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.

A warehouse is a huge structure meant for commercial at the industrial sites. Large amounts
of wares that may be in the form of raw materials, finished products, semi finished products or
the stock material is stocked up in a warehouse. Warehouses are of great interest to
manufacturers, retailers, wholesalers, importers and exporters. These warehousing buildings
are often sited at seaports, airports or railway junctions from where the stocked material is
directly loaded or unloaded. They make apt use of aerial lifts, cranes and forklifts for the
purpose of loading and unloading heavy goods and material. These days a modern concept of
automated warehouses has established which facilitates the storage of goods with the help of
machines and with no workers working inside the warehouse. Commencement of a new
warehousing company requires grave planning work which, if properly implemented, can reap
immense benefits. Here are are few key tips that may, if followed, would ensure the
accomplishment of your undertaking.

TIPS

• The first and foremost step that you need to undertake while commencing a
warehousing company is to clearly define your objective or purpose. This includes
deciding upon various aspects of construction such as cutting the costs, providing the
services to the customers etc.
• The next thing to be kept in mind is regarding the design of the warehouse.
Information should be collected on the design formats and to look if a particular kind
of design may affect the good in adverse way.
• A proper plan should be made for the construction of the warehouse which may
include the availability and allocation of the resources, time line for the construction,
budget etc. this should be followed by the proper implementation of the plan.
• Deciding upon the location of the warehouse forms the important part of getting
started with the business of warehousing. Choosing the right site keeping in view your
target market and the nature of the wares to be stored may help in saving a lot of
time and money.
• Make sure that the provision of systems support to you warehousing company is
adequate enough to help you prosper and increase the level of your business.
• Consider the capability of the warehouse to store the goods in it. It also requires the
consideration of the fact that whether the warehouse has the scope of expanding in
future.
• It is essential to take care of the networking of the warehouse which is beneficial for
the expansion of the business.
• Warehouses lack efficiency without a proper system of transport. Keep in mind to
choose allocation that has adequate transportation.
• Do keep a track of the recruited staff. You need to know your staff and also make site
visits.
• Make a thorough check of the different factors which might affect the quality of goods.
• In case of automated warehouses, do check the efficiency of the machinery.
• Be sure that equipments such as cranes, aerial lifts and forklifts are available and are
made proper use of.

A ware housing company can prove to be extremely beneficial for you as not only it
strengthens the foundations of your business but it also helps you grow with energy and vigor.
Customs, importers, exporters, manufacturers, transport businesses, and wholesalers use warehouses to
store their products. For some entrepreneurs, the warehouse and distribution service is a great way to
conduct business, and eventually proves to be a great investment.
Most of your overhead expenses will go into buying, constructing, renting or outfitting a building or several
buildings for your use. A warehouse business will not be a warehouse unless there is that physical structure
that can hold all the goods, or the “wares,” as they are called. Warehouses need not be acres wide, but
spacious enough to hold whatever your customers would want. Some warehouses hold small products:
microchips, auto spare parts, etc. Others hold larger products like luxury cars, boiler parts, etc. Some of your
customers may be selling small products like light fixtures or bicycle parts, but needs warehousing storage
for a huge supply of them.
It might be wise to accommodate customers whose products can fit into your warehouse. Don’t try to take in
more than your actual warehouse can handle because it will only disrupt everyone’s operations, including
your customers’.
Also, you should try to find your warehouse(s) location somewhere far from residential areas but near other
industrial buildings, or at least, places where your customers can have easy access them. Warehouses are
usually large plain buildings equipped with loading docks to load and unload trucks. Depending on what
company you are servicing, you may want to find a location near airports, railways or seaports.
Warehouse and distribution companies need a lot of people to work within. Some people will have to be
assigned to moving goods, receiving or distributing goods. Logistics officers are essential to this type of
business, for they can make operations run as smoothly as possible. It would be unwise to think that only a
few workers can make this type of business run without a glitch. Without logistic officers, you would have a
difficult time accepting (or picking up) wares, placing them in storage, keeping track of orders for distribution,
or releasing orders.
One marketing trend that is happening with great success is doubling warehouses as retail stores, with the
larger orders on top of tall shelves and smaller bundles on the lower shelves for the walk-in consumers.
Another marketing trend is more geared to Internet subscribers. Small orders are being shipped worldwide
from various warehouses. Typically, a couple of companies would order large bulks of materials once per
month. These days a large number of individuals and small scale business order smaller quantities of
materials from warehouse distributors, but they order more frequently than the larger companies. Depending
on how you wish to go about your business, you can either go for the typical supplier-warehouse-consumer
deal, warehouse / retail outfit deal, or Internet based consumer distribution system.
In any case, all these involve setting up a distribution system: deliveries should be made either by boat,
plane, train or by courier system. Your logistics officers should handle these flawlessly to ensure that
deliveries are made on time, and without damage to the goods. It would also be prudent for you, as owner or
manager of the warehouse business to get insurances for your company and your consumers, just in case
things do not go according to plan.
Lastly, warehouses need hardware and machineries. Tall, sturdy shelves are essential, as with forklifts,
trucks and whatnots. Computers are needed to track down services done and deliveries to be made.
Electricity will take up most of your utility bills.