Warehousing costs can have a significant impact on a company’s profitability. As businesses strive for leaner operations and cost optimization, it’s crucial to understand how warehousing activities relate to the cost of goods sold (COGS). If you are a retailer or a manufacturer, you might be wondering how to measure the efficiency of your warehousing operations and how they affect your cost of goods sold (COGS). One way to do that is by using the Warehousing Cost to COGS KPI, which is a ratio that compares the total warehousing cost to the total cost of goods sold in a given period. This KPI can help you evaluate how well you are managing your inventory, storage, and distribution processes, and how they impact your profitability.
What is the Warehousing Cost?
Warehousing cost is the total amount of money spent on storing, handling, and moving goods in and out of your warehouse. It includes expenses such as rent, utilities, labor, equipment, maintenance, security, insurance, taxes, and depreciation. Warehousing costs can vary depending on the size, location, layout, and design of your warehouse, as well as the type, quantity, and value of your inventory.
What is the Cost of Goods Sold (COGS)?
Cost of goods sold (COGS) is the total production cost of all the products you’ve managed to sell in a specific period. It includes raw materials, labor, overhead, packaging, and shipping expenses. COGS can vary depending on the volume and mix of your sales and the efficiency and quality of your production processes.
“There are two kind of companies-those that work to raise prices and those that work to lower them”
How to Improve Warehousing Cost to COGS KPI?
There are several ways to improve your Warehousing Cost to COGS KPI and reduce your warehousing expenses relative to your COGS. Try Optimizing the following to reduce the expenses
By keeping optimal levels of inventory in your warehouse, you can avoid overstocking or understocking issues that can increase your warehousing costs and affect your sales.
Warehouse layout and design
By arranging your warehouse space and equipment in a way that maximizes storage capacity and minimizes movement time and distance, you can improve your warehousing efficiency and productivity.
Warehouse processes and procedures
By standardizing and streamlining your warehouse operations such as receiving, put-away, picking, packing, and shipping, you can reduce errors, delays, and waste that can increase your warehousing costs.
Train and motivate your warehouse staff
By providing adequate training and incentives for your warehouse workers, you can enhance their skills, performance, and satisfaction which can reduce labor costs and turnover rates.
How to Calculate Warehousing Cost to COGS KPI?
To calculate the Warehousing Cost to COGS KPI, you need to divide the total warehousing cost by the total cost of goods sold in the same period. The formula is:
The result is a percentage that indicates how much of your COGS is attributed to warehousing. A lower percentage means that you are spending less on warehousing relative to your COGS, which implies higher efficiency and profitability. A higher percentage means that you are spending more on warehousing relative to your COGS, which implies lower efficiency and profitability.
Example of Warehousing Cost to COGS KPI
Let’s say that you are a retailer that sells clothing online. In the last quarter, you had the following data:
- Total warehousing cost: $50,000
- Total cost of goods sold: $200,000
Using the formula above, you can calculate your Warehousing Cost to COGS KPI as follows:
Warehousing Cost to COGS KPI =50000/200000=0.25=25%
This means that 25% of your COGS is attributed to warehousing. Depending on your industry benchmarks and historical trends, you can evaluate whether this percentage is acceptable or not. For example, if your average Warehousing Cost to COGS KPI in the previous quarters was 20%, then you might want to investigate what caused the increase and take corrective actions.
Warehousing Cost to COGS KPI & OKRs for Optimal Outcomes
Setting forth clear objectives supported by tangible results can provide a roadmap for optimizing costs and ensuring business success. Here are the OKRs to effectively measure and act upon the Warehousing Cost to COGS KPI with initiatives.
Objective: Reduce warehousing costs as a percentage of COGS by 10%
KR 1: Decrease average inventory holding cost from $5 per unit to $4 per unit
Initiative: Implement a demand forecasting system to optimize inventory levels and avoid overstocking or understocking
KR 2: Increase inventory turnover ratio from 4 to 5
Initiative: Reduce lead time for replenishment orders by establishing long-term contracts with reliable suppliers
KR 3: Decrease warehouse labor cost from $10 per hour to $9 per hour
Initiative: Implement a performance-based incentive scheme to reward high-performing workers and motivate low-performing workers
Warehousing Cost to COGS KPI is a useful metric that can help you measure and improve your warehousing efficiency and profitability. By calculating and monitoring this KPI, you can identify and address the factors that affect your warehousing costs and COGS, and optimize your inventory, storage, and distribution processes. Like all KPIs, it’s essential to consider it in the context of the broader business environment and the company’s strategic objectives
Inventory management is a crucial aspect of any business that deals with physical goods. It involves balancing the costs and... Read more
Subscription revenue is the lifeblood of any subscription-based business. It represents the recurring income you generate from customers who regularly... Read more