Distribution and Fulfillment

centers
By Dr. Albert Tan

1 1
 Course Overview
• This course will discuss the role of
warehousing and distribution centres (DC) and
how they can perform order fulfilment in the
optimal way.
• It will provide methods and tools to optimize
the distribution center’s layout as well as put-
away and picking processes.

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 Assessment
• Individual Assignment – 30%
• Case Study in class – 30% (2nd day)
• Exam MCQ – 40% (3rd Day)

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 Textbooks to use
• World Class Warehousing and Material
Handling, McGraw Hill. (RM 110)

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 Lecture 1
• Overview of Warehousing and Distribution
centers
• Importance of Warehousing
• Warehousing costing
• Public warehouse versus Private warehouse

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 Warehouse Versus Distribution Center
• Warehouse store all products • Distribution Centre holds
minimum inventories and
predominantly high-demand
items.
• Warehouse handles most • Distribution Centre handles
products in 4 cycles (receive, most products in 2 cycles
store, pick and ship). (receive and ship).

• Warehouse performs a • Distribution Centre performs a

minimum of value-added high percentage of value-
activities. added, including possible final
assembly.
• Warehouse collect data in • Distribution Centre collect data
batches. in real time.

• Warehouse focuses on • Distribution Centre focuses on

minimizing the operating cost maximizing the profit impact of
to meet shipping requirement. meeting customer delivery
requirement.

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 Warehousing
Nature and Importance of Warehousing:
Why Should a Firm Have Inventories?
1. To achieve transportation economies.
2. To achieve production economies.
3. To take advantage of quantity purchase
discounts and forward buys.
4. To maintain a source of supply.
5. To support the firm’s customer service policies.
6. To meet changing market conditions (e.g.,
seasonality, demand fluctuations, competition).

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 Warehousing
Why Should a Firm Have Inventories?
7. To overcome the time and space differentials
that exist between producers and consumers.
8. To accomplish least total cost logistics
commensurate with a desired level of customer
service.
9. To support the just-in-time programs of suppliers
and customers.
10. Provide customers with a mix of products instead
of a single product on each order.
11. Provide temporary storage of materials to be
disposed of or recycled (i.e. reverse logistics).
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Warehousing Links Producers and Customers
• Warehousing plays a vital role in providing a desired level
of customer service at the lowest possible total

Product

MARKETING
Price Promotion

Place/customer
service levels
LOGISTICS

Inventory Transportation
carrying costs
costs

Lot quantity costs Warehousing costs

Order processing
and information
costs
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 Warehousing
Nature and Importance of Warehousing:
Relationships between Warehousing and Transportation
• Transportation economies are possible for both the
physical supply system and the physical distribution
system.
• In the case of physical supply, small orders from a
number of suppliers may be shipped to a consolidation
warehouse near the source of supply.
• The warehouse is located near the sources of supply so
that the LTL rates apply only to a short haul, and the
volume rate is used for the long haul from the warehouse
to the plant.

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 Warehousing
Nature and Importance of Warehousing:
Relationships between Warehousing and Production
• Short production runs minimize the amount of inventory
held throughout the logistics system by producing
quantities near to current demand, but they carry
increased costs of setups and line changes.
• On the other hand, the production of large quantities of
product for each line change results in a lower per unit
cost on a full-cost basis and more units for a given plant
capacity.
• Traditionally, warehousing was necessary if a company
was to take advantage of quantity purchase discounts on
raw materials or other products.
• However, those savings must be weighed against the
added inventory costs incurred as a result of larger
inventories.
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 Warehousing
Nature and Importance of Warehousing:
Relationships between Warehousing and
Customer Service
• Customer service policies, such as a 24-hour
delivery standard, may require a number of field
warehouses in order to minimize total costs
while achieving the standard.
• By keeping some excess inventory in field
warehouse locations, companies can respond
quickly to meet unexpected demand.
• In addition, excess inventory allows
manufacturers to fill customer orders when
shipments to restock the field warehouses arrive
late.
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 Strategic Distribution Decisions

Capability Requirements Network Design Facility considerations

Product attributes Inventory positioning Size of Operations

Flow requirements Number of facilities Interior layout
Roles to be fulfilled Location of facilities Product location
Facility ownership

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 Warehousing
Nature and Importance of Warehousing:
Factors Influencing Warehousing
• Time
– Best warehouse operations is to reduce cycle
time.
• Quality
– Perfection in fulfilling orders
• Asset Productivity
– Reduce total costs, reuse and recycle
• Innovation
– Meet new challenges
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 Warehousing
Nature and Importance of Warehousing:
Factors Influencing Warehousing
Ø Additional factors that will influence warehousing in the
future
– Communication and value-added service;
– Compression of operations and time for e-commerce;
• More frequent shipment; faster inventory turnover
rate; smaller order size and etc)
– Cross-docking;
– Automation and electronic tracking and control of
product;
– Customized warehousing service
• On demand packaging, labeling, palletizing and etc.
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 Types of Warehousing
• Plant warehouses
• Regional warehouses
• Local warehouses
• Wholesalers
• Public warehouses

