… the monthly or annual cost of a pallet position in your existing or planned facility? If you haven’t, this little exercise may be helpful in assessing those costs and could provide some useful insight. We have all heard about inventory carrying costs, which are estimated by most accounting and consulting firms to be around 15% – 35% of the average inventory value. The calculation below gives you a more detailed and accurate look at a portion of those costs. The fact is that these costs can vary substantially from facility to facility and from various system designs.
The following example considers four facilities, each with 20,000 Sq. Ft. of warehouse space, and the primary difference being the ceiling height of the building. Buildings with higher ceiling heights allow for taller racking and more pallet positions per racking bay.
Cost Analysis
If all other things are similar, then typically higher ceiling heights will demand a premium lease rate. Operating costs will be similar for all buildings, but utilities will generally be a bit higher with taller buildings. A large portion of the repairs and maintenance costs include maintaining the racking system and the material handling equipment, which will be relative to the total cost of the equipment. Other R&M costs such as maintaining the floors, lights, and general cleaning will be relatively similar for each facility.
As the examples show, the higher ceilings allow for substantially more pallet positions within the same footprint. A uniform 61 inch beam spacing was used for each layout, consisting of a 54” high pallet, with 3” spacing between the pallet and the beam, and using a 4” high beam. We have assumed that the entire space has been maximized for pallet storage using a standard single deep selective racking system. For this exercise, the most important consideration will be the number of pallet positions that the facility and the racking system provides.
Besides occupancy costs, the depreciation cost of the required equipment must be considered. To calculate the cost of the racking system we have assumed a standard cost of $65.00 per pallet position. We have used this constant factor for easier comparison purposes, however taller racks may be a little more expensive, (per pallet position), depending on the load requirements. We have included more material handling equipment for the facilities with greater pallet positions and you can expect the equipment to be more expensive in order to access higher pallet positions. For simplicity, depreciation costs were calculated on a straight line 10% basis. If the equipment is being leased, then these numbers could be used instead.
The Total Fixed Costs are then divided by the Total Pallet Positions, providing an annual cost per pallet position, where the monthly cost is extracted from. The monthly cost per pallet position is useful for analyzing your business and your options.
1. What if you were to allocate these storage costs to your inventory?
a. When you consider the cost of storing product, are you saving when you buy in bulk and store product for several months?
b. Do you have obsolete or slow moving inventory that is costing you money?
c. Are you considering the cubic dimensions of your product and the relative storage costs into the margin of your product?
2. If you are looking at new facilities, how do your costs compare for each? Some of our clients are calculating their real estate cost on a per cubic foot rather than strictly on a per square foot basis to consider ceiling heights.
3. Are you maximizing your current facility heights or have your operations sprawled?
4. Can you extend the height of your racking, or adjust beam levels to accommodate more pallet positions?
5. Can you consolidate your operations to achieve a lower cost per pallet position?
6. Do high density storage options make sense for your facility, where you can get more pallet positions into a smaller space and consolidate existing space, or prevent expansion or a move?
Higher is not always better. From the above example, it may seem that the higher the building the better your cost structure will be, but this is not always the case. The marginal premiums associated with buildings with higher ceilings typically results in a lower average cost per cubic foot, however, there are several variables working together in this calculation and the results can vary when your actual numbers are used.
The facility itself may prevent you from maximizing the cube utilization. Ceiling obstacles, sprinkler systems or lack thereof, permitting issues, floor slab capacity, and column patterns can significantly limit the total storage capacity. The size and weight of your pallets and your SKU distribution will also have an impact on the system design and your ability to maximize the space.
Your choices in storage and material handling equipment, combined with the layout, will not only affect your capital costs and depreciation expense but also have implications on the time and labour costs to access the storage locations when picking and putting away product. The cost per storage bin or location is very important however total operating costs and the ability of the design to meet your throughput and customer service requirements must be evaluated.
Contact Us
If you want to examine ways of reducing your cost per storage position, while achieving your throughput requirements, let us know and we would be happy to work with you. If you are considering a move, expansion, or consolidation of your facilities we can work through various alternatives to ensure you are maximizing your efficiency and minimizing your total costs. If you are experiencing a shortage of storage space and do not have the option of expanding or moving, maybe we can help. Contact us for a no-obligation discussion of your needs.