3. Overview
We will examine the functional nature of
warehouses
We will discuss some reasons for having
warehousing as a component of our logistics
system
We will review several different ways of
accomplishing the warehouse function
We will briefly discuss the warehouse location
problem and solution approaches
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4. Introduction
A warehouse is more than just a place
to store inventory while we wait to use it
or ship it
The warehousing function can have a
significant impact on both the cost and
operation of our logistics system and
thus the firm’s business
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5. Introduction
Warehousing is involved in four supply-
chain process:
– Sourcing/inbound logistics
– Processing/manufacturing
– Outbound distribution
– Reverse Logistics
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6. Strategic Role of Warehousing
We invest in warehouses or a distribution
center (DC) to:
– Provide local inventory
– Perform value-added services for our customers
– Operate near vital suppliers
– Consolidate outbound orders
– Protect against manufacturing lead-times
– Handle reverse logistics
– Perform quality inspections
– Enable manufacturing economics
– Enable procurement efficiencies, etc.
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7. Strategic Role of Warehousing
As with any other function of the
logistics system, management must
make decisions about warehousing
based on the overall system impact
– Benefits must outweigh the costs
If
the cost are greater than the
benefits…find another way to do
business
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8. Functions of Warehousing
1. Receiving
2. Put-Away
3. Storage
4. Replenishment
5. Order Selection/Order Picking
6. Checking
7. Packing and Labeling
8. Staging and Consolidation
9. Shipping
10. Clerical/Office Administration
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10. Functions of Warehousing
Not all functions are necessarily performed in
every warehouse
Notice that the majority of these functions
revolve around the movement of product
The layout in the previous diagram is aimed
at minimizing wasted product movement
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11. Functions of Warehousing
A warehouse strategy that minimizes
inventory results in requirement for less
storage and smoother flows
Warehouses with “0” inventory are
essentially cross-docking operations
– FedEx, UPS, DHL, etc. do a good job of
this
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12. Warehousing Roles
1. Gathering facilities
• Smaller quantities gathered for manufacturing or
repackaging
• Less-Than-Load quantities from a variety of sources
reshipped as Full-Load (TL originally Truck-Load)
• Freight forwarding operations
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13. Warehousing Roles
1. Breakdown centers
• Bulk quantities broken down, repackaged and
shipped in smaller quantities (typical of DCs)
• May be TL inbound and TL or LTL outbound
• Wal-Mart DCs for example
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14. Warehousing Roles
1. Multi-functional roles
• Both gathering and breakdown may be
necessary in a global logistics environment
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15. Warehouse Location Issue
Whether you are operating globally or
domestically, managers must decide on
a warehousing strategy with respect to
warehouse location that best serves
their customers
There are two basic strategies:
– Centralized facility
– Facilities in each markets served
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16. Warehouse Location Issue
Ofcourse, in reality, a mix of these
strategies may be necessary in order to
deliver the appropriate level of
customer service in varied specific
markets
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17. Warehouse Location Issue
Centralizing the warehouse function has a
number of advantages and disadvantages
– Advantages include:
• Simplified order processing
• Elimination of nationally (locally) based operations
• Reduced capital requirements
• Reduce inventory holding costs
• Reduced outbound shipping costs
• Increased opportunity for use of intermodal transport
• Opportunity to simplify channel network
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18. Warehouse Location Issue
– Disadvantages to centralization include:
• Increased inbound shipping cost
• Possibly means larger, more complex and thus more
costly warehousing facilities and systems
– Market specific product packaging
– Market specific safety and physical requirements
• Negative customer perceptions
• Negative marketing, sales and channel associate
perceptions
• Increased dependence on channel intermediaries
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19. Warehouse Location Issue
Ingeneral, centralization can results in
decreased inventory holding costs
Square Root Law of inventory
n2
X 2 = X1
n1
where :
n1 ≡ number of existing facilities
n2 ≡ number of future facilities
X 1 ≡ total inventory in existing facilities
X 2 ≡ total inventory in future facilities
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20. Warehouse Location Issue
Basically a management decision that should
be made under the same constraints as all
other logistics system decisions (i.e. total
system cost minimization, profit maximization
and customer service constraints)
However, once again, government laws and
regulations may dictate what approach we
take in any single market
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21. Warehouse Location Issue
For a global company, the decision can
become extremely complex
Like all other strategies, warehouse
location is one that must be reexamined
on a period basis
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22. Selecting the Warehouse
Location
Once the firm decides on a strategy, one still
must choose specific locations for each
facility
Numerous variables must be considered, but
the task not too difficult if you only have one
product…but with even a small variety of
products, the problem can become unwieldy
very quickly
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23. Selecting the Warehouse
Location
Basic questions to be addressed in a
location decision include:
– How many warehouses?
