Expand Your Warehouse versus Outsource Your Fulfillment Needs

Published : December 3, 2018

facility management

It’s no secret that managing warehousing expenses has always been tricky for COOs and supply chain managers. What happens when your warehouse is reaching capacity? Do you build, relocate or outsource your fulfillment needs?

Space doesn't come cheap and can't easily be expanded in small increments. When a company decides to build new warehouse, it typically must build more than it presently needs. In the near-term, much of the new capacity will probably sit empty. On the other hand, space limitations will cap your company's potential revenue or potentially create safety issues for your associates. In both instances, something must change.

How do you strike a balance between current warehousing needs, anticipated future warehousing needs and justifying the projected budget? If you’re looking to expand, follow these steps to determine if it’s time to outsource your fulfillment needs.

Step 1: Get a Handle on Your Needs

The financial implications of your decision whether to expand must be projected out in time. None of us can predict the future, naturally. You can employ a basic principle of calculus: take derivatives and use them to predict your company's near-term growth rate.

How do you do that? According to Steve Howard, President of Esquire Express in Hileah, Florida, you talk to your customers.

"I did that aggressively at the beginning of 2015," Howard said. "I called all my customers and said, 'Look at your crystal ball. What do you see in the next year, in the next three years? In the next five? I’m not asking you to commit. I’m trying to get a feeling of what you think the future will hold.' I got some really useable info, which is one reason that I’m considering taking on more space [now]."

Your business volume at the time of a new warehouse space's go-live date will be determined exclusively by your business. How much are you selling to them now? What are their short- and long-term plans? How will the business plans affect the volume of work they do with your company going forward?

Step 2: Watch the Market

If the market is healthy, most of your clients envision expanding their business and needing more of your company’s products within the next six to 12 months; it may be time to expand. The next step for you is how. Do you move your shipping operations to a bigger facility or outsource to a third-party fulfillment company?

One of the worst things that can happen is for a client to double or triple its order suddenly or for a seasonal cycle to run too hot and your company cannot fulfill the demand, due to capacity issues.

If this happens, you're either going to lose part or all of the business to a competitor that has the capacity or you're going to run your staff into the ground trying to turn larger-than-expected orders. The latter scenario can and will negatively impact quality control, bringing the added worry of a negative ripple effect moving down through your client accounts.

If you are at warehouse capacity, the market is healthy and your customers anticipate holding volume steady at present levels or cautiously expanding, it might be a best to outsource shipping and fulfillment needs. You can always re-evaluate as market conditions change at a later date.

It never hurts to begin planning for the future. A good time for this consideration is if the market is cooling and your customers are trying to ride out the dip. Explore your expansion options and start budgeting for when the order volume returns to a healthy state.

Step 3: Know the Costs Associated with your Inventory

Are you paying too much in overhead to store your inventory? Maybe you're producing too much. The sweet spot in both manufacturing and logistics is to find the equilibrium point at which your supply meets their demand, with room to tolerate sudden spikes and  dips.

Consider a municipal water system: if there isn't enough water in the pipes to maintain pressure in the lines, water won't come out of the faucets. If there is too much water in the pipes, the system could catastrophically burst and cause a lot of damage. Civil engineers and hydrologists know that it's best to keep water lines between 60% to 75% full — enough to maintain adequate tap pressure, and enough to handle a flash flood.

If your warehouse expenses are too high, you might be carrying too much inventory [need fresh link here]. Maybe production needs to be slowed down for the time being. You might not need more warehouse capacity at all. You might be able to use more liquidity for R&D, venture development or to attract better talent.

But what about the opportunity costs associated with running an inefficient warehouse? Could you produce and move more product if shipping operations were streamlined? Is warehouse productivity slowed because staffers must maneuver around each other in tight aisles or because they spend valuable time moving one item to reach another? Maybe you're paying more than you need to for labor.

If marginal costs like these are creating a drag on your company's profitability it may be time to outsource warehousing, shipping and/or fulfillment services. Unclogging the logistics side of your operation may allow you to build "rainy day" capital or, if the market can handle increased supply, could allow you to devote more resources to production.

Outsourcing doesn’t always mean layoffs. Check if the sum of the logistics-side savings plus the increase in production-side revenue would allow you to shift workers from warehouse roles to production floor roles.

However, if overhead is consistently low, the market looks robust for the foreseeable future and marginal costs are the only issue, then yes, it might be time to build more in-house capacity.

Step 4: Design Well

If you do undertake an expansion, make sure to conduct a thoughtful study of your current logistical operations and develop a clear understanding of your organization's pain points before you design a new space.

Are traffic jams to blame in the current warehouse? You may just need wider aisles. Are slow pick times affecting productivity? Build up instead of out, place commonly paired items together and automate your lifts.

Are your energy costs too high? Use efficient LED lighting and generous fiberglass insulation. Consider designing around an on-site geothermal or wind power generation system. If the new facility will have a large footprint, adding rooftop solar panels could make your company a net energy supplier. Imagine — a manufacturer being paid by the power utility!

Could you invest in an automated picking system and reduce your company's projected labor expenses? Some companies are already experimenting with autonomous picker robots. If you haven't yet fully digitized your inventory control system, seize on the opportunity an expansion or new build could afford you.

Step 5: If You Decide to Outsource your Fulfillment Needs, Shop Rates

You shouldn't have to wonder whether your third party warehousing expenses are too high. Before signing any contracts, develop clear expectations of cost.

Make sure your RFP does a good job of explaining your company's needs to ensure bids can be compared apples-to-apples. It may help to grid out services offered, so you can visualize each vendor's value proposition before making cost comparisons.

We recently significantly expanded and enhanced our West Chester facility. To schedule a tour and a “No Obligation” meeting please give us a call 1-800-225-7145.

Topics: Vendor Management, Supply Chain Workforce Management, Warehouse Management, Supply Chain Efficiency

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