Warehouse Renewal Bids Can Hide the Accounts That Erode Margin
A warehouse account can generate substantial revenue while consuming more labor than its rates recover. When a contract comes up for renewal, the risk is that the next bid carries forward the same assumptions. Higher prices may cover some cost increases without correcting the activities that made the account unprofitable.
In written responses to The Supply Chainer, Dan Cavanaugh, CEO and President of Da Vinci, a warehouse management software provider, described how third-party logistics operators should separate customer-specific costs from shared expenses. His starting point is a practical question: which costs would disappear if the customer left?
Allocate Costs According to the Work
“The clearest way to sort the two is to ask which costs exist only because of that customer. If the customer left tomorrow, the labor spent receiving, picking, packing, kitting and handling returns for them would go away, along with any equipment dedicated to their account, their packaging and the accessorials their orders generate. Those are customer-specific costs.”
The building, racking, systems and management team would remain, Cavanaugh said. He recommended allocating those shared costs on a defensible basis, such as the pallet positions or floor space the customer actually uses. His distinction exposes a weakness in allocating every expense by revenue. Two accounts can produce similar sales while requiring different amounts of handling. An account with more complex orders may consume additional labor that a revenue-based allocation fails to reveal.
Cavanaugh argued that customer-level labor figures should come from systems recording work as it happens. Reconstructing them from timesheets immediately before a bid leaves the operator relying on an estimate at the point when pricing decisions become contractual commitments.
Test the Rate Card Against Actual Activity
For renewals, Cavanaugh recommended comparing the cost of each activity with what the operator billed. For new business with incomplete order history, an existing account with similar units per order, SKU count and channel mix can provide a starting point.
That comparison still needs testing. His proposed approach is to examine rates at low, expected and high volumes and identify where margin breaks down. A comparable account provides evidence for assumptions; it does not establish that the prospective customer will behave identically.
The difference between possessing information and using it operationally appeared in earlier Supply Chainer coverage. Kristian O’Meara, chief commercial officer at PairSoft, said: “Visibility does not automatically translate into action.” His comments concerned the gap between analyzing data and connecting it to business processes.
Applied to a renewal, the implication is straightforward: a cost report only changes the outcome if its findings inform the proposed rates and contract terms.
Put Unverified Assumptions Into the Contract
In his written reply to The Supply Chainer, Cavanaugh said unverified assumptions should be made explicit in the agreement. Examples include volume bands, units per order and a pricing review once actual orders are flowing. The response did not include a measured margin improvement or a customer case demonstrating the approach. It offers a method for making uncertainty visible before the operator accepts the work.
The renewal decision therefore extends beyond the headline rate. It concerns which activities that rate covers, the operating assumptions behind it and how pricing can be reviewed when actual demand differs. Leaving those questions unresolved can preserve the same margin problem for another contract term.
