DEFINITION
INTRODUCTION
Warehouse can play a key role in the integrated logistics strategy and its building and
maintaining good relationships between supply chain partners. Warehousing affects
customer service stock-out rates and firm’s sales and marketing success. A warehouse
smoothens out market supply and demand fluctuations. When supply exceeds demand, a
demand warehouse stores products in anticipation of customers requirements when
Demand exceeds supply the warehouse can speed product movement to the customer by
performing additional services like marking prices, packaging products or final
assembling etc.
Warehousing is an integral part of any logistics system. The warehouse is a link between
producer and customer.
TYPES OF WAREHOUSES
1. Private Warehousing
2. Public Warehousing
3. Contract Warehousing
Private Warehousing
A firm producing or owning the goods owns private warehouses. The goods are stored
until they are delivered to a retail outlet or sold. Potential advantage of using a private
warehouse is the ability to maintain physical control over the facility, which allows
mangers to address loss, damage, and theft. When not in use they can rent it out.
The construction and maintenance of private warehousing can be extremely costly. All
the expenses have to be carefully analyzed and evaluated. These are:
i. Fixed expenses and building and land acquisition costs which are high;
ii. Expenses incurred on ensuring that warehouses are properly equipped with material-
handling equipment like conveyors, fork lifts, hand trucks, racks and bins, and dock
levelers;
iii. The costs of salaries of staff required for peak activity periods which can be very high
since retrenchment during slack periods may not be possible;
iv. Extra payment to be made for work on Saturday and Sundays and holidays;
v. Generator and other services charges are required to be taken into account.
vi. The office and record-keeping equipment necessary for successful warehousing
operations has to be budgeted for;
vii. To this must be added the cost of such item as fuel, air-conditioning, power and light.
viii. The cost of maintaining insurance records and of the premiums paid for fire, theft,
and also for workmen’s compensation.
Advantages
The advantages and disadvantages of private warehousing as against those of public
warehousing are:
a. Private warehousing offers better control over the movement and storage of products as
required by the management from time to time.
b. There is less likelihood of error in the case of private warehousing since the company’s
products are handled by its own employees who are able to identify the products of their
own company better.
c. If there is sufficient volume of goods to be warehoused, the costs of private
warehousing compares favourably with that of public warehousing. But private
warehouse may not be expected to be packed upto the brim all the while. Therefore the
costs of private warehousing per unit may actually be higher.
Public Warehousing
A public warehouse rents space to individuals or firm needing storage, some provide
wide array of services including packaging, labeling, testing, inventory, maintenance,
local delivery, data processing and pricing.
All the foregoing cost factors operate in public warehousing as well. But in public
warehousing, the expenses are distributed over several other consignments of other
clients. In most instances therefore can render better service with greater flexibility for
the user. A company running a private warehouse will have to compare costs incurred
with the total figure for the complete service through public warehousing.
Advantages
a. It is generally less expensive and more efficient.
b. Public warehouses are usually strategically located and immediately available.
c. Public warehousing is sufficiently flexible to meet most space requirements, for several
plans are available for the requirement of different users.
d. Fixed costs of a warehouse are distributed among many users. Therefore the overall
cost of warehousing per unit works out to a lower figure.
e. Public warehousing facilities can be given up as soon as necessary without any
additional liability on the part of the user.
f. The costs of public warehousing can be easily and exactly ascertained, and the user
pays only for the space and services he use.
Contract Warehousing
FUNCTIONS OF WAREHOUSES
Warehouses are basically intermediate storage points in the logistics system where raw
material, work in process, finished goods and good in transit are held for varying duration
of times for a variety of purposes. The warehousing functionality today is much more
than the traditional function of storage. The following are main function that warehousing
serves today:
1. Consolidation
This helps to provide for the customer requirement of a combination of products from
different supply or manufacturing sources. Instead of transporting the products as small
shipments from different sources, it would be more economical to have a consolidation
warehouse. This warehouse will receive these products from various sources and
consolidate these into shipments, which are economical for transportation or as required
by the customers.
2. Break Bulk
As the name suggests, the warehouse in this case serves the purpose of receiving bulk
shipments through economical long distance transportation and breaking of these into
small shipments for local delivery. This enables small shipments in place of long distance
small shipments.
