Cold Storage: Make vs Buy?
Building an in-house cold chain system or outsourcing a cold chain system is one of the most vital decisions for managers and directors. Outsourcing has become one of the backbones of today’s cold chain industry, but there are debates in every industry on make vs buy and as supply chains get complex, the decision will become difficult, resulting in delays. Experts believe that outsourcing is cost-efficient, but at the same time, businesses lose control over the operations; on the other side, an in-house cold storage system provides more flexibility but comes with hefty costs. Each story has two sides and in this article, let us critically analyze whether to make cold storage or buy cold storage in the complex global cold chains.
What is Cold Storage?
Cold Storage is a subset of Cold Chain used to create a place and time utility to increase the product value. Imagine a warehouse facilitated by a controlled temperature mechanism in a layman’s language. The purpose of Cold Storage in a Cold Chain is to create time & place utility and improve the value of the products. It all started in the 19th Century when Frederick Jones developed the concept of mobile refrigeration and iceboxes. These boxes and mobile refrigeration were used to store medicines and animal tissues. Cold Chain and Cold Storage have come a long way since then. We now see refrigerated ships, temperature-cold trucks, temperature-cold warehouses, and insulated shipping containers.
Cold Storage plays an essential role in transporting perishable vaccines and improving product shelf-life. The complex and lengthy supply chains make it inevitable to have a functioning cold storage, especially for perishable products as they contribute heavily towards the country’s GDP.
After knowing the importance and functionality of cold storage, businesses need to know whether to outsource or insource the cold storage facilities.
Benefits of Outsourcing
Managing a cold chain and cold storage is not a cakewalk. A tremendous amount of dedication, time, and planning is needed to execute a successful cold storage operation. Primarily Cold Storage is expensive. Outsourcing helps SMEs indulge in using Cold Storage facilities for their supply chain and delivering quality service to customers. The increased demand for fresh products has made it difficult for start-ups, 3PLs, and SMEs to deliver high-quality perishable products. SMEs and other players have less and no knowledge about the jargon of cold storage like facility customization, temperature settings, temperature movement, etc. Thus, outsourcing could ease the extra pressure from businesses and allow them to focus on core activities.
Jay McHarg, the CEO of Aerospace Global, discusses the rising importance of cold chains as a service (CCaaS). He exemplifies CCaaS as an integrated cold chain service that will reduce losses caused to pharmaceutical companies. The Institute of Human Data Science estimates that the pharma industry loses 35 USD billion annual sales due to weak or unorganized cold chains or storage. Thus companies should benefit from CCaaS.
The second reason for outsourcing could be an increase in value & reduction in cost. External expertise increases the value of the process. It is just like a mechanic practising the repairs daily, every day. Companies with the expertise of handling cold storage know where potential bottlenecks could form, places to relax, focus on, operational excellence, and a value chain approach. CCaaS companies know the perfect size required for cold storage depending on the inventory in the pipeline. The key to increasing product value depends on at what temperature the products are kept. The temperature for food items and pharmaceutical products is different. Hence CCaaS companies examine which products are to be deep-frozen and which ones are to be kept in defrosting zones.
A CCaaS company can guide clients to function lean financially. Having a cold storage facility means heavy investments in infrastructure, yearly costs for repairs & maintenance, and extra salary to hire experts in cold chain & cold storage. Capital & operational expenses are the nasty sweepers of any business and affect profitability. Many biopharma companies in Europe consider outsourcing their cold storage to experts around Europe.
Some of the notable CCaaS providers in Europe are:
Along with these benefits, there are plenty others. With the advent of Business Process Outsourcing (BPO), every industry has become faster, linear, and more profitable. Nevertheless, we should always keep in mind the negatives like heavy reliability, security threats due to excessive information sharing, and the rise of competitors.
In-house Cold Storage
The other story is that companies believe in the “make” and not buy process. These companies often have a view of achieving more agility and flexibility. Supply and cold chains are fragile for various reasons, and companies prefer flexibility in their operations. Another reason for in-house cold storage systems has tailor-fitted solutions. The debate here is that the workforce understands businesses better than outsiders. Last but not least, managers believe in having cultural alignment when resources are in-sourced.
One prime example of insourcing all the activities is from India, Tata Group. Tata did not believe in outsourcing services; instead, he would create a separate legal entity. We have Tata Consultancy Services for IT solutions, Tata Motors for the Automotive industry, Tata Power for solar power & energy, Tata Elxsi & Auto comp, which looks after the supply chain & logistics department many others.
However, not every business is a Tata Group. It takes courage and cost to build an in-house cold chain system. If we take the example of building cold storage in Europe, it would cost billions with no guarantee of full-fledged returns. Along with the infrastructure cost, the company also needs skilled employees who know cold chain & cold warehouses.
Factors to consider & Recommendations
The size of the cold warehouse will decide whether to outsource or insource the cold storage process. Here, size is the total amount of inventory present as finished goods, work-in-progress, and raw materials. The total amount of SKUs that require cold storage daily will determine the size of the cold warehouse.
For SMEs, the ideal solution could be having a 3PL or cold chain expertise handle the cold storage operations as they will perform effectively and save cost. For billion-dollar companies, the combination of insourcing and outsourcing will benefit them in the long run.
2. Cold Storage Types
Outsourcing also depends on the services provided by the third party. Usually, cold warehouses use the system of Evaporator, where the heat is taken from outside from the inner compartment and by the act of condensation makes the warehouse cold. There is another type called clip-on refrigeration, in which Evaporator and condenser are in the same bloc.
You can find more types of cold warehouse here.
Depending on the business location, companies should decide whether to insource or outsource. Act of condensation and vaporization releases massive amount of energy; hence, it is not allowed to function in a residential place due to CSR norms.
3. Integration within the Logistics
If a company is outsourcing the cold storage part, it is also crucial to integrate it with the cold chain process. Not doing so will result in breaches and comfortable spaces to form unresolvable bottlenecks. Thus, terms and conditions, period of outsourcing, costs, and process integration must be considered before finalizing the deal.
One of the most commonly used but highly effective recommendations is integrating both systems. This Hybrid process is now being used by big companies like P&G, Nestle, Unilever, Mondelez international, etc. to help increase the value of the products. Ideally, in the recent global business trade, outsourcing is one of the most trusted way of achieving more significant results. However, due to pandemic, companies have realized the importance of flexibility which is not attained in case of outsourcing; hence, in the next couple of years, the story of make vs buy will unfold in every industry.
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