When it comes to business, organisations ask the same question about their warehousing strategy, and the answer isn’t always apparent. Academic literature and supply chain studies are full of debates on the benefits and drawbacks of each approach. More recently the global disruption to supply chains and warehouse availability have also affected conclusions. But ultimately, we think advances in warehouse technology - and the benefits that follow across the entire supply chain - have shifted this debate firmly in favour of outsourcing.
Should I invest or outsource warehousing?
To start with, we will consider some of the traditional arguments for investing in and maintaining in-house warehousing, examining their validity.
Warehousing as a strategic source of competitive advantage
“Warehousing is an intrinsic part of my business and I want to invest in it and use it to beat the competition”
It’s clear that reducing the cost of warehousing can make your business more profitable. In certain sectors, like chemicals, the warehousing cost can be as much as 4% to 5% of total revenue. If you consider the overall costs of carry in a supply chain, as illustrated below, effective warehousing can minimise both service and storage costs, and risk costs in particular - which can be substantial.
So an efficient, cost-effective and flexible warehousing strategy can become a serious competitive advantage in a sector like that. The most notable example is Amazon, which has an incredibly efficient logistics platform that has propelled them to be the top internet-based retailer globally, with sales of $469.8 billion in 2021.
The cost of great warehousing
What does it take to get to that level of efficiency and dominance? As of 2021, Amazon’s fulfilment centres average about 800,000 square feet in size. The total number of Amazon warehouses in the United States, both current and confirmed, have amassed approximately 319 million square feet and by 2023 will number 355+ large warehouses.
Furthermore, Amazon operates more than 175 fulfilment centres worldwide, with more than 150 million square feet of space, making it a leader in the warehouse industry, with the majority being in North America and Europe.
Source: Statista
That’s because we’ve come a long way from over-sized sheds in which inventory was stacked up high. Reducing storage costs means optimising every last square foot. And that needs big technological investment.
DHL too have spent millions of dollars in warehouse tech. The company introduced augmented reality (AR) technology across their warehouse operations. Picking costs represent 60% of DHL’s total warehousing cost, and implementing AR in the warehouses has contributed to a 25% increase in worker efficiency, and a 40% reduction in errors.
The problem, though, is that most business can’t invest enough to get their warehousing to perform at that level. And if you can only afford traditional, low-tech warehousing, you’ll be at a disadvantage versus the competition who can.
The late Lee Kuan Yew, former Prime Minister of Singapore said:
“If you deprive yourself of outsourcing and your competitors do not, you’re putting yourself out of business.”
If warehousing and logistics are really a core part of your business - one that you hope to grow and develop into a market-leading operation - then it makes sense to invest big.
If not, why not spend the time and money actually focussing on the more important aspects of your business, and leverage the capabilities of third party logistics providers (3PLs) to help you stay at the forefront of technological advances in warehousing?
The costs of warehousing have surged globally, driven by the rapid growth of e-commerce, supply chain bottlenecks, and increased manufacturing activities. In the last few years, total warehousing costs, including rents, service charges, and taxes have risen sharply, with prime rents alone increasing by 11.8% across key markets. Factors such as low vacancy rates and limited land availability, particularly in urban centres, have added to the rising costs. For instance, in Sydney, warehousing costs soared by 25.4% in the year leading to mid-2023 due to extremely low vacancy rates and land constraints.
Labour and energy costs are also contributing significantly to the upward trend. Wages for warehouse workers have risen, driven by tight labour markets, and electricity costs remain high, despite a recent drop in diesel prices. Even though the pace of cost increases has slowed, they are likely to remain elevated in the coming years. The ongoing demand for efficient, strategically located warehouses, particularly as businesses focus on de-risking supply chains and meeting sustainability goals, will continue to support rental growth.
Warehousing as an asset
“Warehousing is an investment and will create an asset that will grow over time - it’s better than spending money on outsourcing that I will never see again”
Let’s look at the evolution of warehousing over the last 30 years:
The concept of a warehouse has evolved from a large building with a solid roof to a “smart” building which tracks individual items, uses cutting-edge automation to cut labour costs, and generates data that helps you keep improving your processes.
In the past, the bulk of the value of warehousing was the commercial real estate which it sat on, and as the value of land rose, the value of your “asset” increased. But in the future, it will be the technological capabilities within your warehouse that will be the major source of value. Whether a company can keep up with technological change will decide whether warehousing becomes an asset or, in fact, a liability.
