Racking Up The Savings

With steel prices rising, companies need to re-evaluate racking purchases.


The price of steel is at an all-time high, thanks to heavy demand from China and India, as well as the fact that the U.S. dollar's weakness makes domestic steel a great buy for other nations.

Each month brings additional price increases from domestic steel mills and according to industry sources, prices, which have more than doubled since January, will continue to rise at least until the end of the year.

However, warehouses need additional pallet position more than ever. Before companies make the decision to commit themselves to a racking upgrade, they should consider what their alternatives might be.

"When a company is deciding whether or not to expand its racking system, where it is located can drive what the optimal solution is," explains Ned Bauhof, principal and vice president of Precision Distribution Consulting Inc., a York, PA-based warehouse design consulting firm.

"For example, it might want to consider renting outside storage space during peak times of the year, as opposed to constructing new racking. The affordability differs depending on whether the company is situated in an urban or rural location, as do costs to shuttle goods from the facility to the storage space," he says.

Bauhof also cites the availability of racking in a company's area and the cost to ship it to a location among the factors to consider. If racking still makes sense after all other considerations, it can then determine what type is required.

"There are two ways that a company can affect the cost of its rack purchase: first, it should ensure it's buying the right quantity and then it must make sure it is buying the right type of rack," he says.

An analysis can often reveal that companies don't require as much racking as they thought. They might be able to cut down on their expenditure if they better utilize the space they have, which might involve putting some of their products in cartons or carton flow.

"In our case, we try to take their pallets and cases and cube them into the correct space," says Terry Shaw, director of applications engineering for SSI Schaefer LTD., Charlotte, NC. "We maximize the investment they already have and get it functioning."

Shaw suggests companies concentrate on getting rid of any SKUs that aren't turning for the business. "Why store dead product? Use the space for more profitable product lines."

Understanding a company's business requirements is important in order to avoid wasting money on knee-jerk purchases. For example, buying rack with the intention to merely add capacity can be an expensive mistake if a company sacrifices selectivity in the bargain.

"The direction that the food and beverage industries are going-adding an ever-increasing number of SKUs-means that the ability to get to the right SKU without having to move something else out of the way is vitally important," says Precision Distribution's Bauhof. "Ignoring this factor in a rack purchase can not only hurt a business, but mean a lot of money wasted on high-priced steel."

A Menu Of Options

With the price of racking so high, manufacturers are reporting that their customers are showing a strong interest in leasing their racking systems.

"With racking up 40 or 50 percent, leasing is a little easier for companies to accept these days," says Dennis Hartman, chairman and CEO of Twinload Corp., Southbend, IN. "They can amortize it if they do a five-to-seven-year residual lease and pay by the month for it."

Hartman says that there are different types of leases available, including lease to own as well as residual leases. "It's just like leasing a car. They estimate what the value of the product will be at the termination of the lease period and they take it off up front."

"Racking can also be bought in phases," says Kevin Curry, national accounts manager for Steel King Industries Inc., Stephens Point, WI. "Maybe you don't fill the whole building right now. Maybe you fill half of the building and wait."

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