The profit in warehouse optimization

Ben Franklin is often credited with the statement, “A penny saved is a penny earned”.  

When it comes to Warehouse optimization and Inventory optimization, saving expense is very much part of the profit game.  In fact, if you can save just 2% of revenues in processing your orders, managing your inventory, and improving staff productivity, then you are actually increasing your profitability by 40% or more.  That’s a lot of pennies!

Entrepreneur magazine says that the typical profit margin or gross margin (revenue minus cost of goods) for a wholesale distributor is around 25% (you may be more or less than that, but the principle here remains the same).  Then, from that you would deduct your operating expenses. It is typical that the operating expenses of a distribution company can be 20% or more of sales. That leaves just 5% for the bottom line or net income. In fact, CSI Market, a stock and market tracking service, indicates that the average Net Income, or profit for distribution companies is 2.43% of sales.

For our example here, let’s say that after paying for your product, operating, general and administrative expenses, you are left with a 5% profit.  

Now, let’s say you found a way to save just 2% of sales through inventory optimization or warehouse optimization.  Your profit would go from 5% to 7% for a 40% increase in profits. That’s real cash in your pocket and represents the profit-based value of improving operations.  

If you can implement changes that optimize, the result can be a dramatic increase in profits.

Examples of Warehouse optimization:

What are some of these warehouse optimizations or inventory optimizations?  Here’s a short list:

  • Staff inefficiency in the pick/pack process that increases the cost of the product by the time it takes to get the product on your warehouse shelves and then off the shelf and out the door.  If it’s not a “well-oiled machine”, it’s costing you profit. It’s very possible that with the right process and systems, your staff could manage twice the volume they are currently processing.
  • Errors in the process. Every time the wrong thing is picked, packed and shipped, there is a good chance it will take the profit from the next five or ten sales to make up for it.  Getting it right the first time is vital.
  • Eliminating stockouts.  If you can’t sell it because you don’t have it, or if you have to backorder and a customer cancels, that’s a sale lost and gone forever and possibly a customer that will never return.
  • Expense in the shipping process.  If the process and fees associated with shipping could be cheaper, every penny you save goes to bottom line profit.
  • Time spent on managing your business instead of growing your business.  This is a simple principle of economics. The opportunity cost of time spent on managing the current business is the lost sales that could have been made if the process didn’t demand your attention.
  • Better decision making.  Knowing how much or what sales best and at what profit, helps you make the decisions that produce better profits.  So often, the right numbers just don’t pop out of a spreadsheet.

Is it worth trying to save 2% to increase profits by 40%?  That is what Zangerine is focused on. Helping you turn your warehouse and inventory operations into a profit center that generates a positive monthly ROI.

By Jim Pack