WAREHOUSING

 Define Warehousing or what is

Warehousing?

Definition 
Warehousing is that part of firm’s logisticsSystem
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.

 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

 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

 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.
 What are the basic components of
a warehouse?

There are 3 basic components.

(a) Space (b) Equipment (c) People.

(a) Space: - Space allows for the storage of

goods when demand and supply are unequal.
(b) 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.
(c) 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.

 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

 What are the benefits realized

from Strategic Warehousing?

Benefits realized from strategic warehousing

ECONOMIC BENEFITS SERVICE

BENEFITS
A Warehouse should not be included in a logistical
system unless it is fully justified on a cost benefit
basis.

Economic 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
Postpone
ment

(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.

CONSOLIDATION
 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.

BREAK BULK WAREHOUSE

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.

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  A broad product

product line.
Assortment  Functional year
 Functional for round.
limited time  Limited to a few
period. strategic locations.
 Large number
of small
warehouse,
dedicated to
specific markets.

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

A B 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
WAREHOUSE PLANT
VENDOR B

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.
  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

Effective communications
oPARAMETERS PUBLIC WAREHOUSEmayPRIVATE
be a problem.
WAREHOUSE
o Specialized services may not always be
available in the BY
OWNERSHIP desired location. BY FIRMS OWING
GOVERNMENT
o Space may not (RENTED) THE PRODUCT
be available where and when
needed.
FLEXIBILITY HIGHLY FLEXIBLE RIGID
RETURN ON CONTRIBUTES A CONTRIBUTES LESS
INVESTMENT CONSIDERABLE
AMOUNT
COMPARE PUBLIC WAREHOUSE AND PRIVATE
WAREHOUSE:
COST LOW OPERATING HIGH OPERATING
COST COST
ECONOMIES OF YES NO
SCALE
RANGE OF SERVICES GRATER LESSER

SCALE OF LARGE SMALL

OPERATIONS
(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.
 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?

WHERE? (LOCATION)

INTERIOR LAYOUT

Warehousing
WHATstrategy
PRODUCTS, WHERE
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.

(A) 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.

(B) 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.

(C) 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.

(D)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.

(E)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
X2 = (X1)
N1

Where,
N1 = Number of existing facilities
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.