The Problem Operations Managers Don’t Talk About

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.

How a Paper Company Turned Empty Space into $8K Per Month

A leading paper company based in Long Beach, CA manufactures corrugate boxes for ecommerce brands.  They are growing quickly and decided to move into a bigger warehouse to support their future growth.  They signed a multi-year lease on a 20,000 sq ft warehouse just minutes from the port of Long Beach.

When signing the lease, they knew that they only needed 10,000 sq ft for the next year.  This is common as in the beginning of a lease, there is often a significant amount of empty warehouse space.  The rent payments for this empty space negatively impact operating margin.

Solution

The paper company’s Operations Manager contacted Flowspace and listed their empty space on the Flowspace website.  Shortly thereafter, Flowspace found two customers who needed a warehouse to store excess, slow-moving inventory for several months.

The paper company started receiving inventory within a day of approving the customers’ requests.  They managed the entire transaction on the Flowspace system, which means they didn’t need to do any technical work or worry about invoicing.

The paper company needed to provide the labor and space to unload and store the pallets;  Flowspace handled the rest.

Results

The customer with the inventory is happy because they did not have to sign a lease and are only paying for the space they are using, which is saving them thousands of dollars.

On the other hand, the paper company is generating $8K per month from their empty space, boosting their operating margin.

About Flowspace

Flowspace (www.flow.space) provides on-demand warehousing for business.  Backed by leading investors in Silicon Valley, Flowspace helps companies who need extra warehouse space and capacity find and manage it on a month-to-month basis.

Download the Flowspace Case Study

Shipping Costs are a Warehousing Problem

I read a great article on the cost of free shipping and how it is destroying margins for retailers and ecommerce companies.  Shipping costs are often blamed for the poor margins at ecommerce companies, but what these articles miss is that high shipping costs are a result of an insufficient warehousing strategy.  

Where you store your products has a direct and outsized impact on a company’s shipping costs (and margin).  Too often warehousing is seen as solely an execution function (eg, get the product into the building and ship it out), but your warehousing strategy will determine whether you can profitably grow an ecommerce business.

Most ecommerce companies are reliant on the shipping rates provided by Fedex and UPS or the postal aggregators for the outbound shipments to customers. When negotiating with these carriers, the only ways to effectively drive down your shipping costs are to increase your volume so you can achieve a higher discount tier, use a discounted, slower service, or to shrink the distance your products have to travel to reach the end customer.

Assuming that you are doing the best you can to increase your sales and assuming that slower isn’t option, you are left with distance as the variable that you can optimize.  In order to optimize for distance, you need more distribution points.

Amazon gets great shipping rates not only because of its massive volume and clever zone-skipping strategies but also because its expansive warehouse network enables it to ship most orders within 1 shipping zone.  A company with 1 West Coast distribution center is shipping their packages across 5-6 zones on average.  Not only is the transit time unacceptable to the end customer, this decision is eroding margin.

A McKinsey study argues that you need 20 distribution centers to compete with Amazon.

These are not easy decisions and cannot be done in isolation from other supply chain functions.  There are inventory carrying cost ramifications associated with duplicating inventory, and very few companies can sign up for the lease-obligations associated with 20 distribution centers.  That means these companies will likely need to rely on a 3rd party for fulfillment.  But even integrating with a national 3PL for that many nodes is a multi-year effort that requires long-term contracts and significant developer resources for integrations.

And it’s not as simple as just moving your product to a distribution center.  Before a company even embarks on this project, it needs a robust order routing and inventory planning system to ensure that the products are in the right distribution center and that orders are sent to the best distribution node.

In short, driving shipping costs down will not come overnight (no pun intended).  It will require a full-scale reevaluation of fulfillment networks, and any meaningful conversation about shipping costs needs to involve a discussion about warehousing too.

What is a 3PL?

 

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.

5 Surprising Things to Think about When Starting Your Own Warehouse

Image result for empty warehouse space

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.  

