Strategic Real Estate Portfolio Planning: How Much Expansion Space Should a Growing Manufacturing or Distribution Company Warehouse in their Inventory?

When looking for a commercial property, it is easy for companies to neglect  adequately planning for expansion space for their future space needs. Often, they focus on their existing needs and how they currently use their space, rather than on future needs and possible space utilization changes.   At IAG Commercial, we guide our clients to give preference to facility plans where there is room to support their anticipated growth in the short-term and  the possibility to expand in the future.. There are several ways through which you can practically expand the space capacity of an existing property, but you must begin by understanding how much expansion space is needed today and in the future.  

There are many factors that can used to determine a safe estimate of the amount of expansion space a company should plan for in their facility inventory. Let’s break down the two main factors.

FUTURE GROWTH OF SALES AND SKUS

The very first metric you can use to determine adequate expansion space is expected sales and SKU growth. Sit down with your financial reports and determine the percent of growth for both the number of sales but also the increase in SKUs. We recommend using the average among the past 5 years to create a predicted growth track. Then create a data model showing where you expect to be (in terms of sales and SKU growth) for the next 5 years, 10 and  15 years. We understand that after 3 years the forecast becomes more difficult to predict!  Based on your long-term  goals, the property you choose should have enough expansion space to accommodate this growth model.

HOW MUCH INVENTORY YOUR BUSINESS MODEL PLANS ANTICIPATES

All business models are different. Some require large amount of inventory to accommodate seasonal boosts and some have a high inventory turnover due to materials used in the product or market demand. You might even have a mix of the two situations within one warehouse. When determining expansion space, you need to figure out how much inventory you will have at one time and how quickly the inventory turns over. You will also need to consider the fact that inventory with quicker turnover may need to be stored closer to loading docks. Inventory becomes an issue of not only how much expansion space, but where the expansion space is located.

KEEPING FUTURE WAREHOUSE/PRODUCTION REDESIGN IN MIND WHEN PURCHASING PROPERTY

While shopping for warehouse/production space you need to verify a space has potential for expansion by meeting the criteria for any future redesign. How the space is laid out and designed now, might not aligned with future growth. If you anticipate future needs, you can begin to map out plans for future warehouse/production redesign and make sure that any property you buy now, can meet those needs in the future.

Normally, distribution centers are built in the middle of the region covered for distribution by the manufacturing company. However, sometimes it is right beside the main unit of the company where the products are produced. Depending upon the situation, we recommend which one would best suit your company’s infrastructure. Without starting by knowing which you need, you can’t locate a new property that will meet those needs.

Expansion space objections to consider:

• Efficient usage of space and SKU management
• Efficiency in material handling
• Cost-effective solutions for storage keeping
• Maximize flexibility to handle changing needs and requirements
• Future expansion of space

There are strategic ways of adding additional space to the existing property. For instance, there are multiple methods of expanding the storage capacity of any facility.

1. Adding walls to separate existing inventory keeping units. You can add extra walls and possibly clearances to add extra space to your inventory building. With increased daily production, you can utilize the same warehouse to store more products that may need storage separation.
2. Storage for single and bulk products. Single products that are stored in bulk due to weight and possibly other factors are most often stored under 20 feet for stackable products. This way, you can store maximum single SKUs in the same block without getting into trouble. The inventory’s in and out can be easily managed and monitored. Furthermore, any unit which has a higher roof enables you to add more stacks vertically.
3. Storage for mixed sized products.  If the products stored in a warehouse are of mixed size, you can opt for portable racks. They allow you to stack different sizes of products as they are re-configurable for any product mix. Racks can be expensive but they provide the best alternative for efficient use of space and creating more storage.
4. Racks over docks. The majority of the inventory loading and offloading activity is performed at the lower 10 feet of the space. The upper portion that is a dock is usually left unutilized for its inherent place. Racking over the docks is another option for creating strategic expansion opportunities for a warehouse. Even the long-term material that is staged can also be put safely in those racks for safe stocking. Shipments that are delayed, pre-picked, or awaiting final release can be put safely aside in those docks.
5. Utilization of vertical cubes. Vertical cubes are the usual structure of an inventory unit. These include all space above the loads, space above cross aisles, total building clearance, space above work and pick areas, and space above docks. When looking for strategic expansion, you should first increase the storage density and pick faces of the facility through increased utilization of vertical cubes.
6. Vertical cubes parameters. The vertical rack should at least have a cushion of 6 inches for loading and unloading of products. This depends on the average size of your products. If it is a single product with the same measurements, it would be very easy for you to determine how much total space is required, including the cushion. In the case of mixed products, the best strategy is to keep separate vertical units. But, if that is impossible for any reason, then average product size can be used to calculate the exact inner space of the cube along with cushion space.
7. Calculate if you are wasting utilizable space. A formula regularly used to know if you are wasting any cubic space of the racks is the space utilization formula. It is calculated by taking a sample of unit loads stored in SKU, divide a typical vertical bay of product height by the vacant height in that area of SKU. If the answer to space utilization is less than 50%, then, ideally, you should opt for drastic redesigning and improvement. If the space utilization is between 50-70%, you can moderately change the structure to bring improvement. If the space utilization comes at 75-85%, then it means you are ideally utilizing the space at hand.
8. Adding tunnel rack. There is another underutilized space at many warehouses that is the area over cross aisles. Back-to-back racking sections can eliminate that waste of space. This phenomenon is also referred to as “tunneling the rack”. Generally, the upper two levels of racks are tunneled in an SKU with 20-24 ft. clearance with 4 levels of storage. It instantly improves the capacity of storage from 5-10% in an SKU.

When buying an industrial property, we firmly believe in the farsighted approach compared to the myopic approach of cost-saving.  Short-term cost-saving can bring more financial burden on the company in the future.  For this reason, IAG Commercial always recommends taking into consideration all expansion plans before purchasing a warehouse/production space.