The management of warehousing expenses has always been tricky for COOs and supply chain managers to deal with. Space doesn't come cheap, and it can't easily be expanded in small increments. When a company builds new warehouse space, it typically has to build more than it presently needs. In the near-term, much of that expensive new capacity will probably sit empty. On the other hand, if space limitations have begun to cap off your company's potential revenue, or if they are creating safety issues for your associates, something must be done.So how do you strike a balance between current warehousing needs, anticipated future warehousing needs and your projected budget? Do you build or relocate? Do you keep warehousing in house, or outsource to a third party logistics vendor?
Step 1: Get a handle on your needs.
The financial implications of your decision whether or not to expand must be projected out in time. None of us can predict the future, naturally. But 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 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 any 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 those business plans affect the amount of trade they do with your company going forward?
Step 2: Watch the market.
If the market is healthy, if most of your clients envision expanding their business within the next 6 to 12 months and if they foresee needing more of your company's products, the time could be right to expand your warehouse's footprint, to move your shipping operations to a bigger facility, or to outsource to a third-party fulfillment company.
After all, one of the worst things that can happen is for a client to suddenly double or triple its order, or for a seasonal cycle to run too hot, when your company doesn't have the capacity to fulfill the demand.
In such a case, you're either going to lose share 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 with it the added worry of a negative ripple effect moving down through your client accounts, each in turn.
If the market is middling to healthy, your customers anticipate either holding volume steady at present levels or cautiously expanding and you are already at your warehouse's capacity, it might be a better move to stick to outsourcing shipping and fulfillment for the time being, with an eye to re-evaluate as market conditions dictate.
If the market is cooling and your customers are trying to ride out the dip, now's not the time to expand, but it is the right time to start planning for future expansion and budgeting for same.
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 manufacture and logistics is to find the equilibrium point at which your supply meets their demand, with room to tolerate sudden spikes and sudden troughs.
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 customers' faucets. If there is too much water in the pipes, the system could catastrophically burst and cause a lot of damage. Civil engineers and hydrologist's 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. Maybe production needs to be slowed down for the time being. You might not need more warehouse capacity at all. And you might be able to use more liquidity for R&D, for 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 have to spend valuable time moving one item to reach another? Maybe you're paying more than you need to on labor.
If marginal costs like these are creating a drag on your company's profitability in an uncertain market environment, then yes, it may indeed be time to outsource warehousing, shipping and fulfillment. Unclogging the logistics side of your operation may allow you build "rainy day" capital or, if the market can handle increased supply, could allow you to devote more resources to production.
Outsourcing, in such a case, might not need to mean layoffs, 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.
If, however, 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 that you conduct a thoughtful study of your current logistical operation 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 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. And, 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 outsource your warehouse, 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, too, that your RFP does a good job of spelling out your company's needs, and that bids can be compared apples-to-apples. It may help to grid out services offered, so that you can visualize each vendor's value proposition before making cost comparisons.