In our previous post (read it first here before you read this one), we outlined the proposition that improving your warehouse management via improved delivery capabilities with fewer mistakes will yield reduced expenses. And that happened to be the Aberdeen research study group’s number one competitive pressure. (In the land of flat revenues, reduced costs are king).
There are two key ways to calculate your return on better warehouse management.
(1) You can compare the savings you would incur by reducing enough of your delivery mistakes to move up from the Industry Average or Laggards class of companies into the Best of Class companies.
(2) Or you can look at the cost savings derived from just an improvement – say 1% — in picking accuracy. We’ll look at both…
It turns out that merely improving from Industry Average to Best of Class leads to a substantial cost savings – and the larger the company, the bigger the bang.
Just how big? Let’s just say that they are proof-positive that companies who invest in improving their warehouse management capabilities – that is, their ability to pick, pack and ship better and faster – are setting themselves up for huge cost savings. They not only make the investment cost of automated WMS a no-brainer, but they give themselves a competitive advantage in the marketplace: they not only deliver more accurately … they also get faster turnaround and are in a stronger position to provide more value-added services.
Here’s what I learned, based on Aberdeen’s figures:
To start, let’s look at a shipping error, which we noted earlier runs about $33 on a per piece basis. And let’s look at the impact of that $33 per piece cost of a mistake, comparing just the Industry Average companies (roughly, the middle 50% of companies) to Best of Class. In other words, you’re already pretty Okay in your warehouse management, but you aspire to be Best in Class.
As we noted earlier, the difference between the two classes was a mere 2-1/2% in “on-time complete delivery.”
Now, the Aberdeen survey companies were large in some cases, averaging over 4,000 shipments per day. Starting there, a $33 cost per error on a 2.5% performance gap (all numbers are rounded) yields $3,500 in daily error-costs which, multiplied over a year, produced a whopping $875,000 in added (mistake) costs!
Maybe you don’t ship 4,000 pieces a day. Maybe you do 1,000. But maybe you’re one of those “laggards” – those with the 88.43% on-time complete delivery. Even at only 1,000 pieces shipped per day, if you could move up to Best in Class, your savings would be an equally whopping $700,000 per year!
And finally, even if you only ship a mere 100 pieces per day, and moved from Laggard to Best in Class, you’d recoup warehouse savings in excess of $70,000 – in just one year.
And by the way… if you calculate error-correction costs by the carton, all the figures above are 33% higher. If you calculate by pallet, they are 78% higher. (However, the number of cartons or pallets you ship is likely to be fewer than the number of “pieces” shipped in our examples, so the cost savings are relatively about the same overall.)
We’ll look at the other way you save with better warehouse management in the next post, our third in this series.