Economic tradeoffs in sizing warehouse reserve

storage area
Kumar Bhaskaran’

Philips Laboratories, North American Philips Corporation, Briarcliff Manor, New York,
USA

Charles J. Malmborg

Department of Decision Sciences and Engineering Systems, Rensselaer Polytechnic

Institute, Troy, New York, USA

Warehouses, generally the conventional type, have separate reserve storage and active pick areas.
The reserve storage area stocks the buffer inventory and facilitates the replenishment of inventory in
the active pick area. An important but largely unadressed warehouse design issue is what should be
the size of the reserve storage area relative to the active pick area. The relative sizing of the reserve
storage area is influenced by economic issues such as the storage cost per cubic foot of space and
the cost of replenishment of inventory in the active pick area. The relative sizing problem is formulated
for a warehouse with dedicated linear shelving and dual-command picking discipline. The optimal
partition of the warehouse layout is then obtained from the stochastic approximation of the problem.
The significance of sizing the reserve storage area arises from its impact on the order-picking cost, a
major operational cost component in warehouses.

Keywords: order picking, warehousing, lot sizing, storage/retrieval, staging

ploying better material-handling systems such as the

Introduction
Warehouse space is an important aspect of warehouse
layout, and its effective utilization is a predominant
objective in warehousing operations. Warehouse space
requirements are influenced by operational factors such
as the storage needs of the inventory mix and the stor-
age discipline (randomized or dedicated storage), lay-
out factors such as the choice of the storage medium
(e.g., pallet racks), and the material-handling system
(e.g., forklifts). Some space is also required for non-
storage features such as building obstructions (col-
umns, duct work), utilities (aisles to access storage
addresses, staging area), and unused space in the stor-
age location itself; this accounts for 25-35% of the total
space in a finished goods warehouse.’
Warehouse space can be effectively used by em-
‘This work was done during the author’s stay at Rensselaer Poly-
technic Institute.
Address reprint requests to Dr. Malmborg at the Department of
Decision Sciences and Engineering Systems, Rensselaer Polytechnic
Institute, Troy, NY 12180, USA.
Received 18 October 1989; accepted 5 February 1990
narrow-aisle stacker* that operate in low aisle widths
and proper choice of storage medium.3 In contrast the
emphasis of this paper is on the operational factors
that affect warehouse space. Typically, warehouses
have separate areas earmarked for locating reserve stock
or buffer inventory. 1.4 The order-picking activity (ma-
terial handling in storing and retrieving goods) is con-
fined to the active pick area, which is separate from
the reserve area. The active pick area contains a suf-
ficient quantity of goods to sustain operation over a
short time period (say a day or less, depending on a
variety of factors such as the proximity of the reserve
storage and the demand for goods). The goods in the
active pick area are replenished from the buffer in-
ventory located in the reserve area. It may be empha-
sized that some inventory is always essential to provide
a hedge against demand and procurement lead time
uncertainty. The precise amount of inventory is de-
termined by inventory management practices and is
not considered here; the inventory levels of the goods
are assumed to be known in the following discussion.
The warehouse sizing problem has been considered
by many researchers without drawing any distinction
between the reserve and active pick areas in the layout.
In one of the very early works, Moder and Thornton’

