Contract Warehousing: What It is and 7 Key Benefits for Your Business

At Buske Logistics, we operate over 37 warehouses offering a variety of contract warehousing services for our clients. What is contract warehousing? Contract warehousing is an arrangement where a company, such as our client Molson Coors or PepsiCo, that contracts warehousing services to a third-party logistics (3PL) provider in exchange for services for an an agreed upon price over a set period of time. Based on our experience, a contract warehouse is usually for a minimum of 1 year. The average is 3 years for a relationship with a 3PL and 5 years for existing relationships. Some of our clients in niche industries such as automotive and aerospace have upwards of 8 and 10 year contracts.

In this post, we’ll discuss seven benefits of contract warehousing and how it can help your business.

The Difference Between Contract Warehousing and Public Warehousing

There are 2 main types of warehousing arrangements: public warehousing and contract warehousing. Companies that work with 3PLs on a monthly basis without an expensive exit clause can be considered to use public warehousing. Contract warehousing typically starts with a contract of services with 1 year at a minimum.

7 Benefits of Contract Warehousing

What are the benefits of contract warehousing? They are many depending on a company's scope of needs.

1. Cost Savings and Risk mitigation: A major benefit of contract warehousing is cost reduction. Starting a warehouse demands a significant upfront investment and can be expensive without the expertise to run a dedicated operation. Contract warehousing providers have advanced systems and processes to maximize productivity and reduce costs. Additionally, by contracting services it allows companies to put pricing into a contract mitigating any unforeseen price hikes that are common in public warehousing arrangement.
2. Predictability: As companies grow, their warehousing demands expand. By outlining scope of services, volumes, and projections in a contract, it allows companies to predict when changes happen and allow executive teams to plan for the future. 
3. ‍Expertise and Technology: When you partner with a contract warehousing provider, you gain access to their industry expertise and advanced technology like what Buske Logistics has. We make use of cutting-edge warehouse inventory management systems and data analytics to maximize efficiency in storage and distribution. Having this level of expertise can greatly improve the efficiency of your supply chain and minimize errors. Contract warehouses rely on logistics and supply chain management experts to efficiently handle your products in accordance with industry standards. This experience has the potential to greatly improve inventory accuracy, lead times, and operational efficiency.
4. ‍Access to Specialized Services: Many contract warehousing companies provide a variety of specialized services that can greatly benefit large businesses. The range of services includes automotive sequencing, packaging, labeling, and returns management.  With the help of these extra services, you can make your operations more efficient and streamline your overall processes.‍
5. Compliance and Security: Some warehouse operations, such as those storing food, require strict regulations to store and operate it. By outsourcing to a contract warehousing provider, companies can leverage the years of experience from 3PLs that specialize in food warehousing.
6. Focus on Core Business Activities: Outsourcing logistics warehousing and distribution lets you focus on business growth. By outsourcing warehousing, you can focus on marketing, product development, and customer service. You may devote more time and resources to revenue-generating activities with this strategic emphasis, improving corporate results. You can focus on other important aspects of your business instead of warehouse workers and inventory.
7. Improved Customer Service: Meeting client expectations requires logistics warehouse efficiency. Contract warehousing stores, handle, and ship your products efficiently, providing faster delivery and better order accuracy for customer satisfaction. Contract warehouses improve customer reliability and consistency. Faster and more precise shipments can set your business apart and build consumer loyalty. Our company, Buske Logistics and other contract warehouses, offer specialized packing, kitting, and returns handling to satisfy your customers.

Who Should Use Contract Warehousing?

The companies that should use contract warehousing really depending on their scope of needs, how big their company is, and an in-house team to handle and manage the contracted 3PL. Our general rule of thumb is if your company stores greater than 50,000 square feet of product or your company is spending over $250,000 on warehousing, then you'd benefit from a contract warehousing provider. Other conditions for what meets the criteria of contracting out warehousing services include: 

1. Companies with Seasonal or Variable Demand: Retailers or CPG brands with holiday spikes or promotional campaigns can use contract warehousing to flex capacity without long-term fixed costs.
2. Suppliers with Just-in-Time Distribution Needs: Automotive or industrial suppliers that are required to supply JIT inventory to manufactures greatly benefit from contract warehousing. Why? If a supplier shuts down a manufacturer, they can receive a charge back between $10,000 and $50,000 for every minute they shut down the line. By contracting out warehousing services to a 3PL with expertise and the correct systems in place, they can mitigate their risk exposure to this event. One of the many things we are proud of at Buske is that we have never shut down an automotive production line for the OEMs we ship into.
3. Companies Requiring Valued Specialized Services: Businesses needing value-added services like kitting, co-packing, labeling, or lot tracking will benefit from contract providers that offer those as part of their SLA. When a company enters into a contract, they can expect to receive a fixed price for those services.

