PROJECT ON WAREHOUSING - June 22nd, 2007

WAREHOUSING

DEFINITION

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

INTRODUCTION

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

Private 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.

Advantages
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.

Public Warehousing

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.

Advantages
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

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:

1. Consolidation
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.
6. Postponement
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.

7. Positioning
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.

8. Assortment
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.

9. Decoupling
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”.

Therefore

Where
N1 = Number of existing facilities
N2 = Number of future facilities
X1 = Total inventory in existing facility
X2 = Total inventory in future facility

Example
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.
Solution

Here,
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.

WAREHOUSE LOCATION

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.

Product flow

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.

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.
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