Perhaps your business completed a comprehensive logistics network study years ago when you determined the location and design of your current warehouse and selected or constructed your building. And perhaps your warehouse facility has served your business well over those years. Even so, some things have probably changed since you moved in. Your customers have changed. Your inventory has changed. Your workers have changed. Your neighborhood has changed. Your costs have changed. Your needs have changed.
The reality is, the value your warehouse contributes to your business is heavily driven by the age-old real-estate mantra: “location, location, location.” In addition to the location, your warehouse’s value is also driven by other key attributes that should support your business effectively and efficiently.
So how do you decide whether it’s time for your business to move to a new warehouse? To make the right decision, consider and evaluate these five important aspects of your business and your warehouse operation.
Your Business Growth
As the old saying goes, “You can’t put 10 pounds of potatoes in a five-pound sack.” That might seem obvious, but something similar could be said about your warehouse. The effective operating capacity of your warehouse comes in three distinct forms, which I call the “capacity trinity.” These capacities track different things and are measured differently, but you should understand them in your warehouse operation:
· Physical capacity – How much “stuff” (in units of inventory) can your warehouse hold in storage?
· SKU capacity – How many pick facings are available in your warehouse to support efficient picking of your unique items (SKUs)?
· Throughput capacity – How much volume (in units of inventory) can be efficiently processed through the functional areas of your warehouse during your peak week of the year?
You probably planned your current facility to satisfy your expected business requirements for some timeframe after you moved in, but has your sales volume (in units stored and shipped) increased significantly since those days? Has your warehouse exceeded its original expectations? Or are you forecasting additional growth in sales volume in the coming years?
These situations are generally good problems for a business to have, but your warehouse needs room to grow efficiently. In the face of growth, limited capacity of any type could mean your current facility is reaching the end of its useful life. It might soon “hit the wall” and be incapable of supporting the future requirements of your business.
2 Your Customer Expectations and Outbound Freight Costs
More than ever before, your businesses must cope with “the tyranny of ‘now.’” Customers of all types are demanding faster deliveries, even as soon as the day their orders are placed. Speed of delivery is driven mainly by proximity, and unless your customers pay for shipping, delivering your products to them over longer distances increases your shipping costs. Consequently, regardless of the outbound transportation modes you use (parcel, LTL, FTL, fleet, etc.), the location of your warehouse has a profound effect on your operating costs — and on your customers’ satisfaction.
As a practical matter, this means your warehouse should be located close to your delivery points, such as your customer locations or retail stores. Or, if you ship primarily through a specific carrier, your warehouse should be located close to that carrier’s major hub or crossdock facility.
Whether your warehouse serves customers in the retail, wholesale, commercial, industrial, or government business sector, or some combination of these, it’s likely that you’re experiencing increasing demand for smaller and more frequent deliveries associated with e-commerce. It’s also likely that this “ones instead of tons” trend accelerated during the recent pandemic. In most cases, a warehouse that was designed to pick and ship fewer, larger orders does not efficiently support the picking and shipping of smaller, more frequent e-commerce orders.
Starting from scratch by moving to a new warehouse optimized for e-commerce can be much more cost-effective and expedient — and result in fewer headaches — than redesigning an existing warehouse to support a significantly different business model.
Moving to a new, logistically optimal, efficiently designed warehouse can pay big dividends to your business. Reduced delivery times to your customers and shorter delivery distances are likely to result in increased sales and reduced freight costs, respectively. And ensuring that the design of the warehouse is tuned for efficient picking, handling, and shipping of e-commerce orders is likely to result in other reduced operating costs, such as the costs of labor and space.
Your Inbound Freight Costs
If you pay your suppliers for shipping their products to your warehouse, then the location of your warehouse can also have a substantial effect on your inbound freight costs. As with deliveries to your customers, proximity also affects the speed of delivery from your suppliers to your warehouse. So even if the cost of your inbound freight is paid by your suppliers, the location of your warehouse is likely to govern how quickly you can receive products from them.
Ideally, this means your warehouse should be located close to your supply points, such as your primary suppliers’ shipping locations, your manufacturing facilities, and the ports and other points of entry through which you import your products. Logistically optimizing the location of your warehouse based on these supply points will result faster product availability and reduced freight costs.
Your Labor Costs
Your local labor market is constantly changing. Finding, hiring, and retaining workers for your warehouse probably becomes more difficult with each passing year. Labor costs are consistently increasing in most geographic areas, but some local markets have seen greater wage increases than others.
In addition, the shrinking availability of qualified workers (emphasis on the word “qualified”) with basic skills who are willing to work in warehouses for reasonable wages is a growing problem in many geographic areas. As a case in point, a general manager of a medium-sized warehouse recently told me he would immediately hire more than 100 workers — if he could just find workers who could and would do three basic things: read, follow instructions, and show up for work. And as industrial centers grow, competition with other local employers can compound the problem, further limiting worker availability and putting additional upward pressure on local wage rates.
Without question, labor is the largest single cost category for operating most warehouses. Since local market conditions can radically influence labor availability and costs, one of the major potential benefits of moving to a new warehouse is that your business can select a location where qualified labor is more readily available, competition is lower, and wages are more reasonable.
Your Facility Operating Costs
The characteristics and condition of your current facility should also be considered when you’re thinking about the possibility of moving to a new warehouse. Understandably, the costs of operating a warehouse (such as wages, rents, utilities, insurance, regulatory fees, and taxes) tend to increase over time. And industrial facilities naturally deteriorate with ongoing operation, so they require more maintenance and repairs as they age. Older buildings also have more antiquated design elements, which result in higher operating costs.
On the other hand, newer buildings are more likely to incorporate desirable design elements for warehousing, such as greater clear heights, floors with higher structural capacities, and broader column spans, all of which facilitate modern, high-density storage methods. Newer buildings are also more likely to be equipped with energy-efficient heating and cooling systems, insulation, and lighting, as well as modern fire-prevention systems. Assess the condition of your current warehouse facility relative to the benefits of a better facility.
Also ask yourself if the design of your current facility supports modern warehousing best practices. For example, facilities with multiple floors or poorly proportioned aspect ratios (length-to-width) typically don’t enable functional layouts that provide efficient material flows. Your business might experience major savings in facilities costs if you move to a new warehouse.
All Things Considered
When making the important decision whether to move to a new warehouse or not, it’s vital to be objective rather than emotional. Take a holistic approach. Define your realistic business requirements and variables (suppliers, customers, demand volumes, etc.). Perform a cost-benefit analysis that compares the “stay put” alternative with the potential “move” alternative. Evaluate the alternatives quantitatively by crunching the numbers using the same set of data and requirements, but also be sure to consider qualitative factors, such as when your current lease will end.
If you decide it’s time to move, then what? How do you decide where to move? Find out in my article in the next issue of PARCEL.
Stephen T. Hopper, PE is Founder & Principal of Inviscid Consulting, whose mission is to help business plan and streamline their warehousing, logistics, manufacturing, and distribution operations to drive down operating costs, boost capacity, improve service levels, and mitigate risk. He can be reached at firstname.lastname@example.org or 404.832.5326.
This article originally appeared in the July/August 2021 issue of PARCEL.