Warehouse Pricing at a Cold Storage Facility in Indianapolis

Assignment Task

Abstract

Magna Logistics is a 3PL warehouse that makes money packing and storing pallets. Unfortunately, hourly staff is no longer able to keep up with customer demand. Compared to last year, stock-keeping units (SKUs) per month and the number of items packed per pallet are up. The company president has asked her management team to update the staffing model. In addition, she expects them to establish new price points for packing and storage as well as forecast next year’s revenue, operating costs, and net profit margin.

Background

Demand for fresh food is on the rise. According to the Economic Research Service (2019) Americans spent USD 1.7 trillion on food, representing a USD 78.2 billion increase from the previous year. As of 2019, there were over 9.5 million links between counties in the U.S. food supply chain (Konar, 2019). Key linkages in this network include cold supply chains. Cold supply chains specialize in the storage and movement of perishable items such as fruits, vegetables, meats, and dairy products. In 2018, over USD 15 billion was spent on cold storage in the United States. Grand View Research (2019) estimates that over the next five years this amount will increase by 4% per year.

agna Logistics operates a public, 3PL cold storage facility in Indianapolis, Indiana. 1 Five years ago the company moved into of a state-of-the-art, 120,000 square foot, refrigerated warehouse. At a cost of USD 150 per square foot, this 20-foot high storage space offers the latest in picking and packaging automation as well as temperature control and tracking

The Problem: Additional Picking Time Affects On-Time Delivery and Profits

There are over a dozen public cold storage facilities in the state of Indiana. Competition is fierce. Magna Logistics differentiates itself by offering unique services. These include blast freezing, internet inventory control, pallet exchange, customs bonding, and load consolidation. Magna customers are willing to pay a premium for these services because their products demand it. On one hand, their high-end ingredients have short shelf lives. On the other hand, both the taste and texture of their specialty foods are highly affected by small variations in temperature.

Magna has five customers: Leonard’s Fresh Catch, Organic Produce of Westfield, White River Cheeses, Martinsville Prime Meats, and Farm Fresh. While the USD 14 million in sales last year were impressive, the same can’t be said for on time delivery and profits. Last year, deliveries to promise date were down by 4%. A key reason for delays was order picking. The company has seen a steady increase in the number of items and stock-keeping units (SKUs) per pallet shipped. Last year, warehouse operators picked on average 72.2 items and 44.2 SKUs per pallet. This represented a 25% increase in items picked, and a 35% increase in SKUs packed compared to three years ago. Company President Ann Davis knows pricing is no longer adequately capturing the rising cost of serving customers. She has asked her management team to develop new staffing and pricing models.

Cold Storage at Magna Logistics

In the United States, commercial developers typically build then lease out cold storage facilities. Leases usually run 20 to 25 years. Senior management at Magna decided to take a different approach. They built their own warehouse. With a 10% down payment, management was able to secure a construction loan at 3% interest. Business property tax is 1.05% of depreciable building value. Commercial property insurance costs the company USD 200 per month per million dollars of depreciable building value. The building is being straight line depreciated over 39 years.

Under the Uniform Commercial Code (UCC) that covers all commercial transactions in the United States, Magna Logistics is legally responsible for the materials stored by their clients. To mitigate this risk the company purchased a Warehouse Legal Liability policy. Coverage costs USD 150 per month per million dollars in sales revenue. 

Not all of the warehouse space is generating sales revenue. Office space, aisles, breakrooms, and restrooms account for 30% of the warehouse. Aisleways between the 4-high, 40×48-inch pallet racks take up 10% of available storage space.

Magna’s building expenses pale in comparison to what the company pays for electricity. Refrigeration requires 1.5 watts per hour per cubic foot. Condensers run all day every day. The local power company charges 12 cents per kwh.

Questions

• What hourly staffing is required for the warehouse?
• At this staffing level, what are the packing and storage costs?
• At these costs, what prices do you recommend for packing and storage?
• By revenue stream, it’s common practice in the U.S. cold storage industry to offer discounts.
• To which customer(s) would you offer discounts—how much, and why?
• At these pricing and discount levels, what are Magna’s expected revenue, operating costs, and net profit margin?

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