Meaning
Economic models analyze the costs and returns associated with maintaining inventory within a specific warehouse or facility. Analysis of storage unit economics helps a business decide between owning their own space or using a third party logistics provider. These calculations include the cost of the physical space, utilities and the labor required to manage the goods.
Capacity Utilization
Efficiency of a warehouse depends on how much of the available space is actually used to store products. The capacity utilization of the facility is a major factor in determining the cost per pallet or per unit. High utilization rates reduce the overhead allocated to each item, but they can also make it harder to move goods quickly.
Cost Allocation
Management must distribute the fixed and variable expenses of the warehouse across the different types of inventory. The cost allocation of the storage program determines the true landed cost of the products when they are sold. Items that sit in the warehouse for a long time incur higher charges, which reduces the total profit margin for those units.
Businesses use these figures to identify slow moving stock that should be discounted or removed from the catalog. This ensures that the most profitable items have priority for the best storage locations.
Profitability Assessment
Final evaluation of the storage strategy depends on the ability to meet customer demand while keeping expenses low. The profitability assessment of the warehouse operation compares the total cost of storage to the revenue generated by the inventory.