The role of warehouse in the Logistics System

A Basic conceptual Rationale

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 Introduction
• The warehouse is a point in the logistics system where a firm stores or holds
materials, semi-finished or finished goods for varying period of time.
• Holding goods in a warehouse stops or interrupts the flow of goods, adding cost
to the product or products.
• Some firms view warehousing cost very negatively and hence they sought to
avoid it if at all possible
• Some other think that warehousing can add more value than cost to a product
• Neither end of the spectrum is usually correct. Firms should hold or store items
only if tradeoff exists in their areas.
• The warehouse serves several value added roles in a logistics system which are
shown in the table below:

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 The role of warehouse in the Logistics System
• Warehouse Value Adding Roles
Value-Adding Role Trade-off Area
Consolidation Transportation
Product –Mixing Order filling
Service lead times,
stock-outs
Contingency Protection Stock-outs
Smooth Operation Production

• Consolidation - Companies sometimes face less-than-truckload (LTL) shipments of raw

materials or finished goods. Shipping goods to a long distance at LTL rates is more
costly than shipping at full truckload or carload rates. By moving LTL amounts relatively
short distances to or from a warehouse , warehousing can allow a firm to consolidate
smaller shipments into a larger shipment with significant saving in transportation.
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The role of warehouse in the Logistics System
• Product Mixing-When placing orders, customers often want a product line
mixture, for example, five dozen four-cup coffer pots, six dozen ten-cup coffee
pots with blue trim and ten dozen with red trim and three dozen blue salad bowl
sets. Because companies often produce items at different places, a company that
did not warehouse goods would have to fill orders from different locations,
causing different arrival times and opportunity for mix-up. Therefore, a product
mixing warehouse for a multiple product line leads to efficient order filling.
• Cross-docking- It is an operation that facilitates the product-mixing function. In a
cross-docking operation, product from different suppliers arrive in truckload lots,
but instead of being placed into storage for later picking, they are moved across
the warehouse area to waiting trucks for movement to particular customers.
• Service-A third warehouse function is to provide service. The importance of
customer service is obvious. Having goods available in a warehouse when a
customer places an order, particularly if the warehouse is in reasonable proximity
to the customer, usually leads to customer satisfaction and enhances future sales.
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The role of warehouse in the Logistics System
• Protection against contingencies- The fourth warehousing function is protection
against contingencies such as transportation delays, vendor stock outs, or strikes,
goods damaged in transit can affect inventory level and order filling.
• Smooth operation- A fifth warehousing function is to help in carrying out smooth
operations in manufacturing process. Otherwise, demand in the market cannot
be met continuously.
• Thus warehousing functions can make important contributions to logistics
systems and company operations. However, we must also view warehousing in a
trade-off context; that is, contribution of warehousing to profit must be greater
than its cost.
• Warehouse management involves a number of important decisions, including
ownership, number, size, stocking, and location, that is what type, organization,
how many, what size, what products and where. All these are shown in the
following figure.

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The role of warehouse in the Logistics System
• Basic warehousing Decisions
Ownership

Private Public

How many

Centralized Decentralized

What size

Where (location)

Interior layout

What products, where 6

 The strategic importance of logistics network design
• All business operate in a very dynamic environment in which change is inevitable.
• Characteristics of consumer and industrial-buyer demand, technology, competition, markets,
and suppliers are constantly changing.
• As a result, business must redeploy its resources in response to and in anticipation of this ever
changing environment.
• Considering the rate at which change is occurring, it is questionable whether any existing
logistics network can be truly up to date.
• Any logistics network that has been in existence for a number of years is certainly a candidate
for reevaluation and potential redesign.
• Even if the existing system is not functionally obsolete, an analysis of the existing network will
probably uncover new opportunities to reduce cost and/or improve service.
• Changing customer service requirements- The logistical requirements of customers are
changing in numerous ways. As a result, the need to reevaluate and redesign logistics networks
is of great contemporary interest. While some customers have intensified their demands for
more efficient and more effective logistics services, others are seeking relationships with
suppliers who can take logistical capabilities and performance to new, unprecedented levels.

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 The strategic importance of logistics network design
• Shifting locations of customer and/or supply markets- Considering that manufacturing
and logistics facilities are positioned in the supply chain between customer and supply
markets, any change in these markets should cause a firm to reevaluate its logistics
network.
• Change in corporate ownership-A relatively common occurrence today is for a firm to
experience an ownership related change associated with a merger, acquisition, or
divestiture (the action or process of selling off subsidiary business interests or
investments). In such instances, many companies choose to be proactive and to
conduct a formal evaluation of new versus previous logistics networks in advance of
such a change. This is very helpful in terms of making sure that the newly merged or
newly independent firm will have fully anticipated the logistics impacts of the change in
corporate ownership.
• Cost Pressures-A major priority for many firms today is to figure out new and innovative
ways to take cost out of their key business process, including those related to logistics.
In such instances, a reevaluation of the logistics network and the functioning of the
overall supply chain can frequently help to uncover new sources of such savings.