The Flexible Warehouse

Operations people love to plan things.  We are the people with checklists; the ones who ask the salespeople, “Well, how are we going to do this?”  In short, we don’t like surprises.  But unfortunately, in a start-up environment or any company going through rapid change, there will be surprises and plans will evolve.  You see it every day – companies that started selling primarily online are selling to traditional wholesalers, traditional wholesalers are trying to figure out how to sell online.  Operations managers know that you will use Plan B if you’re lucky, but more likely you will use Plan C or D.

But in an environment like this, how do you optimize for cost and productivity?  The answer is flexibility. In times of uncertainty and change, your initial assumptions will be wrong.  And unfortunately, when you are talking about leasing a warehouse or investing in automation or material handling equipment, these decisions cannot be easily reversed.

“Don’t bolt anything down,” a mentor told me told me when planning a warehousing strategy.  

A warehouse lease is multiple years, and the moment you sign, you’ve not only committed to a monthly rent payment; you’ve committed to a sales forecast.  Are you certain what sales will look like in 3 – 5 years?  What if you got too much space?  Not enough?  Errors in both ways are expensive lessons.

We started Flowspace as a way to delay these difficult decisions and to give companies flexible warehouse options—pay for what you use on month to month terms.  It’s warehousing that can change as your business does.

Flowspace Customer Testimonial: Story of a small business owner

We started Flowspace to help businesses find warehouse space when they need they need it most by offering clear, month to month pricing and an easy to use warehouse management system.  We love hearing from customers that we’ve helped out of difficult situations. Here is one customer’s story.

 

warehousing, short term warehousing, Flowspace
Flowspace customer evaluating inventory in in his Orange County, CA warehouse

From a Flowspace customer and owner of a small business:

As the owner of a small manufacturing business in Orange County, CA I wear a lot of hats. Purchasing. Operating. Negotiating. Selling.

I’m constantly putting out fires. But I’ve kept my nose to the grindstone long enough now that I’m growing quickly. With growth comes a whole new set of problems, and none bigger than the one I’m facing now:  Warehousing.

If things continue as planned, I’m going to outgrow my current warehouse and distribution center in the next year and will need to sign a new lease on a larger warehouse. The problem is, things never go as planned.

I’m negotiating the renewal of a contract for my biggest customer, who represents 30% of my sales revenue and over a quarter of my warehouse space. But what if I sign a lease on a new, larger warehouse and I don’t receive the contract renewal? That’s a risk I’m just not willing to take.

I need flexibility. I need a temporary warehousing solution to buy me some time for the deal to close before before I commit to a new long-term lease.

This is where Flowspace flat rate flexible warehousing is so useful. I ship my inventory, they receive it and store it until I free up the space to bring it back. If a surprise comes up and I need to ship some of that inventory to a customer, I can do it through their inventory software. This gets me out of a jam and allows me to focus on the things I do best, like selling and running my business.

From our CEO: Why we started Flowspace

Flowspace
Flowspace CEO Ben Eachus

Before Flowspace, I ran a distribution center at a fast-growing ecommerce company and we had 500 pallets of product set to arrive in a few days. The only problem was that I had absolutely no place to store them. I looked at our storage utilization report from our WMS, which read “110%” and thought to myself, “How is that even possible?”

I was stressed.  I looked online for available space in the area; no source exists. I called commercial brokers in the area looking for short-term warehouse storage and they told me I should walk around the neighborhood and ask around to see who had space.  I thought to myself, “Yes, let me add driving to random warehouses to my list after the receiving kaizen project, WMS testing, and staffing models I’m working on.”  

Being an operations manager is stressful enough; finding warehouse space shouldn’t be.  

When I complained to my wife about the problem, she listened patiently and asked, “Well, what are you going to do about it?”

Flowspace is our answer to that question.  This is more than a business for us. It’s a mission to make the make the jobs of the hard-working people in supply chain and operations easier.