Costs are rising
To control the rising cost of warehousing, companies are using fewer but bigger facilities and outsourcing more of their warehousing needs.
By Staff -- Logistics Management, 7/1/1999
Warehouse operators these days are doing more--and they're often doing it with fewer facilities and resources, says William Drumm, president of Herbert W. Davis & Co., a New Jersey-based logistics consulting firm."There is a steady growth in the value-added services required by customers," says Drumm. "Warehouses now are doing assembly, special labeling, prepackaging, and other activities that used to be done by the customer."
Not surprisingly, then, warehousing costs have been rising. According to the Davis Database, which has been tracking logistics costs for major companies for more than 20 years, warehousing costs as a percentage of sales rose by 3.72 percent between 1997 and 1998. All other categories of logistics costs, including transportation, order processing, and administration, actually dropped in 1998.
One way companies are trying to reduce warehousing costs is simply by cutting the number of facilities, reports John Boyd, president of the Princeton, N.J.-based site-location company bearing his name. "When a logistics manager looks at his company's entire network, it increasingly makes sense to have fewer warehouses," says Boyd. "The cost of transportation is far less than buying and operating warehousing assets. Companies are going to continue to see how few warehouses they actually need," he predicts.
A recent survey of members of the Warehousing Education & Research Council (WERC) confirms that the number of warehouses is shrinking. According to the results of that survey, not only are companies reducing the number of warehouses in their distribution networks, but they also are using larger warehouses than they did in the past.
Respondents said that on average, their companies had reduced the number of warehouses in their networks by 2.6 between the fall of 1997 and the fall of 1998. These respondents said they expected to eliminate another 2.5 warehouses by the end of 1999.
Of the 224 survey respondents, manufacturers forecast the greatest decline in the average number of warehouses they used, projecting a 23-percent reduction from 12.1 facilities in the fall of 1997 to 9.3 in the fall of 1999. Wholesalers, meanwhile, predicted that the number of facilities they used would increase from an average of 11.3 in the fall of 1997 to 12.2 in the fall of 1999. The survey also found that various industries were taking different approaches to designing warehouse networks: Respondents who worked for consumer-goods companies, for example, projected a drop of 23.4 percent in the number of warehouses between 1997 and 1999. A sharp contrast was found in the electronics/computer sector, where respondents predicted a 45.3-percent increase in the number of warehouse facilities, rising from 7.0 to 12.8 facilities on average.
The survey also looked at the use of private and third-party (public and contract) warehouses. One surprising finding was that overall, respondents reported increasing their usage of private warehouse space as a percentage of their total warehousing mix. The survey also found that:
- Although the number of private facilities generally is decreasing, those remaining will constitute a larger percentage of the total number of warehouses than they do now.
- Large companies reported plans to decrease their use of public warehouses by nearly 50 percent between the fall of 1997 and the fall of 1999.
- Manufacturers depended the most on third-party warehouses, with 62 percent of their network consisting of public or contract facilities.
- Retailers predicted that only 20 percent of their distribution networks would be third-party based, while wholesalers predicted that only 8 percent of their warehousing needs would be outsourced to third parties.
- In terms of product lines, industrial/office products and consumer-goods manufacturers expected to rely the least on third-party facilities, outsourcing only 12 percent of their warehousing.
- The grocery and chemical sectors reported the greatest current use of public facilities, but respondents from both sectors predicted a drastic reduction in future use of public warehouses.
New facilities to be added or replaced in 1999 generally will be larger than existing warehouses. Respondents in the consumer-goods industry, for example, predicted that new warehouses added in 1999 would be 41 percent larger than the facilities they replaced. Retailers projected that new warehouses would be 86 percent larger than existing facilities, while pharmaceuticals manufacturers expected new facilities to be double the size of what they use now.
Operating Costs Climb
For all warehouses--whether private, public, or contract--costs are rising rapidly. According to Michael Jenkins, president of the International Warehouse Logistics Association (IWLA), which represents 600 public and contract warehousing companies, the two largest cost components in warehousing are capital cost (ownership or lease cost of the facility) and labor.
According to Jenkins, labor often represents 25 percent or more of operating costs. "The labor component increases as the facility gets more into value-added services, which tend to be highly labor intensive," he says. "The problem is not just the cost, but more and more, it is just finding good workers."
Information technology probably is the third-largest budget item for warehouses, according to Jenkins. The biggest expenditures are on information technology that is linked to inventory control, such as WMS and data-collection systems. "Integration of warehousing systems with those of the customers is a rapidly increasing area of attention, and therefore cost," he observes.
Another heavy budget item for many warehouses, especially in the third-party sector, is ISO 9000 quality-control certification. "Internationally based companies insist on ISO certification," says Jenkins, who adds that between three and five IWLA facilities per month are being certified. Though ISO certification offers numerous benefits to customer and vendor alike, attaining and renewing certification requires many months and many thousands of dollars.
Perhaps the fastest growing expense for warehouse operators these days, Jenkins says, is the cost of compliance with regulations issued by the many government agencies that have regulatory powers over warehouses.
The Occupational Safety and Health Administration (OSHA) has the greatest impact on warehouse operations, he says. Starting in 1999, all lift-truck drivers need to be trained and certified in the operation of the specific vehicles they drive. According to Jenkins, certification costs for a typical warehouse will run about $20,000 to $30,000 per facility. "This number goes up quickly if the warehouse has a lot of turnover or uses a significant number of temporary workers," says Jenkins. "They all need to be trained and certified."
OSHA also has issued proposed guidelines for ergonomics, which if adopted could cost a warehouse between $100,000 and $300,000, Jenkins believes. "The regulations require plans for evaluation, remediation, and ongoing monitoring of ergonomics standards for all workers and all jobs, just for starters," he says. The cost of compliance may prove to be too high for some: "The total cost of compliance could exceed the profit of several IWLA member warehouses," he predicts.
The Environmental Protection Agency (EPA) also has jurisdiction over any warehouse that stores so-called "dangerous substances," which include products ranging from chemicals used in manufacturing to such benign items as household chlorine products. The EPA requires any warehouse that stores such materials to have a management plan for dealing with accidental releases. "The cost of these plans is often $150,000, plus another $50,000 for annual updates," says Jenkins. Altogether, Jenkins estimates, the total cost of regulatory compliance for a typical warehouse is $500,000 per facility--a cost that inevitably will be reflected in the price warehouse users pay.
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