Warehouse Consolidation: Is it the Right Move in Today's Economy?

Many companies are looking at the possibility of consolidating warehousing operations because of financial pressures. The consolidation approach closely parallels the current trend of looking at staffing more closely.

The current trend toward “downsizing” or “rightsizing” frequently reflects the realization that companies have tended, during good times, to allow some overstaffing. This overstaffing can exist as excessive headcount or additional functional areas that are not cost effective.

In addition, some companies are going through the “rightsizing” exercise due to Wall Street pressures even though they may not be facing substantial profit reduction. In all, unless you are one of those being surplused, this trend is not unhealthy. The trick is to lose the fat, not the muscle, as one advertisement recommends.

This is also true for the consolidation of warehousing and distribution facilities. There are many factors to consider when the decision is made to look into consolidation. Following is a quick look at some parts of the decision making process that must be considered and some alternatives to shipped.

CONSIDERATIONS FOR CONSOLIDATION
OF FACILITIES

1. Customer Service Levels:  Maintenance of customer service is a primary consideration. The level of service required by key customers must be determined. Then an analysis must be made to verify that service would not suffer if provided by another, perhaps more distant facility. Most businesses realize that the competitive edge is customer service.

2. Current Capacity:  Another consideration is that of capacity. Both inventory and throughput capacity must be evaluated. The capacity of each existing operation and the capacity of the total system must be analyzed. Then an estimate must be made of what capacities would be required in a “normal” economy. A historical review may show that even in the best times there was excess capacity. Based on the system capacity and the individual unit capacities, a consolidation strategy can be developed.

3. Consolidation Costs:  There can be significant costs to consolidating facilities. These must be considered and weighed against possible savings. These costs can include:

· Employee related
- Unemployment rate increases
- Severance pay
- Relocation to keep key
· Tenancy cost
- Ongoing lease payments or termination penalties
- Mortgage payments, maintenance, taxes, insurance and security costs even if the building is empty
- Loss on sale; the current market value may be less than the book value
· Removal and storage costs
- Disassembly of
equipment
- Storage costs or loss on sale of surplus equipment
- Moving costs to the consolidation facility
· Environmental cleanup
- The cost of cleanup, if required, may make closing a facility impractical
In individual circumstances there may be union problems, loss of good will, and other intangible considerations.

ALTERNATIVES TO CONSOLIDATION

1. Renegotiate Leases:  Because of the recent economic space in many regions of the country. If a distribution center is in a leased building in one of those areas, it may be well worth your efforts to renegotiate your lease.  Besides the possibility of reducing the rent, there may be other concessions that a landlord will give to keep you as a tenant. These can include:
· A reduction in total space leased
· A reduction of common area maintenance charges
· Elimination of escalation clauses
· Additional free services
· Increased space at reduced rates

2. Reduce Operating Costs:  If buildings are owned, not leased, the options are different. With current market conditions, selling buildings can be very difficult. Therefore, other ways must be found to reduce costs. Some options are:

a. Partially close buildings:  If the building configuration permits, it is possible to close off one or more bays to reduce heating, cooling, and lighting expenses. Ir may be possible to negotiate reduced taxes on those portions of the building not in use. This option is also possible in office spaces if the mechanical systems can be shut down in some zones.

b. Lease out space:  Where market conditions permit, it may be possible to lease out some of your space to other companies. Short term leases at very low rates may attract tenants. Even if you total operating costs are greater than the rent you are receiving, you are still in a better net situation.

c. Reduce work hours:  Both operating and labor costs can be reduced by shortening the work week, or work days. Employees may prefer to work fewer hours rather than have the doors close at their location.

d. Use Public or Third Party Warehouses:  Where a distribution center may be required for service reasons but low volumes make it uneconomical to operate the facility, the use of public warehouses may provide a good alternative. Public or third party warehouses can absorb peak inventory overflow for seasonal products. If the consolidation site is large enough for most of the year, but too small for peak periods, public warehousing can make the difference cost effective.

CONCLUSION

An advantage to these and related strategies is that once business improves, you are in a position which will allow you to grow.

Since each company has its own unique set of conditions, a details analysis is required before a decision is reached as to the feasibility of consolidation. There may be several different possible combinations in any multi-warehouse distribution network. Each option must be evaluated with not only today’s conditions in mind but also tomorrow’s. Therefore the evaluation process requires a projection of needs tied to company strategy.

This article was written and published by Gross & Associates.  For additional information about Gross & Associates please visit: http://www.grossassociates.com