Page 204 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Unit 9: Warehousing

 Discuss the Ownership Arrangements Notes
 Describe the Warehouse Decisions

Introduction

Manufacturers were able to recognize the fact that the customer needs need to be fulfilled as
soon as he is asking for the product in order to retain him. This perspective of storage created a
tendency to consider warehouses “a necessary evil” that added costs to the distribution process
and that resulted in creation of operating expenses with little appreciation of the broader
logistical spectrum in which warehousing played a vital role. Warehousing capability used to
group products into assortments desired by customers was given little emphasis. Internal control
and maximum inventory turnover received little managerial attention.

Literature of the early era correctly described the situation. Firms seeking to operate effectively
between points of procurement, manufacturing, and consumption gave little attention to internal
warehouse operations. The establishment of warehouses was essential for survival, but little
emphasis was placed on improving storage and handling effectiveness. Engineering efforts
were cantered on manufacturing problems.
Operation of early warehouses illustrated the lack of concern with material handling principles.
The typical warehouse received merchandise by rail car or truck. The items were moved manually
to a storage area within the warehouse and hand-piled in stacks on the floor. When different
products were stored in the same warehouse, merchandise was continually lost. Stock rotation
was handled poorly. When customer orders were received, products were handpicked for
placement on wagons. The wagons or carts were then pushed to the shipping area where the
merchandise was reassembled and hand-loaded onto delivery trucks. Because labour was
relatively inexpensive, human resources were used freely. Little consideration was given to
efficiency in space utilization, work methods, or material handling. Despite their shortcomings,
these early warehouses provided the necessary bridge between production and marketing.

9.1 Strategic Warehousing

Benefits realized from strategic warehousing are classified on the basis of economics and service.
From a conceptual perspective, no warehouse should be included in a logistical system unless it
is fully justified on a cost-benefit basis. While there is some overlap, the major warehouse
benefits are reviewed individually.

9.1.1 Economic Benefits

Economic benefits of warehousing materialise when overall logistical costs are directly reduced
by utilizing one or more facilities. It is not difficult to quantify the return on investment of an
economic benefit because it is reflected in a direct cost-to-cost trade-off.
For example, if adding a warehouse to a logistical system will reduce overall transportation cost
by an amount greater than the fixed and variable cost of the warehouse, then total cost will be
reduced. Whenever total-cost reductions are attainable, the warehouse is economically justified.
Four basic economic benefits are consolidation, break bulk and cross dock, processing/
postponement, and stockpiling.

Consolidation

Shipment consolidation is an economic benefit of warehousing. With this arrangement, the
consolidating warehouse receives and consolidates materials from a number of manufacturing

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