The marginal cost of complexity
- PDF / 1,225,601 Bytes
- 3 Pages / 589.56 x 841.92 pts Page_size
- 38 Downloads / 231 Views
The marginal cost of complexity analysis of picking costs in a warehouse reveals the operational implications of stocking additional products -
Michael Gering Complexity is an important issue in supply chain
laid out so that the items picked would not deviate significantly from the order in which they would be used in the stores. Within these constraints the layout had been optimised to minimise travelling time within the warehouse. The warehouse cost nine
manu geinent; new products, new channels and new customers generate revenue hut also generate cost.
While saies ¡nana gers tend to argue that an
additional product generates 'on top' revenue, operations directors tend to argue that additional complexity brings disproportionate costs, often
million dollars per year to run.
hidden. Resolving such issues involves understanding the marginal cost of extra complexity.
Table 1
Cost Driver
Activity
This article looks at the marginal cost of complexity. lt tises the simple but real example of picking costs in a warehouse to understand the operational implication of a marginal stock keeping unit (SKU) and therefore the implications of complexity.
000 $
Picking trays: normal items 4.478 cases 652 cases Picking trays: small items 626 pallets Replenishing cases: normal
Although the structure costs are sunk costs, the
items
¡na rginal operational cost mas' be calculated. Putting
Replenishing cases: small
u cost on marginal complexity helps operationalise decisions on proliferation.
items Goods receiving Outward inspection
Fixed personnel costs Rent, energy and maintenance
-oo0oo-
Modelling the cost of a warehouse
270 pallets
Volume Cost (000) per driver
15,848
4,942 348
0.28 0.13 1.80
170
1.59
310 pallets 518 210 containers 291 925 fixed fixed fixed 1,545 fixed
0.60 0.72 fixed fixed
9,016
Total
The first step in understanding complexity in a warehouse is to understand the cost structure. This
can be done
using an activity based costing
approach, that is by dividing the cost into segments and by understanding the cost driver associated in
In
Table
I
we see the cost breakdown of the
warehouse in question. Each line represents an activity and against each activity is the associated cost. In the first line we see that the cost per annum of picking normal items is 4478 thousand dollars.
each segment.
The warehouse in question is the central warehouse of a large German grocery chain. It is one of eighteen similar warehouses and, in 1995, had a throughput of just over 500 million dollars per annum with a range of 6500 different stock keeping units. It is split into two sections. one for normai items and a separate picking stage for small items. The warehouse was
The cost driver for picking normal items is the
number of cases to be picked less cases imply less
picking and proportionally less picking costs. Dividing the cost of picking by the number of cases picked gives a factor of 28 cents per case picked. Picking small items from the separate
29
picking stage cost 652 thousand dollar
Data Loading...
