Commercial Warehousing: 3PLs Dominate, Three-Year Contracts the Norm

Of the estimated $25.7 billion in revenues earned by commercial warehouses, 60 percent is comprised of value-added warehousing and distribution services managed by third-party logistics providers (3PLs), reports Armstrong & Associates (Stoughton, Wis.) in

For the sake of definition, value-added services being offered by 3PLs and commercial warehousemen include order management, vendor management, light manufacturing and assembly, kitting, reverse logistics, cross docking, customs brokerage, logistics network optimization, transportation execution and freight bill payment, project management, and radio-frequency and barcode labeling, and other services. Smaller operators are beginning to offer more and more services in order to compete with the larger firms.

"As they pick up the marketing they pick up a broader range of value-added services," observes Richard Armstrong. "Some guys are marketing [these services] before the customers demand them, in anticipation that the customers will want them because they want the services from the big guys. The other thing that happens is that customers are asking for these things and they haven't got them, so they have to add them. It cuts both ways."

The research effort also looked at the specific prices and contract terms with contract and public warehouses. Respondents reported that most contracts are for threeyear (43 percent) and fiveyear (27 percent) terms. Only 9 percent of contracts are negotiated on an annual basis. At the opposite extreme, 14 percent of commercial warehouse contracts are for more than five years. Average contract lengths vary little by industry except for high-tech with an average contract length of 2.6 years, which reflects the faster obsolescence rates for most high-tech products.

Standard warehousing pricing models include space utilization, labor, administrative costs and margins. Looking at operation margins of 3PLs specifically, the research found that the vast majority look for operating margins of 15 percent or higher. The average handling charge for moving a pallet of product into and out of a warehouse is $5.35, varying regionally from $4.70 to $5.86 per pallet. Handling charges for refrigerated and frozen products average $11.45 per pallet, ranging from $9.50 to $14.10. Respondents crossdock perishable products at an average price of $4.50 per pallet.

The report also looked at the retail distribution center pricing practice of lumping some costs together into a per-carton price. In addition to other charges, the modal charges range from $0.30-$0.40 each for cartons less than 15 pounds, and $0.40-$0.49 each for cartons over 15 pounds. High-volume contract warehouses charging by the carton range in price from $0.20-$0.40 per carton, plus $0.04-$0.08 for building costs depending on the location.

The analysis also shows the growth of contract warehousing at the expense of public warehousing, although profitability is not more inherent in either business model, but reportedly owes more to management practices. The research and consulting firm initiated the study after discovering that there was no comprehensive source of information on what 3PLs and commercial warehouses in the United States are charging for their warehouse services. For a copy of the full report ($1,495), which includes regional specifics for both contract and public operations, contact Armstrong & Associates, 608-873-8929 (www.3PLogistics.com).

Largest North American Commercial Warehousemen

Company

North
American
Warehouses
Square
footage,
millions

Exel

385 73.3
UPS SCS 1,238 28.6
APL Logistics 162 26.0
AmeriCold Logistics 106 21.0
Caterpillar Logistics 95 20.0
Ozburn-Hessey Logistics 92 18.3
GENCO Distribution 85 17.0
Kenco Logistics 68 17.0

TNT Logistics NA

71 17.0
EGL, Inc. 87 15.0
Source: Armstrong & Associates.
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