The three types of warehousing that we'll share with you about are Private,Public and Contract(3PL).
A private warehouse is a type of warehousing owned and operated by the firm itself on a long-term basis. The warehouse can be located on-site or off-site.
Off-site warehouse in the U.S.A
On-site warehouse space
On-site warehouses can be located at a central location or dispersed throughout the firm’s manufacturing facilities. On the other hand, off-site warehouses are satellite facilities located close to potential market areas, storing excess inventory from the on-site warehouse and to act as a distribution center for finished goods.
Private warehouse is also known as proprietary warehousing. It operates as a division within the firm and requires a large amount of investment in land, building, equipment and skilled labor (also known as set-up costs). The warehouse facility itself can be privately owned or rented.
Skill express private warehouse
A 3PL is a firm that provides outsourced or “third party” logistics services to one or more logistics functions of a company.Examples of 3PLs are DHL and Kan Ban Logistics.
A public warehouse is a type of warehousing owned and operated by a 3rd Party Logistics service provider (3PL). Usually firms rent public warehouse space on a short-term basis. Unlike private warehousing, public warehouses do not require any set-up cost.
A contract warehouse is an altered form of a public warehouse. It is also owned and operated by a 3PL. Firms usually use contract warehousing on a long term basis. The contract can be either for an entire or a part of a building. The main purpose is to reduce cost. Businesses that seek to minimize risk or liability also benefit from contract warehousing as the risk is shared between the owner of the goods and the warehouse company.
Bewley contract warehouses.
Some of the other functions that a 3PL provide besides public and contract warehousing are order fulfillment, distribution and customs and freight consolidation. The 3PL manages and executes the particular logistics functions using its own assets and resources, on behalf of the client company. In this way, the client company also benefits as it has more resources available to concentrate on its core competences.
Here's a video on featuring 3PL service provider - KanBan Logistics.
Firms usually adopt the public warehousing approach when they are unable to determine the costs needed to setup and maintain the warehouse such as inventory holding costs or do not wish to make any commitment in owning and operating a warehouse.
For private warehousing, it is usually adopted when unique handling services are needed for products such as gasoline or when the firm is stable enough to provide for their own warehousing needs on a long-term basis i.e. able to make long term investments for their warehouses. Established retail giants such as wal-mart make use of private warehousing as they have to handle high volumes of merchandise on a regular basis. By combining the warehousing function with purchasing and distribution to the respective retail outlets, they gain economies of scale.
Private warehouse is considered when the company has high throughput levels and permanent storage for the product. The company can also exert more control over their warehousing activities and services. Factors to consider for private warehousing are
Responsiveness Although private warehousing may provide more operating freedom in responding to customer demand and meeting internal shortages of raw materials and supplies, the firm must also be able to use warehouse space efficiently when there are fluctuations in demand. Else, it might result in excess space or shortages.
Availability and cost of capital Before setting up a private warehouse, the company must consider if it has enough capital to fund the warehouse. If the firm has limited funds, should it invest in warehousing (non-productive) or manufacturing (facilities)? Most firms based their capital investment request on Return On Asset (ROA), Return On Investment (ROI) or Return Of Capital (ROC). Profit generated from the warehouse rarely meets the requirements thus given the least priority for a firm with limited funds.
Management The management of the private should have the same technical know-how as public warehouses to keep the warehouse operations smooth.
Warehouse labor competence and experience A skilled labor-force is required to run the day-to-day operations of the warehouse such as space-efficient operation of materials handling equipment, picking packing and staging. It is especially important when the firm’s products’ requires specialized handling equipment or software.
Risks and liability In a private warehouse, all risks for damage and loss to facilities and inventory, as well as harm and injury to employees are borne by the company itself.
Reference: Ernst F Bolten, Managing Time And Space in a Modern Warehouse.
Public warehouse is appropriate when considering temporary storage and low throughput volume for the product. It charges differently for type of services used. The public warehouse sells service on a space basis per time period- dollars per square per time period. Here are factors to consider affecting public warehousing rates.
Value The risk increases with higher valued goods. Thus rates also increase according to the values of the product.
Fragility Warehouse rates may change according to how susceptible the product is to damage because the warehouse needs to consider the safety of the product.
Damage to other goods In a warehouse setting, incompatible stored products have the risk of damaging each other. The product may damage another or the product is vulnerable to damage by others. Examples are chemicals and food products.
