| || |
PROJECT ON WAREHOUSING -
June 22nd, 2007
A warehouse is a commercial building for storage of goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings in industrial parts of towns. They come equipped with loading docks to load and unload trucks; or sometimes are loaded directly from railways, airports, or seaports. They also often have cranes and forklifts for moving goods, which are usually placed on ISO standard pallets
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 can be defined as a location with adequate facilities where volume shipments are received from production center, which are then broken down into particular order and shipped onwards to the customer.
Warehousing is an integral part of any logistics system. The warehouse is a link between producer and customer.
Out-bound warehouse help consumers buy on demand without a near4by production plant warehousing cost are about 10% of total integrated logistics costs for most companies.
TYPES OF WAREHOUSES
1. Private Warehousing
2. Public Warehousing
3. Contract 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.
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.
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.
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 is a specialized form of public warehousing. In addition to warehousing activities such warehousing provides a combination of integrated logistics services. Thus allowing the leasing firm to concentrate on its specialty. They provide customized services, eg. Value Added Services.
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:
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.
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.
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.
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.
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.
10. Safety Stocking
In order to cater to contingencies like stock outs, transportation delays, receipt of defective or damaged goods, and strikes, safety stocks have to be maintained. This ensures that, on the inbound site production stoppages do not occur, and, on the outbound side customers are fulfilled on time.
Advantages of Warehousing
Warehousing offers many advantages to the business community. Whether it is industry or trade, it provides a number of benefits which are listed below.
i. Protection and Preservation of goods - Warehouse provides necessary facilities to the businessmen for storing their goods when they are not required for sale. It provides protection to the stocks, ensures their safety and prevents wastage. It minimises losses from breakage, deterioration in quality, spoilage etc. Warehouses usually adopt latest technologies to avoid losses, as far as possible.
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.
iii. Continuity in production- Warehouse enables the manufacturers to carry on production continuously without bothering about the storage of raw materials. It helps to provide seasonal raw material without any break, for production of finished goods.
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.
vii. Creation of employment - Warehouses create employment opportunities both for skilled and unskilled workers in every part of the country. It is a source of income for the people, to improve their standards of living.
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.
SQUARE ROOT LAW
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.
Square root law:
The square root law helps to determine the extent to which inventories may be reduced through such strategy. Assuming the total customer demand remains the same, the Square Root Law estimates the extent to which aggregate inventory needs will change as a firm increases or reduced the number of stocking location. In general, the greater the number of stocking locations, the greater the amount of 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 application of the square root law.
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”.
N1 = Number of existing facilities
N2 = Number of future facilities
X1 = Total inventory in existing facility
X2 = Total inventory in future facility
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.
X1 = 40,000
N1 = 8
N2 = 2
THE NUMBER OF WAREHOUSES
The number of warehouses is another decision parameter impacting a number of cost variables and customer service. If customer service is taken in cost terms as cost of customer dissatisfaction, the number of warehouses will affect transportation, inventory, warehousing and customer dissatisfaction costs.
Transportation costs initially decreases with increasing number of warehouses. This is due to the transportation economics obtained by having large-volume long-range transportation from consolidation warehouses and short-range small-volume transportation from break-bulk warehouses. However, as the number of warehouses increases beyond a certain value, the transportation costs starts increasing due to large number of transportation trips in – between the larger numbers of warehouses. Inventory costs continuously increases with the increasing number of warehouses beyond the increased space available needs to be utilized and firms increase the commitment of inventory at these warehouses beyond those actually needed. Transit inventory costs continuously decrease with the increased number of warehouses due to the shorter transportation times between the larger number of warehouses. The warehousing costs increase with more warehouses due to the maintenance and facility costs associated with each warehouse. For the same space, a single warehouse incurs less warehousing cost than two warehouses.
The increasing number of warehousing leads to increasing customer service levels, thus, decreasing customer dissatisfaction cost.
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.
A few of the factors governing the warehouse locations are:
• Availability of services
• Land cost
• Availability of transport linkages for example, to a rail siding
• Availability of utilities of water and power
• Taxes and insurance cost
• Expansion space availability
• And soil strength and lay off land for drainage.
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
As a company service levels increase, it typically requires more warehousing space to provide storage for higher levels of inventory. As the market served by a warehouse increases in number or size, additional pace is required. When a firm has multiple products or product groupings, especially if they are diverse, it needs larger warehouse to maintain at least minimal inventory levels of all products. In general, greater space requirements are necessary when products are large, production lead-time is long, manual material handling system are used the warehouse contains office, sales or computer activities and demand is erratic and unpredictable.
Demand Fluctuations Impact Warehouse Size
Demand also has an impact on warehouse size. Whenever demand fluctuates significantly or is unpredictable, inventory levels generally must be higher. This result in a need for more space and thus a larger warehouse.
WAREHOUSE LAYOUT AND DESIGN
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.
Warehouse operating principles
Design criteria: Three factors, which have to be considered in the design process, are the number of stories in the facility, height utilization and product flow. Most warehouse houses have 20-30 foot ceiling. Through the use of racking or other hardware it is possible to store product up to the building ceiling. Warehouse design should also allow for straight product flow through the facility whether items are stored or not. In general this means that product should be received at one end of the building, stored in the middle and then shipped from other end.
Figure below illustrates the flow of production.
Straight line product flow minimizes congestion and confusion.
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
In a warehouse layout product are grouped according to their compatibility, complementarities, and popularity.
1. Compatibility refers to whether products can be stored harmoniously
2. Complementarities how often product are ordered together and therefore stored together
3. Popularity relates to different inventory turnover rates or demand rates of products. Items that are in greatest demand should be stored closest to shipping and receiving docks.
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.
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.