Warehouse Pricing at a Cold Storage Facility in
Indianapolis
Author: Craig Seidelson
Pub. Date: 2021
Product: SAGE Business Cases
DOI: https://dx.doi.org/10.4135/9781529761993
Disciplines: Business & Management, Operations Management, Logistics, Operations Strategy, Supply
Chain Management
Access Date: December 23, 2022
Publishing Company: SAGE Publications: SAGE Business Cases Originals
City: London
Online ISBN: 9781529761993
© 2021 SAGE Publications: SAGE Business Cases Originals All Rights Reserved.
SAGE SAGE Business Cases
© Craig Seidelson 2021
Abstract
Magna Logistics is a 3PL warehouse that makes money packing and storing pallets. Unfortu-
nately, 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.
Case
Learning Outcomes
By the end of this case study, students should be able to:
• calculate fixed and variable costs for a warehouse;
• determine staffing levels for an operation;
• establish pricing to achieve desired levels of net margin;
• understand inventory turns, inventory days, and price discounting in a warehouse.
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.
Magna 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
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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 Lo-
gistics 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 varia-
tions in temperature.
Magna has five customers: Leonard’s Fresh Catch, Organic Produce of Westfield, White River Cheeses, Mar-
tinsville 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 usu-
ally 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% inter-
est. 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,
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Magna Logistics is legally responsible for the materials stored by their clients. To mitigate this risk the com-
pany 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.
In light of high building and utility costs, management decided to lease warehouse equipment. Assets include
three fork trucks and four walkie stackers (Figure 1). Equipment lease terms are shown in Table 1.
Figure 1. Warehouse Worker Operating Equipment
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Source: Author.
Table 1. Equipment Lease
Item USD/month/asset Term Down payment
Fork truck 1,000 6 years 0%
Walkie stacker 500 6 years 0%
Due to frequent upgrades in Warehouse Management Systems (WMS), management decided to lease WMS
software and hardware. The perpetual license fee is USD 3,000 per month. On top of the license fee the ven-
dor also charges a 10% maintenance fee.
Cold storage is clearly asset intensive. It’s also labor intensive. Hourly warehouse personnel work three
8-hour shifts per day, 21 days per month. There is a 30-minute unpaid lunch break. Due to the cold warehouse
conditions, workers are also entitled to one, unpaid 15-minute break every 2 hours. Even though Indiana is
an “employment-at-will” state which gives employers the freedom to terminate labor at any time, management
at Magna does not believe in laying people off during slow periods. They have seen the negative impact that
layoffs have on morale. They pay their hourly staff USD 15 per hour. After factoring in insurance, paid time
off and retirement, as well as legally required benefits such as social security, unemployment insurance, and
workers’ compensation, the hourly worker cost to the company is USD 36 per hour.
The company also employs a number of office staff. The management team consists of an operations man-
ager, a financial manager, and an HR manager. On each shift, there is a warehouse supervisor. On day shift
the warehouse employs one mechanic and a custodian. There is also an IT specialist, one quality analyst,
and one accountant. A second mechanic works on the afternoon shift. Annual salaries for these occupations
are summarized in Table 2. After taking benefits into account, salary costs to the company increases by 30%.
Table 2. Overhead Costs
Position Annual salary (USD)
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Operations manager 82,000
Finance manager 82,000
HR manager 82,000
IT analyst 45,000
Quality analyst 40,000
Accountant 55,000
Maintenance 40,000
Custodian 30,000
Source: Author.
Even with its well-trained staff, on-time delivery was a problem last year. According to the operations manager,
the primary reasons for the shortfall were lower than expected picking accuracy and longer than expected
pick times. The quality analyst summarized last year’s picking accuracy by month in Table 3.
Table 3. Picking Accuracy Last Year
Month Picking accuracy (%)
January 98
February 99
March 98
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April 98
May 95
June 99
July 96
August 99
September 99
October 97
November 96
December 98
Source: Author.
The accountant and IT analyst went through the WMS system to calculate average time used to pack pallets
last year. In their calculations packing consisted of picking items (inclusive of time needed to record the trans-
action in the WMS) and time spent traveling throughout the warehouse locating SKUs. Their findings are
shown by month in Table 4.
