Handing the warehouse to an outside operator: criteria

A manager sometimes wonders: what if we hand the warehouse entirely to an outside operator? Sometimes this is the right decision, and sometimes it means giving up your own knowledge and control. The question of outsourcing the warehouse cannot be settled by price alone: control, flexibility and risk come into it too. Below are criteria for the decision and a way to compare costs properly. This decision allows two kinds of error: keeping in-house work you cannot manage well, and moving out of your control work that is vital to the business.

When an outside operator is convenient

An outside operator usually makes sense when:

• volume is seasonal or uncertain and you do not want to raise fixed costs;
• you are trying a new market or region and are not yet sure of growth;
• there are not enough experienced people to run a warehouse and no time to look for them;
• volume is small but special equipment (for example refrigeration) is needed, and buying it is awkward.

In such cases the operator turns fixed costs into variable ones: if volume falls the payment falls too, but if volume grows, so does the payment.

When your own warehouse is better

Keeping your own warehouse pays when:

• the goods need special handling and you have that knowledge;
• volume is large and steady, so fixed costs spread well;
• the warehouse is your competitive edge: you keep customers through speed, packing or quality;
• the data or customer base is very sensitive.

There is often a middle way too: keep the main goods in-house and put the seasonal or slow-moving part with the operator.

Comparing costs properly

Often the cost of your own warehouse is counted only as rent and wages, and the operator's cost only as the tariff. Count both sides fully. Your own: rent, wages, utilities, equipment wear, software, management time, shrinkage, tied-up capital. The operator's: storage (per pallet place per month), receiving, picking (per line), dispatch, a minimum monthly charge, extra services (packing, returns), plus a coordinator and transport on your side.

An example, with illustrative figures. Your own warehouse costs 180 million so'm a month and ships 30,000 lines, that is 6,000 so'm per line. The operator's offer: 4,000 so'm per line (120 million so'm in all), 600 pallet places at 60,000 so'm each (36 million so'm), about 8 million so'm for the minimum charge and extra services, 164 million so'm in total. Adding 10 million so'm for your own coordinator gives 174 million so'm. The difference is 6 million so'm, about 3 percent. A gap this small is not settled by price: control, flexibility and risk will decide.

Look at hidden items beyond the price too: a minimum volume requirement, a fee for moving goods, a charge for a late order, an extra payment for reports, conditions for extending the contract. When comparing offers, ask about each of them separately.

What control must not be lost

The contract with the operator should state clearly:

1. service level: record accuracy, order dispatch time, the acceptable level of damage;
2. reports: which ones and how often;
3. stock counts and your right to carry out an audit;
4. the ability to see balances whenever you need;
5. liability and compensation: what is paid for lost or damaged goods;
6. confidentiality of data and the fact that the goods are yours;
7. exit terms: how you take back the goods and data if you decide to leave.

Most of these items look simple, but in a dispute they are exactly what decides. Before signing, let the warehouse manager and the finance person read the contract too.

Moving in stages

Do not move everything at once. Run a pilot: one product group or one region, for 2 to 3 months. Agree the indicators in advance and compare them every month. Do not lose warehouse knowledge in your own company: the coordinator should be someone able to understand the operator's work. Otherwise you cannot judge the result and become dependent on the operator. At the end of the pilot ask three questions: did the operator hold your indicators, are the reports reliable, is the answer quick when a problem arises. If you cannot say "yes" to two of them, do not expand.

Conclusion

Outsourcing gives convenience but reduces control; your own warehouse gives control but demands fixed costs and attention. The OmborExpert specialists help calculate the cost of your own warehouse, assess operators' offers and write the service level into the contract.