CHAPTER 9

WAREHOUSING & STORAGE

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Learning Objectives
1. To discuss the role of warehousing in a logistics system
2. To learn about public, private, contract, and multiclient
warehousing
3. To analyze select considerations when designing warehousing
facilities
4. To examine some prominent operational issues in warehousing

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 What is Warehousing?

It is that part of a firm’s logistics system that stores products*

at and between point-of-origin and point-of-consumption,
and provides information to management on the status,
condition, and disposition of items stored.

* Includes raw materials, parts, goods in process and finished goods.

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 Importance of Warehousing
• To achieve scale economies (production, transport, etc.)
• To capitalise on quantity purchase discounts
• To maintain a source of supply
• To support firm’s customer service policy
• To meet changing market conditions
• To stress on time & place utility
• To accomplish least total cost logistics
• To support just-in-time programs

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Uses of Warehousing

Manufacturing Product
support mixing

Consolidation Breakbulk

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 Manufacturing Support
CL or TL
Supplier A
Production
Supplier B Warehouse Plant
Supplier C

• Firms order supplies from various suppliers who ship

carload (CL) or truckload (TL) quantities to a warehouse.
• Supplies are then transferred from warehouse to the
plant (close by).
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 Product-mixing
CL or TL CL, TL or LTL Customer 1
Plant A A, B , C

Mixing Customer 2
Plant B A , C
warehouse
Customer 3
Plant C A , B

• Multiple plants shipped finished products to warehouse.

• Each plant manufactures only a portion of the total product offering
of the firm.
• Customer orders for multiple products are mixed (combined) for
shipment.
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 Consolidation
CL or TL TL or LTL
Plant X portion Customer 1
Consolidation
Plant Y portion
warehouse Customer 2

Plant Z portion Customer 3

• Shipments are made from many small plants to a central warehouse. Each
plant supplies only a small portion of the required parts.
• The warehouse then combines the products into a single shipment to the
customer, i.e. small, flexible shipments in; large, economical shipment out.

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 Breakbulk
LTL Customer 1
CL or TL

Breakbulk
Plant Customer 2
warehouse

Customer 3

• Several customer orders are combined into a single large

shipment and then sent from plant to warehouse.
• Shipment is then subdivided into smaller LTL shipments and
then sent to customers.

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Process of Warehousing
• https://youtu.be/65rpWadKLxc
• https://youtu.be/65rpWadKLxc

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Major Factors Influencing
Warehousing
• Time - The best warehouse operations are those designed to
reduce every aspect of order cycle time.
• Quality - Users now expect performance that approaches
perfection.
• Asset productivity - Reduce total cost, reuse, and recycle.
• New kind of workforce - Requirements for both
management and labor will change significantly.

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Types of Public Warehouses
General Merchandise • Used by manufacturers, distributors and customers for
Warehouse storing all kinds of products.

Refrigerated • Provides temperature-controlled storage. Used for storing

Warehouse perishables, pharmaceuticals, furs, etc.

Bonded • Warehouse is placed under an agent of US Treasury.

Warehouse • Goods stored are subject to import taxes & duties.

Household goods • Used for storage of personal property for an extended

Warehouse period of time. Open storage or private room storage.

Special commodity • Used for particular agricultural products – grains, wool,

Warehouse cotton.

Bulk storage • Provide tank storage for liquids and open/sheltered storage
Warehouse of dry products (coal, sand, chemicals).
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 Other Alternatives…
Direct Store •Market products directly to customers, e.g. mail-
Delivery order catalogue companies.

• Products arrive in bulk at warehouse and are

immediately broken down and mixed in the proper
Cross-docking
range and quantity for customer shipment.
Technically, the product never enter the warehouse.

• Long-term mutually beneficial arrangement that

Contract
provides specially tailored warehousing and
Warehousing
logistics service exclusively to one client.

Private
• Own or lease warehouse.
Warehousing
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 Warehousing Functions
1. Movement
* Receiving

* Transfer or put-away
* Customer order picking
* Cross-docking
* Shipping

2. Storage
3. Information Transfer
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Movement
• Unloading of products from carrier, updating inventory records,
Receiving
inspection for damage, verify merchandise count against order.

