On the Watch for Rising Warehousing Costs

Warehouses can stem growth in operational costs by staying abreast of market trends and planning for procurement now

Ian Buchanan
Ian Buchanan

In the next three years, as the economy recovers and demand for manufactured goods increases, warehousing activity is anticipated to rise, prompting greater demand, and higher costs for labor, handling equipment, materials, maintenance work and other expenses associated with running a warehouse. Fortunately, by understanding the factors that will shape costs during the three years to 2019, warehouse operators can develop strategies to save money.

Labor Costs

Wages are a key cost for warehousing providers, which require a significant amount of labor to handle and manage inventory. Labor usage generally fluctuates throughout the year, increasing during the holidays as demand for consumer products strengthens. During the holiday season, warehouse operators hire temporary workers to help cope with these increased workloads. In the three years to 2016, temporary warehouse staffing is increasing in price at an estimated average annual rate of 3.1 percent, and it is forecast to continue doing so during the three years to 2019.

Consequently, operators that regularly hire temporary staffing to help during periods of high demand should expect temporary staffing costs to rise each year. Though, buyers can make early arrangements to hire temporary staff to lock in lower rates before prices begin to peak. Also, general wages for warehouse operators are relatively stable, rising at a slow annualized rate of about 0.3 percent during the past three years; and they are expected to increase at an average annual rate of only 0.1 percent during the next three years. Stable wages will make it easier for operators to budget and better prepare for seasonal cost spikes.

Equipment and Material Costs

Because industrial firms and vendors of consumer products, such as retailers and wholesalers, regularly use warehouses to store inventory or raw materials, growth in consumer spending and industrial production drives warehouse usage up. According to IBISWorld, during the three years to 2019, consumer spending is forecast to increase at an annualized rate of 3.1 percent, while industrial production is anticipated to rise at an average annual rate of 2.2 percent. To better prepare for the resulting increase in warehouse usage, operators will need to assess whether or not their machinery and equipment is in working order, and if they have an adequate supply of materials such as wood pallets.

Warehouses generally make heavy use of forklifts to assist in product and material handling, so they may need additional forklifts to cope with the anticipated increase in warehouse usage. IBISWorld projects that forklifts will increase in price at an annualized rate of 3.4 percent during the next three years. Consequently, warehouse operators that expect to need new forklifts in the near future should look to purchase sooner rather than later to avoid steeper costs.

Alternatively, warehouse operators can choose to rent forklifts. During the past three years, forklift rental prices remained fairly steady, only growing at an estimated annualized rate of 0.3 percent; however, the price of renting a forklift is forecast to grow at an average annual rate of 1.3 percent during the three years to 2019. Because prices are expected to rise more rapidly in the future, operators that can rent now rather than later will be able to avoid higher costs. While renting a forklift offers warehouse operators some immediate cost savings, rentals may only be practical solutions for buyers with short-term needs, such as coping with seasonal demand spikes. Operators with long-term needs for additional forklifts are likely better off purchasing.

Similarly, warehouse operators may need to replace or acquire additional pallet trucks, also known as pallet jacks. Due to stronger construction and manufacturing activity, demand for pallet trucks is anticipated to strengthen. As demand for pallet trucks rises, suppliers of this equipment will face less competitive pressure. Consequently, the price of pallet trucks is forecast to increase at an annualized rate of 3.7 percent during the three years to 2019. Warehouse operators that are looking to purchase pallet trucks should expect costs to grow as the period progresses. As such, operators should purchase now or lock in a supply contract with current prices to avoid higher future costs.

As warehouse usage rises, warehouse space will decline. To combat this, warehouse operators will increasingly use wood pallets to store and stack products and materials more efficiently. As a result, the ramp-up in warehouse usage will drive higher demand for wooden pallets. Increased demand will, in turn, allow pallet suppliers to raise prices at a projected average annual rate of 2.9 percent during the three years to 2019. To avoid steeper prices, warehouse operators that anticipate their need for wooden pallets to increase in the coming years should look to purchase pallets soon or enter a supply contract in order to avoid higher prices.

Maintenance Costs

One of the key maintenance needs in a warehouse is heating, ventilation and air conditioning (HVAC) maintenance. It is imperative that operators of climate-controlled warehouses have an operational HVAC system to ensure products and materials are stored at optimal temperature and humidity levels. This is particularly important for warehouses containing agricultural products.

Growth in construction and industrial production activity is anticipated to strengthen demand for HVAC system construction and maintenance services, and pressure prices upward at an annualized rate of 2.7 percent during the three years to 2019. As a result, warehouse operators can expect to pay higher prices for maintenance and repair work to their HVAC systems during the period. Operators should consider performing all necessary maintenance and repairs now to avoid paying more in the future. Additionally, for ongoing maintenance and repair work, warehouse operators can sign long-term contracts to lock in reduced rates.

With increasing warehouse activity on the horizon and key operating costs for warehouse providers expected to rise, operators should seek to make necessary purchases now. When possible, locking in lower rates by signing supply contracts for material, equipment or maintenance services can help operators secure reduced rates and curb the expected rise in operating costs.