Warehouses versus distribution
Rationale for warehouses
The role of warehousing
Basic components of a warehouse
Function of a Warehouse
Types of Warehouses
Number of warehouses
Warehouse design
Warehouse productivity
Warehouse information system



Facility structure refers to the management of warehouses and distribution centers. Warehouses can play a key role in integrated logistics strategy and in building and maintaining good relationships between supply chain partners. Warehousing affects customer service, stock out rates, and a firm’s sales and marketing success. Many firms ignore warehousing and fail to recognize it as a source of integrated logistics cost reduction and productivity improvement.

A warehouse smoothes out market supply and demand fluctuations. When supply exceeds demand, a warehouse stores product in anticipation of customer requirements A classic example is the build up of retail inventory to anticipate the Christmas season. However, an efficient warehouse can do far more than simply store product. When demand exceeds supply, the warehouse can speed product movement to the customer by performing additional services- marking prices, packaging product, or final subassembly.


The difference between warehouses and distribution centers may cause some confusion. On one hand, the purpose of a warehouse is to store products until customers require them. On the other hand, the purpose of a distribution center is product throughput, not storage. Bulk shipments come into a distribution center, are broken down into smaller shipments, and then are transported further in the supply chain. Also, distribution centers normally serve a large territory than a warehouse. Distribution centers play a major role in the outbound flow of finished goods and are common in large countries with a good transportation infrastructure.

Some companies use a small number of large distribution centers. Large distribution centers handle enough volume to achieve economies of scale. Economies of scale mean that long-term average costs decline as output increases. However, rising customer expectations about service have induced some firms to use smaller, regional distribution centers. This allows each distribution center to be located closer to the market and provide superior service.


From an integrated logistics viewpoint, warehousing is a necessary evil. Warehousing allows production to gain economies of scale from long production runs. Warehouses allow marketing to maintain or increase customer service. If forecasting was perfect and production was instant, the need for inventory and warehousing would vanish. However, in the real world forecasts are wrong and production times vary, so warehousing buffers supply and demand. Other arguments for warehousing include:
To achieve economies in transportation by moving higher volume
To obtain quality purchase discounts
To keep a supplier
To meet changing market conditions
To support JIT programs through the integrated logistics system.


A Warehouse plays multifaceted role in the integrated logistics system. It can serve as a transportation consolidation facility. Companies can transport less than loads into a warehouse, consolidate them into full loads, and then transport them out again. This lowers transportation costs because the carrier charges less per unit for transporting a full load. The reason is simple: the carrier’s cost per unit is lower for a full load.

Warehousing also acts as a reservoir for production overflow. This function, known as stockpiling, can take a variety of forms, including:

Seasonal production-level demand
Level production-seasonal demand

Seasonal production-level demand is created with some food products like corn whose demand is fairly uniform throughout the year.
Level production-seasonal demand is also common. Some products, like sunscreen, are in high demand for one season but low demand for rest of the year.

Some of the roles of warehousing include:

Warehouses act as product mixing sites
It can also facilitate production
It acts as safety valves in plant strikes, supplier stockouts, or transportation delays
Warehouses smooth out production runs

The primary role of a warehouse is to provide customer service. Warehousing can help fill a customer’s order faster. Orders are often filled at the closest warehousing instead of the manufacturing plant. The customer gets the order faster, which usually reduces complaints. An effective warehouse system means quicker delivery, fewer stockouts and better customer services. The result is higher levels of customer satisfaction and more sales.


The three basic components of the warehouse are space equipment and people. Space allows for the storage of goods when demand and supply are unequal. Space affects not only warehousing decisions but also the design of the logistics system. If demand for warehousing space exceeds the supply, the price of storage increases as firms compete for the limited space. Ultimately, the higher cost of space increases the price of the product.

Warehouse equipment includes material handling devices, storage racks, docks and information processing systems. The equipment helps in product movement, storage and tracking. The type of equipment used in a facility depends on the type of the facility used product and interaction between the equipment and the other components of the warehouse.

People are the most critical components of the warehouse. Space and equipment means nothing without competent people. A primary reason for establishing the warehouse is to increase customer service level. This often requires individual attention to special customers requests like final subassembly, specialized packaging, or price marking of shipments. Customers requests can reduce standardization in the warehouse, making complete automation impossible. People play the critical role in every part of the supply chain, and the warehousing is no exception.

