WAREHOUSING

Define Warehousing or what is Warehousing?

Definition Warehousing is that part of firm’s logisticsSystem that stores products at and between point-of-origin and point of consumption, and provides information to management of the status, condition, and disposition of items being stored.A warehouse is a point in the logistics system where a firm stores or holds raw materials, semi-finished goods, or finished goods for varying periods of time. In the macroeconomic sense, warehousing performs a vital function. It creates time utility for raw materials, industrial goods and finished products. The proximity of market-oriented warehousing to the customer allows a firm to serve the customer with shorter lead times. This warehousing function continues to be increasingly important as companies and industries use customer services as a dynamic, value-adding competitive tool.

What is the importance of warehousing? (Rationale for Warehouses)

Achieve transportation economics Achieve production economics Take advantage of quantity discounts Accomplish least total logistics cost Maintain steady source of supplies Support customer service policies Meet changing demand(market) conditions Reduce time & space distance between supplier & customer

What is the need for warehousing?A) Conventional Approach: (Push Concept) Protection against delays & uncertainty in transportation

Availability of products on desired time & at desired place

Provide adjustment between the time of production & use of the product

Serve as a reservoir of goods

B) Modern Approach: (Pull Concept) Movement of products Warehouse is a location where inputs received

from production are converted into outputs to the customers, at shortest possible time

Warehouse is defined as a location of temporary storage facility & from where they are dispatched with main objective of maintaining the flow of goods throughout the logistics system( cross docking)

Warehouse adds to the cost of distribution but the financial overall benefits over weigh the cost

Relationship between warehousing & transportation/ production/ customer service/ least total cost logistics

The Role of Warehouse A role plays a multifaceted role in the

integrated logistics system. It can serve as a transportation consolidation facility. It also acts as a reservoir for production overflow. This function known as “Stock piling” can take a variety of forms:-

(i) Seasonal production level demand(ii) Level production seasonal demand

Warehouse also acts as:-a)Production Mixing Sites:- Variety of

products can be stocked and when orders are received for a particular “Mix” they are sent from warehouse.

b) Warehouse can also facilitate production: - Some final operation like writing name of the customer or coloring can be done there.

c)As a safety during strikes, more rejections etc.

d) Smoothening production runs.

e) The primary role is to provide customer service.

What are the basic components of a warehouse? There are 3 basic components. (a) Space (b) Equipment (c) People.

(a) Space: - Space allows for the storage of goods when demand and supply are unequal.

(b) Equipment: - Warehouse equipment includes materials handling devices, storage racks, dock and conveyor equipment and information processing system. The equipment helps in product movement, storage and tracking.

(c) People: - People are the most critical component of a warehouse. Space and equipment mean nothing without competent people. A primary reason for establishing a warehouse is to increase customer service levels. This often requires individual attention to special customer requests like final subassembly, specialized packaging, or price making of shipments. Customer requests can request standardization in the warehouse, making complete automation impossible. People play critical role in every part of the supply chain, and warehousing is no exception.

Warehouse versus Godown The concept of warehouse is vastly different

from the earlier concept a godown for storage

because the godown is merely a dumping place, which is maintained only for storage of surplus goods.

Types of Warehouses:-(A) Warehouses can also be classified on the basis of benefits realized from them

Benefits realized from strategic warehousing

ECONOMIC BENEFITS SERVICE BENEFITS ( 5 basic economic benefits ) (Five basic service benefits) a) Consolidation 1) Spot Stock b) Break bulk 2) Assortment c) Cross dock 3) Mixing d) Processing/postponement 4) Production Support e) Sock pilling 5) Market Presence

(B) Warehouses can also be classified on the basis of Ownership:-

Private Public

- Short Term- Long Term

Contract or third party The different types of Public Warehouses are:1) General Merchandise

2) Refrigerating Warehousing (frozen/chilled) 3) Special Commodity Warehouses 4) Bonded Warehouses 5) Household Goods and Furniture Warehouses 6) Field Warehouses 7) Agriculture Warehouses 8) Distribution Warehouses 9) Buffer Storage Warehouses 10) Export and Import Warehouses

(C) Warehouses can also be classified on their locations/positions:- Production Positioned Intermediate Positioned Market Positioned

What are the benefits realized from Strategic Warehousing?

Benefits realized from strategic warehousing

ECONOMIC BENEFITS SERVICE BENEFITS

A Warehouse should not be included in a logistical system unless it is fully justified on a cost benefit basis.

Economic Benefits:-

Economic Benefits result when overall logistical costs are reduced by utilizing by one or more facilities. It is not difficult to quantify the return on investment of an economic benefit because it is reflected in a direct cost to cost trade-offs.