• The physical movement of the product into the warehouse for

Transfer
storage, for consolidation and to outbound shipment.

• Regrouping products into the assortments customers desire.

• Discreet picking – order is filled from start to finish by a picker.
• Batch picking – a batch list is prepared from several orders;
Order picker collects items according to the batch list and separate
into single orders.
Picking &
• Zone picking – a picker selects all parts of the order that are
Selection found in a given aisle & then passes it to another picker in
another aisle.
• Wave picking – groups shipment by a given characteristic,
e.g. all of UPS orders might be picked in a single wave.

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Movement

• Bypasses storage by transferring items directly from

inbound receiving dock to the outbound or shipping dock.
• Should be considered if 2 or more of the following criteria are met:
Cross * Destination of inventory is known when received
-docking * Customer is ready to receive inventory immediately
* Daily throughput exceeds 200 locations
* 70% of inventory is conveyable
* Inventory arrives at docks pre-labelled

• Physical movement of assembled orders onto carrier equipment,

Shipping adjusting inventory records, checking on orders to be shipped.

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Storage

• Storage of inventory necessary for normal replenishment.

Temporary
• Extent of storage depends on variability of lead time
storage and demand.

• Storage of inventory in excess of that required for normal

Semi-permanent replenishment.
storage • Depends on seasonal demand, erratic demand,
speculation, quantity discount deals.

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 Information Transfer
• Includes information on inventory levels, throughput
levels, stock-keeping locations, inbound & outbound
shipments, customer data, facility space utilisation and
personnel.
• To improve speed and accuracy, many firms are using
EDI, the Internet and bar coding.

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 Public versus Private Warehousing

• Public warehouses charge on basis of case (volume) or

weight stored.

• Use public warehouse if volume or weight is low.

• Use private warehouse if volume or weight is large.

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Advantages of Public Warehousing
• No capital investment.

• Use of space to meet peak requirements – no over- or under- utilization.

• Reduced risk – obsolete technology.

• Economies of scale – serves a number of firms.

• Flexibility – easy to change locations or experiment with various warehouses.

• Tax advantages – no real estate tax, no property taxes on inventories.

• Specific knowledge of storage and handling costs.

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Disadvantages of Public Warehousing

• Effective communication may be difficult because of

computer systems incompatibility. But EDI, the Internet and
intranets have overcome the problem.

• Specialized services may not always be available. Many

public warehouses provide local services and not regional.

• Space may not be available on demand.

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Advantages of Private Warehousing
• Greater control over storage, handling and management.

• Flexibility to design and operate the warehouse to fit needs of

customers and characteristics of products.

• Less costly over the long-term if sufficient throughput or utilization.

• Make better use of its own human resources.

• Tax benefits – depreciation allowances on buildings and equipment

• Intangible benefits – customers see the company as a stable,

dependable and lasting supplier of products.
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Disadvantages of Private Warehousing

• Flexibility – cannot expand or contract to meet

changing demand & loss of strategic location.
• Investment – very high cost in building and equipment
outlay and difficult to dispose off because of its
customised design.

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Factors Affecting Warehouse Size
Customer Types of rack and Throughput rate
service level shelves used

Number of Level and pattern Production lead time

products marketed of demand

Aisle requirements
Size of markets Materials handling
served system used
Stock layout

Economies Office area

of scale in warehouse Size of products

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The Relationship of Demand
to Warehouse Size
120
110
Inventory (‘000 units) 100
90
80
Public
70 warehousing
60
50
40
30
20 Private
warehousing
10
0
Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec.

Time (months)

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 Determinants of Storage Space
Requirements
These Situations Decrease the Need These Situations Increase the
For Storage Space Need for Storage Space

Decrease in production or sales Market or company expansion

Decrease in number of SKUs Shorter product life cycle
Less volatile demand (including longer Increase in number of SKUs
product life cycles) (stock-keeping-units)
Customer handles store delivery Direct store delivery on a quick response basis
Smaller manufacturing lot sizes Elimination of distributors
Smaller purchase amounts Expansion into specialized products
Higher inventory turns Import/export items
Better information Lengthened production process
Quicker transportation Increase in minimum manufacturing lot size
Cross-docking Requirement for faster response time

Carrier performing consolidation Inflation/forward buying

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 Factors Influencing the
Number of Warehouses
Total cost
Cost of lost sales Total cost

Inventory cost

Warehousing cost Inventory

cost

Transportation cost
Warehousing
cost

Others Transportation
• purchasing pattern cost
• competitive environment
• use of info technology
Number of
warehouses
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 Warehouse Location
• Macro perspective
- where to locate warehouse geographically to improve
the sourcing of materials and the firm’s market offering
(improve service / reduce cost).
• Micro perspective
- examines factors that pinpoint specific locations within
the larger geographic area.

