In a meeting about whether to store inventory in a company-owned warehouse or rent a warehouse, a colleague says, "We should use our own warehouse and save the cost of renting one." Do you agree or disagree? Explain.
It is impossible to know for sure whether using our own warehouse would make financial sense. There are too many variables that are not laid out in the question to allow us to know. However, we can discuss a few questions whose answers could help us decide what to do.
First, do we already have a warehouse or are we planning to build one? If we are planning to build, then we need to consider how much it will cost to build the warehouse as compared to how much we will save by avoiding the rent on someone else’s warehouse. We will also need to consider the fact that building a warehouse would cost more money in the near future than renting. We need to think about what the firm would be doing with that money. If the firm could use the money in a way that gained a return, that return might make it more profitable to rent instead of using large sums of money to build.
Second, if we already have a warehouse, what is our alternative use for that warehouse? If it is just going to sit empty, then we should clearly use it rather than renting. But what if we are renting it out to someone else? Or what if we are already using it to store other things that our firm needs? In each case, using the warehouse would not be “free.” We would lose the rent that we are charging someone else or we would have to find some other place to store whatever of ours is in the warehouse. This might reduce the financial benefits of using our own warehouse drastically enough that renting would be more sensible.
In short, what we have to consider here is the opportunity cost of using our own warehouse. Renting a warehouse costs money. However, using our own warehouse can cost money as well. It might not be money that we have to actually spend, but it could cost us in terms of lost opportunities. Thus, we have to consider whether the money we gain by not paying rent will be outweighed by losing opportunities to make money in other ways.