How we saved €48k ($US57k) annual warehousing operation costs with a 700% Return on Investment.
We were working with a small manufacturing company in Europe. They had set up a warehouse for their raw materials and finished goods many years ago. The warehouse was very well maintained. All finished goods were kept together by product family. The warehouse was laid out with a long rack from the front to the back of the building. The company had a manufacturing engineer but he was not normally involved with the warehouse.
There were three warehouse forklift operators, all who had been with the company for many years and knew where everything was located. One of the operators was due to retire in a few months.
Original layout of racks
Original layout of SKUs by family
The owners did not see any problem with their warehouse operation.
There were three key problems that we observed.
- Forklifts were spending too much time travelling. This was because they could not ‘short cut’ across the warehouse racks.
- Because they had arranged products by family, some of the more popular high running items were located at the back of the warehouse, meaning that forklifts had to travel to the back to retrieve them.
- SKU locations relied on ‘knowledge through experience’. Unless the operators knew where the SKU was located, they could not be found.
We set up a small team consisting of the business owner, the engineer, the logistics leader who managed the warehouse and the warehouse operators. We took a random sample of customer orders and calculated the distance that the forklifts had to travel on a CAD model drawing of the warehouse that the engineer had drawn. Operators pointed to the location of the SKUs and the routes that they would take, and we calculated the distance travelled by the forklifts to fulfil all the sample orders.
We then recreated the CAD model of the warehouse, with two changes:
- We created a gangway in the middle of the warehouse racks to allow forklifts to shortcut between racks.
- We relocated all the SKUs in the model so that the “A” SKUs, the high runners were at the front of the warehouse and the “C” SKUs, the low runners were at the back with the “B” SKUs, the mid runners in the middle. We no longer kept SKU families together.
Revised layout
Revised layout of A, B and C SKUs
There was objection by the operators to the second (theoretical) change because they thought it would be difficult to locate the SKUs as they were no longer in families. We told them that this was just a theoretical test and that we would deal with that problem later.
Results based on the sample data:
Old layout = 4.7km travelled.
New layout = 1.6km travelled.
Clearly there was a huge advantage in the new layout. We agreed to change the layout, which we did at the beginning of the month by closing the warehouse for three full days, including overtime. The racking company came to remove some of the bays. We planned where the SKUs were to live and they used a field in their ERP system to note the location of the SKUs.
The new layout worked extremely well. The time saved meant that the older operator who was due to retire did not have to be replaced and the company continued with two staff. The company is now looking at integrating a warehouse management system now that they have a more efficient layout.
Summary
Cost savings from retiring staff not replaced: €42k
Cost saved after returning one rental forklift including running costs: €6k
Total savings: €48k
Cost of removing racks by subcontractor: +€3k
Cost of IT changes to ERP system: +€3k
Total costs: €6k
Return on investment 700%, payback in 1.5 months.
Conclusion
Although this was a very easy exercise, warehouse layouts in manufacturing operations are often neglected. Simple changes, with very little investment can often make huge savings.