FIVE BASIC ECONOMICS BENEFITS

Consolidation Break Bulk Cross Dock Processing/ Stock Pilling Postponement

(A) Consolidation: - Here the consolidation warehouse receives and consolidates materials from a number of manufacturing plants destined to specific customer on a single transportation shipment.

CONSOLIDATION

FEATURES:- Allows both inbound movement from

manufacturer to the warehouse and outbound movement from warehouse to the customer to be consolidated into longer shipments.

Combines logistical flow of several small shipments to a specific market area.

Lower distribution cost for manufacturer or distributor as number of firms may join together and use for-hire consolidation service.

BENEFITS:- Realization of lowest possible transportation rate. Reduced congestion at customer receiving deck.

(B) BREAK BULK: - It is similar to consolidation except that no storage is performed.

FEATURES: In break bulk operations combined customer orders are received from manufacturers and are arrange for local customers.

PLANT A

PLANT B

PLANT C

CONSOLIDATION WAREHOUSES

A B C

CUSTOMERS

They split individual order arrange for local delivery.

BENEFITS:- As there are long distance transportations from Manufacturing Plant to Break Bulk Warehouse which cover large shipments, the transportation cost per unit is lowers. There is less difficult in tracking.

BREAK BULK WAREHOUSE

(C) Cross dock: - In a cross-docking concept warehouses serve primarily as ‘distribution mixing center’. Product arrives in bulk and is immediately broken down and is mixed in the proper range and quantity of products for customer shipment. In essence, the product never enters the warehouse.Cross-docking is becoming is becoming popular among retailers, who can order TL, then remix and immediately ship to individual store locations. Products usually come boxed for individual stores from the supplier’s location.

PLANT A

BREAK BULK WAREHOUSE

CUSTOMER X

CUSTOMER Y

CUSTOMER Z

Cross-docking should be considered as an option by firms meeting following criteria: Inventory destination is known when received. The Customer is ready to receive inventory

immediately. The Shipments are for fewer locations. The Large quantities of individual items can be

received by firm. Inventory arrives at firm’s docks pre-labeled. Some inventory is time sensitive. Firm’s distribution center is near capacity Some of the inventory is pre-priced

FEATURES: Full trail loads of product arrive from multiple

manufactures. After receiving, it is sorted by and allocated to

customers. Product is then moved across the dock to be

loaded into trailer destined for appropriate customer.

The trailer is then released for transportation after it has been filled with mixed products from multiple manufacturers.

BENEFITS: Full trailer movements from manufactures to

cross-dock warehouse and then to retailers. Reduced handling cost since the product is not

stored. More effective use of dock facilities because all

vehicles are fully loaded, thus maximizing loading dock utilization.

(D) PROCESSING/POSTPONEMENT: Warehousing can also be used to postpone or delay production by performing processing and light manufacturing activities. A warehouse with packaging or labeling capability allows postponement of final production until final demand is known, e.g. vegetable processing. Vegetables can be processed and canned at the manufacture’s end without pre attached labels. No pre attached labels mean the product does not have to be committed to a specific customer.

BENEFITS:

COMPANY A OR

PLANT A

COMPANY B OR

PLANT B

COMPANY C OR

PLANT C

DISTRIBUTION CENTRE

CUSTOMER X

CUSTOMER Y

CUSTOMER Z

Risk is minimized because final packaging is not complete until an order for a specific label and package has been recycled.

The required level of total inventory can be reduced by using basic products for a variety of labeling and configurations.

Combination of lower risk and inventory level often reduces total system cost even if cost of packaging at the warehouse is more expensive than it would be at the manufacturing facility.

(E) Stock pilling: - It provides an inventory buffer which allows production efficiencies within the constraints imposed by material sources and the customer. It is required to support marketing efforts of either seasonal goods manufacturing e.g. Agricultural products which are harvested at specific times with subsequent consumption occurring throughout the year or goods manufactured year round but sold seasonally, e.g. Blankets are sold in winter period.

Service Benefits: - It may or may not reduce the cost. A warehouse justified on service basis allows improvement in the time and place capability of overall logistical system. It is difficult to quantify the return on investment of such a benefit because it involves cost-to-cost trade-offs.

Such a facility would be added only if the net effect would be profit-justified.FIVE BASIC SERVICE BENEFITS ACHIEVED THROUGH WAREHOUSING

SPOT STOCK ASSORTMENT MIXING PRODUCT PRESENCE MARKET SUPPORT

i) SPOT STOCK: Manufacturers with limited or highly seasonal product lines use stock spotting most often in physical distribution of the products. Under this concept a selected amount of a firm’s product line placed or spot stocked in a warehouse to fill customer orders during a critical marketing period. It allows inventories to be placed in a variety of markets adjacent to key customers just prior to a maximum period of seasonal sales.

