STORAGE COSTS IN MODERN LOGISTICS

One of the main characteristics of modern logistics is its increasing operational complexity. Increased product variety, more frequent deliveries, shorter service times, less tolerance for order picking errors and pressure to reduce inventory levels are some of the main drivers of complexity. One of the consequences of this phenomenon is that some components of the logistical cost, until then not very significant, such as storage, start to have an important participation. All of this has pushed companies towards a continuous process of modernization, both technological and managerial. In the search for managerial modernization alternatives, an important question that must be asked is: how are these costs being allocated, which in the past were of little relevance, and which are becoming more and more important every day?

The inability to answer this question can generate a serious problem in the credibility of accounting information in companies, with negative effects on the quality of the decision-making process. A good example of this problem arises when deciding whether or not to continue a particular product line based on its profitability. A wrong allocation of storage costs tends to generate a cross-subsidy, which distorts profitability and can result in a wrong decision on that product line

The need for a more accurate and reliable allocation has the counterpart of greater sophistication and accounting complexity. This signals the need to be careful when deciding on the level of detail / sophistication of the costing system. Simplifications can and should be made so that the costing system does not become too expensive and laborious. Greater attention must be paid to the choice of allocation criteria and their periodic reviews, which can bring significant benefits with little cost to the company.

Faced with this demand for more reliable information, this article will address the costing of activities related to storage, proposing effective ways of allocating costs to products and customers.

Just as a reminder, it's important to clarify the difference between inventory and storage costs. Storage costs will be considered those that refer to the packaging of goods and their movement, such as: warehouse rent, labor, depreciation of forklifts, etc., while costs related to goods, produced or sold, That said, how the financial cost of stock and the cost of losses – due to theft, obsolescence and damage – will be dealt with on another occasion as they are classified as stock.
THE CURRENT FUNCTION OF STORAGE AND THE ROLE OF THE COSTING SYSTEM

The storage activity has not been treated with due attention by the costing systems, not even by the management systems. Typically, these costs are grouped into a single cost center and allocated to products, or even customers, based on revenue or sales volume. Even companies that use the ABC costing system (Activity Based Costing) tend to allocate their storage costs based on billing or volume criteria.

This allocation practice has always generated distortions. However, in the past, these costs were not as relevant and therefore did not have a great influence on the final result.

Before proceeding with costs, it is important to remember why the storage activity has been gaining importance and its costs becoming more relevant, both in industry and in retail.

Industries have followed the market trend of expanding the range of items produced and increasing the frequency of deliveries. As a result of these transformations, there is an increase in the number of orders processed and a change in the profile of these orders. Large orders are being replaced by many small orders with a large variety of items. Thus, it becomes necessary to invest in new technologies for management, movement and separation of materials, such as WMS systems, stacker cranes and automatic or semi-automatic picking systems.

In retail, storage costs are also quite representative. There is no doubt about the relevance of costs associated with shelf space and replenishment of goods. However, these costs are usually not seen as storage costs. In reality, it does not matter if the company considers them as storage or not, but that the same allocation methodology can be used successfully. After all, we are referring to the movement and packaging of goods.

Another strong retail trend is to operate with warehouses that centralize inventory and with the practice of cross-docking, making storage costs more significant, relative to inventory costs, which tend to be reduced in the face of centralization.
In addition to the transformations in the classic industrial and retail storage systems, the need for more accurate information is causing costing systems to fail to meet expectations. The search for greater accuracy of information arises from the difficulty of managing the product portfolio in view of the small contribution margins and the wide variety of items.

To overcome these difficulties, it is necessary that the improvements in the costing systems are the result of the joint effort of the warehousing personnel with the company's controllership. It is essential to combine knowledge of the operation with a solid conceptual basis on costs. The cost measurement and allocation methodology, which will be presented, can be used not only for the development or improvement of a costing system, but also for cost calculations in specific situations in order to support medium and long-term decisions.

STORAGE COSTS

The vast majority of storage costs – rent, labor, depreciation of facilities and handling equipment – ​​are fixed and indirect. These two characteristics make it difficult, respectively, to manage the operation and to allocate costs.

The high share of fixed costs in the storage activity means that the costs are proportional to the installed capacity. This way, it doesn't matter if the warehouse is almost empty or if you are moving less products than planned. Even so, most of the storage costs will continue to occur, since, for the most part, they are associated with physical space, handling equipment, personnel, and investments in technology.

To make the situation even more complex, it is important to remember that the demand for the storage activity is not constant, neither over the months, nor over the days of the month or week. A clear example of this is the concentration of the expedition in the last days of the month. This tends to lead to capacity oversizing to meet peak days, or, on the contrary, causes the warehouse to operate above its capacity, impairing the level of service – through failures, breakdowns, and delays. Thus, measures that dampen these variations in demand will always be positive from the point of view of shipping. Mainly when the reasons for demand peaks are induced by internal policies such as, for example, monthly sales quotas, invoicing deadlines, lack of a continuous resupply policy with customers, etc.

The fact that storage costs are indirect makes it difficult to allocate them to products and customers, as the allocation, in this case, is carried out through apportionments, leaving them subject to distortions. To minimize distortions it is important that:

• cost items are accounted for according to their function (handling, packaging, administration) and not by natural accounts (depreciation, labor);
• the allocation is consistent with the actual consumption of resources in the operation.

STEPS FOR STORAGE COSTING

Regardless of the degree of sophistication of the storage costing system, four basic steps are suggested, which will be developed below.

1. Identify cost items – In this step, you must select the cost items that will be considered. For example: forklift operators, supervisors, forklift depreciation, opportunity cost of forklifts, warehouse rent, rack depreciation, and opportunity cost of racks.

