Understanding and Optimizing Warehouse Costs

As eCommerce business owners, we understand the multitude of expenses that come with running a business. Warehousing costs can be a significant part of your overhead, and it’s crucial to manage them effectively. In this article, we’ll delve into the world of warehousing costs, helping you understand what they entail and providing strategies to reduce them.

What are Warehousing Costs?

A warehouse serves as the backbone of your business, allowing you to store a wide range of products. However, this convenience comes at a price. Warehousing costs encompass various expenses associated with managing the warehouse. These include wages, utilities, equipment handling, and safety management. Keep in mind that the specific costs can vary based on the type of goods stored and the size of the warehouse.

Types of Warehouse Costs

When it comes to warehousing, there are four main types of costs you should be aware of:

Handling

Handling costs dominate warehousing expenses. They encompass activities like receiving, put-away, order picking, and loading of goods. Optimizing your handling processes, such as packaging and package size selection, can help minimize these costs.

Storage Pricing

Even if your goods are stationary, you’ll still incur storage fees. Storage pricing is usually calculated on a per-pallet basis, and it accumulates monthly. These costs include occupying the facility, and if you’re using the entire building, a total occupancy charge.

Operations Administrations

The day-to-day operations within a warehouse come with their own set of expenses. This includes employee wages, IT costs, supplies, and insurance.

General Administrative Expenses

These are indirect costs that are excluded from day-to-day operations. Examples include wages for non-operating staff and general office expenses.

How to Calculate Your Need for Space

To effectively manage warehousing costs, it’s essential to calculate the space you require. Here’s a step-by-step guide:

  1. Stack All Goods Side by Side: Compact your goods to minimize storage space. Measure the stack’s height, width, and length.
  2. Multiply the Length of the Stack: Multiply the length and width of your pallet storage to find the total square footage needed.
  3. Multiply the Square Footage with Height: Measure the highest point of the pallet stacks and multiply it with the calculated square footage. This determines the required cubic foot space.
  4. Divide the Numbers by Size: Divide the square footage by the bay or locker size to determine how many bays you need.

How are Warehouse Costs Calculated?

Warehouse costs can vary based on different factors, including space costs, base rental rates, estimated operating expenses, and additional costs.

Space Costs

You can calculate space costs based on the rate (square feet, cubic feet, or bay) at which you are charged.

Base Rental Rate

Base rental rates can be calculated annually or monthly. Some landlords offer discounts for yearly rentals, so it’s worth exploring this option.

Estimated Operating Expenses

Operating expenses include costs like Triple Nets (NNN) or Common Area Maintenance (CAM) costs. These expenses typically include property taxes, insurance, and maintenance.

Additional Warehouse Costs

Utilities such as water, electricity, janitorial services, and maintenance can add to your warehousing expenses.

Reasons for Increased Warehousing Costs

Understanding why warehousing costs increase is crucial for effective cost management. Here are some key factors:

Real Estate Availability

Low availability of warehouse space, often due to external factors like the Covid-19 pandemic, can lead to increased costs. Choosing distant warehouses might be a viable option in such cases.

Increased Labor Costs

Increased labor costs and labor shortages can significantly impact your warehousing expenses.

Increased Cost of Building

When building materials’ prices rise, new warehouse construction costs increase, leading to higher rents.

Increased Lead Times

Global logistics turbulence can lead to longer lead times, resulting in increased warehousing costs.

Ways to Reduce Warehouse Costs

To optimize your warehouse costs, consider these strategies:

Inventory Visibility

Enhance inventory visibility to streamline picking and packing processes and reduce lead times.

Storage Optimization

Optimize storage by adjusting the physical structure, product placement, and retrieval methods.

Theft Prevention

Implement theft prevention measures to avoid financial losses.

Cross Docking

Consider cross-docking to eliminate the middleman and reduce shipping costs.

Effective Slotting

Categorize and organize inventory to improve productivity.

Optimize Picking Process

Streamline the picking process to reduce time and improve efficiency.

Benchmarking

Conduct benchmarking to identify and rectify inefficiencies in your warehouse.

FAQs

  1. What does the average warehouse cost?
    • The average warehouse costs include base rental and operating expenses, totaling around $1.10 per square foot per month.
  2. Is long-term storage better than short-term storage?
    • Long-term storage fees are typically cheaper than short-term storage fees, but the choice depends on your business needs and customer demands.
  3. Are fulfillment centers a better option?
    • Fulfillment centers offer more functionality but may come at a higher cost. They are beneficial for saving time and shipping costs.
  4. What is the most crucial factor affecting warehousing cost?
    • Wages and space costs are the most significant factors affecting warehousing costs.
  5. How do we ensure the safety of the warehouse?
    • Safety can be ensured through measures such as insurance and safety precautions to protect your inventory.

What’s Next

In conclusion, managing warehousing costs is essential for the success of your eCommerce business. By understanding the intricacies of these costs and implementing cost-saving strategies, you can optimize your profits. If you have any questions or need assistance, feel free to contact us for expert guidance.

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