3. Cross Docking
This type of facility enables receipt of full shipments from a number of suppliers,
generally manufacturers, and direct distribution to different customers without storage.
As soon as the shipments are received, these are allocated to the respective customers and
are moved across to the vehicle for the onwards shipments to the respective customers at
these facilities. Smaller shipments accompanying these full shipments are moved to the
temporary storage in these facilities awaiting shipments to the respective customers along
with other full shipments.
4. Product Mixing
Products of different types are received from different manufacturing plant or sources in
full shipment sizes. These products are mixed at these warehouses into right combination
for the relevant customers as per their warehouses and continuously provided for the
product mixture shipments requiring these.
5. Stock Piling
This function of warehousing is related to seasonal manufacturing or demand. In the case
of seasonal manufacturing, certain raw materials are available during short periods of the
year. Hence, manufacturing is possible only during these periods of availability, while the
demand is full year around. This requires stockpiling of the products manufactured from
these raw materials. An example is mango pulp processing. On the other hand, certain
products like woolens are required seasonally, but are produced throughout the year, and
thus need to be stockpiled as such.
6. Postponement
This Functionality of warehousing enables postponement of commitment of products to
customer until orders are received from them. This is utilized by manufacturers or
distributors for storing products ready up to packaging stage. These products are
packaged and labeled for the particular only on receipt of the order.
7. Positioning
This permits positioning products or materials at strategic warehouses near to the
customers. These items are stored at the warehouse until ordered by the customers when
these can be provided to the customers in the shortest lead-time. This function of
warehousing is utilized for higher service levels to customers for critical items and during
increased marketing activists and promotions.
8. Assortment
Assortment warehouse store a variety of products for satisfying the variety requirements
of customers. For example, retailers may demand different brands of the same product in
small quantities rather than larger quantities of the single brand.
9. Decoupling
During manufacturing, operation lead-times may differ in order to enable production
economies. Thus, the batch size and the lead-time of production may differ in
consecutive operations. This decoupling of operations requires intermediate storage of
materials required for the subsequent operation.
ii. Regular flow of goods- Many commodities like rice, wheat etc. are produced during a
particular season but are consumed throughout the year. Warehousing ensures regular
supply of such seasonal commodities throughout the year.
iv. Convenient location- Warehouses are generally located at convenient places near
road, rail or waterways to facilitate movement of goods. Convenient location reduces the
cost of transportation.
v. Easy handling- Modern warehouses are generally fitted with mechanical appliances to
handle the goods. Heavy and bulky goods can be loaded and unloaded by using modern
machines, which reduces cost of handling such goods. Mechanical handling also
minimizes wastage during loading and unloading.
vi. Useful for small businessmen- Construction of own warehouse requires heavy capital
investment, which small businessmen cannot afford. In this situation, by paying a
nominal amount as rent, they can preserve their raw materials as well as finished products
in public warehouses.
viii. Facilitates sale of goods- Various steps necessary for sale of goods such as
inspection of goods by the prospective buyers, grading, branding, packaging and labelling
can be carried on by the warehouses. Ownership of goods can be easily transferred to the
buyer by transferring the warehouse keeper’s warrant.
ix. Availability of finance- Loans can be easily raised from banks and other financial
institutions against the security of the warehouse-keeper’s warrant. In some cases
warehouses also provide advance to the depositors of goods on keeping the goods as
security.
x. Reduces risk of loss - Goods in warehouses are well guarded and preserved. The
warehouses can economically employ security staff to avoid theft, use insecticides for
preservation and provide cold storage facility for perishable items. They can install fire-
fighting equipment to avoid fire. The goods stored can also be insured for compensation
in case of loss.
In their aggressive effort to take cost of logistics network, firms are searching for new
ways to reduce levels of inventory without adversely effecting customer service. A
currently popular approach is to consolidate inventories into fewer stocking location in
order to reduce aggregate inventories and their associated cost. Correspondingly, this
strategy requires the involvement of capable transportation and information resources to
see that customer service is held at existing levels and is even improved whenever
possible.
The Square Root Law states that: “the total safety stock inventories in the future number
of facilities can be approximated by multiplying the total amount of inventory at existing
facilities by the square root of the number of future facilities divided by number of
existing facilities”.