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 The strategic importance of logistics network design
• Competitive capabilities-To remain competitive in the market place or to develop
a competitive advantage, a company should frequently examine the relative
locations of its facilities towards the goal of improving service and/or lowering
costs.
• Corporate organizational change-When a firm considers any major corporate
organizational change, such as downsizing, the strategic functioning of the
logistics network of the firm is viewed as something that must be protected and
even enhanced through the process of organizational change.
• Six major steps that are recommended for a comprehensive logistics network
design process are shown in the following figure.

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 Logistics Network Design
• Key Steps in the Logistics Network Design Process
1. Define process
Steps

2. Perform
Logistics Network
Logistic Audit
Reengineering Team
Involved in Every step
3. Examine
logistics network
Alternatives

4. Conduct facility
Location Analysis

Location
Selection Team 5. Network/Location 6. Develop
Decision making Implementation plan
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Step 1: Define the Logistics Network Design Process
• The formation of a logistics network reengineering team to be responsible for all
elements of the logistics network design process.

• This team needs to become aware of overall corporate and business strategies
and the underlying business needs of the firm and the supply chain in which it is
a participant.
• To establish the parameters and objectives of the logistics network design or
redesign process itself. An awareness of the expectations of the senior
management, for example is essential to the effective progress of the overall
reengineering process. Issues pertaining to the availability of needed resources in
the areas of funding, people and systems must be understood at an early stage in
the process.
• The potential involvement of third party suppliers of logistics services as a means
of achieving the logistics objectives of the firm.

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 Step 2: Perform a Logistics Audit
• The logistics audits provide members of the reengineering team with a comprehensive
perspective on the logistics process of the firm. Key steps in the logistics audit are as shown
below:
Step 1. Step 6.
Step 2. Step 4. Step 5.
Fundamental Step 3. Strategic
Logistics Logistics Strategic
business Key logistics logistics plan
system provider logistics
information activities selection issues

Listed below are examples of the types of information that should become available as a result of
this audit.
• Customer requirements and key environmental factors
• Key logistics goals and objectives
• Profile of the current logistics network and positioning of the firm in respective supply chains.
• Benchmark or target, values for logistics costs and key performance measurement
• Identification of gaps between current and desired logistics performance (qualitative and
quantitative).
• Key objectives for logistics network design, expressed in terms those will facilitate measurement.
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 Step 3. Examine the Logistics Network Alternatives
• This involves applying suitable quantitative models (optimization, simulation or heuristic)
to the current logistics system as well as to the alternative systems and approaches under
consideration.
• Once an appropriate modelling procedure has been selected, it should be used to help
identify a logistics network that is consistent with the key objectives identified during the
logistics audit.
• Then ‘what if’ types of analysis should be conducted to test the sensitivity of
recommended network designs to changes in key logistics variable.

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 Step 4. Conduct a facility Location Analysis
• In this step the task is to carefully identify and analyze the attributes of specific
regions and cities that are candidates for sites of logistics facilities.
• The analysis includes mainly qualitative aspects such as labor climate,
transportation issues, proximity to markets and customers, quality of life, taxes
and industrial development activities, supplier networks, land cost and utilities
and company preferences.
• The efforts in this step will be facilitated by the formation of location selection
team, which will collect information, on specific attributes, such as those
identified earlier. This team should be able to examine potential sites in terms of
topography, geology, and facility design.
• The first screening by the location selection team usually eliminates areas that
are uneconomical from a logistics perspective, thereby reducing the number of
alternatives.

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Step 5. Make decisions regarding Network and Facility Location

• The network and specific sites for logistics facilities recommended in

steps 3 and 4 should be evaluated for consistency with the design
criteria that were identified in Step 1.
• This step should confirm the types of change that are needed to the
logistics network of the firm and should do so in the context of overall
supply chain positioning.

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 Step 6. Develop an Implementation Plan
• Once the overall direction has been established, the development of an
effective implementation plan or “blueprint for change” is critical.

• This plan should serve as useful road map for moving from the current logistics
network to the desired one.
•
• Since the reengineering process is likely to produce recommendations for
significant change, it is important that the firm commits the resources
necessary to assure a smooth, timely implementation.
•
•

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 Major Locational determinants
• Functional Determinants Site-specific Determinants

Labor climate Transportation access

• Truck
Availability of transportation • Air
• Rail
Proximity to markets and customers • Water
Quality of Life Inside/outside metropolitan area

Taxes and Industrial development Availability of workforce

activities
Land costs and taxes
Supplier networks
Utilities
Land costs and Utilities

Company preference

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 Reverse Logistics Systems Versus Closed Loops

•Reverse Logistics-The process of moving or transporting goods from their final destination for
the purpose of capturing value or for proper disposal.

•Closed loop supply chain-Designed and managed to explicitly consider both forward and
reverse flows activities in a supply chain.

•While these two terms used synonyms, they do have differences.

•Reverse logistics involves the process for sending new or used products “back up stream” for
repair, reuse, refurbishing, resale, recycling, or scrape/ salvage.

•The items in a reverse logistics systems are usually returned to a central location, for
processing. The processing typically involves transporting, receiving, testing, inspecting, and
sorting for appropriate action (repair, refurbishing, resale etc.).

