- Introduction
- Warehousing's Role in the Supply Chain
- Traditional Roles of Warehousing
- Demand for Contemporary Warehousing
- Summary of Key Points
- Key Terms
- Suggested Readings
This chapter is from the book
This chapter is from the book
This chapter is from the book
Demand for Contemporary Warehousing
Warehousing has been called upon by corporate to add value to supply chains while continuing to support traditional economies of scale and customer demand. As discussed, large storage warehouses are utilized to stockpile inventory that is produced, purchased, and transported in quantities large enough to gain competitive and cost-effective economies of manufacturing, procurement, and transportation. Such economies cannot be ignored by contemporary warehouse operators; however, additional factors must be considered when designing the strategy of the warehouse plan.
Anticipatory Inventory
Many times products are produced in anticipation of demand and especially items that have a low cost associated with each unit. Brands associated with long historical demand data and with relatively predictable patterns (little unexpected variations in customer ordering quantities) may be prime candidates for producing in anticipation of the forecasted demand. Items with well-established demand patterns, low cost of goods sold, and minimal handling requirements would be kept in stock at levels to meet ordering and service requirements of customers. Although all inventory represents value in terms of dollars, items such as canned vegetables that have relatively steady base demand patterns, strong historical demand data for adjusting forecasts based on other relevant factors, ordered in case and/or pallet quantities, and require little value-added within the warehouse are potential items for anticipatory inventory.
Seasonal Stocking
Red and white, and sometimes varied in colored, candy canes sold and consumed during the December holiday season represent an extreme case of seasonal stock. Manufacturers of the candy begin production and stock piling inventory well before orders are shipped to wholesalers and retailers. Historically, a southern U.S. candy maker would level production of the item by producing candy canes months in advance of demand so that labor and production machinery could more efficiently be utilized. Production strategies like this helped to reduce costs associated with overtime and running equipment near maximum capacity, thereby, risking an equipment breakdown. Producing well in advance of the season also allowed the candy maker to adjust production plans as the season approached. Compared to many other consumer products, candy canes are relatively low in cost per unit, require little handling without the cost of palletizing materials, may be stacked in high-bay storage, and are less susceptible to theft. As such, warehouse costs are more than offset by the reduction in production and labor costs.
Balances Supply with Demand
It is infeasible to expect all customers to possess the capacity to order and receive full truckloads or even full pallet quantities of single items. Moreover, not all have the capability to store or the equipment to receive in large quantities, be it single items or mixed pallets. Warehouses offer storage to support production economies while also allowing customers the ability to order in lesser quantities and more often. Product assortment is available to customers so that they are not forced to receive and hold large quantities of single items in stock. In addition, warehouses receive products from various producers and offer a single point of interchange with the customer for distributing multiple items from multiple manufacturers. This minimizes the exchange points necessary between producers and their many customers.
Protection Against Uncertainty in Demand and Lead Time
As previously discussed, seasonality may be a factor in the increase of demand for products sold and consumed during holidays or other seasons. Short-term marketing and sales promotions designed to stimulate customer purchases also must be considered in determining future demand while changes in business cycles and product life cycle trends may influence longer-term demand patterns for some products. Various influences on demand must be identified and taken into consideration when planning production; otherwise, left unknown, the factors may create an uncertainty in the quantity and assortment ordered by customers. Manufacturers will have to rush special production and carriers will have to expedite shipments; all adding cost to the supply chain while risking the loss of sales due to a product shortage when customers demand.
Warehouse inventory is compiled in anticipation of forecasted future demand. In addition, safety stock includes inventory on-hand to protect against any unknown influences that stimulate demand beyond the level forecasted. Under such conditions, warehouses are utilized to position and maintain stock in strategic locations where uncertainty exists and forecast accuracy is low.
In a similar manner, carrier on-time transit and delivery may fluctuate due to unforeseen circumstances or in extreme cases on-going poor quality of on-time delivery service. Marketers wanting high levels of in-stock availability will, in this case, hold a level of safety stock above the forecast to meet demand even if carrier deliveries are delayed.
