Warehousing Costs: 6 Explained and How to Reduce Them

Global warehousing costs are soaring. This article explores ways you may be able to reduce your warehousing costs.

With the global supply chain crisis heating up, are warehousing costs simply following suit? What’s driving the warehousing cost trend skyward?  And can warehouses and their customers do anything to keep costs down? Let’s find out.

Today, we’ll review the primary cost burdens of the warehousing industry. We’ll then look at what causes warehousing costs to spike. And finally, we’ll identify possible solutions that will help reduce warehousing costs.

No Hot Wings? No Summer Camp? What’s Next?

Has the pain of the supply chain crisis hit your business or organization yet? Seemingly everyone has felt it. We may not all work in logistics. But one way or another, the unfolding crisis has rippled into many surprising corners of the global economy.

The hot wing shortage was a canary in the coal mine for the supply chain crisis. But have you heard about the summer camp closures? Indeed, a rash of summer camp closures hit New England because food wholesaler Sysco failed to deliver their food orders.

Food delivery issues were one thing. But the other issue is one many business can relate to: labor shortages. Camps also couldn’t hire enough counselors!

Social distancing measures in 2020 canceled the summer camp schedule. This heightened anticipation for summer camp in 2021. And this at a time when the great outdoors have so much competition from the great indoors!

Summer camp closures merely highlight what I think is a larger trend. Put simply, we’re feeling more and more supply chain pain in new and interesting places.

E-Commerce Drives Soaring Warehousing Costs

Summer camps may be closing, but the warehousing industry is booming. Let’s unpack what’s making that happen.

As a refresher: You know warehousing plays a key role in the world of fulfillment. Fulfillment is the process of e-commerce that has replaced much of the business once done by brick-and-mortar stores. In other words, fulfillment is the thing that happens between the time you click the Buy button and the moment your package arrives on your doorstep.

How does that work, exactly? Well, after you buy online products from a business, those orders go to their fulfillment center. Inside the fulfillment center warehouse, a human or a robot retrieves the products you ordered and routes them to the packaging area. There, your products go in a box or a bag and get routed to the shipping area. From that point forward, your orders travel by land, sea, and air—and then delivery van—before arriving safely at your door.

Easy enough, right? Now multiply that process billions of times a year, and you can see why warehouses are big business.

Warehousing Costs Are on the Rise

In response to huge demand from e-commerce, overall warehouse capacity has been snatched up. With increased demand and reduced supply, rents have gone up.

For example, according to a CNBC report, certain parts of the country saw increased average base rent for industrial properties of 33% in May 2021 compared to one year earlier.

The same report quotes CBRE (a commercial real estate company): “The need to have facilities in these markets, coupled with record low vacancy rates, has often led to bidding wars among occupiers that are driving up rental rates.”

We’ve gotten used to hearing about bidding wars in residential real estate. Now, back to supply and demand. Both residential and commercial real estate prices have soared. Similar to residential real estate, the costs involved with building new warehouses spiked for a few reasons. Those include pandemic-related demand and lack of supply. But also, prices for raw materials such as lumber skyrocketed in early 2021.

Lumber prices shot up because many sawmills closed during the pandemic, and then they struggled to reopen at full capacity. Eventually, lumber prices fell as supply chains regained some footing. But many experts think lumber prices will remain volatile. For example, President Biden’s $1 trillion infrastructure deal is cited as a boon for all providers of building materials.

Solution 1: Reduce Warehouse Costs through Location, Location, Location

Much of e-commerce exists on the cloud and online. But fulfillment centers bring the entire industry down to earth. Ultimately, the old real estate adage is true: It’s all about location, location, location.

Thus, one obvious way to reduce warehousing costs is to find a less expensive real estate market. For example, companies that locate certain facilities in the Midwest can enjoy cheaper rents compared to the coasts. The same is true for every major metropolitan area throughout the country.

There are less expensive areas to be found throughout the country. Hire a hawk of a real estate agent to find the best location possible!

Solution 2: Reduce Warehousing Costs through Logistics

Location is vital in real estate because of proximity. This is the essence of real estate. What are you located near? What’s convenient to get to from here?

Warehouses want to be strategically located near their customers. Granted, “near” means different things to different companies. A food service company like Sysco will certainly create a strategic network of cold-storage warehouses based on their locations near major customer markets. You can locate warehouses that offer the best value if you weigh nearby rental markets with regional logistics costs.

Solution 3: Reduce Warehousing Costs by Reshoring

As noted, the word “near” is relative. But it’s worth exploring because of another lesson the logistics community learned during the pandemic. The decades-long practice of outsourcing and maintaining single suppliers on the other side of the world created a brittle supply chain.

If you’re a warehouse waiting for stock to arrive from Asia, all it takes is one backed-up seaport or one container ship stuck sideways across the Suez Canal to undo your quarterly and annual forecast.

Therefore, in terms of calculating warehouse costs in the United States, don’t forget to factor in all the costs associated with outsourcing. For example, the cost of shipping containers has increased dramatically. Also, what are your opportunity costs of late deliveries due to delays getting into port?

After you factor in those logistics costs, you might find that establishing a supplier on the same continent is near enough! Maybe it’s wisest to tolerate American labor rates and set up shop in town?

Solution 4: Reduce Warehousing Costs Contractually

So, your hawkish real estate rock star is scouring the countryside for the best deal. Let’s also get them to negotiate the best possible terms! One tried and true way to reduce warehousing costs is to lower your rental price by signing a long-term lease.

Longer-term leases carry added risk. No one can predict the future. But that tradeoff is why you can use uncertainty to get better rental prices.

That said, maybe high material prices plus supply and demand issues have sent rents soaring and left you with little leverage. Don’t give up. Instead, think outside the box!

Solution 5: Reduce Warehousing Costs by Repurposing

Let’s consider repurposing some of that other commercial real estate. You know, all the places that are empty? Office space is suffering from a lot of vacancies! Let’s tear out the carpet, knock down some walls, roll in the forklifts and pallet racking, and start using that space!

Is storing stock in Frank’s old cubicle ideal? Maybe not. But Frank’s working from home, so let’s use that office space!

When building, material, and warehousing costs get astronomical, why not repurpose existing space?

Solution 6: Reduce Warehousing Costs Operationally

There are vast amounts of literature on warehousing efficiency. Cost-reduction techniques and practices streamline every inch of a warehouse. These operational cost reductions start when a truck is dispatched to deliver into a warehouse and end when the goods are delivered to their destination.

Technological upgrades promise huge leaps in efficiency and cost reduction. For example, digitized documents can save countless wasted steps across a warehouse floor. Digitized documents and the general move away from paper versions of BOLs and other load documents streamline the entire logistics industry.

The use of control towers and blockchain protocols promise to improve supply chain visibility. In turn, supply chain visibility will help reduce warehouse costs through the communication of data. This leads to better, more effective partnerships.

A Little S’more Before We Go

When links in the supply chain can work with and see each other, they have more thoughtful conversations, and the entire system works better. In other words, a s’more needs the graham cracker, the marshmallow, and the chocolate to truly work right.

Ultimately, a more resilient supply chain can help people avoid the costliest, most catastrophic type of risks—way beyond canceled summer camps!

This post was written by Brian Deines. Brian believes that every day is a referendum on a brand’s relevance, and he’s excited to bring that kind of thinking to the world of modern manufacturing and logistics. He deploys a full-stack of business development, sales, and marketing tools built through years of work in the logistics, packaging, and tier-1 part supply industries serving a customer base comprised of Fortune 1000 OEMs.

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