Optimizing E-commerce Warehousing Costs

Setting up and maintaining a warehouse represents a significant portion of your total operating costs and strongly impacts your profitability. If you're considering renting or buying a warehouse, it's essential to be aware of these expenses. Optimizing warehousing costs can boost your brand's profits, but it is no small challenge.

That's why we've created this comprehensive guide to help you better understand warehouse costs, how to calculate warehouse pricing, and whether you should buy or rent. Additionally, we will show you how to optimize warehouse costs so they don’t cut into your revenue. Let’s get started!

Read more: E-commerce Warehouse and Affordable Fulfillment Services

Understanding Warehouse Costs: Where Do They Come From?

Warehouse costs refer to the expenses incurred to operate a warehouse. These costs are a combination of various factors that help the warehouse run efficiently, not just the cost of renting space. Some costs are variable, meaning they can change from month to month.

Understanding warehouse costs is crucial for effective supply chain management. It provides you with a realistic view of your storage expenses, enabling you to identify opportunities to reduce costs. Let’s break down the main components of warehouse costs.

Warehouse Rent

If you rent a warehouse, the rent will account for the majority of your total warehouse costs. Rent is usually calculated based on space, and the price may vary depending on the storage space you use. Some warehouse companies may also charge based on the quantity of goods stored.

Maintenance Costs for E-commerce Warehousing

For businesses that own their warehouse, maintenance costs will be included in the total warehouse costs. This includes regular maintenance, cleaning, and repairs, as well as any improvements you make to the warehouse space.

Utility Costs

Basic utilities like electricity, heating, water, internet, and waste management are essential for operating a warehouse. These costs typically fall under storage expenses and can vary depending on usage. For instance, you may spend more on heating during the winter months, while electricity costs may rise during the holiday season when the warehouse operates more frequently to meet customer demands.

Labor Costs

A large portion of your warehouse operating costs goes toward labor expenses. This includes wages for employees at various stages of the warehousing process, including pickers and packers, managers, forklift drivers, and other staff. Some of these labor costs fall under material handling expenses and can vary depending on whether you hire additional temporary workers during peak seasons.

Equipment Costs

Equipment costs include expenses incurred for purchasing, renting, and maintaining various types of warehouse equipment. This includes forklifts, conveyors, pallet jacks, automated storage systems, AGVs (Automated Guided Vehicles), and other equipment used to carry out warehousing operations.

Technology Costs

Modern warehouses use technologies like Warehouse Management Systems (WMS) and inventory management systems to optimize processes. The cost of purchasing or using this technology contributes to the overall warehouse expenses.

E-commerce Fulfillment Costs

Costs related to order fulfillment are also a significant factor in your total warehouse costs. This often includes packaging materials and shipping costs. If you choose to customize the unboxing experience (e.g., custom packaging, promotional materials, etc.), these are additional costs that fall under fulfillment expenses.

Insurance and Taxes

Businesses need warehouse insurance to protect against damage, injury, or theft. Therefore, you will also spend money on warehouse insurance costs, which may vary depending on the type and value of goods stored. Additionally, there may be taxes like property taxes that are charged to maintain your warehouse.

Read more:What is Order Management? How to Speed Up Order Fulfillment

How is Warehouse Pricing Calculated?

How you calculate warehouse pricing depends on factors like the pricing model you use and whether you buy or rent the warehouse space. In most cases, the main factors are the monthly or annual rate for using the space and the estimated operating costs to run your warehouse.

Common Warehouse Pricing Models

Fixed Variable Pricing is the most common pricing model, where businesses rent, lease, or buy a fixed warehouse space. In the case of renting, businesses pay a fixed monthly fee to use the storage space, regardless of whether you utilize the full capacity of the warehouse. This is usually calculated per square foot, where you calculate the total space and the price per square foot.

