10 Ways to Improve Efficiency and Reduce Costs in Your Warehouse Operations


Absolute productivity has declined in many companies because productivity has not kept up with the rate of increased costs over time. As an example, since the 1990s, labor rates have increased from around $5.00 per direct labor hour to $15.00. Some larger companies are paying $18.00 to $20.00 per hour in some markets.

In contrast work produced in many companies (i.e. work produced in orders, units, shipped orders per hour) remained flat or did not keep up with costs.

A Warehouse Assessment

The place to start - when trying to reduce costs and boost customer satisfaction and profits and improve process - is to first measure and analyze what's currently being done. To determine if your warehouse operation in particular is as efficient as it can be, start with a warehouse operations assessment. Such an audit takes a quantitative and qualitative look at your fulfillment operation's productivity and accuracy, and does so in a systematic way.

Download: 70+ Cost Reduction and Productivity Ideas

An effective assessment enables you to measure warehouse productivity and other important metrics to identify patterns and trends. Once you gather the data, develop options for improvement and draft an action plan. Different options may have different costs and return on investment.

10 Critical Success Factors

As you perform a warehouse assessment, here are 10 key factors common to successful warehouse operations:

1. Use the cube.

Total occupancy costs (space and utilities) can be 20% or more of the total cost per order not including freight.

One of the single biggest culprits in optimization of your warehouse asset is not adequately using available cubic space. When you look up in a center is there “honeycombing” of space? Is your WMS aiding you in recombining bulk locations?

Another common inefficient use of the cube is not be using the space overhead in areas where there are manual operations such as kitting and assembly, packing and returns processing. Use racking, mezzanines, multilevel order-picking modules and powered conveyor placement to increase your facility's utilization.

2. Ensure that sufficient product is available when a picker needs it.

Use a combination of scheduled replenishment of the primary pick slot utilizing the min-max and demand-replenishment concepts. Most warehouse management systems allow for both types of replenishments. Not being able to pick an order because the pick slot does not have sufficient product, causes delay and additional expense. 

3. Develop appropriate pick locations.

Order picking is a major labor expense in warehousing and distribution. As much as 70 percent of a picker's work hours can be spent in “travel time”, walking between locations. Automated pick modules can often be cost justified in larger operations, and reduce the travel time.

Consider product velocity (sales movement) and size (cube) when selecting the picking slots sizes and location. Many operations replenish forward picking too frequently. Set up a system in which you can store at least one week's average unit movement in the pick slot and a hot pick area for extremely fast movers. Use various storage media of different sizes to move away from all products having the same forward pick slot locations. 

4. Take advantage of bar code technology.

Learn how to reduce costs by maximizing use of bar code technology from the receiving through the shipping functions. Barcodes let you track the “what,” “who,” and “when” for all activities within the warehouse’s four walls. You can track products and orders, verify accuracy, speed processes, gain visibility and eliminate paperwork. Develop an ROI study to show where savings can be gained.

5. Keep it clean and organized.

Generally, you can tell a lot about the organization and disciple of warehouse operation just by looking at the facility's overall organization and appearance.

Is the center clean and organized and free of trash or clutter? How much congestion occurs in aisles, docks and work areas? What is the condition of all storage and material handling equipment? The answers to these are indicators of safety and efficiencies.

6. Plan for flexibility and scalability.

Any warehouse facility or system should be designed to maximize flexibility and be as scalable as possible. With increasing uncertainty about future business plans, it's mandatory that you remain flexible and able to respond to changing requirements, such as when merchants add SKUs or change the type of items and product profiles (sizes) they offer.

Considering the cost of moving to future warehouses, can your current one be expanded? This scalability permitted the warehouse to meet actual inventory needs without major difficulty. If the idea of scalability had not considered in the design, the lack of space would've been a critical issue.

7. Functionality of WMS’ stock location system.

For efficient operations, your WMS’ inventory system must be able to identify what product is stored in each location, as well as the quantity of each product in every location. Maximizing barcode use will make inventory 99.98% accurate. Other WMS’ inventory functions assist you in combining bulk locations, replenishment functions, inventory audit trails of stock locations and the history of SKUs that have been stored there and SKU history of what locations it is presently in or has been. For these audit functions transactions are date, time and operator stamped as well as type of transaction.

Read: What You Need to Know Before Signing a WMS Contract

8. Develop a vendor compliance program.

Everything starts at your warehouse's receiving door. Moreover, every function, from put-away to shipping, is impacted in some way by your vendors in terms of cost, rework and inability to use product immediately. Develop and enforce a vendor compliance program that defines the detailed expectations and specifications required of every vendor. The program also should include corrective processes to be used and ramifications for non-compliance.

9. Measure and report performance metrics to your employees.

The old axiom, “You can't improve what you don't measure”, holds for improving labor efficiency. The simple act of measuring operating metrics and reporting the results to your employees will result in an improvement even if you do nothing else with the data. Why? Most employees just want to know how they're doing. By setting expectations and then telling everyone how they're measuring up, you can improve overall productivity.

Set up productivity measurements in units and cost for all warehouse departments (e.g., receiving, stocking, replenishment).

access our Productivity Formula Excel workbook

10. Reduce freight costs and time to customer.

The cost of outbound freight now exceeds in many businesses the sum of all other warehouses costs – management, direct and indirect labor, total occupancy costs including material handling, sortation and conveyance system, and packing expense.

Understanding the shipping profile of your business is key to reducing costs. Other businesses are continually negotiating to lower freight rate, implementing enterprise wide shipping systems, etc.

To compete with Amazon’s fulfillment network, companies are investigate the use of multi-DCs to reduce costs and in-transit time for customer orders.


Improving these 10 areas will dramatically change costs and servicing the customer. Take a check point each year as part of your on-going operational improvement process.  

*Note: this post was originally published in 2011. We've updated it with recent industry information and republished it so you can get the same relevant information in it's most accurate format.


How to Reduce Warehouse Expenses and Costs 10-20%