Differentiating between Cost-Avoidance and Cost-Savings in Industrial Material Handling
Every month, we receive a healthy number of inquiries about how to reduce costs in a warehouse. Since we serve some of the largest supply chain companies in the Midwest, we are routinely involved in at least a few cost reduction initiatives at any given time and have insight into the topic which we’d like to share below.
Before that, we want to provide a couple definitions to make sure we’re starting off on the same page. Too often, we hear of customers that were led down the path of cost reduction, only to discover that their investment didn’t actually cut ongoing costs. Instead, their investment was misdirected to a future condition that may or may not happen – a case that we refer to as cost avoidance, not cost savings.
- Cost Avoidance – implementing solutions or taking intentional actions that will address risk exposure to potential costs that may or may not be incurred in the future are cost-avoidant in nature. For example, painting pedestrian crossing lines on a warehouse’s floor is a cost-avoidant decision and not a cost-saving decision. No current expenses will be reduced once the crossings are painted – that is, performing this action will not render any savings on an income statement, and is purely performed to avoid potential future Occupational Safety and Health Administration (OSHA) fines.
- Cost Savings – cost saving actions are those that specifically cut current ongoing expenses, and can be readily reflected on an income statement as a reduction in expenditures month to month (or year to year). When we speak about cost saving opportunities, we are pointing to actions that render a net lower expense burden in a relatively short amount of time. For example, switching suppliers in order to obtain a lower ongoing price directly reduces that product’s cost to the business, which is clearly a recognizable cost savings.
As we can see, cost avoidance is a potentiality, not a certainty. In contrast, cost savings are a certainly (barring unforseen circumstances, of course). This is our opening point: customers should always require that any cost-saving initiatives presented by vendors or internal stakeholders can be quantified in actual expense reports.
Low-Hanging Fruit – Cutting Easy Costs in Warehouse Applications
Naturally, managers will want to start with the low-hanging fruit of cost cutting opportunities to render the quickest savings, such as:
- Optimizing Workflows – one of the first tasks that we tackle when helping our customers cut operational costs is to identify and resolve wasteful workflows. These can take many forms and are best analyzed by first establishing operational baselines to measure against. Most often, workflow elements such as mission times, travel distances, quantity of task steps, quantity of touch points, and waiting durations between task steps reveal ample opportunities to optimize waste out of workflows. Solutions can be as simple as changing a worker’s path or breaking up long missions into multiple tasks within manageable zones.
- Right-Size Equipment – most businesses naturally expect growth but often target their equipment purchase decisions at the wrong point in their growth curve. Businesses may over-buy equipment thinking they’ll grow into it, or may under-buy equipment expecting to upsize later. In both cases, short-term efficiencies are sacrificed for long-term possibilities that may not happen as expected (or at all). Businesses would be better served to right-size their equipment to the task at hand, which might include trading in or renting equipment, as well as adjusting operations to better utilize existing equipment.
- Rearrange Wasted Space – over time, most warehouses naturally experience changes to their product profiles in terms of lot volumes, dimensions, and weights. If a warehouse’s storage racking, shelving, or stack layouts are not updated to match these new product profiles, space utilization suffers. When walking their warehouses, managers are encouraged to spot empty bays, mismatched pallet formats, bays with excessive top lift-off clearance, and products that have spilled over into floor piles. Armed with this knowledge, managers can then rearrange warehouse spaces to better align with current needs.
- Perform Proactive Maintenance – maintenance costs tend to be cost-avoidant, as performing maintenance work on a piece of equipment serves as a hedge against unplanned downtime and unexpected failures in the future. While this is true, there are many proactive maintenance actions that can be performed to specifically reduce ongoing expenses, and so should be implemented wherever possible. For example, annual forklift maintenance can combat decreasing fuel efficiency (that would otherwise raise fuel costs), and quarterly dock seal maintenance can combat drafts (that would otherwise increase building HVAC energy costs).
Reaching for Deeper Cost Cutting in Material Handling Warehouses
With low-hanging savings all achieved, managers can now turn to larger cost-saving opportunities in their warehouses, such as:
- Total Warehouse Efficiency – one of the hardest parts of managing a warehouse is balancing cost expenditures to provide a net improvement. Too often, investing in some parts of the business will have a negative cost impact on others, and these impacts are usually not recognized for some time. For example, adding electric forklifts to increase capacity may push total electrical consumption into the next pricing tier, raising utility costs. Instead of succumbing to these issues, warehouse managers can analyze potential projects in terms of total warehouse efficiency, selecting projects for their benefits across the wider business. Managers can partner with material handling consultants to model their operations and derive which projects will benefit total warehouse efficiency the most.
- Managerial Automation – once repetitive tasks are eliminated and individual workflows are optimized, warehouse managers can look at wider decision-making automation options to further reduce expenses. Managerial automation systems are software platforms that can substantially speed up and even preempt management decisions across three primary fronts: asset utilization, workforce effectiveness, and data analytics. For example, a Warehouse Management System (WMS) can track long-term employee actions and performance, and suggest visceral optimization opportunities as well as advise of looming issues before either could be determined manually.
- Operational Automation – where managerial automation serves long-range objectives, operational automation systems serve a warehouse’s day-to-day activities. Forklift operator assist systems, telematics, automated vehicles, goods-to-person systems, and co-work robots (“cobots”) are all examples of operational automation solutions that improve daily warehouse workflows. Even better, these operational automation systems can tie directly into WMS systems, providing real-time data from the warehouse floor to feed into management decision analytics without the need for human data entry or interpretation. Operational automation systems cut costs mainly in the forms of reduced labor hours, increased daily volumes, and increased perfect-pick rates.
- Defensive Design – a material handling business’ operational costs can be largely attributed to the physical design and selection of the warehouse’s space, equipment, and assets. When considering a warehouse’s infrastructure, most managers would think in terms of capital design costs and immediately write off any design changes as too complex or costly. We offer a different perspective: if managers were to view their infrastructure in terms of expenses, they could start to see where design improvements could “defend” against these expenses. This concept of defensive design suggests that relatively small changes can render big expense savings, such as: replacing selective racking with push-back racking to improve density, upgrading to lithium-ion forklift batteries to cut charging times, and adding powered conveyors to automate material flows, all of which reduce handling and labor costs.
We hope that this discussion has been helpful for your commercial material handling needs. Fairchild Equipment is the Upper Midwest’s premier Material Handling Equipment and Service resource, with headquarters in Green Bay, Wisconsin, and numerous locations serving needs 24/7 across Wisconsin, Minnesota, North Dakota, Northern Illinois, and Michigan’s Upper Peninsula. For more information or to discuss which Warehouse Optimization solution might be best for you, please send us a message or call us at (844) 432-4724.