In 2012, Amazon spent $775m acquiring Kiva Systems, which became Amazon Robotics. As of 2020, Amazon had 200,000 robots working in warehouses, picking items from containers and transporting them around the warehouse. Deutsche Bank has estimated that if Amazon implemented the technology across all of its fulfilment centres, it would provide an annual saving of $22bn.
Kiva Systems robots - Now Amazon Robotics
UPS spent $2.2bn on its WorldPort Facility in Kentucky, which includes over 155 miles of conveyors and can process 416,000 packages per hour - the largest facility of its kind in the world. UPS are also spending more than $1bn a year on “intelligent logistics”, and have made investments in drone technology to increase automation even further. The combination of these economies of scale and the level of technology in these operations have reduced delivery and storage costs across the globe, and created same-day delivery across a number of products.
So it’s important to consider whether buying a long-dated warehouse lease is really an investment Or, if your competitors can tap into these billion dollar investments in technology at the click of a button, and you can’t – is it a liability?
Control over business operations
“I want control over my supply chain and don’t want to rely on anyone else”
Owning the end-to-end process in an industry is something many companies strive for, because it means they depend less on other firms. But there’s no doubt that when it comes to warehousing, there’s a trade-off between autonomy and efficiency.
Advances in WMS (warehouse management systems) and tracking hardware mean it’s now more possible than ever before to really have oversight of your inventory. For instance, using the latest hardware in cargo tracking and surveillance means a company can have real-time updates on its cargo all the way from a factory in China to a warehouse in the UK.
RFID (radio frequency identification) and Internet-of-Things (IoT) developments let businesses have real-time updates on the exact quantities of their inventory and locations of stock, as well as generating valuable data to help improve processes. Yes, you’re still relying on an external provider. But maybe the cost savings, data collection, customer satisfaction, inventory accuracy and expertise make it worthwhile.
If you currently already own a warehouse and are looking for ways to acquire new customers then we have created guide specifically for you. Take a look at how warehouse managers can acquire new customers.
Now let’s look at some of the other advantages of outsourcing your warehousing to 3PLs.
The flexibility to respond
One of the main advantages is the ability to respond to dynamic trends. We’ve talked about the concept of a bi-modal warehousing in more detail in a previous post. The bottom line is, in an uncertain environment, every business should have an element of flexibility in their warehousing strategy. That means being able to scale up the business effectively, including internationally, but also being able to “turn off” capacity you’re not using. It also means not having significant amounts of money invested in one place, so you can respond to new consumer trends and choose your storage locations based on demand.
And warehouses aren’t standalone operations, either. Much of their efficiency depends on their ability to transport and distribute goods around the country. So being part of a large warehouse and distribution network allows businesses to benefit from network effects and strong relationships, built up over many years, which translate into lower shipping and distribution costs.
It's not just logistics
How many young millennials own cars, versus rely on Uber?
How many couples own holiday homes, versus use Airbnb?
How many people own music collections, versus subscribe to Spotify?
Just as technology is moving us from ownership to the experience economy in our personal lives, the consumerisation of B2B technology means businesses are moving from the ownership model to leveraging external expertise.
We’re willing to bet the same trend will sweep the warehousing industry. It comes back to the old business adage, “Master your strengths, outsource your weaknesses.” Focus on your core business and tap into flexible, on-demand, high quality warehousing solutions when, where, and how often you want. At Stowga we’re connected to over 4,000 sites across the UK and our main aim is to add new operational functionality to the marketplace that ushers in the era of fully flexible and efficient logistics services for customers worldwide. What this means in real terms is a streamlined Control Tower type functionality with an intuitive dashboard and collaborative end-to-end fulfilment tools for customers to optimise operational efficiency and control costs, whilst maximising Customer Service delivery.
Benefits of Investing in Warehousing
An owned warehouse can provide unique benefits that might align better with your long-term business goals. Let’s dive into some of the key advantages of investing in your own warehousing operations.
Complete Control Over Warehouse Operations
Owning your warehouse allows you to maintain complete control over your operations. This includes managing inventory levels, supply chain processes, staffing decisions, and quality assurance measures. When you have control over these elements, it enables you to optimize your processes based on specific business needs, customer demands, and operational efficiencies tailored to your company’s objectives.
