Table 1: Typical warehouse performance indicators
Measure Type Calculation Typical value
Cost as % ofSales Min (Total Warehouse Cost)/(Overall Sales) 3.82
Cost per Order Min (Total Warehouse Cost)/(Total Orders Shipped) 5.23
Items per Hour Max (Items Picked (Packed))/(Total Warehouse Labour Hrs) 120 pickeditems / hour
Order per Hour Max (Orders Picked (Packed))/(Total Warehouse Labour Hrs) 5 orders / hour
Table 1 shows that Cost per Order is calculated from thetotal warehouse cost. Other metrics are also calculated fromtotal (aggregated) values. If
we look at how the warehousecosts are usually monitored in companies we find that they areeither not monitored at all or are expressed by one
total value. This meansthat most companies cannot know the structure of warehousecosts or manage them effectively. In other words this meansthat
metrics based on total cost values do not allow us to findopportunities for cost reduction.
The procedure of process cost allocation is as follows. First,based on the analysis of activities, sub-processes (SP) areestablished in existing
costs pools (e.g. purchase department).Cost drivers and process quantities for individual sub-processesare simultaneously defined. The data are
obtainedfrom the statistical analysis of repetitive warehouse processes.The next step is summarization of several related sub-processeswhich
exceed cost pools into a few main processes.
Determination of sub-process cost and cost rates is asfollows:
1) Selection of allocation basis.
2) Total cost of cost pool is divided into so-called lmi-processes(they are quantity variable and depend onprocess quantities) and lmn-processes
(they are quantityindependent). Allocation basis is used as a scale fordistribution.
3) Lmi and lmn sub-processes are displayed in the cost pooltable.
4) Lmi sub-processes costs are calculated. The total cost ofthe cost pool is divided between individual sub-processes.Allocation basis is used as
a scale.
5) Establishing surcharge. In this step lmn sub-processescosts are assigned to the lmi sub-processes cost.
6) Sub-processes cost rates are established for lmi+lmn sub-processesas a proportion of the cost of sub-processes andcorresponding process
quantity.
The calculation procedure described in the previous sectionis shown at first in general and then numerically for the sub-processcalled picking.
The individual steps ofcalculation are as follows:
1) Personal capacity is selected as allocation basis. Pickingprocess depends on process quantity; therefore it is an“lmi process”.
2) For example we know (from statistical data) that pickingprocess quantity was 15,000 in the previous time period.The total warehouse cost was
10,000 AED in the sameperiod.
3) Calculation of lmi sub-process cost:
SP lmi cost = (Total Cost)/(Total number of employees)x No. of employees of SP …(1)
4) Calculation of lmi sub-process cost rate:
SP lmi cost rate =(SP lmi cost)/(Amount of SP) …(2)
5) Calculation of lmn surcharge:
SP lmn surcharge = (lmn total cost)/(∑_(i=1)^n▒〖SP lmi cost〗)x lmi cost of SP …(3)
6) Calculation of sum lmi+lmn sub-process cost:
SP (lmi + lmn) cost = SP lmi cost + SP lmn surcharge …(4)
7) Calculation of lmi+lmn sub-process cost rate:
SP (lmi + lmn) cost rate = (SP (lmi+lmn) cost)/(Amount of SP) …(5)
The following two tables are required for calculating the cost rates for the sub-processes.
Table 2: Warehouse sub-processes cost rates – Right part
Number Sub-process Cost drivers Quantity of sub-process No. of employees
1 Receiving lmi No. of received pallets 1800 0.5
2 Put-away lmi No. of put-awayed pallets 2000 0.3
3 Picking lmi No. of picked items 15,000 2.0
4 Packing lmi No. of packed items 1500 2.0
5 — — — —
Sum — 4.8
6 Control lmn — — 0.2
Sum
(lmi + lmn) — — — 5.0
Table 3: Warehouse sub-processes cost rates – Left part
Sub-process cost (AED) Sub-process cost rates (AED)
lmi Surcharge lmn Sum of (lmi + lmn) lmi (lmi + lmn)
1000.0 41.7 1041.7 0.56 0.58
600.0 25.0 625.0 0.30 0.31
4000.0 166.7 4166.7 0.27 0.28
4000.0 166.7 4166.7 2.67 2.78
— — — — —
9600.0 400.0 10,000.0
400.0
10,000.0
Questions:
1. Find out the picking lmi cost.
2. Find out picking lmi cost rate.
3. Find out picking lmn surcharge
4. Find out picking cost
5. Find out picking cost rate (i.e. cost of one picking process).
6. Identify the metrics used to measure the performance ofwarehouse processes.
7. Assume that the warehouse has a Drive-in racking system. Describe (along with diagrams) loading/ unloading sequence of Drive-in racking in the
context of this warehouse. Any realistic assumption in this regard is welcome
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