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Embracing Risk

Our culture is noted for its risk takers. Many of us are descended from people who left the security of family life in Europe to cross the Atlantic and start a new life in unfamiliar surroundings -- certainly a risky proposition.

Logistics service providers have been notable risk takers. Before contract warehousing became common, warehouse operators built substantial businesses with every client on a month-to-month agreement. They constructed new buildings and invested in equipment, and the only contract was a handshake and a promise of future business. Furthermore, they lived with the knowledge that any customer could depart at any time.

Those who finance warehouse projects must also understand the risks. Long-term lease arrangements are not always available or even desirable. When a buyer and vendor implement on a long-term warehouse contract, it is important to read the details of the agreement. If the buyer has the right to terminate if the vendor is unable to fulfill key performance indicators (KPIs), the contract may offer little more security than a month-to-month agreement.

Some types of warehousing are notable for acceptance of risk. A number of logistics service providers are specialists in the handling of hazardous materials. There are some important products that are necessary, but also dangerous. Agricultural chemicals provides several examples. This material must move through the supply chain, and its producers rely on specialists who have the knowledge and the equipment to handle hazmat with a minimum of risk. The provider of temperature controlled warehousing faces the risk that the refrigeration equipment or the power that activates it might fail. Redundant systems must be in place to control this risk.

Both buyer and seller must recognize that the acceptance of a risk is purchased at a premium price. High risk is accompanied by higher margins. The square-foot rental cost for a hotel room is always higher than the cost of an apartment lease, because the hotel occupant may leave at any time. The user who expects a service provider to bear a higher risk should expect that provider to enjoy a higher profit margin. When the buyer seeks the lowest price, it is normal for the seller to create an agreement that minimizes risk.

 

K. B. Ackerman Company
2041 Riverside Drive
Suite 204
Columbus, Ohio 43221
Phone 614-488-3165
Fax 614-488-9243

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