A contract warehouse is a third-party logistics (3PL) storage facility that stores goods on behalf of a client. The client and the warehouse enter into a contract that typically spans months or even years.
This agreement can feature a fixed fee structure or operate on a cost-plus model. Beyond storage, contract warehouses offer a variety of additional services, including handling, packing, labelling, fulfilment, and other related activities.
In this blog, we will discuss all of it, exploring how this solution could address your long-term storage needs and strategies for securing favourable warehouse contracts.
Meaning of Contract Warehouse
A contract warehouse manages the shipping, receiving, and storage of goods on a contract basis. Typically, clients must commit to these services for a specific period, often measured in years rather than months. The fee structure can vary, based on transactions, and may include a fixed cost, cost-plus, or a combination of both.
Importance of Contract Warehouse
1. Lower Costs and Capital Investments
Acquiring a proper warehousing space requires a significant amount of capital. Costs include renovating a building, purchasing equipment, and staffing the facility.
With contract warehousing, the facility is already established and divided into zones for various types of goods, such as temperature-controlled storage, dry storage, and general storage.
The logistics company providing the space takes care of employees, equipment, and maintenance expenses. They also handle most incidental costs, further reducing expenses.
2. Locked-In Service Period
Choosing a contract warehouse space guarantees access for a specified period. Whether you plan to use the space for a year or a decade, a contract protects your company from unexpected costs.
The contract will specify the annual or monthly cost and outline potential changes over the contract period. It will also detail the process for extending the contract.
3. Reliability
Contract warehouses offer additional services related to packaging and distribution, which are useful for businesses expanding or experiencing sharp demand increases.
With a contract warehouse, a business can rely on logistics providers to ensure the timely movement of goods to and from storage.
Building long-term relationships with reliable partners is crucial for a business’s longevity, requiring both parties to work together in an atmosphere of trust.
No matter the size of your company, choosing the right warehouse space for your goods is crucial. Make a smart choice: reduce expenses, define a specific service period, and enhance customer service through high reliability. Contract warehouses are a common choice, and choosing CWI is a no-brainer.
Types of Contract Warehouses
WSI Supply Chain Solutions offers our customers the attention and support needed to choose the best warehouse option for their company. After reading, get in touch with one of our experts to get started!
1. Public or On-Demand Warehousing
Public warehouses are an attractive choice for many companies because they allow a third party to manage the warehouse itself. The company is a tenant who rents the space, with rental options available through either long-term or short-term contracts.
A public warehouse contract can be highly beneficial if your company experiences a seasonal surge in a particular product and needs temporary storage.
The third-party managing the warehouse also handles inventory control, packaging, and fulfilment of the stored product, reducing the company’s responsibility. In contrast, a private warehouse requires all these tasks to be managed independently. Additionally, the system software used in public warehousing streamlines the process.
2. Private or Dedicated Warehouses
Private warehousing is fully managed by the company itself. This option might be ideal if you have multiple product types requiring specific care and attention. Private warehousing also offers management flexibility since your company handles product fulfilment, packaging, and inventory control independently. Without relying on a third-party company, you can make decisions freely.
The main characteristic of this option is that your business will not only be responsible for the management system and software but also for one more additional level to manage the system. However, this also means that you take more of an independent hands-on approach if that is suitable for your business.
When it comes to choosing private warehousing, you must complete a cost/benefit analysis. On the one hand, you will save on employing third-party warehousing staff, while on the other hand, you will need to allocate funds for paying your workers and might need to increase their number to manage the fulfilment systems.
Private versus public warehousing, there are several issues to watch, and a cost/benefit ratio can help determine the best choice for your company.
3. Contract Warehousing
A viable alternative to consider for your company is contract warehousing in terms of warehousing needs. With this model, the warehouse will be owned by a third party but managed by your organization.
A contract similar to a lease is drawn up between the company storing the goods and the warehouse owners. This contract details the period of use and the payment method.
Your company then operates the warehouse day-to-day, providing the labour and skills needed to manage operations. If your company can handle these elements, this option offers some control without the full investment of owning and operating the warehouse.
4. Shared vs. Dedicated Contract Warehousing
Under the contract warehousing umbrella, there are shared and dedicated contract warehouses. Shared contract warehousing involves splitting the warehouse space among several customers, while dedicated contract warehousing is for a single customer.
Shared warehouse contracts limit the available space and customization options, whereas dedicated warehouse contracts offer increased customization and specialization. A dedicated warehouse contract provides fixed prices agreed upon beforehand, allowing for more predictable costs throughout the contract period.
Choosing the right warehouse space for your goods is crucial, no matter the size of your company. Make the smart choice: reduce expenses, define a specific service period, and enhance customer service through high reliability.
When Should You Invest in a Contract Warehouse?
Storage and Inventory Management
- Contract warehouses receive goods and carefully manage inventory until they are ready to be shipped.
- They handle the shipping, receiving, and storage of goods in a dedicated facility with dedicated labour.
Cost and Capital Savings
- Significant capital is required to secure a building, purchase equipment, and staff operations.
- 3PL providers often have available space in existing buildings or can acquire space for dedicated operations.
- Solutions include building layout design, process implementation, staffing and training, and providing equipment to ensure efficiency and high customer service levels.
Flexible Service Periods
- Contract warehousing agreements typically range from 3 to 10 years.
- Ideal for larger manufacturing and distribution support for traditional retail, eCommerce, and contract packaging solutions.
Tailored Facility Design
- Facility layout and design are tailored to meet the business’s unique needs.
- Providers often supply necessary software and equipment for the warehouse management system.
Additional Services
Beyond basic warehousing functions like inventory management, order processing, and shipping, contract warehouses offer:
- Packaging services
- Point-of-sale displays
- Labelling
- Transportation management
Due Diligence and Long-term Relationship
- Careful selection of your 3PL provider is crucial for a long-term relationship.
- Ensure the provider’s services match your needs.
- A clear understanding of required service levels and commitment to aligned operating procedures is fundamental to a successful operation.
FAQs: The Role of a Contract Warehouse in Supply Chain Management
What are the disadvantages of using contract warehouses?
Contract warehouses may include long-term commitments, less flexibility and the risk of high costs for the customization. Also, companies tend to have less control over operations if managed through third parties, and the quality of service is greatly dependent on the quality of the third-party provider.
What is the difference between a contract warehouse and 3PL?
A contract warehouse is a specialist service within 3PL, providing dedicated storage and handling of goods. There is a wider spectrum of third-party logistics services which involve transportation, forwarding and supply chain management besides just warehousing.
In what way does contract warehousing participate in logistics?
Long-term and specialized storage solutions, handling of inventory, packaging and shipping of goods are provided by contract warehousing which is a key element of logistics. It allows the companies to be able to optimize supply chain efficiency and focus on core business processes without worrying about the management of the warehousing process.
Is contract warehouse the most efficient kind of warehousing?
The contract warehousing type suits the needs of companies looking for long-term, bespoke solutions with exact service requirements. Nevertheless, the choice depends on the size of the company, its flexibility and budget. Public or private storehouses could be the best alternative in different cases.
Conclusion
The very last but not least, contract warehousing is a flexible and efficient way for companies to have long-term, dedicated storage and inventory management. Through dealing with docking, and receiving as well as other services like packing and labelling, these companies can slash costs and streamline the logistics operation.
Although the right kind of warehousing depends on your company’s unique circumstances and budget, contract warehousing provides a great option for those who look for tailored, dependable support. When it comes to efficient warehousing solutions, you can count on Qodenext to be your ultimate partner.
