Contract Warehousing: What It Is, Benefits, and Alternatives

Steve Schlecht
April 17, 2024
Buske Logistics warehouse in Edwardsville, Illinois

Contract warehousing, also known as dedicated warehousing, involves a service agreement between a company and a warehousing provider where space and services are customized for a client for a fixed period of time.

This arrangement contrasts with public and private warehousing by offering a middle ground that provides both customization, cost efficiency, and mitigation of risk.

An example of contract warehousing is when Ardagh Group went to the market to find a contract warehousing provider for a customized and long term warehousing solution.

This post discusses what contract warehousing is, the benefits, and other options depending on a manufacturer’s needs.

Types of Warehousing Arrangements Between Manufacturers and Providers

There are 3 main types of warehousing agreements between a provider and a customer.

Contract Warehousing:

This arrangement provides the benefits of private warehousing but without the capital expenditure. It is tailored to the specific needs of a company for a contracted period, usually spanning several years. A ‘Warehousing and Logistics Services Agreement’ is one example of what it is called.

The benefit with contract warehousing is that space needs are always guaranteed to the manufactured based on the scope of the work.

One example is of Purina starting up a new distribution center. They know they will need 190,000 square feet of space for a period of time. Rather than renting warehouse space on a month-to-month basis, they can go out and get contract for warehousing on a long-term basis.

Public Warehousing

Public warehousing offers space and services to multiple clients on a short-term basis. It’s flexible and ideal for businesses with fluctuating warehousing needs.

A great example is of a beverage manufacturer that needs an extra 10K square feet in the spring to build enough inventory for summer demand. This happens a lot with our clients such PepsiCo, which will go out and find extra warehousing for Gatorade.

Private Warehousing:

Owned and operated by large companies, private warehouses provide complete control over logistics operations. However, they come with high operational costs and capital investment.

Private warehousing typically occurs when the cost-benefit analysis has occurred by the manufacturer and the result is that it’s better to keep everything in house.

An example is that some aerospace and defense companies, like BAE Systems, will have a private warehousing arrangement given they have long-term contracts with the government and can plan their warehouse space needs accordingly. Another reason could be the work being done is classified between the 2 parties.

Fixed vs. Variable Agreements: How Contract Warehousing Pricing is Structured.

How contract warehousing pricing is structured can be segmented into fixed and variable agreements. The main difference is how they are structured in their pricing.

Fixed Contract Warehousing

Pricing for a fixed contract is where a company contracts a set amount of space in a warehouse. An example is a company wants to ensure they have 50K square feet of space dedicated to them at all times.

A fixed contract ensures predictable costs and services for the duration of the agreement, making budgeting easier and reducing risk. Big companies prefer these arrangement because of the predictability, even if it’s going to be more expensive in the long run.

Variable Contract Warehousing

Pricing for a variable-contract arrangement offers flexibility in pricing and services, adjusting costs based on the volume of goods stored and services utilized, which can be particularly advantageous during fluctuating market conditions.

An example of a variable contract warehousing is pricing on a per pallet position and each time a pallet, case, or unit goes out the door. This arrangement is also seen in public warehousing agreements.

Advantages of Contract Warehousing

There are many advantages to contract warehousing for the manufacturers and brands that decide to use contract warehousing company.

  • Customization and Flexibility: Contract warehousing solutions are highly customizable, catering to specific business needs such as handling, storage requirements, and additional services like packaging and transportation. An example is  General Mills opening a new distribution center. They will typically look for a 3PL, such as Buske Logistics, to run the operation on a contractual basis.
  • Cost Efficiency: By avoiding the capital outlay required for private warehouses and leveraging the expertise of dedicated logistics providers, companies can reduce overall logistics costs. Additionally, the fixed nature of contract warehousing allows for better budget control and cost predictability.
  • Core competencies: Warehousing is a beast in of itself. Many manufacturers find that they are good at manufacturing, but that’s it. In this case, they will outsource it because it would be more costly without the level of service if they were to do it themselves.
  • Reduce upfront costs: An estimate to build a warehouse can cost between $55-$70 per square foot. If a company is looking to build a 1,000,000 square foot facility, it can cost in upwards of $60,000,000. That money for the brands or manufacturer could be better used for R&D and other initiatives that will help grow top line revenue.

Disadvantages of Contract Warehousing

While there are advantages of contract warehousing, there are some disadvantages as well of this arrangement.

  • Long-Term Commitment Concerns: Contract warehousing agreements typically require a long-term commitment, which can be a disadvantage if a business’s needs change drastically due to market shifts or unexpected events like COVID-19 creating a shortage of warehousing space. An example is if demand dries up for their produce and they are left with 100,000 square feet of space that’s not being utilized.
  • Potential Lack of Control: While contract warehousing offers many customization options, the ultimate control over operations resides with the warehousing provider, which might not always align with a company’s operational philosophy or speed.

Pros and Cons: Contract vs. Public vs. Private Warehousing

What are the pros and cons of contract, public, and private warehousing?

  • Contract Warehousing: Best for businesses looking for a balance between flexibility and cost without the burden of managing a facility.
  • Public Warehousing: Ideal for businesses with variable demand and a need for short-term commitments.
  • Private Warehousing: Suitable for large companies that require full control over their logistics operations and can afford the significant investment.

Contract Warehousing Providers

If you are contemplating the shift to contract warehousing, public warehousing, or need more information on how it can benefit your business, reach out to Buske Logistics. With our expertise and range of customizable logistics solutions, we can help you optimize your warehousing strategy to meet your specific needs.