Economic downturns and economic recoveries affect everyone. When, during an economic recovery, a price increase in warehouse space impacts a fulfillment business, the increase gets passed on to a client, and passed on again to a customer.
One cost increase that is very disconcerting to AMS Fulfillment at this time, is the rising cost of warehouse space in Los Angeles County. Fulfillment companies lease warehouses in which to store client inventory, and they bear the cost of increasing square footage rates. Only when absolutely necessary, will they pass their increased costs on to their clients.
During the economic downturn there was almost no speculative new warehouse construction in Los Angeles County. But now, with changes taking place related to the economic recovery, demand for warehouse space is increasing. The result of a situation of low building inventory is, of course, higher storage rates.
Over the past three years facility costs in Southern California have increased materially. In fact, AMS has seen square footage rates increase nearly 50%. Much of this cost increase is related to the situation of economic recovery in conjunction with very low inventory of buildings.
Like many in the fulfillment industry, AMS allows a portion of their fulfillment margin to offset shortfalls in storage revenues. This gap however has increased dramatically, making it something AMS Fulfillment must address. As a result, AMS has had to make adjustments to their clients’ storage costs to meet their new cost basis.
If increased facility costs are combined with a 2-year 20%+ federal increase in minimum wage, it becomes even more difficult to share a diminished margin.
AMS has made recommendations to their clients on ways that they can mitigate these increases by minimizing their physical footprint. This can be achieved in a few ways:
- Sell off, donate, or transfer old/obsolete inventory and reduce storage cost as a percentage of fulfillment activity. The lower this percentage, the less AMS is concerned about 100% recovery on storage costs.
- Reduce footprint through a strategic inventory reset. The AMS client programs are constantly evolving into new channels, different product groups, different distribution strategies, and so on.
- Periodic strategic meetings are held to make sure that warehouse storage and pick face are optimized for efficiency. AMS recommends that these meeting should be held once a year at minimum.
Additionally AMS, through the growth of the company, is looking to shed smaller buildings under 100k SQFT, and increase the number of larger buildings. The larger buildings, higher ceilings, and better density achieved through the consolidation of resources, and reduction of redundant space requirements, all support that the company will gain efficiency on a per square foot basis, thus effectively mitigating some of the increased space cost.
Along with this strategy, AMS is currently in negotiation to build a 257K SQFT facility close to their current Headquarters. This should help to control the rising cost of industrial space in LA County.
While all of these efforts will assist AMS in minimizing facility and storage costs, there will still be some storage rate increases in relation to the base increases they are incurring. AMS recommends that if possible, clients mitigate this increase by reducing their footprint.
From a space perspective, there are areas in Los Angeles that may be slightly lower in cost, but the current accelerated increases are being experienced throughout Los Angeles County. In addition, one factor that can be challenging and must be looked at in any area of the city is the labor market. On average, 60-65% of a fulfillment company’s invoice to their clients is based on labor production, 25-30% on storage, and 5-10% on direct materials (this excludes freight).
AMS considered opening up other operations in Southern California, but the company determined that their business was best suited to the Santa Clarita Valley. Why Santa Clarita? The type of complex fulfillment AMS provides generates the most revenue from labor. This high labor component means AMS requires a strong and affordable labor market as a key to their location selection.
Studies have indicated that Santa Clarita is a premier location for both affordability and reliability of workforce. Santa Clarita is also one of the safest small cities in the United States, and provides exceptional residency, community recreation and educational opportunities for employees. These factors are important to any fulfillment company. The year after year growth that AMS enjoys, supports their choice of location.
In conclusion, the cost of warehouse space appears to be increasing, and businesses should keep that in mind as they make their plans. The actual cost increase will relate both to current fulfillment activity levels against storage requirements, and the actual billing cost gap in storage.