Competitive Supply Chain Strategies
Beyond supporting traditional economies of production, purchasing, and transportation, modern-day warehousing must assist in achieving corporate strategies designed to compete based on low cost and differentiation through various time-based strategies. Michael Porter, Harvard Business School professor and leading expert on competitive business strategy, and others have long established these as two overarching corporate-level strategies.
Low-Cost Strategy
Low-cost corporate strategies may require long-term storage of large quantities of product. This was shown to support economies in production, purchasing, and transportation. Warehouses offer intermediate stocking points so that manufacturers do not have to service each individual final customer location. This allows manufacturers to ship in larger quantities to regional facilities servicing multiple end customers. The longest distance from the manufacturer to the regional warehouse utilizes truckload carrier service, thus leaving the shortest final distance for the more costly, yet flexible, LTL services. Overall, the total cost of transportation would be reduced with the help of the location of the regional warehouse (decentralized warehousing).
Time-Based Strategies
While walking through a warehouse, a customer service manager looked up and said, “Look at all that candy.” The accounting manager replied, “Look at all that money!” Twenty-first century supply chains must reduce costs and increase service to maintain competitiveness. Warehouses must do the same, and in ways unlike in the past break the service versus cost trade-off. By designing and adopting time-based strategies, supply chains may reduce inventory in the system and improve service responsiveness for themselves and their clients.
Firms are constantly seeking ways to reduce the lead-time from customer order placement to customer receipt of product and all while reducing levels of inventory in the system. Warehouses must contribute by instituting processes that are flexible and responsive to individual client needs. This may entail a cross-dock strategy, whereby, multiple shipments or items are received into the facility in bulk form and sorted according to final destination consignees. Orders for an individual consignee are then rebulked, loaded on an outbound trailer, and shipped to the destination without ever having been entered into storage.
Cross-docking and other time-based distribution strategies can assist in reducing supply chain system inventory, improving inventory turnover in stocking warehouses, responding better to customer lead-time requirements, adjusting to demand fluctuations, and reducing distribution facility costs. Postponement is another product customization and distribution strategy used to support firm-level, time-based market strategies. Intermediate or final stages of product customization are postponed until actual demand is realized; at which point the product is finalized according to customer specifications. Items are held in a higher level general state within materials or finished goods warehouse inventory until orders are received from customers.
Interface Between Supply Chain Partners
Warehouses occupy strategic positions between suppliers and customers. Oftentimes, warehouse operators are the last personnel to see and touch products before final delivery. As such, they are the final entity to inspect product quality, condition, and count, and verify documentation accuracy. During any time of receipt, putaway, storage, picking, or loading products are vulnerable to cost increases. It is the efficiency, accuracy, and overall customer orientation of the warehouse operator that ultimately influences final customer perception and reality of quality and cost.
Managers of warehouses and their employees, alike, must interface with clients and customers of clients. Therefore, warehouses must be seen and managed as supply chain partners. Their impact can mean the success or failure of supply chain relationships between marketers and the ultimate customers.
Critical Customer Service Role of Warehousing
For an order fulfillment center, customer service’s role in order processing encompasses receiving the completed order form via an electronic or a paper device. On-hand inventory is checked to verify that the amount of stock requested on the order is in the warehouse and available to fill that specific customer’s order. Stock availability, thereby, becomes a critical component of customer service that is influenced by the warehouse/order fulfillment center. Figure 1-2 illustrates warehouse racks consisting of multiple stock-keeping units with a majority of the slot locations having less-than-pallet quantities of product. Varied products and reduced inventory levels create challenges for warehouse operators to hold the correct amount of each product to satisfy customer demand.
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Figure 1-2. Storage of varied stock-keeping-units (SKUs) in varied quantities.
When a stockout occurs and the item is not available in inventory when ordered, a customer must wait for the product to be replenished or authorize a substitute product to replace the original item ordered. Substituting a case of cherry breakfast pastries for a case of blueberry that was originally ordered may be of little consequence to the customer. (This is an assumption to make the point.) However, some products may not have suitable substitutes and a stockout could influence the customer to source from a competing supplier one time or for all future orders. Warehouses are often measured on stockout frequency or the related fill rate percentage of cases ordered (case fill rate = cases shipped / total cases ordered). This too impacts the ratio of orders shipped complete compared to total number of orders also known as order fill rate.
