CHAPTER 10

Warehousing

Cost trade-offs in Marketing and Logistics
Product Price Order processing and information costs

10-2

MARKETING

Place/customer service levels LOGISTICS Inventory carrying costs Transportation costs Warehousing costs Order processing and information costs
McGraw-Hill/Irwin

Lot quantity costs

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Uses of Warehousing
• • • • Manufacturing support Product - mixing Consolidation Breakbulk

10-3

McGraw-Hill/Irwin

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Factors Influencing Warehousing in the Future
• Time - The best warehouse operations are those designed to reduce every aspect of order cycle time. • Quality - Users now expect performance that approaches perfection. • Asset productivity - Reduce total cost, reuse, and recycle. • New kind of workforce - Requirements for both management and labor will change significantly.

10-4

McGraw-Hill/Irwin

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Advantages of Public Warehousing
• Conservation of capital • Use of space to meet peak requirements • Reduced risk • Economies of scale • Flexibility • Tax advantages • Specific knowledge of storage and handling costs

10-5

McGraw-Hill/Irwin

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Disadvantages of Public Warehousing
• Effective communication may be difficult because of system incompatibility • Specialized services may not always be available. • Space may not be available on demand.

10-6

McGraw-Hill/Irwin

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Advantages of Private Warehousing
• • • • • • Control Flexibility Less costly Better use of human resources Tax benefits Intangible benefits

10-7

McGraw-Hill/Irwin

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

The Relationship of Demand to Warehouse Size
120 110 100

10-8

Inventory (‘000 units)

90 80 70 60 50 40 30 20 10 0
Jan. Feb. M ar. Apr. M ay June July Aug. Sep. Oct. N ov. D ec.

Public warehousing

Private warehousing

Time (months)

McGraw-Hill/Irwin

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Determinants of Storage Space Requirements
These Situations Decrease the Need For Storage Space Decrease in production or sales Decrease in number of SKUs Less volatile demand (including longer product life cycles) Customer handles store delivery Smaller manufacturing lot sizes Smaller purchase amounts Higher inventory turns Better information Quicker transportation Cross-docking Carrier performing consolidation
McGraw-Hill/Irwin

10-9

These Situations Increase the Need for Storage Space Market or company expansion Shorter product life cycle Increase in number of SKUs Direct store delivery on a quick response basis Elimination of distributors Expansion into specialized products Import/export items Lengthened production process Increase in minimum manufacturing lot size Requirement for faster response time Inflation/forward buying
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Comparison of Traditional Costing Versus Activity-based Costing
General ledger view of warehousing costs Storage and handling……………...$40.1 General and administration………...30.9 Trucking and delivery………………14.5 Freight consolidation……………….. 2.4 Value-added services………………...3.3 Total ……………………………...$91.2

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Activity-based view of warehousing costs Dry storage………………………...…$25.0 Refrigerated storage………………….…8.1 Receiving………………………………20.0 Shipping…………………………...…..18.8 Billing…………………………………...3.2 Delivery…………………………………6.0 Packaging/stenciling…...……………….1.8 Freight consolidation……………………3.0 Material handling equipment…………...5.3 Total………………………………….$91.2

McGraw-Hill/Irwin

Source: Terrance L. Pohlen, “Activity Based Costing for Warehouse Managers,” Warehousing Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Forum 9, no. 5 (May 1994), p. 1.

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