CENTRAL WAREHOUSE

SPOT STOCK WH. A

SPOT STOCK WH. B

SPOT STOCK WH. C

ii) ASSORTMENT: An assortment warehouse which may be utilized by a manufacturer, wholesaler or retailer stocks product combinations in anticipation of customer orders. The assortments may represent multiple products from different manufacturers or special assortments as specified by customers.

BENEFITS: Improved service by reducing the number of

suppliers that a customer must deal with. Combined assortments allow large shipments that reduce transport cost per unit.

Spot Stock v/s Assortment

SPOT STOCKING A narrow product Assortment Functional for

limited time period.

Large number of small warehouse, dedicated to specific markets.

COMPLETE LINE ASSORTMENT

A broad product line.

Functional year round.

Limited to a few strategic locations.

iii) MIXING: - It is similar to break except that it involves many different manufactures’ shipments. Truckloads of products are shipped to the mixing warehouse where the desired combination of products for each customer or market is selected.

BENEFITS:Reducing the overall product storage in a

logistical system.Inventory is stored to precise customer

specifications.

iv) PRODUCTION SUPPORT: It provides a steady supply of components and materials to assembly plants. Safely stocks on items purchased

PLANT A

PLANT B

PLANT C

WAREHOUSE TRANSIT MIXING POINT

PRODUCT ID

CUSTOMER W

A B C D

CUSTOMER X

A B C D

CUSTOMER Z

A B

CUSTOMER Y

A B C

from outside vendors may be justified because of long lead or signified variations in usage.

BENEFITS: It allows supplying or ‘feeding’ processed materials, components and sub-assemblies into the assembly plant in an economic and timely manner.

v) MARKET PRESENCE: Market presence benefits are basically from the local warehouses’, which are more responsive to customer needs and offer quicker delivery than more distant warehouses.

BENEFITS: It can enhance market share and potentially

increase profitability. However, a little solid research exists to confirm it’s actually benefit impact.

VENDOR A

VENDOR B

VENDOR C

MANUFACTURING WAREHOUSE

ASSEMBLY PLANT

WAREHOUSING ALTERNATIVES OR TYPES OF WAREHOUSES ON THE BASIS OF OWNERSHIP

The three types are: (a) Private (b) Public (c) Contract (a)PRIVATE WAREHOUSES: Private warehousing facility is owned and managed by same enterprise that owns the merchandise handled and stored at the facility. This facility may be owned or leased as per the decision about the strategy, which best fits the financial aspect of the firm.In general, an efficient warehouse should be planned around a material handling system in order to encourage maximum efficiency of product flow.

COST INVOLVED: Fixed capital expenses in building, land, etc. Cost of material handling machinery and equipment. Cost of manpower. Office and other facilities expenses. Maintenance and repair cost. Insurance premium.Advantages of private Warehousing: -o Flexibility to design to specifications- Special

design and material handling equipments to suit the company’s product can reduce the storage costs.

o Greater direct control on warehousing activities.o Housing of other offices.o As company’s trained employees handle the

goods, there is no error or handling damages.o If the volume is sufficient, this may workout

cheaper.o For some products public warehouses may

not be available in some strategic locations.

Disadvantages of Private Warehouseso Lack of geographical flexibilityo Prohibitive costs may preclude some firms

from generating enough capital to build or buy a warehouse (Huge Financial requirements)

o Permanent liability

(b)PUBLIC WAREHOUSES: It is operated as an independent business offering a range of services such as storage, handling and transportation on the basis of a fixed or variable free. They generally offer relatively standardized services to all clients.

Costs involved: Rent of the space hired. Payment of charges towards use of other facilities

Advantages of public warehousingo Less expensive as fixed costs are distributed

over many customers. Due to this they can also invest in better material handling equipments.

o Offer greater operating and management expertise since warehousing is their core business.

o Public warehousing may also have lower variable cost than comparable privately operated facilities. The lower variable cost may be the result of lower pay scales, better productivity, or economic of scale.

o It is easy to change location, size and number of facility.

o They are more flexible as they offer different plans to different customers

o Facilities can be given up when not required.o It is easy to ascertain the storage costs.

Disadvantages of public Warehousingo Effective communications may be a problem.o Specialized services may not always be

available in the desired location.o Space may not be available where and when

needed.

