Contract warehousing advantages and disadvantages

Introduction

A company may choose to combine public and private warehousing through a contract process. In San Antonio, Texas there are a series of public warehouses that are actually owned by the city and they are located in Port San Antonio. Many of the businesses contract the warehouses for a specified period of time. Often this is based on a contract that the company has to manage materials for another company or as a temporary expansion option for a growing company. In this situation a company may or may not have its own transportation assets. In a contracted warehouse situation a company may or may not, depending on the contract, be responsible for maintaining the facility. The arrangement exists for the duration of the contract and any other responsibilities agreed upon by the two parties will be delineated in the contract. Public warehousing is a very good option for a company that does not have the money to hire full time staff to manage its product or manage its transportation costs. The cost of operating and maintaining the facility falls on the company that owns the building but only manages the inventory. A private warehouse it typically owned by a company with sufficient monetary assets to afford to hire a staff, maintain insurance, maintain a fleet of vehicles and takes to care of any facility maintenance that may be necessary. This keeps the whole supply chain within the bounds of one company. Combining public and private warehousing may be an attractive and economical option for any company.

A company will choose to combine public warehousing with private warehousing when, financially, it makes sense for the company to lease a facility instead of build or purchase and staff it with their own personnel.

Business Example

There are several instances when private and public warehousing teaming up together makes good business sense. International Finance Corporation (2012) describes a public-private partnership (PPP) in agricultural storage in various locations around the world. The need for modernized storage facilities in developing countries and upgraded logistical systems is imperative for growth of the industry. The governments in the Middle East, Sub-Saharan Africa, South, and East Asia have recognized the short falls of public warehousing and are opening up the agriculture business to more privatization of warehousing and logistics. The introduction of privatization has allowed the governments to improve operational efficiencies, reduce waste/damage, and introduce the latest technology and international best practices, and finally allow better quality control. This allows for more growth and investment in the industry that previously was not being allowed when the storage facilities were owned primarily by the government. (Public-Private Partnerships in Agricultural Storage, pp.5-12).

Transportation Management

The benefit of combining private transportation in a logistical system for warehousing is a task the transportation manager must plan for based on the daily operations of their company.

It could make the overall process of warehousing cost effective, in terms of price, scheduling and transportation flexibility. By offering the vendor these solutions of transporting their products throughout the logistical system of warehousing is what separates the private transportation from the public transportation.

The private transportation company tailors its service to meet the needs of their customers. The public transportation company does not have this flexibility due to the nature of their business model and operations being set to provide for a wider demographic.

The public transportation company has at its disposal, the intermodal transportation for multi stop locations, and can provide standard rates for this operation. It is sometimes not needed on a smaller scale operation in warehousing.

The private transportation company can offer this option as well, but are better suited and cost effective for transporting from point A to B with better efficiency. Their automated network for processing to a selected demographic allows them to compete more effectively too. So for warehousing the private transportation company serves the vendor best.

The private transportation company has their own fleet of vehicles, operators and mangers that work to provide the intra warehouse transportation needed. They can even be embedded within the warehouse company.

Overall, it depends upon the customer need, and the service the vendor would like to provide, will determine whether private or public transportation is best.

Inventory Control

Inventory control is an important component of supply chain management. In today’s fast paced marketplace, maintaining excess inventory is not conducive to remaining competitive. Efficiency is important for survival and maintaining excess inventory utilizes important resources to purchase and maintain. “There are four major components of inventory carrying cost: capital cost, storage space cost, inventory service cost, and inventory risk cost. Capital cost is the amount of money that is tied up on inventory that could be invested or spent somewhere else. Storage space cost is the cost to move excess inventory, rent, heating, lighting, and handling costs. Inventory service costs is the amount of insurance and taxes that are spent on inventory. Inventory risk costs include the costs associated with obsolescence, damage, pilferage, expired goods, and other risks to stored products. “(Coyle, 2009, Page 332-333).

Utilizing information technology and just in time processing assist in maintaining appropriate levels of inventory that satisfy consumer demand and do not waste valuable resources with excess inventory. “At the Nabisco Division of Kraft, branch warehouses are located adjacent to bakeries. Inventories for all products are located at these warehouses to facilitate full shipments to customers.”(Bowersox, Closs, and Cooper, 2012, Page 297). This ensures the right products in the right quantities are strategically located for distribution and reduces the inventory cost for items that are in transit. “Inventory carrying costs are on average about 34 percent of the total logistics costs for organizations. Transportation costs comprise about 61.4 percent of all logistics costs.” (Coyle, 2009, Page 323).

Order Processing

One key ingredient to a contract warehouse agreement is the order processing department. Kraft is known for their contract warehousing facilities which gains logistical benefits from the private as well as the public systems. With a contract warehousing agreement, Kraft would be entering a longer contract then they would with a public contract, but this contract would be cheaper and allow for more control. What this means to the order processing department is that the processing of all orders can be potentially controlled more by the company, unlike the normal stipulations under a public warehouse. Aparna Iyer stated that a, “public warehouse results in the lessee having to relinquish control” (2009). Furthermore, with Kraft being in a contract warehouse deal with AmeriCold, in regards to their order processing department, “the longer Kraft utilizes AmeriCold’s services, the better the contract warehousing firm’s capability to understand business needs and provide customized services” (Bowesox, Closs & Cooper, 2012). This can easily benefit both the order processing department, as well as the return merchandise processing. AmeriCold will be able to recognize recurring errors or problems with the various processes, and be able to address them in a better way than a public warehousing deal would be able to.

