WAREHOUSING

 Define Warehousing or what is Warehousing?

Definition  Warehousing is that part of firm’s logistics
System 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:-
Seasonal production level demand
(i) 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

PLANT A
CUSTOMERS

CONSOLIDATION A B
PLANT B C
WAREHOUSES

PLANT C

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.
 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

CUSTOMER X

PLANT BREAK BULK CUSTOMER Y

A WAREHOUSE

CUSTOMER Z

(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.

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.

COMPANY A
OR
PLANT A
CUSTOMER X

COMPANY B
DISTRIBUTION
OR CUSTOMER Y
CENTRE
PLANT B

COMPANY C
CUSTOMER Z
OR
PLANT C

(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:
 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.

SPOT STOCK WH. A

CENTRAL WAREHOUSE 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 COMPLETE LINE

ASSORTMENT

 A narrow product  A broad product

Assortment line.
 Functional for  Functional year
limited time period. round.
 Large number of  Limited to a few
small warehouse, strategic locations.
dedicated to specific
markets.

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.

CUSTOMER W

A B C D
PLANT A WAREHOUSE
TRANSIT MIXING CUSTOMER X
POINT
PLANT B
A B C D
PRODUCT ID
PLANT C CUSTOMER Y

A B C

CUSTOMER Z

BENEFITS: A B
 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 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.

VENDOR A

MANUFACTURING ASSEMBLY
WAREHOUSE PLANT
VENDOR B

VENDOR C

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.

 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 Warehouses
o Lack of geographical flexibility
o 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 warehousing
o 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 Warehousing

o 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 PUBLIC WAREHOUSE PRIVATE

WAREHOUSE

OWNERSHIP BY GOVERNMENT BY FIRMS OWING

(RENTED) THE PRODUCT

FLEXIBILITY HIGHLY FLEXIBLE RIGID

RETURN ON CONTRIBUTES A CONTRIBUTES LESS
INVESTMENT CONSIDERABLE
AMOUNT

COST LOW OPERATING HIGH OPERATING

COST COST
ECONOMIES
(C) CONTRACT OFWAREHOUSES: YES NO characteristics of both
They combine the best
SCALE
private and public warehouse operations. Contract warehousing is a “long term,
RANGE beneficial
mutually OF SERVICES GREATER
arrangement which provides uniqueLESSER
and specially tailored
warehousing and logistics services exclusively to one client where the vendor and
SCALE
client OFthe risk associatedLARGE
share with the operations.” SMALL
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 DECISIONS

The 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
field warehouses are public facilities. A contract facility could be used in either case.

WHAT PRODUCTS, WHERE

WHERE?
INTERIOR
WHAT SIZE?
(LOCATION)
LAYOUT
 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.
 N2
X2 = (X1)
N1
Where,
N1 = Number of existing facilities
N2 =Number of future facilities
X1 =Total inventory in existing facilities
X2 = 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:

2
INVENTORY AT 2 FACILITIES WOULD BE (X2) = (40,000)
8
= (40,000) (0.5)

= 20,000 UNITS

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