1. What is Public, private and contract warehousing?
2. The advantages and disadvantages for public warehousing
3. The advantages and disadvantages for private warehousing
4. Comparison of the 3 warehousing modes in terms of capital cost, expenses, rates and risks
Douglas M. Lambert, Fundamentals of Logistics Management, McGraw/Hill Publication (1998)
Ernst F. Bolten, Managing Time and Space in the modern warehouse, New York (1997).
Jenkins, Creed H., Complete guide to modern warehouse management, Prentice Hall (1990)
Ken Ackerman, Warehousing profitably, Ackerman’s publication (1994)
Ken Ackerman, Practical Handbook of Warehousing, London: Chapman & Hall (1997)
1.1 What is Public warehousing?
l Warehouse is owned and operated by a third party
l Charges in particular for type of services used
l Mainly for short-term usage
1.2 What is Private warehousing?
l Also known as proprietary warehousing
l Operated as a division within a company
l On-site* and off-site** warehousing
l Substantial corporate fixed investment in land, building, and equipment
1.3 What is Contract warehousing?
l A variation of public warehousing
l A long-term contract and/or services
l Warehouse is owned and operated by a third party
l Customized services/space over a long term
l A trade-off between location flexibility for assured space over the contract period and a lower price that is usually lower than warehousing rates
l Contact for either an entire building or for a defined, fixed portion of square-foot or cubic-foot space
*On-site can be either at a central location or dispersed throughout manufacturing facilities
**Off-site warehouses are satellite facilities located close to marketing areas to store excess on-site inventory and to serve as distribution centre for finished goods.
a) Zero capital investment in Warehousing:
A major advantage is there is no capital investment (eg. Leasing of bldg, material handling equipment and startup cost of operations hiring and training personnel) from the user to do one’s own warehousing. The cost of public warehousing is a variable cost component.
b) Provides
Capability to Expand Market:
For companies that are expanding, public warehousing provides economical and practical means to reach out to new markets.
c) Adjusts for seasonality:
If firm’s operations has seasonality, then having public w/h allows the user to rent as much of w/h space during peak season, since there is no commitment of $$ as compared to public w/h. Moreover, there is this distinct advantage of allowing storage costs to vary directly with volume.
d) Reduced Risk (Low opportunity cost):
Since there is no commitment of funds in public w/h, the user firm can switch to another facility in a short period of time, often within 30 days. Moreover, if there is another attractive location, which may have a lower rent, the user firm can easily switch warehouse….
e) Permit freight to move at lower rates:
This is a major advantage to justify perhaps half of all public warehousing today. It is possible since they handle the requirements of a number of firms; their volume allows them to pay consolidated freight rates but not the much higher freight costs that result from shipping small quantities at premium rates.
f) Gain Access to
Special Features and Services:
Most can offer specialized services (eg. Broken-case handling, packaging services for manufacturer products for shipping, breakbulk services, freight consolidation services). They are resulted from the consolidation of small shipments with those of noncompetitors who use the same public warehouse. Most public warehouses have special features, which makes them unique.
It can range from design, when the warehouse first sets up for business, or it can evolve into the specialty. Some examples of special features are:
l Temperature-controlled, cool and cold storage
l Crane capabilities
l Ultraclean segregated area
l Guard service around the clock
l Attractive facilities and amenities
l Dedicated docking areas for special customers
l Special staff functions like customer service, inventory ordering, etc
l Office space to rent for customer’s sales, accounting, etc
g) Greater
flexibility:
Owing a long-term lease on a warehouse is a huge liability and there is a huge opportunity cost on changing the warehouse if business conditions make it necessary for the change. Thus, public w/h is better since there is only a short-term contract, and thus, short-term commitments.
h) Tax advantages:
Since it doesn’t own property, it is not subjected to taxes, which is quite substantial.
i) Specific knowledge of costs for storage and handling:
When a company uses a public w/h, it knows how much exactly is spent on storage and handling costs since the monthly bill displays all necessary information. This allows the user to forecast costs for each different levels of activity. On the other hand, firms that operate their facilities often find it difficult to determine the fixed and variable cost exactly.
