When a company grows, the warehouse eventually hits its limits. Do you expand? Build an additional hall or open a new facility? Growth requires space, you might think. But how much more can your existing warehouse actually handle?

The primary function of a warehouse is not storing goods, but processing them. The measure for this is throughput: the number of pallets, cases, or order lines that pass through per year.

A warehouse expansion adds fixed costs that you carry for years, while more volume through the same warehouse only adds variable costs. The fixed costs of a warehouse are in the building, the layout, transport equipment, and IT. These remain largely the same, regardless of throughput. Variable costs are mainly in personnel and packaging materials. These do scale with throughput.

If you grow within the existing infrastructure, only variable costs increase and the cost per unit decreases.

Four Capacities

The size and layout of the warehouse determine how much it can process. We distinguish four separate capacities:

• outbound capacity
• inbound capacity
• storage capacity
• dock capacity

Together, they set the ceiling.

The deployment of people determines how much of this you actually use: with extra shifts, overtime, or temporary workers, you get more out of the same warehouse. In the current labor market, however, this flexibility is not a given. Where people cannot be found, personnel does become a structural constraint.

Outbound Capacity Sets the Pace

Most labor sits in the outbound process, and that’s usually where it first gets tight. The process covers the entire journey from picking to staging. This includes any value added logistics: repacking, labeling, assembling sets and displays. If that VAL department is large, it becomes a capacity in its own right.

To get an impression of achievable outbound capacity, look at the busiest day of the year, the productivity of the different pick systems, the number of trucks and workstations, and the capacity of automated systems.

Take the fictional company Meerkan, a trading company that processes 60,000 pallets per year and wants to grow to 90,000 within a few years. Can they still grow within the existing building?

At 250 working days, the daily volume goes from 240 to 360 pallets. Suppose the highest daily volume ever was around 400 pallets. Then 360 seems achievable, but that 400 was an outlier while 360 becomes the new average. We’re not looking for a maximum you hit once a year, but a level that’s sustainable under normal circumstances.

Inbound Capacity Must Keep Up

The inbound process is typically less labor-intensive than outbound. Inbound capacity must be sufficient to keep up with outbound volume. Any VAL activities on the inbound side must also be handled.

For Meerkan, growth means that in the new situation, 360 pallets must be received and put away daily, compared to 240 now. That means going from 5 to 7.5 FTE.

Storage Capacity Is More Than Pallet Positions

How much inventory does Meerkan need?

Meerkan currently has 15,000 pallets in storage. At an annual volume of 60,000, this means three months of inventory. You can process 90,000 pallets annually on the same square meters if you reduce inventory to two months. Turnover goes from 4 to 6, and the warehouse processes 50 percent more goods without adding a single position.

Inventory turnover is therefore a control lever: stricter inventory management, clearing dead stock, phasing out obsolete items, temporarily placing seasonal stock externally, applying cross-docking where possible.

Dock Capacity Is About Flow

Growth also means more truck movements. How many loads can the receiving and shipping docks process per day? And how many pallets fit in the staging areas?

At 26 pallets per trailer, outgoing trips go from 9 to 14 per day. With an average of 33 pallets per incoming shipment, receipts increase from 7 to 11. Together, the total goes from 16 to 25 movements per day. With six docks, that’s an increase from nearly 3 to over 4 trucks per dock per day.

You increase that capacity by scheduling arrivals and departures evenly throughout the day, loading and unloading faster, staging shipments closer to departure time, and processing receipts immediately. Otherwise, by keeping the doors open longer. As with storage, capacity is determined by turnover: the number of times you use the docks and staging areas per day.

Capacity Is Utilized Every Day

Available capacity is determined at the strategic and tactical level, but utilization happens every day. Scheduling trips against dock capacity, deploying staff to match planned inbound and outbound volumes, managing inventory within storage capacity.

Warehouse capacity planning is therefore not just a warehouse task, but an interplay with transport planning and inventory management.

Lower Cost Per Pallet

Back to the numbers. Meerkan processes 60,000 pallets per year at €1 million fixed and €1 million variable costs. That’s €33.33 per pallet.

If Meerkan grows 50 percent to 90,000 pallets within the existing infrastructure, fixed costs stay the same and only variable costs increase by 50 percent. Total €2.5 million, or €27.78 per pallet. The cost per pallet drops by 17 percent, which yields an annual scale advantage of half a million euros.

What about your warehouse? How far can you increase throughput? It lowers your cost per unit and postpones expensive expansion investments by years.

Metrica is a Warehouse Optimization System that goes beyond where ERP and WMS stop. The Capacity Planning module combines warehouse planning with transport and inventory management to better utilize available capacity.

About the author
Jeroen van den Berg is the author of Highly Competitive Warehouse Management and holds a PhD in warehouse algorithms from the University of Twente. He has been advising companies on warehouse optimization and WMS since 1997, running his own consultancy since 2001. He develops Metrica, a Warehouse Optimization System.