Basic functions of warehouse include moment, storage, and Information transfer. To store product property moment is necessary. It takes place in four distinct areas:

Receiving inbound goods from transportation carriers and performing quality and quantity checks.
Transferring goods from the receiving docks and moving them to specific storage locations throughout the warehouse
Order selecting the products for filling customers orders including checking, packing, and transporting to the outbound dock
Shipping the goods outbound to customers by some form of transportation.

Storage refers to the physical disposition of products throughout the facility. This can be temporary or semi permanent. A temporary basis means storing a product that is necessary for inventory replenishment. Semi permanent storage is used for inventory in excess of immediate needs. This is called safety.

A basic warehouse decision is choosing the type or combination of type to use. There are three basic types of warehouses. Private, public and contract.

The firm producing or owning the goods owns private warehouses. The focus of this type of facility is to store the firm’s own a goods until they are delivered to a retail outlet or sold. High volumes and high levels of utilization favor owning the warehouse because economies of scale. The firm can maintain lower delivered prices or higher profit margins based on such economies. Private facilities also offer a great deal of control regarding hiring and firing employees, benefits packages, and operations within the warehouse. Another potential advantage of using a private warehouse is the ability to maintain physical control over the facility, which allows managers to address loss, damage and theft.
Also a firm can earn extra income from renting or leasing excess space in private warehouse. The private warehouse is a depreciable asset to the firm, which reduces net income and income taxes. To make a private warehouse cost-effective, the facility needs high product throughput to achieve economies of scale and spread the fixed costs of the facility over many items. A firm needs stable demand and generally should be located in or near a dense market area. Without these factors, the firm should investigate external


A public warehouse rents space to individuals or firms needing storage. The service these warehouses offer may her. Some provide a wide array of services including packaging, labeling, testing, inventory maintenance, local delivery, data processing and pricing.

There are many reasons to lease space instead of owning a warehouse. First leasing lowers the capital investment needed to establish a warehouse. Second, leasing offers flexibility. If a firm’s market shifts to another region, it simply leases space in the new area.


Contract warehousing is a specialized form of public warehousing. In addition to warehousing activities, a contract warehouse provides a combination of integrated logistics services, thus allowing the leasing firm to concentrate on its specialty. Contract warehousing often provides customized services. In essence, contract warehousing is a third party integrated logistics organization that provides higher quality services than are available from a public warehouse. There are in testing many reasons for the growth of contract warehouses, including;

Product seasonality
Geographic coverage requirements
Flexibility in testing new marketing
Management expertise and dedicated resources
off-balance sheet financing
Reduction in transportation cost.

A contract warehouse often replaces a private warehouse. The decision frequently rests on the results of a leave versus buy analysis. The goal is to examine all relevant variables and decide whether to build and operate a private warehouse, purchase public housing services.
Financial considerations include the operating costs of each option (e.g., direct handling and direct storage expenses). Direct handling expenses are incurred when moving goods into, through, and out of a warehouse. The type of lease can also affect the type of warehouse chosen. The lease – or – buy decision calls for expert financial and legal advice.


Independence of warehouse type, a critical question is how many warehouses are needed to effectively serve customers. Theoretically, the more warehouses in or near market areas, the higher the customer service levels because goods can be delivered to the consumer faster.
Some factors to consider when evaluating the optimal number of warehouses include:
The level of customer service required
The number of customers, their location, and buying habits.
The amount and type of electronic data interchange (EDI) taking place between producers and consumers.
A few firms have increased the number of warehouses to improve customer’s service, but the recent trend is to use fewer warehouses to reduce total costs. More warehouses mean higher inventory and more frequent, smaller shipments – and higher costs. Logistics information system like EDI often helps to improve consumer demand forecasting and communication with suppliers and customers. Whether to increase or decrease the number of warehouses should depend on the goals of the organization.

Figure 11.1 : Number of Warehouses and Logistics Costs.

information systems like EDI often help to improve consumer demand forecasting and communication with suppliers and customers. Effective EDI application can improve order processing, product receipt, and delivery to the customer. Whether to increase or decrease the number of warehouses should depend on the goals of the


In warehouse design, five interrelated variables should be considered. They are:
Land and building
Management and staff
Storage and handling equipment.
Computers and software.
Operating methods and procedures.

