Warehousing

The Logistics System

Information Warehouse
LOGISTICS
Systems Management

Inventory Materials
Management Management

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 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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 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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 Introduction
 Warehousing is involved in four supply-
chain process:
– Sourcing/inbound logistics
– Processing/manufacturing
– Outbound distribution
– Reverse Logistics

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 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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 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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 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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12/07/21
1a
Receiving - 1b

2
Bulk Storage - 3

4
Order Pick Storage - 5

Packaging - 7
8a
10
Functions of Warehousing
Facilities

Staging and Shipping - 8b

9
 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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 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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 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

Vendor Customer
LT
L TL

LTL TL
Vendor Warehouse Customer
L TL
LT

Vendor Customer
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 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
Vendor Customer

TL LTL
Vendor Warehouse Customer

Vendor Customer

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 Warehousing Roles
1. Multi-functional roles
• Both gathering and breakdown may be
necessary in a global logistics environment

Vendor Customer

LTL TL LTL
Vendor Warehouse Warehouse Customer

Vendor Customer

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 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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 Warehouse Location Issue
 Of course, 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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 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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 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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 Warehouse Location Issue
 In general, 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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 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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 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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 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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 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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 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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 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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 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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 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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 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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  Warehouse location has a direct impact
on the entire logistics system

– Number of warehouses affects overall level

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  Most significantly, location affects
customer service
– Order cycle times and variability of that
time
– Product availability
– Replenishment lead times and their
variability

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 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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 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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 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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 Warehousing Alternatives
 Public Warehousing 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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 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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 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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 Concerns in Overseas Markets
 Myriad of 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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 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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 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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