WAREHOUSING

Q1. 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.

Q2. 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

Q3. 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.

Q4. 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.

Q5. What are the basic components of a warehouse?

There are 3 basic components:

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

ii) 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.

iii) 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.

Q6. 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

Q7. What are the benefits realized from Strategic Warehousing?

A Warehouse should not be included in a

logistical system unless it is fully justified on a cost Benefits Realized from strategic warehousing
benefit basis.

Economic Benefits:-
Economic Benefits Service 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.

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.
 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.

Q7. 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 Assortment • A product line.

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

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

PLANT C CUSTOMER Z
A B
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 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
VENDOR B WAREHOUSE PLANT
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.
Q8. 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

i. OWNERSHIP BY GOVERNMENT (RENTED) BY FIRMS OWNING THE PRODUCT

ii. FLEXIBILITY HIGHLY FLEXIBLE RIGID

RETURN ON INVESTMENT CONTRIBUTES A CONSIDERABLE CONTRIBUTES LESS
AMOUNT

iii. COST LOW OPERATING COST HIGH OPERATING COST

iv. ECONOMIES OF SCALE YES NO

v. RANGE OF SERVICES GRATER LESSER

vi. SCALE OF OPERATIONS LARGE 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.

Q8. 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.
OWNERSHIP

PRIVATE PUBLIC

HOW MANY?

CENTRALIZED DECENTRALIZED

WHAT SIZE?

WHAT PRODUCTS, WHERE

WHERE? (LOCATION)
INTERIOR LAYOUT
 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.
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.

(1) 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.

(2) 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.

(3) 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.

(4)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.

(5)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 Where,
X2 = (X1) N1 = Number of existing facilities
N1 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

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.