Warehouse Costing: Cleansheet Analysis

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Warehousing costs at most firms are extraordinarily higher than they ought to be.  Across the world, organizations spend around €300 billion annually on Warehouse Management.  With the boom in online retail stores and the increasing complexity of Supply Chain Management, this spending is going to surge further.

The leadership at these organizations understands that they should spend less on Warehousing operations, but is not aware of the real costs associated with it.  Most leaders are unable to tell how much is their human resources cost per facility.

Lack of appreciation of true Warehousing operations costs is one of the main reasons for failure of most Business Transformation programs.  Without this knowledge, the leadership is unable to comprehend where the improvement areas lie and how much value creation can be achieved from those.

Ascertaining these costs warrants a clear approach, which many organizations lack.  Most firms inquire about their operational costs from 3^rd party Logistics (3PL) providers—by soliciting requests for quotations (RFQs).  However, this does not give an idea of what these principal activities really cost.  The most common approaches to Warehouse costing include:

• Benchmarking
• Cleansheet Analysis

Benchmarking

The Benchmarking method uses a top-down approach to analyze costs based on industry benchmarks.  However, accessibility of benchmarks at lower levels is hard to access, since benchmarks available for comparison are predominantly at high levels—e.g., Total Warehouse Cost as a proportion of Cost of Goods Sold.  Industry Benchmarking fails to take into consideration distinct product or service offerings.

Cleansheet Analysis

Cleansheet (or a Bottom-up Analysis) is a more comprehensive method to estimate Warehousing costs.  It is a numerical approach to ascertain precise costs of critical components of Warehousing operations, including facility spread out, workforce, and equipment.  This method facilitates in understanding where the cost exceeds and how it can be eliminated.

The focus of the Cleansheet Analysis is on determining the lowest possible cost of each major element, and comparing it with the actual cost being paid.  Identifying the lowest costs of major elements allows the organization to determine the most problematic areas and confront major cost inconsistencies.

The Cleansheet Analysis comprises of 3 main steps:

1. Ascertain Critical Parameters
2. Perform Bottom-up Calculations
3. Determine Ideal Throughput Metrics

Let’s dig a bit deeper into the initial step.

Ascertain Critical Parameters

The first step of the Cleansheet Analysis entails scoping the Warehousing facility’s configuration, work, team, volumes, and orders.  Specifically, this includes evaluating:

• The workforce, accountability distribution, workloads.
• The actual warehouse activity levels.
• The volumes.
• The volume drivers—number of SKUs, order patterns, order lines.

Interested in learning more about the steps to using a Cleansheet Analysis?  You can download an editable PowerPoint presentation on Warehouse Costing: Cleansheet Analysis here on the Flevy documents marketplace.

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Want to Achieve Excellence in Supply Chain Management (SCM)?

Gain the knowledge and develop the expertise to become an expert in Supply Chain Management (SCM). Our frameworks are based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. Click here for full details.

Supply Chain Management (SCM) is the design, planning, execution, control, and monitoring of Supply Chain activities. It also captures the management of the flow of goods and services.

In February of 2020, COVID-19 disrupted—and in many cases halted—global Supply Chains, revealing just how fragile they have become. By April, many countries experienced declines of over 40% in domestic and international trade.

COVID-19 has likewise changed how Supply Chain Executives approach and think about SCM. In the pre-COVID-19 era of globalization, the objective was to be Lean and Cost-effective. In the post-COVID-19 world, companies must now focus on making their Supply Chains Resilient, Agile, and Smart. Additional trends include Digitization, Sustainability, and Manufacturing Reshoring.

Learn about our Supply Chain Management (SCM) Best Practice Frameworks here.