etc.

Customer service hours saved

Expected percentage reduction in customer service hours directly related to issues

20.00%

involving or caused by warehouse operations.

Management time saved

Expected percentage reduction in management time due to easier access to real-time

25.00%

information, ability to measure performance objectively, solve root causes of problems.

Shipping error reduction

Expected percentage of current errors that will be eliminated after warehouse system

75.00%

is implemented.

Inventory write off reduction

Expected percentage reduction in inventory write-off due to enforced rotation, better

50.00%

inventory accuracy and detailed audit trail (reduced shrinkage).

Reduction in total inventory

Expected reduction in inventory due to higher inventory accuracy, enforced rotation,

10.00%

reduced safety stock, and reduced shipping errors.

Cost of Capital

Current cost of money used to fund additional activities or facilities

9.50%

Gross Margin

Current gross margin percentage for the company

30.00%

Sales increase due to intagibles

Expected percentage of increase in company sales due to better customer service

as a result of implementing warehouse system. Expressed as preventing lost sales.

2.00%

Expected company growth rate per year

Expected percentage of growth for company over the next 5 years.

110.00%

To use as a factor, 100% is added to the increase percentage.

Discount rate applied to net present value

Rate of return for competing investments, use 0% for non-net present value.

15.00%

Payback Analysis

Savings

Labor and equipment savings in put-away, picking and shipping

$441,000

Productivity increase for first year employees

$60,480

Labor savings in data entry

$112,700

Labor savings in customer service

$13,650

Savings in management time

$78,750

Savings in inventory counting hours

$7,000

Savings due to reduction of customer shipping errors

$56,250

Savings in inventory write offs

$125,000

Savings in cost of capital in reduced inventory

$38,000

Gross Profit increase due to intangibles

$270,000

Total Estimated First year Savings

$1,202,830

Net Present Value Based on 5 Years of Use

$3,640,768

$752,830

$1,202,830

Warehouse Management System Costs

-$450,000

Adjusted First Year Savings

$752,830

Proposed WMS System Payback in months

4.49

4.87

58.44

Labor Savings

Number of Persons

Fully Loaded Wage per person or Yearly Salary

Expected Savings

Total Yearly Labor Costs

Expected Costs after installing WMS

&nbs