Frontline warehouse operations also influence the condition of the product upon shipping. Damaged product arriving at a customer’s facility may be denied and the bill of lading or delivery receipt adjusted at the receiving dock and the invoice cut or a claim initiated to recover the value of cases damaged. Percentage of damaged cases can be tracked over time to indicate severity and frequency of the problem. The number and type of a claim can be recorded and evaluated to identify potential issues and trends pertaining to specific items, customers, or warehouse order picking personnel.
Overages, shortages, and damages (OS&D) cause issues that oftentimes adversely impact multiple partners within the supply chain. Take for instance an issue discovered by the customer service director for a warehouse that managed the southeastern U.S. product distribution for multiple manufacturers of major national household brands of consumable products. In an effort to improve the standing of the warehouse in the eyes of customers, the customer service director began conducting field visits to the receiving docks of customers. When walking into a small wholesaler, the director was greeted by an angry and frustrated owner. The owner showed the director a closet filled with empty boxes that he claimed arrived empty and concealed within the interior cases on pallets. The director and owner set out to discover the root cause of the concealed, empty cases. Assuming the pallets were full pallets of single items, it could be that the cases were empty when they were palletized at the end of the production line. A second possibility is that the cases were emptied by warehouse or carrier personnel anywhere along the distribution channel.
At the end of the supply chain, the wholesaler’s receiving personnel came in early mornings to break down pallets of product that were delivered during the night to a secured fenced area of the receiving dock. After careful investigation, it was determined that the wholesaler’s personnel were breaking down the pallets, emptying and taking the product out of some of the boxes, and then reconfiguring the cases on the pallets where the empty cases would be concealed among the full cases. The owner would come in an hour later to find the issue and naturally assumed the shipping warehouse or carrier was at fault.
Two more critical service factors influenced by warehouses include the lead time required to process and ship an order from the time the order is received and the consistency of that lead time. Greater lead-time requires added inventory in the system to fulfill orders during the time orders are processed. This refers to cycle stock. Moreover, as lead-times fluctuate additional units of inventory are necessary to satisfy customer demand during times when the lead-time increases. Safety stock is necessary to protect against such fluctuations in lead-times caused by inefficiencies in warehouse processes.
Today’s supply chains more often require flexible processes and partners. By working closely together to communicate alterations in demand and service needs, warehouse clients and operators can formulate the best circumstances for building flexibility in the warehousing and distribution system.
Light Manufacturing and Assembly
Partners subscribing to the supply chain concept continuously search for more efficient and economical means to reduce supply chain costs. Here is where warehouses can add value beyond tradition. For example, a third-party warehouse (neither the manufacturer nor the customer) was storing wiring harnesses for a major automobile assembly plant. A plant in Mexico’s Maquiladora region along the U.S. Texas border performed the laborious task of running and securing the many wires along each harness. To increase the value that the warehouse provided its customer, the warehouse operator drafted a proposal to perform the wiring of harnesses in the warehouse that is more strategically situated nearer the U.S. automotive assembly plant. The warehouse reduced the cost of the light manufacturing of the harnesses while also reducing the cost associated with the transportation and transit time required from the Mexican plant. Figure 1-3 illustrates a warehouse operation adding value by assembling tires to wheels that are then shipped just-in-time to the production line for final assembly on automobiles.
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Figure 1-3 Warehouse value-added tire and wheel assembly
Oftentimes, certain light manufacturing or assembly activities can be more efficiently and effectively conducted within a warehouse instead of within a complex manufacturing plant. Under such circumstances, forward-thinking warehouse operators can add value in the supply chain by removing some of the manufacturing burden from the plant. This is especially beneficial given the warehouse has the capability to perform such processes to a level of expected quality and lead time all while reducing the cost to do so.