Table 4. Warehouse Pallet Packing Times Last Year
Month Picking (min) Traveling (min)
January 0.123 0.55
February 0.154 0.4
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March 0.124 0.23
April 0.133 0.23
May 0.132 0.34
June 0.133 0.33
July 0.135 0.34
August 0.135 0.22
September 0.132 0.21
October 0.133 0.33
November 0.13 0.2
December 0.132 0.3
Source: Author.
The operations manager blamed poor pallet packing times on the increased number of picks per pallet and
longer travel distances in the warehouse necessary to complete picks. The IT analyst pulled average items
picked per pallet and SKUs picked per pallet from the WMS. Her findings, by customer, are listed in Table 5.
Table 5. Forecasted Picking Mix
Leonard’s Fresh Organic Produce of West- White River Martinsville Prime Farm
Catch field Cheeses Meats Fresh
Items/pallet 56 70 80 90 65
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SKUs/
40 60 20 56 45
month
Source: Author.
The operations manager took this analysis one step further. He used data in the WMS to forecast, by cus-
tomer, next year’s pallet shipments and the number of days pallets will be in inventory. His data is summarized
in Table 6.
Table 6. Pallet Shipment and Storage Forecast
Pallets shipped by customer
Month
Leonard’s Fresh Organic Produce of White River Martinsville Prime Farm
Catch Westfield Cheeses Meats Fresh
January 3,960 3,060 2,070 3,060 1,080
February 2,070 4,050 3,060 5,040 3,060
March 3,870 5,040 3,060 3,060 2,070
April 5,040 4,860 4,050 2,070 3,870
May 7,020 5,850 3,240 5,850 2,070
June 3,060 5,040 2,070 4,050 1,080
July 6,030 5,490 3,960 3,060 2,070
August 6,840 5,040 2,610 2,070 4,050
September 2,880 4,950 2,070 2,070 4,860
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October 4,050 3,870 3,960 1,080 3,870
November 5,040 3,780 4,050 3,060 2,070
December 6,300 3,510 5,040 2,070 2,070
Days pallets are in in-
10 20 30 60 20
ventory
Source: Author.
Company President Davis is pleased with the pallet storage and pallet shipment forecasts. The warehouse
will be operating at 89% of storage capacity. However, she isn’t satisfied that existing staffing will be sufficient
to solve last year’s on-time delivery issue. She also wants pricing changes to better reflect pallet picking, stor-
age, and shipping costs while accepting that price hikes over 10% may not be sustainable. Existing prices are
shown in Table 7.
Table 7. Price Points Last Year
Price (USD)
Picking/min 1.3
Storage/sq. ft./month 1.5
Shipment/pallet 9.23
Source: Author.
Per her instructions, pricing levels must ensure at 99% confidence that the overall company profit margin after
taxes is within the U.S. cold storage industry average of 5 to 6%. U.S. corporate income tax is 21%. Indiana
state corporate income tax is 5.5%. To keep the best customers, it is standard practice in the industry to offer
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a 15% discount. Handling is the most price-sensitive part of the business is.
Discussion Questions
1. What hourly staffing is required for the warehouse?
2. At this staffing level, what are the packing and storage costs?
3. At these costs, what prices do you recommend for packing and storage?
4. 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?
5. At these pricing and discount levels, what are Magna’s expected revenue, operating costs, and net
profit margin?
Note
1. For propriety reasons, all business names and financials in this case have been altered.
References
Economic Research Service. (2019). Food price and spending. USDA. https://www.ers.usda.gov/data-prod-
ucts/ag-and-food-statistics-charting-the-essentials/food-prices-and-spending
Grand View Research. (2019). U.S. cold storage market size, share, & trends analysis report by warehouse
type, by construction type (bulk storage, production stores), by temperature type (chilled, frozen), by applica-
tion, and segment forecasts, 2019–2025. https://www.grandviewresearch.com/industry-analysis/us-cold-stor-
age-market
Konar, M. (2019). The first map of America’s food supply chain is mind boggling. Fast Company.
https://www.fastcompany.com/90422553/the-first-map-of-americas-food-supply-chain-is-mind-boggling
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