When your business is growing, shared warehousing with a third-party logistics provider (3PL) enables you to scale your warehousing investment to match your order volumes. Need more or less space? You can add or remove it based on your needs.
But, what happens with a mature business that is flying high and wants a more customized distribution solution? Companies in this situation often turn to a contract warehouse model to support their supply chains. In this article, we’ll take a closer look at contract warehousing and when it may be a good fit for your operation.
What is contract warehousing?
A contract warehouse (or “dedicated warehouse”) is devoted solely to your operation. Your 3PL uses its own staff, systems and equipment to run it. These resources are typically fixed and will not scale up or down (unless the contract is amended). There are three basic models:
- The 3PL owns or leases a warehouse and devotes it solely to your business
- The 3PL partitions off a large section of an even larger warehouse for your operation
- You own or lease a warehouse and hire a 3PL to perform all operations within it. This model is advantageous for many companies as they do not have to pay a 3PL a markup on real estate, and they can easily change 3PLs, if needed
Most contract warehousing contracts entail ‘cost-plus’ pricing in which you reimburse your 3PL for the cost of its space and/or resources, plus an additional (agreed upon) percentage.
Are you ready for a contract warehouse?
There are four main factors that will determine a company’s readiness for contract warehousing: size, customization, cost, and consistency.
- Size. Companies who are ready for contract warehousing may have simply outgrown their own warehouse or their 3PL’s shared warehouse. As mentioned above, a major advantage of shared space is the ability to scale up or down as volumes dictate. But, when volumes continually dictate that your space needs go up, up, and up, you may eventually run out of shared space to expand into.
- Customization. Another characteristic that contract-warehouse-ready companies share is the need for increasing levels of customization. This customization typically comes in the form of value-added warehouse services like rework, kitting, and display building. These services require resources and personnel, and many companies feel that it’s better to lock in the resources and the specific associates that know their business as part of a contract warehouse agreement.
- Cost. The margin for contract warehouse operations is generally significantly lower than it is for shared warehousing, which is based on transactional pricing. So, if you’re able to commit to the fixed parameters of the contract, there are substantial savings to be had.
- Consistency. If your warehouse operations maintain consistent order volumes – and therefore require a consistent amount of space and number of warehouse associates – then it makes sense to enjoy the cost savings that come with a fixed agreement on space and labor. The key here, however, is volume consistency. You don’t want to lock yourself into contract terms based on a period of high volumes, only to find yourself with unused space and excess labor as volumes decline.
Getting started with a contract warehouse
Like most contracts in the logistics world, 3PL contracts are negotiable. It all starts with finding the right 3PL – one that has the space and resources you require, and that is willing to commit them to your operation. From there, every aspect of your contract warehouse operation can be customized to meet your requirements.
If you’re going from shared to contract warehousing with the same 3PL, that 3PL can make the transition a seamless one. It will transfer inventory, systems, and other aspects of your operation quickly while you pay only for minor implementation expenses.
The transition is equally smooth if you’re going from shared to contract warehousing with the same 3PL for only a portion of contracted space. For example, you can say “I store 15,000 pallets with you. I always go up or down 2,000, I want to lock in 15,000, and I want to lock in the same 8 associates that are handling my business today. Let’s make a deal that works for both of us.” Your 3PL can then dedicate those people, switch to a cost-plus agreement and voilà, you’re now a contract warehousing customer.
If, however, you’re moving into a new warehouse (whether yours or a 3PL’s) from another warehouse (whether yours or another 3PL’s), then there could be more significant time and money investments involved. You’ll need to move out of the old warehouse and into the new one (warehouse labor and transportation). You may have systems integration work with your new 3PL. And, you’ll need to change all your ship points with customers. All of this takes time and money.
If you’ve picked the right 3PL for your contract warehouse operation, it will act as a coach and guide you through the transition process. This often entails working directly with your former 3PL so that you don’t have to deal with the logistics intricacies.
At Weber Logistics, we appreciate the significance that a move to a contract warehouse means for your business. And, we’re happy to work with our customers to create a blended cost-plus / transactional arrangement to create a financially favorable contract that is as customized as your operation (if this is preferable). To learn more about our contract warehousing capabilities in California, contact Weber Logistics today.