Warehousing

Warehousing and Storage Systems

Graphics courtesy of Racks & RollersOpens in new window One important logistics functional area, which is strongly related to physical flow, is warehousing. In contrast to transportationOpens in new window, which primarily takes place on network arcs, warehousing and product storage mainly take place at nodal points.

Warehousing and material-handlingOpens in new window activities, which are often referred to as “transportation at zero miles per hour,” take around 20% of total logistics distribution costs; therefore, they compel logistics executives to give them serious consideration.

Warehousing is normally used at two points in the logistics chain. Raw materials (such as coal, iron, ore, steel, gold ore, or sugar cane) may be stored in a warehouse before they are processed in a manufacturing plant; they may also be stored as finished goods after they have been processed.

Thus, we can define warehousing as the part of a firm’s logistics system that stores products (raw materials, parts, goods in process, finished goods) at and between point of origin and point of consumption, and provides management with information on the status, condition, and disposition of items being stored.

A suitable definition of warehousing then would be:

Because demand for products cannot be predicted with certainty and they cannot be supplied immediately, storing inventories is inevitable.

Companies store inventoriesOpens in new window to reduce their overall logistics costs and to reach higher levels of customer service through better coordination between supply and demand.

Therefore, warehousing has become an important part of companies’ logistics systems, which stores goods at and between the origin and destination points and provides the management with information about the status, disposition, and condition of inventories.

These inventories may belong to different phases of the logistics process and can be categorized into three groups:

1. Physical supply (raw materials, components, and parts)
2. Physical distribution (finished goods)
3. Goods in process (constitute small portion of total inventories)

Companies keep inventory/stock in warehouses for the ten following reasons:

1. to achieve economies of scale (“The more you produce, the less it costs.” — Yes, but where do we store the more we have produced? — in a warehouse);
2. to take advantage of quantity purchasing discounts and forward buys (we have bought goods in bulk, knowing that we can sell them, but we must store some of the stock until all of it is sold);
3. to maintain a source of supply (we store so we will not run out of stocks, especially key items);

4. to support the firm’s customer service policies (we must store priority items — “A” and “B” items in the ABC analysis — for the customers, to keep them happy);
5. to meet changing market conditions (for example, seasonality, demand changes, fluctuations in price);
6. to overcome the time and space differentials that exist between producers and consumers (some of our customers live overseas in the Netherlands, so we use a warehouse in Rotterdam in order to distribute goods to them on a daily basis);
7. to achieve a desired level of customer service. A warehouse can save extra distribution costs and make it possible to reach many customers.
8. to service the needs of a company more effectively. Many warehouses are kept for internal production purposes. Toyota may store certain items or parts or even the robotic machinery used in their vehicle production plants to produce the Tazz motor vehicle.
9. to support the Just-in-Time programs of suppliers, vendors, and customers. We get goods from the warehouse on a Just-in-Time basis since the warehouse is situated close to our shop.

The Functions of Warehousing

Warehousing plays a critical role in logistics systems, providing the desired customer-service levels in combination with other logistics activities. A wide variety of operations and tasks are performed in warehousing; these can be categorized under three basic functions:

1. Movement (material handling)
2. Storage (inventory holding)
3. Information transfer

Traditionally, the storage function was considered as the primary role of warehouses because they were perceived as places for long-term storage of products. However, today’s organizations try to improve their inventory turns and move orders more quickly through supply-chain networks; therefore, nowadays, long-term storage role of warehouses has diminished, and their movement function has received more attention.

The Movement Function

The first major function, movement, can be further divided into four handling activities: receiving, order filling, cross-docking, and shipping.

1.    Receiving

Receiving includes the physical unloading of goods from the transportation carrier as well as verifying their count and specifications against order records, inspecting them for damage, and updating warehouse inventory records.

Receiving also includes sorting and classification of products and prepackaging bulk shipments into smaller ones before moving them to their warehouse storage location.

Finally, the physical movements of products to storage areas, locations for specialized services (such as consolidation areas), and outbound shipment places are referred to as pass-away activities.

2.     Order filling or order picking

This is a fundamental movement activity in warehousing and involves identifying and retrieving products from storage areas according to customer orders.

Order filling also includes accumulating, regrouping, and packaging the products into customers’ desired assortments. Moreover, generating packing slips or delivery lists may also take place at this point.

Order-picking activities are time consuming and labor intensive. A study in the United Kingdom revealed that around 63% of warehouse operating costs are the result of order picking.

3.     Cross docking

In this process, receiving products from one source are occasionally consolidated with products from other sources with the same destination and immediately sent to customers, without moving to long-term storage.

A pure cross-docking operation only organizes the transfer of materials from inbound receiving dock to the outbound dock, eliminating nonvalue-adding activities such as put away, storage, and order filling. In practice, however, there might be some delay, and the items may remain in the facility between 1 and 3 days.

4.     Shipping

Shipping involves physically moving and loading assembled orders onto transportation carriers, checking the content and sequence of orders, and updating inventory records. It may also include sorting and packaging the products for specific customers or bracing and packing the items to prevent them from damage.

The Storage Function

The storage function of warehouses is simply about the inventory accumulation over a period of time. The storage of inventory may take place in different locations and for different lengths of time in warehouses, depending on the storage purpose.

In general, four primary storage functions have significant impacts on the storage facilities’ design and structure: holding, consolidation, break-bulk, and mixing. Warehouses may be designed to satisfy one or more of these functions, and their layout and structure will vary based on their emphasis on performing these storage functions.

The storage of inventory in warehouses can be categorized into two main groups, according to the length of storage time:

1. Temporary or short-term storage, and
2. Semipermanent or long-term storage.

In temporary storage, only products required for basic inventory replenishment are stored. The amount of temporary inventory required to be stored in warehouses is determined based on the extent of variability in lead time and demand. Also, the design of logistics systems may affect the inventory extent. The emphasis of temporary storage is on the movement function of warehousing, and pure cross docking tends to use only this kind of storage.

However, semipermanent or long-term storage includes the storage of products in excess of that necessary for basic replenishment. Semipermanent storage is justified in some common situations, including:

• Seasonal or erratic demand
• Conditioning of products (e.g., fruits and meats)
• Special deals (e.g., quantity discounts)
• Speculation or forward buying

The Information Transfer Function

Information transfer, the third major function of warehousing, occurs simultaneously with the movement and storage functions.

Not only does the movement and storage of goods have to be managed in warehousing, but the information that goes along with the movement and storage also has to be managed.

Information on inventory levels, throughput levels, stock-keeping locations, customer data and personnel is vital to the successful operation of a warehouse. One needs to know exactly where an item is in the warehouse or distribution centre.

These types of information along with the data on space utilization, customer and personal information, and other pertinent information are essential for ensuring a successful warehousing operation.

Recognizing the crucial importance of these types of information, companies are continually improving the speed and accuracy of their information-transfer function by using computerized and modern processes such as bar coding their products, and using the Internet or electronic data interchange (EDI) systems for transferring their information.