COMPARE PUBLIC WAREHOUSE AND PRIVATE WAREHOUSE:

PARAMETERS

OWNERSHIP

FLEXIBILITYRETURN ON INVESTMENT

COST

ECONOMIES OF SCALERANGE OF SERVICES

SCALE OF OPERATIONS

PUBLIC WAREHOUSE

BY GOVERNMENT(RENTED)

HIGHLY FLEXIBLECONTRIBUTES A CONSIDERABLE AMOUNT

LOW OPERATING COSTYES

GRATER

LARGE

PRIVATE WAREHOUSE

BY FIRMS OWING THE PRODUCT

RIGIDCONTRIBUTES LESS

HIGH OPERATING COSTNO

LESSER

SMALL

(C) CONTRACT WAREHOUSES: They combine the best characteristics of both private and public warehouse operations. Contract warehousing is a “long term, mutually beneficial arrangement which provides unique and specially tailored warehousing and logistics services exclusively to one client where the vendor and client share the risk associated with the operations.”

BENEFITS: They provide expertise, flexibility and economy

of scale by sharing management, labor, equipment, and information resources across a number of clients.

They are expanding the scope of their services to include other logistics activities such as transportation, inventory control, order processing, customer service and returns processing.

BASIC WAREHOUSING DECISIONSThe basic warehousing decisions are: -Warehousing management involves a number of important decisions, including ownership, number, size stocking and location that is what type organization, how many, what size, what products and where.

Warehousing strategy As would be expected, many firms utilize a combination of private, public, and contract facilities. A private or contract facility may be used to cover basic year-round requirements, while public facilities are used to handle peak seasons. In other situations, central warehouses maybe private, while market area or

OWNERSHIP

PUBLIC PRIVATE

HOW MANY?

CENTRALIZED DECENTRALIZED

WHAT SIZE?

WHERE? (LOCATION)

INTERIOR LAYOUT

WHAT PRODUCTS, WHERE

field warehouses are public facilities. A contract facility could be used in either case. Full warehouse utilization throughout a year is a remote possibility. As a planning rule, a warehouse designed for full capacity utilization will be in fact be fully utilized between 75 and 85 percent of the time. Thus from 15 to 25 percent of the time, the space needed to meet peak requirements is not utilized. In such situation, it may be more efficient to build private facilities to cover the 75% requirement and use public facilities to accommodate peak demand. The second form of combined public warehousing may result from market requirements. A firm may find that private warehousing is justified at specific locations on the basic of distribution volume. In other markets, public facilities may be the least cost option. In logistical system design the objective is to determine whatever combination of warehouses strategies most economically meets customer service objectives.

An integrated warehouse strategy focuses on two questions. The first concerns how many warehouses should be employed. The second question concerns which warehouse types should be used to meet market requirements. For many firms, the answer is the combination that can be differentiated by customer and product. Specifically, some customer groups may be served best from a private warehouse, while a public warehouse may be appropriate for others.

Private Contract Public

Present synergies

Industry synergies

Operating flexibility

Location flexibility

Scale of economies

Qualitative decision factors

The figure presents a strategy continuum ranging from private to contract to public. Qualitative considerations, listed on the vertical dimensions, are (1) presence synergies, (2) industry synergies, (3) operating flexibility (4) location flexibility and, (5) Scale economies. Each consideration and its rationale are discussed.

(A) Presence synergies: Presence synergies refer to the marketing benefits of having inventory located nearby in a building that is clearly affiliated with the enterprise (e.g., the building has the firm’s name on the door). It is widely thought that customers are more comfortable when suppliers maintain inventory in nearby locations. Products and customers that benefit form local presence should be served from private or contract facilities.

(B) Industry synergies: Industry synergies refer to the operating benefits of collocating with another firm serving the same industry. For example, firms in the grocery business often receive substantial benefits when they share public warehouse facilities with other suppliers serving the same industry. Reduced transportation cost is the major benefit since joint use of same public warehouse allows frequent delivery of consolidated loads from multiple suppliers. Public and contract warehousing increases the potential for industry synergy. (C) Operating flexibility: Operating flexibility refers to the ability to adjust internal policies and procedure to meet product and customer needs. Since private warehouses operate under the complete control of the enterprise, they are usually perceived to demonstrate more operating flexibility. On the other hand, a public warehouse often employs policy and procedures that are consistent across its client to minimize operating confusion. While conventional wisdom would suggest that private warehouses can offer more operating flexibility, there are many public and contract warehouse operations that have demonstrated substantial flexibility and responsiveness.