01990 Butterworth-Heinemann Appl. Math. Modelling, 1990, Vol. 14, July 381
Sizing warehouse reserve storage area: K. Bhaskaran and C. J. Malmborg
relate floor space utilization to the dimensions of the
storage medium such as the size of the pallets and their
angle of placement. Rosenblatt and Roll6 have looked
at warehouse size in relation to the internal layout and
the storage policy. They consider construction costs
(proportional to the travelling distance, the warehouse
area, and the warehouse perimeter), the cost of storage
(incurred owing to inability to accommodate all incom-
ing shipments), and the storage policy cost (dependent
on the type of storage policy and the zoning of the
warehouse). A combination of analytical optimization
and simulation technique is then used to derive the
optimal number of double-sided shelves and the num-
ber of storage spaces at each storage level for a fixed
maximum warehouse capacity. White and Francis’ use
a formulation that is very similar to inventory control
to examine the warehouse sizing problem over a finite
planning horizon. They also consider the construction,
the penalty for falling short of storage space, and the
storage costs; further, these costs are assumed to be
linear. A search procedure as in the single-period in-
ventory problem is used to determine the optimal size.
Warehouse sizing remains a fundamental issue in
warehouse design. The cost of a unit space (often re-
ferred to in dollars per square units rather than cubic
units) includes the annual amortization cost, the en-
vironmental cost of heat and light, maintenance, and
other related costs. The reduction in warehouse space
therefore corresponds to potentially significant cost
savings. In this context the presence of the reserve
storage poses an important but largely unanswered
warehouse design issue: What should be the size of
the reserve storage relative to the active pick area? As
indicated before, the reported works on warehouse
sizing have ignored this issue. In fact, the reserve stor-
age has always been relegated to secondary importance
by assuming that the cost of replenishing the goods in
the active pick area is insignificant in comparison to
the picking cost.’
This paper addresses the issue of relative sizing of
the active and reserve storage areas in a warehouse
with dedicated linear storage and dual-command pick-
ing discipline. The next section outlines the relative
sizing problem, and the subsequent sections present a
problem formulation and derive the optimal partition.
The final section offers a summary and conclusions.
The relative sizing problem
The relative sizing of the reserve storage and the active
pick areas is influenced by economic issues such as
the differential in storage cost, the cost of picking, and
the cost of replenishment of the active pick area. The
storage cost per unit of space is considerably lower for
the reserve storage than for the active pick area, pri-
marily because individual location accessibility and
auxiliary support functions such as heat and light are
essential in the active pick area owing to the picking
activity. Thus the economic advantages of storage den-
sity and low physical maintenance cost offered by re-
serve storage make it attractive to locate most of the
382 Appl. Math. Modelling, 1990, Vol. 14, July
stock in the reserve area. They are reinforced by the
increase in average travel distance to a pick location
if an excessive quantity of goods is placed in the active
pick zone. In comparison to this picking cost, the cost
of replenishing the goods in the active pick zone from
reserve storage is of smaller magnitude.’ With most
stock in the reserve area, however, frequent replen-
ishments will be necessary, causing excessive delays
in handling storage and retrieval requests and thereby
reducing the overall operating efficiency. All the above
issues must be considered in determining the optimal
partition of warehouse space into active and reserve
storage areas.
The overall warehouse size for the relative sizing
problem will be characterized by the inventory mix.
Without loss of generality a single item will be as-
sumed, and we let Q represent the maximum inventory
level as suggested by inventory management. For ded-
icated storage this is the quantity of goods to be ac-
commodated in the warehouse. If x is the percentage
of this total quantity located in the active pick area,
(I - X) correspondingly in the reserve area, then the
relative sizing problem is to determine the optimal
x-value. The three principal cost factors in the opti-
mization problem are the storage cost, the picking cost,
and the cost of runout in the active pick area. The
