The Business Case for Outsourced Warehousing

Whether you’re starting a completely new business, entering a new market or wanting to improve the efficiency of your existing services, the location and logistics of how you store your stock or equipment is a high ticket operational cost – and hence a key focus area.

Warehouse infrastructure doesn’t come cheap and the costs of day-to-day operation alone can escalate if not kept under control.

Many companies may benefit greatly from outsourcing warehousing, but it’s not right for every business.

Many factors come into play in the decision to outsource or keep the function in-house and some business operators may struggle in finding the optimum solution.

If the factors involved in making a business case for outsourcing your warehousing are not clear to you, this article will help simplify the matter, as we take a look at the main factors involved in the decision.

Geography

Deciding where to site a warehouse will often factor in proximity to manufacturing facilities, distance to ports of entry, road networks and customer base or receiving points, and even final deployment location.

Location is key, because logic suggests that keeping road miles down will translate into lower overall logistical and handling costs. 

Yet these factors must always be traded off against the amount of warehouse space that is required and what the cost per square foot of that physical footprint is going to be.

Of course the turnaround and frequency of shipments in and out will determine the requirement for proximity to good road networks and ease of access.

With so many factors to consider in locating your warehouse operations, it can be a very cost-effective decision to use a 3^rd party warehousing specialist prior to making a final, long term decision.

Availability of capital

It’s the perennial trade off in business cases: source operating infrastructure with your own internal or financed capital finance – or outsource and pay-as-you go.

The access your organisation has to capital may make your decision for you, but it may not be the only factor. There are plenty of multinational businesses that outsource warehousing to 3^rd parties despite having the capital resources to bring the operation in-house.

But if you’re running a business that keeps stock and operates a regular throughput of manufactured goods – yet your capital position leaves little room for large-scale investment, the business case for outsourcing your warehousing is operationally stronger.

Take into account also that there will be many associated costs such as the warehouse fit out with racking and ancillary equipment and facilities such as forklifts as well as ongoing costs such as health and safety and staff training.

Avoiding the capital infrastructure costs of your own warehouse and instead outsourcing both the capital and operational costs to a 3^rd party provider can prove to be the stronger business case, particularly for the smaller or less established business not wishing to carry capital debt on the balance sheet.

Knowledge and expertise

Capital investment decisions always require a rock solid business case, but clearly those decisions always include consideration of the resulting ongoing operational costs.

This is particularly true for warehousing operations. The decision to take warehousing in-house by definition means you’re now in “the business of warehousing” and that means you’ll also have a need for trained and experienced personnel to manage your warehouse operations.

From logistics managers to warehouse assistants, pickers and packers and forklift drivers, the business case for investing in a workforce needs to be clear because it can potentially run into £ hundreds of thousands – if not millions.

Management overhead, and the ongoing training, for instance in health and safety, are also major factors in the overall business case; the costs of warehousing operations are thus not limited only to capital investment.

Efficiency

When weighing up the business case for outsource warehousing against the option to do it in-house, a key intangible is the efficiency with which you can operate your own warehouse against the efficiencies you will gain by simply paying a 3^rd party.

Outsourcing provides a quick, reliable route into efficient operation that could prove invaluable, particularly in terms of time to market.

Getting your own warehouse operation up to full efficiency and maintaining it at that level with the required staff that may take a little longer but would be achievable in the long run.

The question is therefore not “can we run our own warehouse” but “can we run our warehouse as efficiently as a specialist warehouse provider could do it for us”. If the answer to the latter question is “no”, it is well worth looking at outsourcing.

Growth strategy

What is the growth plan for your business in the mid to long term, and as a result what are the implications in terms of growing your stock, expansions into new sectors and sub markets, and by extension what will your warehouse requirements be in 5 to 10 years?

If you plan to expand your operations quickly you may be better off planning and creating your own facility and building in the scalability you required from day one.

On the other hand if your growth plans are more conservative or cautious, or you are unable to make confident predictions, better to look at a scalable warehousing operation contract with a 3^rd part where growth can be accommodated only if required.

If your established business is experiencing strong growth and warehouse space is getting tighter, it doesn’t make sense to double your available space overnight.

Depending on your projections, the right option may be to expand into outsourced serviced warehousing premises for your additional or overflow stock, and see how that pans out, before taking the plunge into the long term capital investment of a new, additional or expanded warehouse.

Seasonal considerations

There’s no point paying year-round costs for a warehouse you only need for half the time.

If your stock requirements are purely seasonal, or if you handle all imports and exports during a set few months of the year, outsourcing provides the best solution and the business case for your own in-house warehouse will almost certainly not stack up.

For example companies that specialise in Christmas decorations may want to avoid the costs of large-scale summer storage that is simply not needed – and at the same time if your business sells beach chairs you won’t necessarily want to be paying for stock storage during winter months.

By ensuring that you are only paying for your warehousing services and associated overheads and processes when you actually require them, you can dramatically reduce costs and help keep the capital investment for your business under control.

Types of product

The type of products you need to store will play a large part in the decision whether to outsource or operate in-house.

You may have such specialist requirements which cannot be entrusted to any 3^rd party and, therefore, no warehousing provider can service your needs. The requirement for specialist storage methods or equipment may drive up costs to such an extent that the only cost-effective option is to manage warehousing in-house.

On the other hand, there may be warehousing providers who specialise in storage and logistics for the types of products you deal with – in which case there’s a business case for outsourcing.

However for the majority of product businesses and FMCG companies, where the requirement for ‘specialist’ storage and handling of goods is minimal only, the options for outsourcing are greater.

Many 3^rd party warehouse operators like Masters Logistical Services are equipped with various types of racking and handling facilities to cater for different types of product and can offer cost effective outsourcing solutions which will include picking and packing as well as distribution.

Flexibility

At some point during the life of your business, it is likely that you will need to change or adapt your warehousing facilities to evolving business practices or new requirements.

The ease, speed and cost with which this will need to be achieved – and the practicalities of realising these changes – should be factored into your business case decision on whether to outsource or go in-house with your warehousing function.

Outsourced warehousing companies will generally be used to dealing with such eventualities and should be fairly well prepared and efficient when it comes to making changes.

In conclusion…

Visualising how your business warehousing requirements are going to evolve over the next five to 10 years takes some brave planning.

But whichever approach you choose to take – in-house or outsourced – the information in this article gives you a basis for making the business decision, and the business case.

How the costs will eventually stack up will depend on weighing up all the factors and balancing them against each other and your specific business needs.

In general, with just a monthly cost, outsourcing allows businesses to avoid many of the capital investments for premises, equipment, management and training.

To discuss your business case for outsourcing your warehousing operations, please contact Masters Logistical on [email protected] or call us on on 01353 648222.