Since each of these variables can affect the others, they must be considered in an overall systems framework, and total cost analysis should be applied in the warehouse design decision. The design decision should consider possible constraints, such return on investment requirement, available financing, reuse of existing equipment , flexibility of the facility, the existing land, and the existing building. Other, less evident, constraints are union and staff objectives, government regulations, management preference, and needed software requirement.
The first step in warehouse design is forecasting demand for the company’s products. This helps to estimate the required space. Space requirements should also be set for receiving and shipping, picking and assembly, primary storage, equipment needs, offices, rest rooms and locker rooms.
One-story facilities are usually better than multiple stories. A single-story warehouse allows for single line flows of product. The use of single-story facilities is common in the United States since land is relatively abundant. Figure 11.2 shows how a typical


Warehousing affects profits, so most firms measure warehouse performance. There are three primary reasons to monitor facility performance. First, warehousing costs average around 10 % of a sales dollar. So productivity improvements in warehousing appear on the bottom line of the profit and loss statement. Second, most warehouses use cubic space poorly. On average, only about 30 to 35 percent of a warehouse’s available
space is used to store inventory. As land and space costs increase, warehouse managers must find ways to use the available space. Third, warehouses are measured for productivity because it is relatively easy to do. Warehouse costs and operations are fairly straightforward to monitor.

There are three approaches to warehouse measurement: productivity, utilization and performance. Productivity is the ratio of real output to real input. An example is the number of cases handled per labor hour. Utilization is the ratio capacity used to available capacity. This could refer to the amount of space used by pallets, the number of employee hours logged, or even the amount of cubic space used compared to the amount available. Performance is the ratio of actual output to standard output. Examples could include cases picked per hours versus estimated cases per hour and /or equipment hours run compared to estimated equipment hours.


Without information transfer, today’s warehouses would operate much less efficiently. Information technology EDI, automatic data collection, and radio frequency systems have created advantages in warehousing, including improved customer interfaces in receiving, storing quality control, order picking, error control packing and shipping


Electronic data interchange (EDI) has quickly become standard in warehouse management. EDI refers to the exchange of machine-readable data in a standard format between one company’s computer and another company‘s computer. The result is a paperless transaction that offers several advantages. First simply reducing the amount of paper used can save money. Second, EDI transactions can save time because they are nearly instantaneous and use computers instead of people move information, which reduces errors. A third advantage is improved customer service: data are transferred quicker, the order cycle time is reduced, and the product arrives faster. Fourth there are substantial savings in warehousing operations and delivery costs. EDI is readymade for a just-time environment. Production can be scheduled better with supplier and customer orders. By producing closer to supply and demand timing cycles, inventory carrying costs are reduced. A fifth advantage is reduced effort. Using EDI means that data needs to be entered into the system only once. After that, computer interface with each other without additional human intervention in the transfer of data.
For EDI to help operate a warehouse more efficiently, it must meet standards for reliability, clarity, availability, utility and accuracy. Without these, the EDI system will not work as expected.


Another useful application for information technology in the warehouse is automatic data collection (ADC). ADC use computer technology to enter information into a computer system with little or no human involvement. The process enters data through machine-readable bar codes and scanners. The result is quicker and more accurate reading of data. Most often bar codes or Uniform Process Codes (UPC) is used to transfer data from a package to a computer through the use of an optical reader.
Properly installed, ADC benefits warehouse management in a number of ways, ranging from lower inventory costs to better quality control. Table 11.2 lists and discusses these benefits.


Radio frequency (RF) technologies consist of terminals, network controllers, and radio frequency units. The terminals can be handheld; vehicle mounted, or fixed data collect-

tors. The radio frequency units are transmitters/receivers that communicate with the terminals. An RF system is a series of antennas placed under the roof of the facility. Table 11.4 depicts possible RF applications in a warehouse.
RF benefits warehouse operations through increased operator productivity, reduced deadheading, and decreased errors. Other benefits include better use of storage space, better control of stock rotation, shorter order cycles, and better customer service. In fact, an order accuracy rate of 99.9 percent can be achieved.


Logistics by David .J. Bloomberg



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