formulation of these costs and the overall problem pro-
ceeds next with the characterization of demand.
The demand process
Let Y;‘s be i.i.d. random variables representing the
demand size in units of items and
N(r)
D(t) = c yj (I)
.j= I
be the cumulative demand, where N(t), t 2 0, is a
Poisson process with mean 6. This implies that the time
interval between demand arrivals is exponential with
mean (l/6). Further, let Y’s be Poisson distributed with
mean p. It may be noted that this does not preclude
having a demand of zero units with positive probabil-
ity. For practical purposes this probability is extremely
small for even small values of p (for p = IO it is on
the order of 4.5 . lops). The cumulative demand is then
distributed as a Neyman Type A distribution?
=e-
-a&i
.
e-hyjp)d
f,(d;&p) = i j! .,Fl d! d>” ( 2 )
The runout cost
Runout is defined as running out of stock in the active
pick zone when there is stock in the reserve storage
to replenish the active pick area. As opposed to runout,
stockout occurs when there is a complete depletion of
stock in the warehouse (reserve and active areas put
together). Only the ‘runout cost is of interest in the
relative sizing problem.
 Sizing warehouse reserve storage area: K. Bhaskaran and C. J. Malmborg
Let the time interval between replenishment of the Q.0
A, = -
active pick zone be distributed as g(T) with a mean Wff
replenishment cycle of 7 = (l/e). The marginal distri-
bution of the replenishment cycle demand can be de- where u is the unit volume and W, is the height of the
rived by using Palm’s result in queueing: storage medium. Ifx is the fraction located in the active
pick zone, then the expected savings in storage cost
If demand is Poisson then the number of units demanded per replenishment cycle realized by locating
during replenishment cycle in steady state is also Poisson (1 - x) in the reserve area is
for any arbitrary distribution of replenishment cycle time.
The Poisson state probability depends on the mean of the
replenishment cycle time distribution but not on the dis- $(C, - C,)(l - x)
tribution itself.9
The above inference can be extended to compound It may be noted that the storage cost is assumed to be
Poisson distribution based on the generalization of evaluated at the beginning of each replenishment cycle.
Feeney and Sherbrooke. lo Hence the marginal distri-
bution of replenishment cycle time demand is given by
Dual-command travel distance
A dual command is defined as travel of the picking
vehicle, originating at the input/output (i/o) point, to
two storage locations or addresses before terminating
(3) at the i/o. Let X, and X, be the random variables rep-
If x is the fraction of the total stock Q located in the resenting the distances of the two storage addresses
active pick area, then the runout in units of item is visited, measured from i/o, based on any given distance
given by metric. Further, it is assumed that the two points are
uniformly distributed in the two-dimensional storage
dsxQ
rl(xQ) = d-xQ’ xQ<dsQ
(4)
grid, that is, 0 5 X1,X, I I, assuming that the distances
are normalized. (For example, in a square grid of area
A and euclidean metric the maximum distance is
The expected runout in number of units of item is then aA, and this can be used to normalize the distances.)
Q The dual-command travel distance is then given by
rl(xQ) = I (d - xQ)h(d) dd L = x, + Ix, - x,1 + x2 (8)
-rQ
FL(I) = PL 5 I= PX, + IX, - x21 + x, 5 1 (9)
Q where
=
I
UQ
&z(d) dd - xQ[H(xQ) - H(Q)]
Xl )X2
x, =x2
L = 2x,
L = x, + x2 = 2x, = 2x2 (10)
Q X1 <x2 L = 2x2
= d/z(d) dd - xQH(xQ) (5)
I The joint sample space is as shown in Figurr I.
XQ
where H( ) is the complementary cumulative function (11)
of h(d) and H(Q) is zero, since only runout is consid-
ered. The penalty cost for runout in a replenishment Differentiating the above yields the density function:
cycle is therefore
q(xQ)G (6)
where Co is the penalty cost for a unit of runout. (12)
lo otherwise
The expected dual-command travel distance is then
The storage cost
In the absence of reserve storage the entire stock Q ’ 12
will be located in the active pick zone. Accommodating E(L)=~IfL(i)dl=12di=~ (13)
0 0
some of the total stock in the reserve area reduces the
quantity stored in the active area, resulting in savings Assuming a square grid of area A and a rectilinear
in storage cost due to the favorable differential in stor- metric, the expected dual-command travel distance is
age costs. Let C, and CR be the storage cost per unit given by
area in the active and reserve pick zones, respectively,
where C, > CR. Let A, be the area required to house E(L) = 2 (14)
total quantity Q, that is, 3