Customisation and Branding
Investing in your own warehouse means you can create an environment that reflects your brand. This includes everything from the layout and design of the storage space to how orders are processed and fulfilled. A customized warehousing solution can enhance your brand image and customer experience, as your operational practices can align closely with your company’s values and mission.
Long-term Cost Effectiveness
Although the upfront costs of investing in warehousing are substantial, it can lead to long-term savings. You can avoid ongoing outsourcing fees and the potential for rate
increases from third-party logistics providers. Furthermore, having your own facility allows you to optimize your operations for maximum efficiency. With direct control over your warehousing processes, you have the flexibility to implement changes that can reduce overhead costs, improve inventory turnover, and increase overall profitability.
Scalability
Owning a warehouse can also provide a strategic advantage when it comes to scaling your operations. As your business grows, you can more easily adapt your facilities to accommodate increased inventory and additional product lines. This is often more challenging when relying on third-party logistics providers, who may have fixed capacities or limited availability for additional space. Additionally, the ability to make quick adjustments to your warehouse layout or processes can also give you a competitive edge in responding to market changes and customer demands.
Enhanced Security and Risk Management
An owned warehousing facility can provide a greater sense of security compared to outsourcing. While third-party providers may implement strong security measures, owning your space allows you to take control of the safety and protection of your inventory directly. This includes deciding how to implement surveillance technologies, fire safety procedures, and inventory tracking systems that align with your business priorities.
Benefits of Outsourcing Warehouse Operations
When considering your warehouse services from shipping costs, inventory management, fluctuations in demand to seasonal fluctuations, there is a lot to think about. As most warehouse owners will know, time is essential to managing the workload for warehouses. This means that the outsourcing costs for warehousing could be worth the investment. below are some of the benefits of outsourcing the operating costs of warehouse operations.
Professional Expertise and Advanced Technologies
Third-party logistics providers often employ professionals who specialize in warehousing and inventory management, meaning they are well-versed in the latest security technologies and practices. These firms typically invest substantially in state-of-the-art security systems, such as surveillance cameras, access control systems, and alarm systems, which might be cost-prohibitive for smaller businesses to implement independently. Outsourcing allows you to leverage this expertise and technology without the overhead costs associated with ownership.
Insurance and Liability Coverage
When outsourcing warehousing, your logistics provider usually carries comprehensive insurance coverage against potential damage, theft, or loss of goods. This means that, in the event of unforeseen circumstances, such as theft or natural disasters, you may have recourse for compensation which can alleviate the financial impact on your business. Relying on a third party can mitigate risks related to liability and property damage, allowing you to allocate resources toward other critical areas of your business.
Flexibility in Disaster Recovery
In times of crisis, dedicated warehousing providers often have established contingency plans and recovery strategies that can be swiftly implemented. These logistics companies typically have backup facilities, diversified supply chains, and established relationships with carriers that can be activated during disruptions. This flexibility allows businesses to maintain operations and minimize downtime. If you own your warehouse, you might lack the same level of preparedness without significant financial and time investments to develop similar protocols.
Cost Analysis: Weighing Long-Term Investment Against Immediate Costs
When deciding whether to invest in warehousing or outsource, it's crucial to examine the financial implications of both options. Building or purchasing a warehouse typically involves a significant capital investment upfront. This includes costs related to land acquisition, construction, maintenance, and staff salaries. Additionally, businesses must factor in ongoing expenses such as utilities, insurance, taxes, and equipment purchases. While this option may provide long-term value and control over the entire operation, the initial investment can be daunting for many companies, especially startups or smaller enterprises.
On the other hand, outsourcing warehousing to a third-party logistics provider—or 3PL—allows businesses to avoid these substantial upfront costs. Instead, you’ll pay based on usage, which means you’re only spending money when you need space and support. This can result in a more manageable cash flow for growing businesses that may not yet need a dedicated warehouse but still require reliable storage solutions.
About FLOX
FLOX supports businesses in navigating the complexities of today's dynamic environment by providing the tools and insights necessary for success. By promoting collaboration and making better use of available capacity, FLOX enables greater flexibility and agility in supply chain operations planning. Its platform streamlines processes, enhances decision-making, and fosters a culture of transparency and accountability, ultimately transforming how organisations manage their supply chains.