The following formula can be used to calculate this type of warehouse price: (Total rental area x Rent per square foot) + Operating costs = Monthly warehouse costs

For example, if you rent a 10,000-square-foot space at $7 per square foot and incur $25,000 in monthly operating costs, your monthly warehouse costs would be as follows: Monthly warehouse costs = (10,000 x 7) + 25,000 = 70,000 + 25,000 = $95,000 Depending on the type of warehouse, you may even incur additional costs for value-added services such as packaging, assembly, and order fulfillment. You’ll find that fulfillment service providers offer these additional services beyond storing inventory with distributed warehousing. In this case, you are outsourcing the entire warehousing operation, so there won’t be any overhead costs beyond what you’re paying for the service.

Transaction/Unit-Based Pricing Model

Another pricing model commonly used in on-demand warehousing is the transaction/unit-based pricing model, where the price is calculated based on transactions or units.

In this pricing model, you may be charged a flat rate per unit or pallet or even per transaction or shipment. For example, ShipBob’s pricing for DTC (Direct-to-Consumer) fulfillment includes per-pick pricing in addition to other standard fees.

Calculating costs using this pricing model is simpler unless there are additional fees involved. You simply multiply the cost per unit/transaction by the total number of units or transactions. For example, if you are charged $6 per pallet per month to store 1,000 pallets, the total monthly warehouse cost would be $6,000.

Buying or Renting an E-commerce Warehouse: Cost Analysis

When considering warehouse cost optimization, deciding whether to buy or rent is one of the most critical factors. Buying a warehouse may require a larger upfront investment, but in the long run, you could save significantly on monthly costs. Conversely, renting requires a much lower initial investment, making it an ideal choice for smaller operations and businesses with limited budgets.

Costs When Buying a Warehouse

• Property costs (ranging from $625,000 to $750,000 for a 5,000-square-foot space)
• Maintenance costs (setup, repairs, and property upkeep)
• Applicable taxes

Costs When Renting a Warehouse

Rental costs (approximately $8.84 per square foot in the U.S., subject to increase over time)
Applicable taxes
Whether you choose to buy or rent, you will still need to manage your warehouse and order fulfillment operations. This means accounting for NNN/CAM charges, which include all expenses not covered in rent or property costs.

In other words, both renting and buying a warehouse incur operating costs and hidden expenses related to self-fulfillment. This includes labor costs, material handling, packaging materials, shipping, and shipping insurance, just to name a few.

How to Optimize E-commerce Warehouse Costs

The amount you spend on warehousing will impact your total inventory costs, which in turn affects your bottom line. Therefore, optimizing warehouse costs is a crucial step in reducing storage expenses and increasing profits.

Reevaluate Your Warehousing Needs

Start by reviewing your current space to get a clearer picture of your warehousing needs. This will help you assess whether your current spending aligns with your actual needs.

• Do you really need all the space you’re renting?
• Are you spending too much to store slow-moving items?
• Can some items be moved out?
• Or can you use consolidated warehousing to reduce shipping costs?

These are important questions you need to ask to gain a better understanding of how much you should be spending on warehousing. Then, determine what adjustments you need to make to reduce overall costs.

Optimize Space Utilization

Optimizing warehouse space utilization is one of the first steps to reducing warehousing costs. This includes making better use of existing space so you can maximize the amount of money spent. Essentially, you can optimize warehouse costs when you spend less to store more goods.

You can optimize space utilization by improving warehouse layout and storage systems to hold more inventory. You might replace existing racks with AS/RS systems, allowing you to make better use of vertical storage space. Similarly, you can use other storage systems that help you store more goods.

Avoid Overstocking

Overstocking is one of the biggest causes of unnecessary warehousing expenses. This happens when you stockpile too many slow-moving goods, meaning they occupy space that could be used to store more fast-moving and higher-profit items. As a result, your storage costs increase while capital is tied up in unsellable items.

It’s crucial to avoid overstocking to reduce e-commerce warehousing costs. You can do this by accurately forecasting inventory needs based on fluctuations in consumer demand. Then, strategically plan your purchases based on these forecasts to ensure you don’t buy more than you actually need.

Improve Inventory Turnover

A critical step in reducing warehousing costs is ensuring that goods do not stagnate at various stages of the warehousing process. This means you need to maintain a smooth flow of goods so that they quickly move through your warehouse.