Understanding the Benefits versus the Risks  

Companies of all sizes are faced with the dilemma of owning their own warehouses or outsourcing. It has been my experience that most choose to do both, company-owned with a supporting network of partner warehouses. This month, we are going to examine the question of variable cost warehousing versus the fixed cost of a company-owned warehouse. 

Direct Cost: Company-Owned Warehouse 

It is said that managing warehouses is nothing more than the management of space and time. 

You select the space and manage the inventory levels to fill that space efficiently. Management of the labor force is ensuring that you have the right staffing levels to process receiving and shipping within the agreed-upon performance metrics and staff to work on projects, kitting, returns, end caps. If you can manage both factors at over a 90th percentile [Exhibit 1 & 2], you will maximize your investment and have the knowledge that your employees were the last to touch a product prior to customer delivery.  

In a direct cost warehouse, there are 4 categories of expense.  

• Handling Cost  How much labor goes into processing an order. 

• Storage Cost  How much the physical building costs. 
• Administration Expense  Line supervisors, clerical staff, supplies, insurance, security, taxes, and IT expenses. 
• General Administration  Senior management, non-operating staff, and general office expenses. 

There are many benefits if your company chooses to run its own distribution centers. However, there is a lot to account for in the planning and daily operations. 

If you are off in your budgeting and planning, you are at risk of not being able to perform to management’s expectations, and operating at a loss due to having too much building or staff expense. 

Variable Cost: 3rd Party Logistics Warehouse 

A good third-party provider can take warehousing off your hands. Companies who do not have warehousing as a specific management discipline could benefit from using a third-party provider to offset risk.  

A true 3PL warehouse spreads labor and expense across multiple customers. It is truly a pay-to-play scenario. You only pay for the storage space you use and the labor that is needed to process your account. 

A good example is if you have one or two heavy shipping months a year, the 3PL’s job is to staff for these months, not yours. Or if your business is slow, you only pay for the labor you use instead of having to pay your employees a fixed labor cost. 

Cost Comparison 

Handling Cost With a company-owned warehouse, you are responsible for wages no matter how busy your warehouse is.  With a 3PL, you pay for labor on a per receipt and per order basis. 

Storage Cost A company-owned building needs to be sized for the busiest time of the year, so at times you are paying to maintain a warehouse at less than full capacity. In a 3PL engagement, the burden of managing the space and the expense is pushed to your partner. 

Operations Administration 3PL’s excel in this category. To operate within normal sales margins, a good 3PL partner is always implementing efficient management practices and pays special attention to IT innovations and expenses.  Warehousing is not a core business for many companies and their investment in IT systems and resources normally lags behind a 3PL. 

General Administration 3PL’s use multiple accounts to manage this expense so that becomes a shared expense as opposed to a company-owned warehouse that needs to shoulder the entire expense.  

We have laid out a case of why a good 3PL can significantly lower your direct expense and why a variable expense model may be the best fit for you.

In my next installment, we will examine how you can best manage your 3PL provider to meet your own and your customer’s expectation.