Did you know attaining operational savings of £157,000 in the warehouse has the same impact as adding £4.2 million of new revenue?

We regularly meet with warehouse owners and financial directors. These are multi-disciplined professionals dealing with new contract costing, cash-flow, credit control, payroll, management and audited accounts, and the like. Finance people talk numbers and when asked to look at new systems, or cost, rightly demand quantifiable hard savings.

Which is more likely to happen in your operation – adding £4.2m of new revenue – using the same resources, premises, staff and equipment – or realising warehouse operational savings of £157,000?

Here’s the maths:

A study by Armstrong & Associates* has found that the average warehousing operation Net Margin is 3.7%

• Therefore, to generate an additional £37,000 net margin you need to generate new sales of £1,000,000 (£1,000,000 X .037 = £37,000)
• A study by Intermec** found that annual losses are averaging almost £315,000 due to mis-picks alone. (There are many more cost savings to be found in a warehouse environment other than mis-picks)
• Conservatively, let’s assume a 50% reduction in the mis-pick figure above could be attained so £157,500 (£315,000 ÷ 2 = £157,000)
• Adding this to your net margin would have the same impact as adding over £4.2 million in new sales (£157,000 ÷ .037 = £4,243,243)

The point of the above illustration is that warehouse operations typically work on low single digit margins. Consequently, directing your efforts at cost reductions (error reduction, or operational efficiencies, etc.) will have a dramatic effect on your net margin.

When we explain the numbers, warehouse managers immediately
understand the benefits and potential savings of applying our,
in-house developed, In-DEX WMS Warehouse Management solution.

A tried-and-tested engagement process
Initially we ask whether the operation can quantify and build a business case specific to their operation for a WMS to justify hard savings. This is where difficulties arise. Instinctively they know errors occur, but these are not counted or measured. Often, they do not have the required information on pick rates, or operative inactivity times. Frequently they are not even aware of events caused by sub-optimal process flows, absence of real-time data, lack of real-time system verification – and how these impact on their operation. In other cases, they have been appointed long ago and don’t wish to raise their “dirty laundry” to the owners or managers as they feel they may be reprimanded for not acting sooner.

Implementing systems does have a cost implication for organisations, however, ROI is usually short, meaning some can recognise this in just three to six months, most in 12 to 18 months. This should not distract from performing a quantitative review of warehouse operations but should form part of the business case.

Principal Logistics Technologies specialise in assisting companies in delivering cost reductions and operational improvements.

Do you know your Net Margin and Annual Cost of Errors?
If you know, and are able to share these, then please forward to us and we will generate and send you on a graphical illustrated model.

Don’t know your level of Annual Errors and Average Cost per Error?
If you don’t know these then please contact us and we can assist by arranging a no-obligation onsite Quantitative Review.

Finally, if you believe that things are under control and errors don’t affect your business please order a copy of the 1975 movie, One Flew Over the Cuckoo’s Nest, sit back and confuse yourself regarding the plot!

*Armstrong & Associates, 2015
**An Intermec study surveying 250 senior Supply Chain and Distribution managers in the US, UK, France and Germany and spanning industries including Retail, Manufacturing, Distribution, Transport, Chemicals, Logistics, Pharmaceuticals, Wholesale and FMCG.