Opportunity costs, especially in intralogistics, are a popular means of identifying capacities in advance.

Opportunity costs in logistics

Opportunity costs, also known as alternative costs or foregone costs, express a foregone benefit in costs on the basis of decisions that have a negative impact and enable an approximately accurate cost calculation. The degree of utilization always refers to available resources (people, machines, space and operating resources). The reasons for this type of cost are the aforementioned decisions that leave no room for alternative solutions. One speaks of so-called opportunities (possibilities). Thus, a company usually has to choose one process solution out of several. The notional loss account of the alternatives not considered describes the opportunity costs.

Opportunity costs in practice

The notional lost revenues resulting from alternative solution approaches are subsequently quantified and reported as opportunity costs. The avoidance of such opportunity costs is based on the principle ofeconomic efficiency. This principle, in turn, states that a given goal should be achieved either with the least possible effort (minimum principle) or the greatest possible goal with a given limited effort (maximum principle).

Resources: high efforts are to be avoided

Opportunity costs are not costs in the sense of cost and activity accounting, but an economic concept. By means of this concept, it is possible to quantify lost alternatives. The following applies: When resources are used, such costs are incurred, also because resources can only be used for other purposes at a very high cost (set up time – set up time optimization in injection molding). They thus arise in the operation of all production factors such as capital, time and labor and provide information about the economic efficiency of a business process without being directly reflected in the operating result. It is true that opportunity costs are not settled by actual payments and thus do not affect a company’s balance sheet or accounting. But calculating alternatives helps managers make concrete considerations and decisions about how to use resources more efficiently.

Opportunity costs are divided into input-related and output-related opportunity costs. In the case of output-related opportunity costs, we are talking about alternative costs or optimal costs. Accordingly, output-related opportunity costs refer exclusively to the output of the production process. Input-related opportunity costs are costs whose contribution margin is limited to the input factor. These include, for example, the factors: pieces, labor hours or material costs.

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Examples of logistical opportunity costs

  • A company has invested 1,000,000 euros on the financial market at a fixed interest rate and receives three percent interest annually for this. Through a planned construction of a logistics center, the equity capital is released on the financial market and used for the realization of the logistics center. In this case, the foregone interest income represents the opportunity cost, which should be taken into account to evaluate the planned investment.
  • If decisions have to be made subsequently, such as which conveyor landscape, which special logistics solutions (bag sorter, pick-by-robot, pick-by-vision or manual sorter picking) are to be installed, new opportunity costs arise. This is how the planned hardware installation describes the future flexibility of a warehouse or distribution center. For example, if peak times, replenishmentand picking times are rigidly linked to processes, a flexible alternative would be the opportunity. It could conserve resources, save personnel, or ensure sustainable replenishment (delivery guarantee, customer satisfaction) in the aforementioned special cases. It is important to note that the aforementioned flexibility can never be guaranteed 100 percent these days. Thus, rigid process-oriented solutions are even unavoidable in some warehouse areas and cannot be changed completely (conveyor landscape, high-bay warehouse).

In the context of digitalization, Industry 4.0 and Big Data or Smart Data, more and more company-specific potential is being uncovered today that makes opportunity costs measurable. Performance transparency, predictive resource management and intelligent resource management, for example in the sense of real-time logistics, involve the use of existing data which, however, would lie dormant without the appropriate technology. Accordingly, the non-use of modern technologies, i.e., a passive or hesitant attitude toward technically feasible solutions, also gives rise to opportunity costs. For example, not implementing, say, new logistics software (warehouse management system, material flow control or data mart) to ensure more efficient material flow or generally smoother process flow within a warehouse may not be a conscious decision, but it does involve opportunity costs. There, the opportunity costs to be calculated form completely new decision-making and action fields in order to implement more economical processes.

Summary

A business decision inevitably means that other possible decisions and measures cannot be implemented. From these existing possibilities (opportunities), which are not used, opportunity costs arise, which quantify a lost benefit. This quantification, also called alternative or renunciation costs, describes an economic concept that concretely reveals the fictitious, foregone benefit of a certain decision and makes it calculable.

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