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 Warehousing - Services
• General warehouse
– storage and protection of goods
– need to minimize handling and movement
• Distribution warehouse
– goods are received in large volumes
– goods are then sorted and consolidated into
customer orders
– concerned with throughput

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 Warehousing
Type of Warehouse: Public Warehouses

• There are six types of public warehouses, including:

(1) General merchandise warehouses for manufactured
goods,
(2) Refrigerated or cold storage warehouses,
(3) Bonded warehouses,
(4) Household goods and furniture warehouses,
(5) Special commodity warehouses, and
(6) Bulk storage warehouses.

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 Warehousing
Type of Warehouse: Public Warehouses
Refrigerated Warehouses
– Refrigerated or cold storage warehouses provide a
temperature-controlled storage environment.
– They tend to be used for preserving perishable items
such as fruits and vegetables.
– However, a number of other items (e.g., frozen food
products, some pharmaceuticals, photographic paper
and film, and furs) require this type of facility.
Bonded Warehouses.
– Its purpose is to delay GST until it goods leave
warehouse.
– Goods such as imported tobacco and alcoholic
beverages are stored in this type of warehouse.
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 Warehousing
Type of Warehouse: Public Warehouses
• Special Commodity Warehouses.
– It is used for particular agricultural products, such as
grains, wool, and cotton.
– Only handle one kind of product and offers special
services specific to that product.
• Bulk Storage Warehouses
– It provides tank storage of liquids and open or sheltered
storage of dry products such as coal, sand, and
chemicals.
– These warehouses may provide services such as filling
drums from bulk or mixing various types of chemicals
with others to produce new compounds or mixtures.
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 Warehousing
Type of Warehouse: Public Warehouse
• Another alternative is to utilize cross-docking concepts,
whereby warehouses serve primarily as “distribution mixing
centers.”
• Product arrives in bulk and is immediately broken down
and mixed in the proper range and quantity of products for
customer shipment. In essence, the product never enters
the warehouse
• Cross-docking 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.

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 Warehouse Cost comparison

Public warehousing

Total Costs
Private warehousing

Throughput volume
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 Factors affecting DC Ownership
Characteristics Favor Private Ownership Favor 3PL ownership
Throughput volume Higher Lower
Demand variability Stable Fluctuating
Market density Higher Lower
Physical control needs Yes No
Security requirements Higher Lower
Customer service Higher Lower
requirements
Multiple use needs Yes No

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 Public Vs Private Warehousing
Advantages of Private Warehouse
(1) Control
– In private warehousing, the company that
owns the goods can exercise greater degree
of control.
– The firm has direct control of and
responsibility for the product until the
customer takes possession or delivery, which
allows the firm to integrate warehousing
function more easily into its total logistics
system.

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 Public Vs Private Warehousing
Advantages of Private Warehouse
(2) Flexibility
– It offers a greater degree of flexibility to
operate the warehouse to fit the needs of
customers and the characteristics of the
product.
– Companies with products requiring special
handling or storage may not find public
warehousing feasible.
– The warehouse can be modified through
expansion or renovate to facilitate product
changes, or it can be converted to a
manufacturing plant or branch office location.

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 Public Vs Private Warehousing
Advantages of Private Warehouse
(3) Less Costly
– Private warehousing can be less costly over the long
term.
– Operating cost can be 15 to 25 percent lower if the
company achieves sufficient throughput or utilization.
– The generally accepted industry norm for the
utilization rate is 75 to 80 percent.
– Firm cannot achieve at least 75 percent utilization, it
generally would be more appropriate to use public
warehousing.

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 Public Vs Private Warehousing
Advantages of Private Warehouse
(4) Better Use of Human Resource
– By employing private warehousing, a firm can better
use of its human resources.
– There is greater care in handling and storage when
the firm’s own workforce operates the warehouse.
– Some public warehouses allow clients to use their
own employees in the handling and storage of
products. The company can utilize the expertise of its
technical specialists.

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 Public Vs Private Warehousing
Advantages of Private Warehouse
(5) Tax Benefits
– A company also can realize tax benefits when it owns
its warehouse.
– Depreciation allowances on buildings and equipment
reduce taxes payable.
(6) Intangible benefits
– The customer sees the company as a stable,
dependable, and lasting supplier of products.