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 Reverse Logistics Systems Versus Closed Loops

• The facility and related processes may be provided independently by the original
manufacturer or by a third party logistics provider in reverse logistics.
• The closed loop supply chain, on the other hand, is explicitly designed and
manufactured for both flows. In the closed loop supply chain, the manufacturer is
proactive in the processes and the emphasis is on reducing costs and capturing value.
The ultimate goal is for everything to be reused or recycled, i. e., nothing is wasted. An
example of a closed loop supply chain is given below.
• A closed loop supply chain for cartridge reuse.
supplier

manufacturer
• Forward Flows Reverse Flows Prepaid mailers

Retailers

Customers 19
 Compelling reasons for reverse logistics
• Customer returns- A variety of reason can be given as defective or unwanted items, warranty
problems, recalls, and miss-shipments.
• Given the potential magnitude for such returns, managing the product return process can have
substantial impact on the profit of a company.
• The handling of customer return issues can also have a positive customer service benefit when returns
are handled expeditiously (with speed and efficiency) with timely cost or credit issuance or product
replacement.
• Companies need to have a balanced approach that accommodates legitimate returns but discourages
needless returns.
• Environmental issues-Recycling and environmental concerns are frequently viewed simultaneously
because of their association with regulatory policy.
• Social concerns stimulate the development of more environment friendly products, new standards, and
publicly provided recycle programs.
• Some corporations play an active role in this area as part of their focus on ethics and social
responsibility.
• Some evidences suggest that when corporation works with their suppliers to reduce waste, pollution,
and improve overall “eco-efficiency”, they have also been able to improve product quality, reduce
production times, and increase productivity.
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 Compelling reasons for reverse logistics
• Economic benefits-Economic benefits have become an important emphasis for business
and even some nonprofit organizations.
• The potential for viewing reverse flows as a value stream as opposed to a waste stream
was identified by researchers. The researcher pointed out that economic benefits can be
the primary driver for the establishment of explicit reverse flows processes not
otherwise required by customer service and governmental requirements.
• However, making reverse flows profitable, is a challenge as well as opportunity.
Managing such flow for economic benefits requires careful articulation of the processes
and detailed analysis of the costs to determine whether the cost-benefit tradeoffs are
positive.

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 Achieving a value stream for a reverse flows
• Proactive management of reverse flows represents an opportunity for enhancing profits
through cost reduction and/or increased revenue is a consideration for both closed loop
supply chain and reverse logistics systems.
• From a manufacturing perspective, it may appear to be more costly to remanufacture or
refurbish the materials obtained through reverse flows systems than to produce a new
product from basic materials or components.
• Time and distance are often the major cost contributors associated with capturing returns
and their residual value. Transportation cost is the largest cost component of reverse flows
and frequently represents 25 percent or more of the total cost.
• Using transportation management tools and technology to improve and monitor the
transportation network can lower this cost, through better scheduling pickups and deliveries
and/or consolidation of loads to achieve scale economics.
• The handling costs associated with returns can be higher because of the sorting, packaging,
and random sizes that are typically associated with this activity. As company gains
experience, they can usually reduce handling costs.
•
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Achieving a value stream for a reverse flows
• Quantification of the costs must include all costs associated with
return process-labor, transportation, storage, inventory carrying costs,
material handling, packaging, transactional, documentary and
appropriate overhead costs.
• Conversely, accounting for the actual cost savings associated with the
materials flow from reverse flows is important for the tradeoff
analysis to determine the economic value added or lack thereof.

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 Managing Reverse flows in a supply Chain
• The effective and efficient management of reverse flows in a supply chain requires the
careful consideration of a number of key activities or issues. The Reverse Logistics
Educational Council has recommended careful consideration of the following:
• Avoidance- Producing high quality products and developing processes to minimize or
eliminate returns
• Gatekeeping-Checking and screening merchandise at the entry point into the reverse flows
process to eliminate unnecessary returns and minimize handling.
• Reducing reverse cycle times- Analyzing processes to enable and facilitate compression of
time for returns to enhance value recapture.
• Information systems- Developing effective information systems to improve product
visibility, reduce uncertainty and maximize economies of scale.
• Return centers- Developing optimum locations and facility layouts for return centers to
facilitate network flow.
• Remanufacture and/or refurbishment-Preparing and repairing a product for resale as is
usually done in closed loop supply chains to maximize value recapture.
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 Managing Reverse flows in a supply Chain
• Asset recovery-Classifying and disposing of returned items, surplus, scrap, and
obsolete items to maximize returns and minimize cost.
• Pricing-Negotiating the best price for products being returned and resold.
• Outsourcing-Considering a relationship with a third party organization to handle
and manage reverse flows in cases where existing personnel, infrastructure,
experience, and/or capital may not be adequate to implement a successful
program.
• Zero returns-Developing a policy to exclude returns by giving a returns allowance
and/or destroying the product in the field.
• Financial management-Developing guidelines and financial procedures to
properly account for charges against sales and related financial issues when items
are returned by customers.

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