Contract warehousing – the pros and cons

Contract warehousing is being touted as one of the potential routes to success for growing businesses.  Why? Because warehouse space – and warehouse capacity – can often be limiters to business growth and increasing profits.

Outgrowing warehouse space is an obvious problem; whether it happens because you’ve increased inventory, expanded product lines or just started to stock bigger items. Companies find different ways to address this in the short term, by changing their warehousing layout, by investing in different storage solutions like pallet storage, or by renting satellite warehousing that can easily resource the main warehouse. In the long term, these solutions rarely solve the problem permanently.

Outgrowing warehouse capacity is a different matter and may be slower to recognise and address. This happens when you find that your customers are asking for something different from you, such as kitting, or you start to sell items that require specialist handling that your current team isn’t trained for, or – and this is a happy problem – you just don’t have enough staff to process your orders and fulfil them in time. This kind of problem can take longer to spot because a company can firefight problems by hiring temporary staff, by reorganising space, by investing in training etc for quite a long time before realising that there is a systemic warehouse capacity problem.

Contract warehousing – a potential solution to the problems of growth

So is contract warehousing for you? First of all, you have to understand what contract warehousing is, and isn’t. Unlike shared occupancy warehousing, contract warehousing is space that is rented by the business which has sole occupancy of the space. In renting out the warehouse space, an independent contractor takes responsibility for all the elements included in the contract, for the period of the contract. That contract definitely includes receiving and storing goods and might included inventory management, kitting and order fulfilment. The contract period  can range from months to years and the payment method can range from fixed cost through to cost-plus. Understanding the nature of the contract, especially the payment terms, is vital, because cost plus is an agreement to reimburse the contract warehouse operator for their expenses incurred and a specified amount of the contracting business user’s profit, generally expressed as a percentage of the full contract price.

Contract warehousing – the advantages

Lower capital costs

This is the primary reasons that many businesses invest in either warehouse rental or contract warehousing. Rather than building and/or operating their own warehouse space, they prefer not to invest in plant and buildings but to rely on supplied infrastructure to allow their business to operate.

Lower operational costs

Because contract warehousing is purpose-built, it tends to be very efficient in terms of energy use, design and efficiency of operations. Usually utilities, maintenance, repairs and taxes are included in the contract, meaning that costs are fixed for the period of the contract and you can therefore plan your business growth with confidence.

Value added service availability

While the obvious value of contract warehousing is that it allows you to store goods at a fixed price, it may also handle pick and pack, order fulfilment, quality control, kitting, custom labelling and logistics. Depending on the services offered there may also be a guarantee of adherence to specific legal and trade regulations. Obviously, each additional service adds more cost to the contract, but being able to contract out those responsibilities can give a company the opportunity to focus or management and growth without having to invest in extra training for in-house staff. There is also the opportunity to add or subtract elements each time you renegotiate your contract.

Higher reliability levels

Because contract warehousing operators depend on their reputation for delivering services, they focus on ensuring they have high productivity, especially on the order fulfilment elements of their contract. Because they can move personnel around from location to location to meet customer requirements, they can offer greater responsiveness to need.

Streamlined processes

For all the reasons above, contract warehouses have optimised both their processes and their locations to offer good turnaround times and more up-to-date technologies. This can be a cost saving to the business as it may reduce costs in hiring personnel and training or up-skilling them.

Contract Warehousing – the disadvantages

Reduced control

This is a big, and often subjective, area of operation and one that is doubly awkward because until you enter into a contract, you can’t have a sense of how it will work to hand over your storage and possibly order fulfilment, to a third party. For some companies, especially those that have a high degree of personal attention in their brand identity, this can be a difficult – and sometimes unsuccessful – operation. It’s important to evaluate how your management team will feel when they are completely hands-off, but even more important , how will your customers react to an intermediary handling this part of their relationship with the company/brand? If customer engagement is important to your activities, or even if you’re a small company with a hands-on management team, renting warehouse space and maintaining control of your logistics chain may be a better option.

Uncertain economic conditions

Anybody involved in warehousing has experienced unprecedented turbulence in recent years. The pandemic, Brexit, the war in Ukraine, port strikes … there have been so many challenges to warehouse management. Being tied into a contract when economic conditions change can leave you paying for services you don’t need, or having to pay a premium to obtain services that you didn’t know you would want when you signed that contract.

Location

Finding a good contract warehousing operator where you need them is a challenge – even if you succeed in finding what you want, it is likely to have been a long process which will then be extended further by contract negotiations. For fast moving businesses, this can lead to lost opportunities, so for many organisations warehouse rental is a more flexible, and a much more rapid option.

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