– How will we allocate customer demand?
– How will we allocate production/supplier
output?
Notice
that all the issues address
customer service
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24. Selecting the Warehouse
Location
Early location theory focused on
transportation cost minimization…
Focus was on minimizing time of
transport or cost of transport
– Can’t ignore these factors, but it is
customer service that must come first
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25. Approaches for Selecting the
Warehouse Location
Three basic approaches:
1. Optimizations
• Mathematical models (Linear Programming)
• Provide an optimal solution
• But, require a great deal of abstraction to develop the
model and the resulting solution must be critically
reviewed
• Very good approach for well understood systems and
particularly where transportation cost are a primary
consideration.
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26. Approaches for Selecting the
Warehouse Location
Three basic approaches:
1. Optimizations (continued)
• Extremely expensive if you must develop a custom
application/solution
• May lose some important focus when using an existing
solution software package including contribution to
revenue, lot-sizing and timing, for-hire vs. private
transportation, issues pertaining to customer service and
dynamic considerations
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27. Approaches for Selecting the
Warehouse Location
2. Simulations
• Mathematical/logical models generally implemented on a
computer
• They don’t provide an optimal solution except by chance
• Very flexible and capable of addressing many of
management’s “what-if” questions…if properly
constructed
• Can be a significant undertaking to develop and maintain
in both time and money
• Excellent approach for organizations that are expanding
either in terms of markets and/or products/services
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28. Approaches for Selecting the
Warehouse Location
3. Heuristics
• Systems that are highly dependent on
management (or other expert) opinion/input
• May be effectively used to bound optimization
and simulation modeling efforts
• Increase the probability of missing a “good”
solution
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29. Warehouse location has a direct impact
on the entire logistics system
– Number of warehouses affects overall level
of safety stock
– Allocation of markets to warehouses
affects the level of inventories at each
warehouse
– Location of warehouses affect all
transportation times
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30. Mostsignificantly, location affects
customer service
– Order cycle times and variability of that
time
– Product availability
– Replenishment lead times and their
variability
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31. Warehousing Alternatives
Private Warehouse (company owned and
operated)
– Advantages:
• Custom designed to meet our needs
• Highest level of management control
• Conveys a commitment to the market
• Can house other organizational functions
– Disadvantages:
• High capital cost and operations costs
• Decreased flexibility to meet product mix and market
changes
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32. Warehousing Alternatives
Contract Warehousing (operated by a 3rd
party)
– Advantages:
• Similar to owner-operated warehouse
• Generally contracted for a specific level of activity
and services over a specified period of time
• Can provide specialized services and handling
• Dedicates personnel to the company’s products
thus assuring some level of customer service
commitment
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33. Warehousing Alternatives
Contract Warehousing (operated by a 3rd
party)
– Disadvantages:
• Somewhat less direct managerial control
• Sharing of customer information
• Risk associated with a deteriorating relationship,
rapidly changing market/customer needs, and/or
evolving product lines
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34. Warehousing Alternatives
PublicWarehousing operated by a 3rd
party receiving, storing and shipping
goods for multiple customers
– Advantages:
• Only pay for what you use
• Capital and operating cost are of no concern
• Know what the cost will be each month
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35. Warehousing Alternatives
Public Warehousing operated by a 3rd party
receiving, storing and shipping goods for
multiple customers
– Disadvantages:
• Little control over operations
• Higher cost on a unit basis (generally)
• Less emphasis on your customers’ service requirements
• Lower level of customization for your goods
• Risk with respect to flexibility
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36. Warehousing Strategies
Decision to utilize private, public or contract
warehousing should be based on the total system
cost and benefit considerations
– Must assess the firm’s ability to perform the function
– Compare to outsourcing based on factors such as:
• Cost
• Ability to meet customer needs
• Control
• Environmental concerns
• Confidentiality
• Market conditions
• Level of service assurances
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37. Concerns in Overseas Markets
Myriadof issues facing new market
development for any company
– Finding facilities may be challenging
– May not be able to legally own the facilities
– Quality of care in public/contract facilities
– Quality of customer service from 3rd party
providers
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38. Concerns in Overseas Markets
In general, for a company servicing a
global market, warehousing policy will
inevitably vary from market to market.
Those just going international are often
confounded when trying to implement
the same warehousing strategy they
use domestically.
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39. Summary
Warehousing is an important logistics
function
Long term cost and customer service impacts
Location of facilities involves more than just
the cost/time minimization of transportation
Outsourcing of the warehousing function is an
increasingly attractive alternative strategy for
many organizations, but you must understand
the total cost of alternatives
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