Adoption of on-demand warehouse helps reduce costs by reducing excess space and inventory

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By: Sujen G George -- Senior Research Analyst, Logistics and warehousing

27 June, 2017

Adoption of on-demand warehouse helps reduce costs by reducing excess space and inventory
WHITEPAPER

Abstract

1    Introduction

The growing need to improve efficiency in a warehouse has been pushing boundaries of innovation. With the present technology infrastructure, warehouses can be optimized, improved and be effective in handling cost and inventory. This has helped in creation of an on-demand warehouse solution to address excess warehouse space and inventory.

2    Main

For a majority of warehouse managers, the challenge lies in handling excess space during off season and excess inventory during peak season. Most of the organizations are left with few options -- either to write-off the excess space as sunk cost or treat the excess inventory as additional cost of doing business.

3    Recommendation

Organizations can engage with on-demand warehouse solution providers to obtain space and sell excess space as and when required. This can help the warehouse managers to effectively reduce their cost of operation and space. 

Introduction

Increasing and fluctuating demand across the seasons in a year has never helped warehouse managers to optimize the utilization rate of warehouses. More than 75 percent of the organizations have stated that they face significant inventory fluctuations throughout the year owing to seasonal swings, return issues, roll out of new products and opening new markets.  Warehouse space and consumer demand are interrelated which can be witnessed from the below chart.  

Generally warehouse managers obtain inventory space to cover any amount of peaks that occur in a year. During certain high peak seasons, they sub lease the excess space required. Due to these problems, the cost of excess space may impact the overall profit margin.

The need to address the space and inventory issues has led to the development of on-demand warehouse solution. It serves as a spot market where sudden warehouse requirements are met on a necessity basis, while excess spaces are leased out when the inventory demand is low.

Current scenario

At present, most of the warehouses experience inventory fluctuation throughout the year due to changing demand. This is mainly due to the fact that warehouse capacity is typically fixed, while inventory levels keep changing. Although inventory fluctuations due to seasonal swing are often predictable, some of them are unpredictable.

With the seasonal and predicated fluctuation lasting about 2-3 months, it becomes difficult for the procurement and warehouse managers to coordinate and arrange the necessary space as and when required. Most of the time the third party logistics partners might not be ideal for solving the space crunch, forcing the procurement managers to acquire space at exorbitant rates to meet the sudden demand.

The seasonal fluctuation of capacity and inventory is evident during month end and nearing of holidays in F&B industry. Some of the other top demand drivers for inventory are product promotion, bulk/ forward buying, recall and returns, and lead-time variable. These variables are bound to create both excess spaces when inventory volume is low and at the same time drive the inventory to its maximum storage capability.

Contemporary solutions adopted

Currently, majority of the warehouse managers are left with very few options to handle excess spaces or inventory. It was identified that about 70 percent of the warehouse managers usually admit that excess space during off season are considered as sunk cost, as they have little or no option to  handle the empty spaces.  Very few warehouse managers along with their third party logistic providers sub lease their excess space during the off season to others. This practice is least preferred due to the administration overheads associated with the same, as these situations are bound to arise multiple times in a year.

Those with excess inventory requirements are forced to identify warehouse space to store the items. Majority of the warehouse managers prefer short term leasing of space to solve the over capacity issue, while some with multiple warehouses prefer to shift among their existing warehouses in the vicinity. Some of the other options adopted are third party logistics, shifting inventory upstream or downstream and long term lease.

Solution models

A warehouse that experiences multiple peak (seasonal) demands in a year is considered for understanding the effect of current solutions and on demand warehouse on the same.

Assuming that the maximum pallets stored in a warehouse by an F&B company during the peak season is about 8,500 pallets of goods. The company would require ~5,000 sq.m. of space, when goods are stacked 3 pallet high. The rental rates considered are about $3/sq.m./month.

Model 1: Increase of base capacity to cover any seasonal fluctuation

The warehouse is equipped to handle the maximum peak requirement of the space and inventory at any given time of the year

From the case assumed, the F&B company is required to rent the total space at any given time of the year to accommodate the peak season fluctuation.

Pros:

·         The inventory is secure and capable of handling any fluctuation that can occur in a year

Cons:

·         The excess space has to be accepted as sunk cost to the business

Model 2: Addition of short term leased space

The additional space requirement is met by short term leasing of space especially during the highest peak of the season.

From the case assumed, the F&B company is required to rent about 4,500 sq.m. of space at any given time of the year to have sufficient space to cover most of the peak fluctuation, except for the biggest peak, wherein they normally go for sub leasing of the excess space.

Pros:

·         Short term lease can help in keeping the base inventory level at the average required level reducing the sunk cost

Cons:

·         During other small peaks or unexpected peak inventory or space level, waste can occur due to inaccurate size or planning

·         The procuring company has to personally identify suitable warehouse service provider, if not has to outsource it to broker at additional fee

Model 3: Employing on-demand warehouse to solve both excess space and inventory issue

Warehouse space is obtained as and when it is required on spot rate solving the peak season issue and during off season the same can be filled with goods from other organizations requiring space.

Pros:

·         Additional space requirements can be met as and when required, preventing the need for keeping excess inventory space

·         The procuring company does not have to waste time in negotiating and identifying suitable warehouse space

Comparison of models and its effects

On comparing various models with parameters such as cost, safety, reliability and labor we can identify that the on-demand platform has better effect on the procuring company.

The freedom to acquire space as and when required at an affordable price tag, along with safety and reliability are some of the main features of an on-demand warehouse platform.

  Case 2:

Source: Flexe 

Vendor Outlook

On-demand warehouse platform is new idea and vendors are mostly just startups.

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Procurement Action Plan Summary

The advancement in technology such as on-demand platform can be utilized by warehouse managers to increase their overall operating margin as well as put underutilized spaces to productive use. Through this model warehouse managers can obtain excess space as required on the spot rates during peak seasons and in off season the same space can be outsourced to others without any additional burden to the current labor and at the best rate of the day. Along with this the procuring company does not have to waste time in identifying suitable warehouse sourcing partners or space as the platform is capable of providing the same.




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