Appl. Math. Modelling, 1990, Vol. 14, July 383

Sizing warehouse reserve storage area: K. Bhaskaran and C. J. Malmborg

X 2 05x5 1 (17)
2
Z(x) is the potential savings function associated with
the decision x of the total fraction of stock to be located
1 in the active pick area. For the unconstrained univar-
iate maximum (ignoring constraint (17) the sufftcient
conditions for optimality are Z’(x) = 0 and Z”(x) < 0.
Let
x1> x and g-=/3 ( 1 8 )
2
Yr-
It may be noted that (Y and /? represent the threshold
savings in storage cost and picking cost, respectively,
when all of the stock is located in the reserve storage
area (such a scenario may not be practically realizable).
An explicit constraint on the minimum stock to be
located in the active pick area is not introduced, since
this is dictated by the runout penalty cost; the penalty
X cost can be set high to guarantee a minimum amount
1
of stock in the active pick area. Differentiating (16)
successively with respect to x yields
Figure 1. Joint sample space
Z’(x) = -(Y - 2$-_ - Q77’(xQ)G (19)

The picking cost z”(~) = -:(I _ x)-3/2 _ Q27’(xQ)G (20)

Although the storage addresses were assumed to be The derivatives of the expected number of runouts is
uniformly distributed, the actual distribution of X, and given by
X, depends on the mix of items housed in the ware-
house, their demand pattern, and the queueing and Q
dispatching policy used. Additionally, for a palletized Tj’(xQ) = -$ d/z(d) dd - (QH(xQ) - xQ2h(xQ))
storage with less than unit load picks, the correlation I
between the storage and retrieve requests of the pallets = - itI
must be considered. These factors are not considered (21)
here, since relative sizing is treated as an aggregate 17’YxQ) = Q2&Q) (22)
design problem and more detailed operational factors
would only complicate the analysis. For Q > 0, Yj”(xQ) > 0, and hence Z”(x) < 0. Setting
Since A, is the area needed to house stock Q and (19) to zero will fetch the optimal x-value:
(1 - x)Q is located in the reserve storage, the reduction 1 P
in the active pick area is (1 - x)Aa. The expected H(~Q)=Q~c, { a+2G 1 (23)
savings in picking cost, as a consequence, per replen-
ishment cycle is given by It is not very convenient to solve the above exactly.
Some additional bounding of x is possible by making
sd(I -x)Aa use of the fact that 0 5 H(xQ) 5 1:

where CT is the unit cost of travel and S/28 is the 1 -($)2-l - (2cQ2;_aj)2 (24)
expected number of dual-command trips in a replen-
ishment cycle. The above interval contains optimal x-value for the
unconstrained univariate maximum. Including the con-
The economic tradeoff model straint 0 I x 5 1 yields the following necessary con-
dition:
The previous sections have laid the foundations of the
relative sizing model. The overall formulation can be {;}<a<{Q2Co-;} (25)
expressed now as follows:
Maximize Z(x), subject to Hence the optimal solution to the relative sizing prob-
lem x* lies in the interval given by (24) provided that
Z(x) = + (C.4 - C,)( 1 - x) condition (25) is satisfied. The exact value can then be
obtained by enumerating equation (23) over this inter-
+ gd(l - x)Ap - Yj(xQ)C,, (16) val.
The function Z(x) is plotted in Figure 2 to illustrate

384 Appl. Math. Modelling, 1990, Vol. 14, July

 Sizing warehouse reserve storage area.. K. Bhaskaran and C. J. Malmborg
The contour plot of the surface shown in Figure 3
reveals the convexity of the surface.

Conclusions
Contemporary business practices place considerable
emphasis on minimizing inventory, and there is an in-
creasing tendency to employ point-of-use storage,
unifying the active pick and the reserve storage areas.
With remote (frequently foreign) sourcing, however,
the procurement lead times of inventoried items can
be uncertain and significant. This makes the presence
of reserve storage a practical necessity. The analysis
presented here reveals how the size of the reserve
storage directly affects the warehouse operations cost.
The allocation of warehouse space to active pick and
Figure 2. Surface plot of the objective function reserve storage functions is formulated as a stochastic
cost-savings model that includes the savings in storage
and picking costs and the penalty cost of runout. A
solution scheme is suggested to obtain the minimizing
partition of the warehouse layout with linear shelving
and a dedicated storage discipline.

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