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  September 8th, 2022 | Written by

Advantages and Disadvantages of Contract Warehousing

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One of the problems you may encounter as you develop your business very often includes outgrowing your warehouse capacities. This situation can significantly stall your business operations. So, it makes sense to anticipate it and solve it quickly. However, outgrowing your storage capacities is one of those business issues that rarely gets resolved in time because it might seem like a minor issue in your business operations. Mainly because it can be quite expensive and time-consuming to upgrade or build an entirely new warehouse next to your usual tasks and projects; in comparison, contract warehousing can be a much more accessible and affordable solution. For this reason, we will discuss the advantages and disadvantages of contract warehousing.

In short, one of the main characteristics that make contract warehousing suitable for various needs and businesses is the fact that you can add extra storage space for a limited amount of time. Furthermore, you can also benefit from hiring a crew that will run the logistics of the warehouse for you. Contract warehousing might fix many problems for you, especially when facing impossible deadlines. But first, it is useful to recognize what contract warehousing exactly is.

What is contract warehousing?

This type of warehousing supposes that only a single client can access the warehouse. Essentially, an independent business will rent out the warehouse and be in charge of running, distributing, and shipping your goods for the period designated in the contract. Thus, contract warehousing represents outsourcing your warehousing needs to a third party for a specific time determined by your contract.

Therefore, you are entering a contractual arrangement under which the warehouse management agrees to take in, store, and distribute your goods. The designated validity of the contract ranges from a couple of months to several years. Furthermore, the type of compensation can be fixed, cost-plus, or combined. Regarding the functions contract warehousing can satisfy, material receiving, storage, inventory management, and shipping are the main ones. 

What are the advantages of contract warehousing?

Contract warehousing offers a lot more than public warehousing

Contract warehousing is not the same as public warehousing, although they have their fair share of similarities. Public warehousing is different in that it typically provides storage space to several clients simultaneously on a seasonal basis or at a first come-first serve arrangement.

This means businesses often may encounter problems with a lack of storage space as public warehouses simultaneously serve more clients than just one. Furthermore, in a public warehouse, you cannot count on value-added services such as kitting, custom labeling, or US laws and trade compliance. In contrast, with a contract warehousing plan, you have access to these services.

Lower capital investment

As we mentioned, buying or building your warehouse can be financially unsustainable. With contract warehousing, you already have a fully operational building, cutting the capital costs of starting your business. Furthermore, your business never experiences slowdowns or downtimes due to insufficient storage.

Lower operational costs

Contract warehouses are purposefully built to ensure maximum efficiency in terms of the availability of space and human resources. Moreover, the contract prevents you from paying several fees related to warehouse operations, utilities, mandatory maintenance, fixes, renovations, and other relevant costs. Given that the space is rented, businesses can extend or renew the contract according to their needs, leaving room for making adjustments in the amount of space you rent and maintain. However, you probably won’t be able to make adjustments before your contract is up for renewal, so be careful when outlining the initial draft.

You have access to a range of value-added services

Contract warehousing allows you to store your goods but resolves the logistics of picking up and packaging, fulfilling the orders, quality control, kitting, supply management, shipping, and other services. Basically, contract warehousing takes care of all of these phases and processes. This can let you focus on running your business and take a lot of stress away from managing your daily operations.

Disadvantages of Contract Warehousing

Less control over processes

Handing over control over your storage operations can be a double-edged sword. While relieving yourself of these responsibilities, you are also reducing the amount of control you have over the process. In that sense, you must determine if it makes sense to hand over your warehousing to someone else. For some businesses, making more time to focus on other business objectives makes more sense. For others, direct control of your inventory and dispatching may be necessary.

Uncertain economic conditions

One disadvantage of contract warehousing is related to changes in market conditions or heightened demand for warehousing space due to specific seasonal reasons. Even though this makes contract warehousing less expensive than building and running your own warehouse, you might be unable to expand your warehouse or leave your contract whenever you like.

The bottom line

After weighing the advantages and disadvantages of contract warehousing, we hope you can make the best decision for your business. Try to choose the option that makes the most sense now but also leaves room for your company to grow.

Author Bio

George Bailey has worked in the warehousing management and logistics industry for 20+ years. He has considerable expertise with regard to cost-benefit evaluations of different types of storage. Henceforth George frequently collaborates with müv | Trusted Florida Movers in order to deliver the best analytical projections and planning for businesses and individuals who make use warehousing, transportation, and relocation services.