2.2 Its Disadvantages to the user can be:
a) Communication problem: There is a potential problem of incompatible computer terminals and systems. They may not have another terminal just to suit the needs of just one customer. Thus, the lack of standardization in contractual agreements makes communication regarding contractual obligations difficult.
b) Lack of specialized services: Spaces or specialized services needed may not always be available in a specific location. Most public warehouse facilities provide local services which may not be useful for the big MNC who requires more specialized services.
c) Space may not be available: Public warehousing space may not be available when ans where a firms wants it. Shortage of space can happen in some places especially during peak season, and this may affect the firm adversely.
a) Degree of control:
From inventory control, optimum space utilization, maintenance and equipment, internal material flow, handling routines, supervision, and associated cost control, the firm has a direct control and clear visibility for the product until the customer takes possession or delivery. Thus, this will allow the firm to integrate the warehousing function more easily into its total logistics system.
b) Flexibility:
With more control, there is greater flexibility of designing and operating the w/h to suit the needs of its customers and the characteristics of the products. This means that companies who have specialized handling for its products will not find public warehousing viable. In addition, the w/h can also be modified through expansion or renovation to facilitate product changes, which is not possible on a public warehouse.
c) Less costly in the Long term:
Operating cost can be 15 to 25% lower if the company achieves sufficient throughout or utilization. This is possible if the firm achieves at least 75% utilization, if not, it would be best to use public warehousing.
d) Better use of Human resources:
There is greater care in handling and storage when the firm’s own workforce operate the warehouse. This means that the company can utilize the expertise of its technical specialists.
e) Tax benefits:
There are depreciation allowances on buildings and equipment reduce tax payable.
f) Intangible benefits:
When a firm distributes its products through a private w/h, it gives the customer a sense of permanence and continuity of business operations. The customer perceives the company as a stable, dependable, and lasting supplier of products.
3.2 Its Disadvantages to the user are:
a) Lack of flexibility:
The major drawback is it is too costly, because of its fixed size and costs. This means that in the short run, the private facility cannot expand or contract to meet increases or decreases in demand. Thus, when demand is low, the firm still assumed the fixed costs as well as the lower productivity linked to unused warehouse space. However, the disadvantages can be minimized if the firm is able to rent out part of its space. Moreover, it loses flexibility in its strategic location options. They can’t change quickly to rapid changes in market size, location and preferences, and this may mean that they will lose an excellent business opportunity.
b) High
opportunity cost (high risk)
ROI on other investments may be greater if funds are channeled into other profit-generating opportunities. Besides, there is also a potential probability of not being able to sell the w/h in the later period due to its customized design.
c) Low Rate of return:
Since the rate of return is about the same as the firm’s other investments, most companies find it advantageous to use a combination of public and private warehousing. It is best to use private warehousing to handle the basic inventory levels required for the least cost logistics in markets where the volume justifies ownership. On the other hand, any extra volume can be stored in the public warehouse during peak periods where private warehouse is full.
d) High start-up
cost:
Firms have to generate enough capital to build or buy a warehouse. A warehouse is often a long, risky investment. Moreover, there is cost of hiring and training of employees, and the purchase of material handling equipment. The high cost involved may force the company to seriously consider public warehousing as a better option.
4. Comparison of the 3 warehousing modes
To select the type of warehousing for your company, it is important to understand the cost structure. The following table offers an excellent comparison on the warehousing modes.
|
Cost Component |
Private (Company) Warehouse |
Public Warehouse |
|
|
“Pure” Public Warehouse |
Contract Warehouse |
||
|
l Building cost (depn) l Facilities & eqm l Matl-handling eqm l (Un)loading docks/rails |
Not applicable |
Based on contracted responsibilities for land,
buildings, and facilities |
|
|
l Safety eqm l Insurance, taxes, l Maintenance/ repairs l Utilities l Salaries/wages l Employee benefits |
Per unit cost based on the type of services used |
As stated in the contract |
|
|
Not applicable |
Time based: Storage charges Transaction-based: Handling charges; in/out special handling fees,
documentation, special services, etc |
Time and/or transaction based, as stated in the
contract |
|
|
The company assumed all risks |
Defined and bear in accordance with the standard terms
and conditions of the warehouse agreement |
Risks are assigned and assumed as stated in the
lease and/or contract |
|
Table showing a Comparison of warehousing modes (capital cost, expenses, risks)
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