As an outsourcer choosing whether to opt for a dedicated warehousing or shared warehousing, you should consider many factors regarding your business’s nature, type of products, costs, and other elements that could affect your business.
The following article discusses the differences between a dedicated warehousing and a shared warehousing and some advantages and disadvantages of both models. You could also ask professionals for help to understand your needs better.
Dedicated warehousing, also called “contract warehousing,” involves hiring a warehouse service provider to manage your warehouse operations, typically from a larger-scale facility, with every area dedicated to your needs. The warehouse building, complete with its labor, technologies, and equipment, and value-added services, would run solely to fit your specific needs.
Dedicated warehousing involves a multi-year commitment, usually between two to five years. You and the warehouse service provider sign a contract for various elements within a warehouse operation. You, the customer, or the warehouse service provider could either own or lease the physical facility, giving you more control and transparency.
- Cost Structure – In a dedicated warehousing model, the cost structure between you and the service provider could include transactional-based costing, cost-plus, or a combination of the two. Transactional-based costing sometimes referred to as activity-based costing, involves using fixed rates agreed upon by the two parties for all activities related to the warehouse operations.
Meanwhile, a cost-plus structure involves the warehouse service provider to charge a contracted markup for warehouse operations. You and the provider know all expenses for infrastructure management, systems, processes, and labor.
- Advantages – As the outsourcer, opting for dedicated warehousing would allow you to understand unit costs and impact key performances directly. The whole warehouse operation would also function around your product flow and other requirements of your business. Dedicated warehousing would also give you access to specialized services such as bulk packing, cross-docking services, order consolidation, etc.
- Disadvantages – It might seem that fixed monthly rates would be advantageous for your business, especially if you have a huge inventory amount. However, dedicated warehousing could give you higher overhead and maintenance costs when orders diminish due to market conditions, or perhaps seasonal reasons.
Also known as “multi-client warehousing,” shared warehousing stores multiple-clients’ inventory in a shared space. It is a more flexible solution with shorter contract terms, usually spanning from one to three years. You, along with other clients, could also share transportation as needed.
Shared warehousing typically serves small-to-mid-sized businesses such as businesses new to the market, and those with seasonal products and needs. The warehouse manager would allocate inventory space and labor based on each company’s requirements sharing the facility.
- Cost Structure – Shared warehousing usually involves a combination of transactional-based pricing as described above, fixed storage charges for square footage used, and “pallet-in-pallet-out” charges for each pallet of product handled.
- Advantages – Shared warehousing could be the perfect fit for your business as it allows relative increase or decrease of costs for seasonal cycles or unexpected surges in inventory. This model allocates costs proportionally to each client sharing the facility. As you occupy less square feet and use less labor and equipment, your costs would decrease accordingly.
- Disadvantages – As the nature of the shared warehousing involves multiple clients in a single space, you would not avoid having competition for square footage, especially when the warehouse reaches its maximum capacity. This could also pose a challenge during seasonal sales cycles.
Additionally, while low sales volume keeps costs down, the high volume could increase your costs beyond expectations, especially during unexpected sales surges. If poorly managed, this could eat up profit margins resulting in a low ROI.