Customer Service

According to the VendorSeek website (2013), there are three types of warehousing: public, contract and private. Each offers businesses various advantages such as no long-term commitments (public) and reasonable per square foot storage costs (contract). However, each also has limitations, such as potentially high startup and operating/maintenance costs (private). Foremost, a business should consider their customers’ needs. Will the customer’s product be more at risk in a public warehouse versus a private warehouse? What are the total costs for each option? Can this cost be absorbed into the product price, or will it need to be satisfied internally? Private warehousing offers many customer benefits because its operation can be tailored to fit the customer’s needs. On the other hand, public warehouses can benefit multiple customers if it offers multi-load transportation. The VendorSeek website (2013) asks the following questions:

Do they need to store the products near the customer in order to reduce the time from order placement to delivery? Does the customer need the product shipped via a specific carrier (air, land, or sea)? If so, then the warehouse would need to be at or nearby one of these carriers’ hubs.

Hudock (1998) wrote that “customer service is the true value of warehousing, and people will pay for [product] availability.” With the introduction of information technology into the supply chain system, the need for large, inventory-filled warehouses is being replaced with smaller or consolidated warehouse operating facilities that are able to fill a customer’s order in a more efficient amount of time and cost.

Return Merchandise Processing

Returned Merchandised Processing involves the process whereby a product is returned so as to receive a repair, refund, or replacement during the warranty period for the product. In such a situation, the purchaser of the product should first contact the product’s manufacturer or retailer or distributor to obtain authorization to return a product. Typically, the logistics department are responsible for warehousing that also involves directing returned product back to their constituent manufacturers.

Consolidated returned merchandise processing should start through a definite credit policy that includes ground rules that are coded in a customized copyrighted software solution. The proprietary software should be able to provide an infrastructure that is necessary to manage order information, return receipts, replacement fulfilment and credit/billing services (Daugherty, Richey, Genchev, & Chen, 2005).

The process in turn is supposed to capture information about the returned item at the component level that will be able to control a manufacture’s exposure to incomplete and invalid returns. For a good reason. Incomplete and invalid returns can at times be very costly to importers and manufacturers.

Manufacturers can reduce the overall costs of supply chain by approximately 25% and backlogs from the return processing from 40 to 80 days to 8 days through distribution process in a given location as well as through reverse logistics. Refurbishment and reprocessing can as well be added to the return merchandise processing process and include disassembly, restoration, reassembly, diagnosis, and rebuilding activities with requirements for accurate inventory control, product sorting, and warehousing for goods in progress, rebuilt finished product and components (Mukhopadhyay & Setaputra, 2006). In order to meet specific needs, these processes require customized processes.

Ultimately though a solid IT infrastructure and well defined procedures and policies as well as a flexible workforce and an accurate inventory control, the processing of returned merchandise should not pose any problems or difficulties to the company’s logistics.

Conclusion

References

Bowersox, D., Closs, D., Cooper, B., (2012). Supply chain logistics management. (4th ed., pp. 30-31). New York, NY: McGraw-Hill. Retrieved from http://online.vitalsource.com/books/9781308001029

Coyle, J. J. (2009). Supply chain management: a logistics perspective (8e [ed.] Ed.). Mason, OH: South-Western Cengage Learning. Print

Daugherty, P. J., Richey, R. G., Genchev, S. E., & Chen, H. (2005). Reverse logistics: superior performance through focused resource commitments to information technology. Transportation Research Part E: Logistics and Transportation Review, 41(2), 77-92.

Edward Jr, S. J., Stevens, M. J., Milch, J. A., Sidari, P. J., Combs, T., & Kern, D. J. (2004). Merchandise return system with value added returns processing (dispositioning). Washington, DC: U.S. Patent and Trademark Office.

Hudock, B. (1998). Secret weapon: Warehouse strategies help improve customer service. Materials Management and Distribution, 43(10), 58. Retrieved from http://search.proquest.com/docview/227982270?accountid=8289 .

Iyer, A. (2009, July 23). Advantages and disadvantages of contract warehousing. Retrieved June 3, 2014 from http://www.buzzle.com/articles/contract-warehousing.html

International Finance Corporation (2012), Public-Private Partnerships in Agricultural

Storage, PPP Workshop Bhubaneswar, Retrieved from

http://www.ppiaf.org/sites/ppiaf.org/files/documents/NEERAJ-

Agribusiness-Storage-PPP.pdf

Mukhopadhyay, S. K., & Setaputra, R. (2006). The role of 4PL as the reverse logistics integrator: optimal pricing and return policies. International Journal of Physical Distribution & Logistics Management, 36(9), 716-729.

VendorSeek website (2013). Retrieved from

http://www.vendorseek.com