Flowspace Company Blog

The metric most important to Operations Managers is per unit cost.  This is the cost for the company to pick and pack one unit destined to an end customer.  For instance, when you order a t-shirt from a website, this cost represents the amount the company pays to grab it off the shelf, scan it, and put it into a box.

To simplify, the main drivers of unit costs are the amount of labor you use to fulfill an order and the amount of fixed costs required to operate.  There are smaller line items such as forklift leases, software licenses, and supplies, but labor and rent are really the areas most managers should focus to move the needle.

(Labor Costs + Rent Costs )/ # of Units Shipped = cost per unit

This is not a unique observation.  Operations managers are already obsessed with labor spend.  A good distribution center will have numerous concurrent projects going on focused on how to produce more shipments with less labor. These projects include time studies, trying to smooth out order peaks, and reorganizing where items are stored to minimize walking times.

Rent costs, however, rarely creep into the conversation of driving costs down.  This is mainly because Operations managers (I’m speaking from experience here) view the monthly rent payment as something that can’t be moved or changed.  It is perceived as being fixed.

The amount spent on warehouse rents is not trivial.  Warehouses can range in size from 5K sq ft to 1M sq ft.  Companies in Southern California are paying 60 cents to $1 per sq ft per month for warehouse space and rates will continue to rise.   Compounding the problem is that the amount of space required to run an ecommerce business will also grow.  In fact, one recent article suggests that warehouses are now 143% bigger than before due to the unique requirements of ecommerce fulfillment.

The problem is that as a business you are often not utilizing all of the space you have leased.  Warehouse leases are long (5 – 20 years) and companies lease the space they will grow into over time; they do not lease space for their business today.  This means there is often empty space at the beginning of these leases.  Similarly, sales forecasts are seasonal or volatile, which means warehouses operate at max capacity for a few months but have idle space throughout the year.  A traditional sublease does not work in these situations.

In the face of rising rents on larger amounts of space, not considering rent as something to be optimized is the equivalent of leaving money on the table.

Simply put, it’s time to start talking about this and there are tools, such as Flowspace, now to help businesses turn warehouse space into a variable cost and monetize empty space in their buildings.

A 3PL, also known as a third party logistics provider, is a company that will manage your transportation spend, provide warehouse space, and fulfill customer orders on your behalf.  This is a broad category, but to keep things simple we will focus on the warehousing and fulfillment component of a 3PL.

When a 3PL ships your company’s order, the package looks like it comes directly from your company, as your company name is often listed as the return address.  But the people who prepare the package for shipment are employees of the 3PL.  

When fulfilling your orders, a 3PL typically charges you every time they touch something meaning that they are charging you every time they go to a shelf and grab a product to put into a box (often called a cost per unit).  Some 3PL’s will also offer “cost plus” or “open book” pricing, which means that they take their costs and add a margin to the amount you pay.  They often do this when the scope of work is unclear and it’s hard to gauge what their costs will be.

On the surface, it seems like a 3PL would be more expensive than fulfilling your own orders.  After all, a 3PL is hiring people on your behalf and then charging a mark-up on top of what it costs them.  When you are operating at massive scale, internal fulfillment will be cheaper than 3PL because you will have the volume to drive down your costs.  

But when you are a young company, the main advantage of a good 3PL is that they are able to pool their teams across multiple accounts.  For instance, the Operations Manager on your account may be working on several accounts so you only pay for a portion of their salary; similarly, the cost of a forklift lease or software might also be shared across multiple accounts.

So even if they are charging a mark-up on their costs, at an early stage, they may be able to generate a cheaper cost per unit than you can on our own.

You’ve signed the lease, but your work has just begun.  Here is a list of some of the surprising (and critical) things you need to think about when launching a new warehouse:

1. Hiring a team.  Will you need a dedicated Operations Manager or will you oversee the fulfillment yourself?  This is not something that can be done remotely.  How many people will you need to hire to work in the facility?  Should you hire permanent associates or utilize a temporary staffing agency?  How reliable are your order forecasts?
2. Leasing forklifts and equipment.  Directly related to #1, but you need equipment to run the facility.  How many forklifts you need is tied to how many people will be operating in your building.  Once you decide on your vehicles, you can work out a separate vehicle leasing agreement with a material handling company.
3. Finding a supplier for shipping materials, tape, and dunnage.  Who is going to supply the paper or air pillows that go into the shipping box to your customer?  How much inventory should you hold?  Without shipping supplies, you can’t ship orders.  Believe it or not, many early companies have near shut-down moments when they realize they are out of packing tape or boxes.
4. Removing Trash.  Warehouses, especially those fulfilling ecommerce orders, go through a lot of cardboard.  Suppliers often ship product in full cases and you often ship just a few units to each of your customers.  As a result, there are a lot of cardboard boxes that need to be recycled in a warehouse.  Often companies will pay you for the cardboard, but the rates vary depending on whether you compact or bale the cardboard.  Balers and compacters have different upfront prices, so you need to run an analysis to see what works best.
5. Choosing an inventory management software.  Now that you have a facility, you will need to choose a software to tell you where in the building your goods are stored and to track inventory when you receive it or ship it on customer orders.  This is a big decision, so plan ahead – some of the more complex enterprise software will take 6+ months to install and to train.  

These might seem like small decisions, but are all critical when running your operation.  We started Flowspace to take these decisions off of your plate.