Wednesday 18th Sep 2019 - Logistics Manager Magazine

You don’t know your warehousing costs? Outrageous…

Suggesting that the readers of Logistics Manager don’t know their warehousing costs might seem outrageous. But I’m not the one making the suggestion – management consultancy McKinsey is.

In an article entitled “Getting a handle on warehousing” costs, McKinsey argues that operations leaders know what they are spending – and are likely to know that they need to spend less, but they don’t really know what their true costs could be.

Malory Davies, FCILT, Editor.

Malory Davies, FCILT, Editor.

Globally, it reckons that warehousing operations cost companies about €300 billion a year – a figure that is only going to rise given the development of extended supply chains and the rise of e-commerce.

Companies “may have put out a tender for outsourced services through a third-party logistics provider. That’s a good way to find out what someone will charge you, but not what the underlying activities truly cost.”

The argument is that most organisations don’t have a clear methodology for determining warehouse costs. In a way, that is understandable: if your business is manufacturing motor parts, that is where the focus of management attention is going to be.

More than 30 years ago, I carried out a small survey of own-account operators asking about their distribution costs (back in those days, we talked about distribution rather than logistics). From the responses it was clear that few organisations were doing much detailed analysis. More often than not distribution was done in the same way that it had been for years and there seemed to be little enthusiasm for change.

The business environment has moved on and become more competitive since then, so perhaps it is surprising that McKinsey calculates that organisations could make potential gains of 15 to 20 per cent if they carried out a bottom-up analysis to determine the ideal cost structure for a given facility.

It argues that once companies understand their biggest problem areas, the next step could be a digital warehouse – creating a “digital twin” of any existing warehouse facility to model the impact of changes to the layout and workflow.

Digital twin technology is the “next big thing” in logistics – according to DHL, which has just produced a report which suggests that it will “change traditional supply chains, with a range of options to facilitate data-driven decision making and collaboration, streamlined business processes, and new business models”.

What is clear is that there is a real need and a real opportunity for organisations to find cost savings in warehouse operations. It must be worth a second look.

McKinsey: Getting a handle on warehousing costs

DHL report: Digital twins in logistics