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Macro perspective of warehouse location

Market • Locate warehouses nearest to final customers.

positioned • Maximises customer service levels and transportation
strategy economies (TL and CL shipments).

Production • Locate to sources of supply or production plants.

positioned • Serve as mixing facilities for products manufactured
strategy at a number of different plants.

Intermediately • Locate at a point between final customer & producer.

positioned • Product offering produced at several plant locations &
strategy need to offer high customer service levels.

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Micro perspective of warehouse location

For Private Warehousing For Public Warehousing

• Quality & variety of transportation • Facility characteristics

carriers serving the site • Warehouse services provided
• Quality & quantity of available labour • Availability & proximity to motor
• Labour rates carrier terminals
• Cost & quality of industrial land • Availability of local cartage
• Potential for expansion • Other companies using the facilities
• Tax structure • Availability of computer services &
• Building codes communications
• Nature of the community environment • Type and frequency of inventory
• Costs of construction reports
• Cost & availability of utilities
• Cost of money locally
• Local government tax allowances

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Approach to Site Selection
Initial decision to
establish facility

Form Form
corporate team engineering team

Develop
key criteria

Evaluate
geographic regions

Schmenner, R.W. Making Business

Identify specific sites Location Decisions Prentice Hall, 1982
within geographic regions

Evaluate specific sites Select specific site

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Warehouse Layout and Design
• Store items in the closest available rack and retrieve them on a
Randomised
FIFO basis.
storage • Employs a computerised automatic storage and retrieval system.

Dedicated • Store items in permanent locations within a warehouse by:

storage (1) part number sequence, (2) usage rates or (3) activity levels.

• How well products may be stored together.

Compatibility • Example: Pharmaceuticals cannot be stored with bagged agricultural
chemicals.

• How often products are ordered together.

Complementarity • Example: Computer disk drives, CD-ROMS, monitors.

• Refers to inventory turnover rates or demand rate (velocity).

Popularity • Velocity high – store closest to shipping/receiving deck.
• Velocity low – store at more remote areas.
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Measuring Warehouse Productivity
• Productivity
– ratio of real output to real input, e.g. cases handled per labour hour.
• Utilisation
- ratio of capacity used to capacity available, e.g. % of pallet spaces
filled in a warehouse.
• Performance
- ratio of actual output to standard output, e.g. cases picked per hour
versus standard rate planned per hour.

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 Productivity Improvement Programs
• Methods-related
- involves warehouse cube utilisation, layout & design, methods & procedures analysis,
standardised packaging, etc.
• Equipment-related
- includes the use of optical scanners, auto-labelling devise, conveyors, computers, etc.
• Systems-related
- includes router/location systems, geographic or zone picking, random location, etc.
• Training/Motivation related
- includes employee training, management development programmes, incentive
system, awards recognition, etc.

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 Financial Control

• Use Activity-Based Costing (ABC) to trace overhead and direct

costs to specific products, services or customers.
• ABC unbundles traditional cost accounts and re-orients costs to
show how resources are actually consumed.

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 Comparison of Traditional Costing
Versus Activity-based Costing
General ledger view of warehousing costs Activity-based view of warehousing costs

Storage and handling……………...$40.1 Dry storage………………………...…$25.0

Refrigerated storage………………….…8.1
General and administration………...30.9
Receiving………………………………20.0
Trucking and delivery………………14.5 Shipping…………………………...…..18.8
Billing…………………………………...3.2
Freight consolidation……………….. 2.4 Delivery…………………………………6.0
Packaging/stenciling…...……………….1.8
Value-added services………………...3.3 Freight consolidation……………………3.0
Total ……………………………...$91.2 Material handling equipment…………...5.3
Total………………………………….$91.2

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Thank you !

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