(D)Location flexibly: Location flexibly refers to the ability to quick adjust warehouse location and number in accordance with seasonal or permanent demand changes. For example, in-season demand for agricultural chemicals requires that

warehouses to be located near markets that allow customer pickup. Outside the growing season, however, these local warehouses are unnecessary. Thus, the desirable strategy is to be able to open and close local facilities seasonally. Public and contract warehouses offer the location flexibility to accomplish such requirements. (E)Scale economies: Scale economies refer to the ability to reduce material handling and storage cost through application of advanced technologies. High volume warehouse generally have a greater opportunity to achieve these benefits because they can spread technology’s fixed cost over larger volumes. In addition, capital investment in mechanized or automated equipment and information technology can reduce direct variable cost. Public and contract warehouses are generally perceived to offer better scale economies since they are able to design operations and facilities to meet higher volumes of multiple clients.

Inventory at Multiple Locations – The Square Root Law (SRL)

Currently popular approach is to consolidate inventories into fewer stoking locations in order to reduce aggregate inventories in their associated costs. The Square Root Law helps to determine the extent to which inventories may reduce through such a strategy assuming that the total

customer demand remains the same, the SRL estimates the extent to which aggregate inventory needs will change as a firm increases or reduces the number of stocking locations. In general, grater the number of stocking locations, grater is the amount inventory needed to maintain customer service levels.Conversely, as inventories are consolidated into fewer stocking locations, aggregate, inventory levels will decrease. The extent to which these changes will occur is understood through the application of the Square Root Law.

The inventory level is normally proportional to the number of the number of warehouses. The square root law states that the total safety stock in a future number of facilities can be approximated by multiplying the total amount of inventory at existing facilities by the square root of the numbers of future facilities divided by the number of existing facilities.

Where,N1 = Number of existing facilitiesN2 =Number of future facilitiesX1 =Total inventory in existing facilitiesX2 = Total inventory in future facilities

Example: Consider a company that presently distributes 40,000 units of product its customers

from a total of eight facilities located through out the country. The company is evaluating an opportunity to consolidate its operations into two facilities. Using the square root law, the total amount of inventory in two facilities is computed as follows:

Thus the two future facilities would carry a total inventory of 20,000 units. If the company designed them to be of equal size, and if market demand was equal for the geographic areas, each of these distributions would carry one-half of this total, or 10,000 units.

Conversely, if for some reason the company considered increasing the number of distribution centers from 8 to 32, total inventory needs would double from 40,000 to 80,000 units.

Assumptions:Although the square root formula is simply

stated, the model is based on reasonable assumptions: Inventory transfers between stocking locations

at same level are not common practice; Lead times do not vary, thus inventory

centralization is not affected by supply uncertainties;

Customer service levels as measured by inventory availability, is constant regardless of the number of stocking locations;

Demand at each location is normally distributed.

Points to be considered while deciding a warehouse location (Selecting location of a warehouse):(Market/ Production/ Intermediary Positioned) Cost of the warehouse Order cycle time Desired customer service level Nature of the products (seasonal/ perishable) Market service area and cost of distribution Cost and availability of transport facilities Location of competitors warehouses Availability of basic infrastructure such as power, water, etc. Labor supply situation and wage structure Government rules, taxes, levies, etc. Potential for further expansion of warehouse Re-sale value in future Possibility of change in the use of facility at later stage Geographical hazards like flood, earthquakes, etc.

Factors determining Area of Warehouse: Desired customer service level Size of market to be served

Number of products marketed Types, size and shape of the products to be

stored and for what period Material handling system to be used Product throughput (sales volume) present and future Production lead time Economies of scale Stock layout arrangements Aisle and gangways required for movement of goods Office area requirement Fluctuations in demand (high inventory

required to meet erratic demand) Activities to be performed in warehouse

Factors determining warehouse layout (design): Types of products to be stored Company’s financial resources Competitive environment

Warehousing storage principles: Grouping by product compatibility Grouping by complimentarily (functionally rated

items) Grouping by physically similar items Grouping by popularity (fast moving items to

closer exit points and slow moving items at remote place in warehouse)

Working stocks and buffer stocks are to be kept separately

To minimize workload (time) for order picking and shipping aisles are redesigned to facilitate more efficient flow of products to and from dock areas

Advantages of layout: Increase in output Improved product flow Reduced cost of operations Improvement in customer service level Provide better employee working conditions

Conclusion:

The entire area of facilities development that is

size and number of warehouses, location analysis,

warehouse layout and design is an important

factor yet complex, part of warehouse

management. In recent years, computers have

played a more significant role as logistics

executives attempt to optimize warehouse

operations

Thus a warehouse plays a multi-faceted role in the

integrated logistic system.