Traditional Roles of Warehousing
Although supply chains demand greater service value from warehouse operations, the basic economies of manufacturing, purchasing, and transportation must continue to be supported. Cost trade-offs, along with service expectations, must be evaluated to determine the role of the warehouse in supporting the traditional economies of scale.
Supporting Functional Economies of Scale
Wide scope business strategies catering to broad-based clientele require large scale purchasing, production, and distribution. Achieving competitive scale demands operating efficiencies and economies supported by large scale warehousing of supplies and product. Economies of scale in purchasing, production, and transportation have long required warehouse support, and today, need continues for such warehouse support.
Role in Supporting Economies of Manufacturing
Long manufacturing runs of single products create efficiencies in production processes, allocation of personnel, and capacity utilization of machinery and equipment. A manufacturer and marketer of a major brand of candy found that it would be financially feasible to operate a single production line for three flavors of a specific candy. To change from one product to another, the changeover process required that the machinery be completely disassembled, sterilized, and reassembled prior to running the next item on the master production schedule. Three days were required to complete the changeover, and the sterilization was critical because one of the three products included a nut ingredient. Sterilization reduced the threat of cross-contamination of products that could have devastating consequences if consumed by people with severe allergies toward nut products.
Plant supporting warehouses must add value in the supply chain by supporting long manufacturing runs to gain economies of production and reduce changeover needs. Single-item finished products produced in mass quantities must be stored and maintained for future demand.
Role in Supporting Economies of Purchasing
Materials planners utilize the master production schedule and materials requirements plans to determine ordering needs for each material or component required to meet production plans. Planners and procurement personnel work together to evaluate material needs, lead times for receiving materials, and price-break concessions afforded to buyers for ordering in bulk quantities. All the components influence the need to receive and store materials and components for future production. Specifically, bulk purchase pricing may provide cost-savings per item that when purchased in great enough quantity it more than offsets the cost of storing and maintaining the materials.
Warehouse operators add value for manufactures, assembly operations, and consolidation points by receiving, storing, maintaining, picking, and shipping materials and components to support large volume purchase discounts. The need is further realized as variations in quality and lead times necessitate purchasing added safety stock to protect against such fluctuations.
Role in Supporting Economies of Transportation
Similar to both manufacturing and purchasing economies, the better a carrier utilizes the full capacity and capability of its transportation equipment, the more efficient and cost-effective products are transported. Transportation cost per unit is reduced as a greater number of units are transported. Fixed costs are spread over the greater product amount being transported, and the variable costs do not necessarily increase one-for-one as another case of product is loaded onto a trailer and transported. Truckload (TL) business models are based on this premise, and truckload (LTL) and package carriers create bulk shipments by consolidating or bundling independent orders destined for a common ZIP code zone.
Costs associated with managing and holding greater levels of inventory in warehouse stock must be compared with the cost of transporting in large quantities to gain economies of transportation associated with reduced unit pricing. In many supply chains the transportation savings per case or item more than offsets the cost to warehouse additional product. Carriers can more efficiently utilize transportation equipment and offer discounts to shippers for helping carriers fill trailers. Warehouses add value by supporting large volume transportation needs.