Therefore
Where
N1 = Number of existing facilities
N2 = Number of future facilities
X1 = Total inventory in existing facility
X2 = Total inventory in future facility
Example
A company presently distributing 40,000 units of product to its customer from eight
facility location throughout India is located at A, B, C, D, E, F, G and H. The company is
evaluating an opportunity to consolidate its operation into two facilities. Square Root
Law we will find the total amount of inventory in the two future facility.
Solution
Here,
X1 = 40,000
N1 = 8
N2 = 2
The increasing number of warehousing leads to increasing customer service levels, thus,
decreasing customer dissatisfaction cost.
WAREHOUSE LOCATION
Warehousing is important to the firms since it improves service and reduces cost
improvements in service are gained through rapid response to customer request (time
utility), which is a primary factor leading to increased sales. The location decision
regarding warehouses is affected by manufacturing plant, customer and market locations.
A traditional classification by Edgar Hoover classifies warehouse locations as market-
positioned, manufacturing-positioned, or intermediately-positioned.
1. Market-positioned warehouses
Market-positioned warehouses are located near to the customers and markets (point of
product consumption) with the objective of serving them. These generally have a large
variety and low volume of items to service local requirements. Such warehouses reduce
cost by providing place utility. A Market-positioned warehouses functions as a collection
point for the products of distant firms with the resulting accumulations of product serving
as the supply source for retail inventory replenishment. This approach allows large and
cost-effective shipments from the manufacturer with lower-cost, local transportation
providing service to individual retailers. Market-positioned warehouses may be owned by
the firm or the retailer (private warehouses), or they may be an independent business
providing warehouses service for profit (public).
2. Manufacturing-Positioned Warehouses
Manufacturing positioned warehouse are located near to the manufacturing facilities in
order to support manufacturing on the inbound side and to facilitate assortment-creation
and shipping on the outbound side. Improve customer services and manufacturing
support achieved through type of warehouse which acts as the collection point for
products needed in filing customer orders and material needed for manufacturing.
3. Intermediately-Positioned Warehouses
Intermediately-positioned warehouses are those located between manufacturing and
market-position warehouses. These help in consolidation of assortments for shipments
from different manufacturing facilities. A firm may have many manufacturing plant
located, for economic reasons, near the sources of raw material. Under these conditions
the cost-effective warehouse may be at some intermediate point.
SIZE OF WAREHOUSE
Many factors influence how large a warehouse should be. First it is necessary to define
how size is measured. In general, size can be defined in terms of square footage or cubic
space.
Some of the most important factors affecting the size of warehouse are
1. Customer service levels
2. Size of market
3. Number of products marketed
4. Size of the product
5. Material handling system used
6. Production lead time
7. Office area in warehouse
8. Types of racks and shelves used
A good warehouse layout can increase output, improve product flow, reduce cost,
improve service to customers and provide better employee working condition.
The optimal warehouse layout and design for a firm will vary by the type of product
being stored, the company financial resources, competitive environment and needs of
customer. The warehouse manager must consider cost of trade between labor, equipment,
space and information. Whatever layout the company finally selects for its warehouse it
is vital that all available space be utilized as fully and efficiently as possible.
Product flow
Handling technology: The second principle focuses on the effectiveness and efficiency of
material handling technology. The element of this principle concern movement
continuity. Movement continuity means that it is better for a movement handler to make a
longer move than to have a number of handlers. Exchanging the product between
handlers wastes time and increases the potential for damage. Thus, as a general rule fewer
longer movements in the warehouse are preferred.
Storage plan: According to the third principles, a warehouse design should consider
product characteristics, particularly those pertaining to volume, weight and storage.
Product volume is a major concern when defining a warehouse storage plan. High
volume sales product should be stored in a location that minimizes the distance it is
moved, such as near primary aisle and in low storage racks. Such a locations minimizes
travel distance. Conversely, low-volume product can be assigned locations that are
distant from primary aisle or higher up in a storage rack. Relatively heavy items should
be assigned to location low to the ground to minimize the effort and risk of heavy lifting.
open floor space or high level racks can be used for bulky or low density product as it
requires extensive storage volume. Storage plan must consider and address the specific
characteristic of each product.
Figure below illustrate a storage plan based on product movement
2. Complementarities how often product are ordered together and therefore stored
together
Good warehouse layout and design often involve the use of automated equipment, such
as a conveyor system to handle large number of products packaged in a carton.
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