Strategically Speaking: 12 Costs to Consider in Outsourcing Distribution
Moving warehouse operations is a complex undertaking under the best of circumstances, and prudence dictates that your analysis consider all the pluses and minuses of maintaining the status quo. The figures developed in this phase of the analysis should cover a multiyear horizon (5 years minimum) and should be realistic—this is not the time to put on your rose-colored glasses in an effort to maintain the status quo.
One-Time Costs of Outsourcing
The first step in the analysis is to consider the one-time costs that would be associated with outsourcing your captive distribution operation. Many of these costs can be developed while you are waiting for the vendor proposals to be submitted. At minimum, the one-time costs should take into account:
1. Moving Costs: The cost of transporting the inventory from the publisher's warehouse to the third-party distributor is likely to be significant. In addition to the out-of-pocket freight costs, the transition schedule has to be set to minimize the risk to the business and ensure the new arrangements will be in place before the start of the publisher's busy season. This almost certainly will require overtime from the publisher's warehouse staff, another cost that should be considered.
2. Inventory Write-Offs: Moving to a third-party distributor is the perfect time to dispose of the organization's slow-moving inventory and finally make that move to print-on-demand. Only move the inventory you believe you can sell—the rest should be destroyed or remaindered, and the expected cost recognized in the evaluation.
3. Human Resource Costs: This is undoubtedly the most difficult element in the evaluation, but essential to understanding the full picture. This component should consider the cost of severance, vacation payouts, benefit continuation, stay bonuses and out placement.
4. Fixed Asset Write-Offs: The decision to shut your warehouse may necessitate writing off the unamortized portion of infrastructure investments including racking, material handling equipment, computer systems and lease-hold improvements.