Addressing the Challenges of Warehousing for Large Businesses

Warehousing and logistics can be difficult for large businesses. Operations are expensive, supply chain management is complicated, and 3PLs only provide 1 to 2 unique services such as e-commerce or retail logistics. Contract warehousing and the companies that provide this service solve all these issues, thanks to its flexibility and turn-key approach.

One challenge that has cropped up recently is from e-commerce. Recent data shows that e-commerce and the necessity for efficient logistics solutions have increased demand for warehouse services. Warehousing and storage in the US is worth $28 billion as of 2023, with a 3.8% projected compound annual growth rate (CAGR) through 2026. 

E-commerce adds a level of complexity to already existing warehousing services such as bulk pallet movement, value-added logistics, and retail logistics. One of the solutions and benefits of using contract warehousing is that it provides a turn-key solution. In this example, contract warehousing brings all of these services under one roof and can provide cost savings. 

A great example of contract warehousing in practice is Buske Logistics' work with the joint venture between PepsiCo and Starbucks. We provide a contract warehousing solution to provide not only storage and fulfillment but also building their retail displays and some e-commerce orders. Without it, the customer would have utilized multiple 3PLs. 

FAQs About Contract Warehousing

What is the importance of warehousing?

Warehousing is an essential component of supply chain management as it guarantees the secure storage and efficient accessibility of products. It helps with keeping track of inventory, fulfilling orders, and distributing products efficiently.

What are the advantages and disadvantages of contract warehousing?

There are several benefits to consider, such as saving costs, easily scaling up or down, gaining access to specialized expertise, and enhancing customer service. There are some drawbacks to consider, such as relying on a third-party provider and having less control over warehousing operations. Depending on how a contract is structured, a recession could put the customer on the hook for unused space in a warehouse.

What is logistics warehousing and distribution?

Logistics warehousing encompasses the crucial task of storing goods prior to their distribution to customers or retailers and distributors.  Distribution involves getting these commodities to their destination. 

Many contract warehousing providers offer integrated logistics, warehousing, and distribution. These services improve supply chain efficiency and streamline.

Choosing the Right Contract Warehousing Services

Choosing the appropriate contract warehousing services is vital to fully enjoy the benefits mentioned earlier. Here are some valuable tips to ensure that you make the best decision:

• Assess Your Requirements: Gain a clear understanding of the unique warehousing and logistics requirements for your business. Take into account factors such as the volume of goods, the nature of your products, and your distribution requirements.
• Research Providers: Look for top warehousing companies with a good reputation and a track record of reliability and efficiency. Read reviews, get references, and assess their expertise in your specific industry.
• Technology and Systems: Ensure that the provider has modern technology and systems that can integrate with your existing procedures. This includes automated systems, best inventory management software, and real-time tracking.
• Flexibility and Scalability: Select a provider that provides adaptable solutions and can adjust to the growth and seasonal changes of your business.
• Location: Consider the location of the warehousing facilities. Being close to your target markets can help you cut down on shipping times and costs, which ultimately leads to happier customers.

Common Concerns About Contract Warehousing

Although contract warehousing has many benefits, some large business owners may have concerns about outsourcing. Let's discuss common issues:

Loss of Control

Some worry about losing control over warehouses. Renowned contract warehousing providers work closely with clients to ensure operations meet corporate goals. Control and service levels are maintained by regular communication and performance reviews.

Quality of Service

Contract warehousing service quality is another issue. To mitigate this risk, find a company with a good reputation and client reviews. Due diligence and facility visits can also help evaluate the provider's capabilities and service quality.

Cost Considerations

Some businesses worry about contract warehousing costs. Outsourcing has costs, but reduced capital investment, operating costs, and efficiency frequently outweigh them. One unique and fair way to mitigate labor expenses is to peg hourly labor for a given job to an index and create ceilings or floors. If the index from the creation of the contract goes above or below that number, then prices are renegotiated. One index includes using a benchmark from the Federal Reserve of St. Louis (FRED). Another index is simply looking at Indeed to get a market benchmark. 

Resolve Your Warehousing Problems

Ultimately, contract warehousing benefits large businesses in cost, efficiency, scalability, and customer service. So, imagine the relief of having a trusted partner for warehousing and logistics. Partnering with Buske Logistics lets you focus on growing your business and maximizing profits.

Contact us today for personalized solutions that meet your goals from our team of experts.

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