10.6 Warehouse Ownership

Now that you've been on a "virtual" warehouse tour, you know that warehousing is a complicated, specialized, and potentially expensive business. You may not want to do this yourself. In fact, you may want to focus on what your company does best—that is, your core competency—and outsource your warehousing needs to a third-party specialist. If you choose to run your own warehousing, you are engaged in private warehousingThe act of running one's own warehousing operations, regardless of the ownership status of the warehouse facilities (company owned or rented). . You might make this choice to enjoy the highest level of operational control and security. For instance, De Beers, the world's largest diamond miner and marketer, has run its own private warehouse in London, England since 1889. You can't blame De Beers for wanting to secure its highly valuable merchandise. Private warehousing also makes sense when the scale and scope of your operations enables you to obtain needed economies and achieve distinctive customer service levels.

When you turn to an outside expert (a public warehouse or 3PL), you can get very creative in setting up the operating arrangement. For instance, you might own the facility and invite someone like DHL or UPS to manage it for you. United Technologies' Carrier division does just that in its Monterrey, Mexico air conditioner manufacturing operation. Or, you may simply use the warehouse company's facilities. If so, you only pay for the space and services you use. This is kind of like going to a restaurant and ordering off a menu. In fact, we sometimes call this menu pricingThe application that allows a customer to pay only for the services received and the space used when working with an outside expert (a public warehouse or 3PL) for warehousing needs. . Going this route gives you maximum flexibility. You can use more or less space over time and change your choice of service options. You can also usually exit the operation more easily than when you own and operate the warehouse yourself.

Of course, when you "share" space in a public warehouseFacilities that provide long-term or short-term warehousing services to companies. , you need to ask, "Is my ‘landlord' really good?" and "What kind of ‘roommates' might I get stuck with?" A grocer learned the hard way how important it is to inquire about "roommates" before signing the service contract. The grocer began hearing complaints from consumers about bad-tasting bottled water bought at the company's stores. When the number and intensity of complaints increased, an investigation revealed that the water had been stored in a 3PL warehouse near a supply of fresh rubber tires. The plastic bottles had absorbed the fumes seeping from the tires, leading to the strange-tasting water.

To make the right decision about ownership—as well as level of automation—you need to carefully consider your needs and then perform a total cost analysis. As always, your biggest challenge in doing a total cost analysis is to identify your relevant costs and gather accurate data so you can run the numbers. For warehousing decisions, the most important criterion is typically volume of product you will handle over time. Figure 10-9 makes cost comparisons for different warehouse operations and indicates your likely choice based on the tradeoff between fixed and variable costs. Remember, higher volumes justify higher fixed cost—that is, you can spread the costs of ownership and automation over a larger number of units handled.