Volume and regularity Although a public warehouse it also incurs fixed costs such as utility expense. Thus it needs to spread its fixed cost over the volume and regularity of the product.
Weight density Warehouse charges rates in terms of space. If the product occupies more space, warehouse rates are higher.
Services Different type of product may need different variety of services. As the services have associated costs, hence the warehouse charges for services.
Reference: Johnny Tan, Oh Hui Ling, Cheryl Wee-Teo, Distribution Centre Management, Fourth Edition (2007)
Cost variables between public and private warehouse
One of the major factors leading to the decision between public and private warehouses is throughput volume especially for private warehouse.
This is because private warehouses incur high fixed costs. Thus, higher throughput volume would help to spread out and reduce average cost.
Public warehouses do not incur any fixed costs as it does not initial setup costs such as land and equipment. It only incurs variable costs. Thus, the cost increases as the throughput volume of items increase.
The point of intersection is the point of decision. From the graph, it can be seen that if the firm has low throughput level, it would be better to adopt the public warehousing approach. If throughput level is high, it would then be more viable for the firm to own a private warehouse.
Reference: Johnny Tan, Oh Hui Ling, Cheryl Wee-Teo, Distribution Centre Management, Fourth Edition (2007)
This is a major advantage of public warehousing as no capital investment involved (e.g. Start up cost of operations hiring and training personnel) from the user to do one’s own warehousing. Public warehousing costs only deals with variable costs such as when volume increases, costs increases.
Reduced Risk (Low opportunity cost)
Since there is no capital investment required for public warehouse, the user firm can switch to another facility in a short period of time. Thus, if there is another attractive location with lower rent, the user firm can easily switch warehouse.
Lower freight rates.
Since 3PLs handles the requirements of many firms. It is more economical and easier for them to consolidate shipments. With a larger volume for each shipment, freight rates are lower.
Constraints
Communication problem
As the 3PL handles many different products, there is a potential problem of incompatible computer terminals and systems. They may not have another terminal just to suit the needs of just one customer. Thus, the lack of standardization in contractual agreements makes communication regarding contractual obligations difficult.
Lack of specialized services
3PLs have many warehouse locations. However, specialized services needed may not always be available in a specific location. Most public warehouse facilities provide local services which may not be suitable for the big MNC who requires more specialized services.
Space may not be available
Public warehousing space may not be available when and where a firms wants it. Shortage of space can happen in some places especially during peak season, and this may affect the firm's operations.
From inventory control, optimum space utilization, maintenance and equipment, internal material flow, handling routines, supervision, and associated cost control, the firm has a direct control and clear visibility for the product until it is delivered to the customer. Thus, this will allow the firm to integrate the warehousing function more easily into its total logistics system.
Flexibility
With a higher degree of control, the firm is able to exercise greater flexibility in designing and operating the warehouse to suit the needs of its customers and the characteristics of the products. This means that firms which require unique or special handling for their products would not find public warehousing suitable. The private warehouse can also be modified through expansion or renovation to facilitate product changes, which is not possible on a public warehouse.
Intangible benefits
Distributing through a private warehouse gives the customer a sense of permanence and continuity of business operations. The customer would perceive the company as a stable, dependable, and lasting supplier of the desired products. This gives a personal rapport and a relationship between the companies building trust and goodwill.
Constraints:
Lack of flexibility
The major drawback about private warehousing is the high costs of setup and maintenance. Due to its fixed size and costs, the warehouse is unable to expand or contract to meet the fluctuations in demand in the short run. Thus, when demand is low, the firm still assumed the fixed costs as well as the costs associated with unused warehouse space due to lower productivity. However, the disadvantages can be minimized if the firm is able to rent out part of its space when not in use. Since they cannot respond quickly to to rapid changes in market size, location and preferences, they may lose potential customers or business opportunities.
High opportunity cost (high risk)
Rate Of Interest (ROI) on other investments may be greater if funds for the warehouse are channeled into other profit-generating opportunities. There is also a high probability of not being able to sell the warehouse in the later period due to its customized design. Warehouse may end up as a liability when there is a change of product line which defeats the purpose of the warehouse.
High start-up cost
Private warehouse requires a significant amount of investment in land, building and equipment thus incurring high start-up cost. As private warehouse are adopted on a long term basis, the risks are high. In addition, there is still cost incurred from hiring and training of employees. The high cost involved may force the company to seriously consider switching to public warehousing as a better option.
Off-site warehouse in the U.S.A
On-site warehouse space