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 Role of Warehouses

• Transportation consolidation

• Product Mixing

• Service

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 Transportation Consolidation
• Reduces transportation costs
• Truckload (TL) shipments to warehouse
• Less than truckload (LTL) shipments to
local customers
• Break-bulk
– breaking down large shipments from factories
into small shipments for local buyers

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 Product Mixing
• Avoids many small LTL shipments
• Customers want a mix of products often
from different manufacturers or locations
• The distribution center can assemble
many small items into one shipment

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 Service
• Local distribution centers can improve
customer service by being close to the
customer
• Faster response time
• Improved variety of products
• May add value
– e.g. customer specific labelling

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Product Mixing

Figure 13.6 Product mixing

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 Warehousing and Transportation Costs

• Number of customers Customer

Service
$
• Geographic distribution of
customers
• Customer order size
• Number and location of
plants and distribution
centers

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 Warehousing and Transportation Costs
- Example Problem

A plant located in Toronto is serving customers in the

Boston area. If they ship direct to customers most
shipments will be LTL. However if they locate a distribution
center in Boston they can ship TL to the warehouse and
LTL from the warehouse to the local customers. Costs are
as follows:
Plant to customer (LTL) = $100 / cwt
Plant to distribution center (TL) = $50 / cwt
Distribution center = $10 / cwt
Distribution center to customer (LTL) = $20 / cwt

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 Warehousing and Transportation Costs
- Example Problem

Costs if a distribution center is used:

TL Toronto to Boston = $50 per cwt
Distribution center costs = $10 per cwt
LTL Boston area = $20 per cwt
Total cost = $80 per cwt

Savings per cwt = $100 - $80 = $20 per cwt

Annual savings at 10,000 cwt = $20x10,000 = $200,000

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 Effect of Adding More Warehouses

• As more distribution centers are added:

– TL shipments to DC s will increase

– LTL costs to customers will decrease

– Total cost of transportation will decrease

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Effect of Adding More Warehouses

Figure 13.8 Transportation cost versus number of warehouses

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 Packaging
• Identifies product
– may be part of marketing promotion
– size, description, date of manufacture
• Contains and protects the product
– movement
– environment
• Contributes to distribution efficiency
– handling in larger quantities

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 Packaging
• Primary package
– holds the product for the consumer
– e.g. a box of cereal
• Secondary package
– contains small products for distribution
– e.g. a corrugated carton
• Unit load
– e.g. a pallet

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 Unitization
In warehousing, the consolidation of
several units into larger units for fewer
handlings.
• APICS 11th Edition Dictionary

Box Pallet
Container

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 Pallets
• Standard sizes
– e.g. 48 x40 x4
• Sized to fit into further unitized loads
– e.g. railcar, truck, container
• Handled by fork lift trucks

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 Materials Handling
Objectives:
• Increase the cube utilization
– use as much height as possible
– keep aisles to minimum
• Improve operating efficiency
– increase the load per move
• Improve speed of response

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 Equipment
• Conveyors
– move in a fixed route, consume space
– need high volumes
• Industrial trucks
– can move anywhere in the plant
– do not consume fixed space
• Cranes and hoists
– make use of overhead space

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 Multi-Warehouse System
+ Transportation costs
+ Inventory-carrying cost
+ Warehousing costs
+ Materials handling costs
+ Packaging costs
= Total system cost

• System service capability

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 Transportation Costs
• TL shipments will be made over long
distances
• LTL shipments to customers will be shorter
• Total costs decrease with more
warehouses
– diminishing effect as more warehouses are
added

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 Inventory-Carrying Cost
• Inventory
– order quantity - stays the same
– safety stock
• increases with the number of warehouses
• varies with the square root of the change

SSnew = SSold new # of warehouses

previous # of warehouses

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 Inventory Carrying Costs
• A company is considering adding a warehouse.
For an item with an average demand of 1000
units (2 warehouses), each warehouse will have
a demand of 500 units.
• The safety stock in one warehouse was 100
units for a service level of 90%. What is the new
safety stock?
SS = 100 500 = 71 units (in each warehouse)
1000

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 Warehousing Costs
+ Space for additional inventory
+ Duplication of nonstorage space
offices, washrooms, lunchrooms
+ Duplication of support staff
supervisory, clerical, support

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 Materials Handling Costs
• Number of units handled will remain the
same
• As number of warehouses increase, the
size of the loads handled will decrease
• Handling of non-unitized loads increases
costs

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 Packaging Costs
• Per unit costs remain the same

• Total costs increase with inventory

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 Total System Cost

Figure 13.11 Total system cost

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 System Service Capability

• Customer service (speed of delivery)

– improves with more distribution centers
– diminishing effect as more DC s are added
• Must consider cost of service with total
system cost

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 System Service Capability

Estimate of market reached versus number of warehouses

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 System Service Capability

Cost versus number of warehouses

• 3 distribution centers provide the lowest total

system cost

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 Summary
• Warehouse versus DC
• Factors in choosing a storage location
• Different types of warehousing for different
purposes
• Relationship between warehousing and other
functions
• System costs for warehousing

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