It is important that accounts are not grouped solely according to their nature – such as depreciation, personnel, etc. -, because in this case the allocation of all accounts would be conditioned to a single criterion. Thus, instead of using a single depreciation account, the depreciation of each asset (forklift, rack, pallet, etc.) must be considered separately.

2. Calculation of cost items – Some items, such as salaries, benefits, maintenance, rent and others, are easily obtained through accounting. Other items, such as depreciation and opportunity cost, need to be actually calculated, as shown below:

• Depreciation – according to the managerial view, the time used for depreciation should not be the legal accounting time, but the operating time of the asset – how long the company uses a certain asset before replacing it. Thus, to calculate the monthly depreciation value, the difference between the acquisition value and the residual value must be divided by the time (n months) that the company will use the asset (before changing it).
• Opportunity cost – does not exist from an accounting perspective, as there is no expense associated with this cost, but rather a loss of revenue caused by the immobilization of capital. A company that has its own warehouse does not have a lease account. However, there must be a cost item associated with the opportunity cost of the property, which represents how much the company would earn if it sold it and invested the capital in other projects, or if it decided to rent it. To calculate the value of the opportunity cost, the value of the asset must be multiplied by the company's opportunity rate – which normally varies between 10 and 20% per year. It is worth pointing out that, for an asset such as a forklift, both the depreciation cost and the opportunity cost must be considered.

3. Group cost items related to each function (or activity) – The purpose of grouping costs into functions or activities is to facilitate the allocation of these costs in the next step. For example, the movement function will gather cost items from different natural accounts – personnel, maintenance, depreciation – but which are all directed towards the same objective, movement of materials, and thus can be allocated by a single apportionment criterion, such as number of shipped pallets.

When the operation is relatively simple, the costing system can be developed considering the basic functions of the storage activity. In the case of a more complex operation, which moves products with very different packaging or movement characteristics, it may be necessary to subdivide functions into activities. The basic functions that should be considered are discussed below:

1. a) The movement of materials includes the receipt and dispatch of goods. Thus, all cost items related to these activities should be grouped in this function, such as costs associated with forklifts, stacker cranes, forklift operators, handling supervisors, etc.
2. b) Product packaging refers to product storage. It should be borne in mind that this function does not include movement. This function refers only to the fact that the product is stopped in stock. In this case, the product would be consuming space, not only in a warehouse but also in a pallet, container, rack. Thus, costs related to space, such as rent or opportunity cost of the warehouse, and items related to assets that are being used in the packaging of the product, such as pallets and racks, would have to be grouped together.

In the case of products that require special packaging, such as those that must be kept in a refrigerated environment, the costs of refrigeration equipment and electricity consumption must also be considered.

Because the packing function is directly linked to the physical space, the cost group of this function is commonly called the space occupation cost.

1. c) The function of managing the flow of goods will actually add costs that do not concern the previous functions because they have a more administrative character, such as costs related to the manager, the secretary, the telephone, office supplies, etc. .
2. Allocate costs to each product or customer – Once grouped according to functions (or activities), it is necessary to allocate these costs to products. Customer costs can be obtained from the consumption mix of each customer, always paying attention, of course, to any special conditions that the customer may require.

Below, some allocation criteria for each of the three basic functions of storage are discussed.

1. Moving material – the costs of this function, even if indirectly, refer to the volume of shipped cargo. It is important to understand what is actually the resource consumption generator. In the example of a warehouse where all merchandise is palletized, the number of pallets shipped for each product would be a good apportionment criterion for these handling costs.

In this case, one can imagine that the consumption of resources is due to the movement of the forklift, which always carries a pallet, regardless of the quantity of products or boxes contained therein. Thus, it is possible to obtain the cost of each movement by dividing the total cost associated with the movement by the sum of pallets received and shipped.

It is important that all incoming and outgoing pallets are considered, even those that are not complete, because, as already mentioned, the handling work is practically the same whether the pallet is complete or not. Once you have the cost of each movement, you just need to check how much of each product was moved – in this case, how many pallets were received and shipped – and multiply this value by the unit cost of moving pallets.

If that same warehouse dispatched not only pallets, but also single boxes, it would be interesting to separate the movement function into activities, such as: reception, pallet shipping and single box shipping.

1. Packing products – the costs of this function usually give rise to allocation distortions, since these are not proportional to the shipped volume. One product line may be taking up space in the warehouse and not having any units sold, while another may occupy relatively little space and have a high volume of sales.

Box 2 presents the main steps for allocating the costs of packaging in a structure of racks and pallets. In cases where products are not arranged on pallets or racks are not used, the process is quite similar. However, in these cases, the storage limit for each item per square meter must be considered, which is a function of the size and maximum stacking of each product.

Box 2 indicates that for a given cost associated with the occupation of space, the allocation to each product is made according to two factors: turnover and the space occupied by each product:

• the smaller the space occupied by the product, the lower its unit occupancy cost;
• the greater the turnover of the product, the lower its unitary cost of occupying the space.

1. manage the flow of goods – the costs related to warehouse management are usually not related to the volume of cargo shipped, nor to the quantity of products in stock, but rather to the number of processes carried out. In this way, this cost can be allocated according to the number of orders (or notes) for receipt or dispatch.

It is important to note that the allocation of costs for this specific function will vary greatly depending on the company, with the participation of the area executive being paramount in defining the criteria for this allocation.

TENDENCIES

If today the storage activity already has a much greater importance than a few years ago, the trend is that for the next few years, this activity will become even more expressive. E-commerce (electronic commerce), which is a worldwide trend, is already starting to develop here in Brazil. Faced with this reality, delivery orders will become even more fragmented, requiring greater competence in the storage process, especially with regard to the separation of materials. On the other hand, the tight contribution margins will continue to be a reality, making the accuracy of cost information increasingly important.