Itl lecture-07 to 10 (warehousing- a role beyond storage)

07/06/10 1

By :

Prof. Amit Kumar

07/06/10 2

“Logistics has advanced from warehousing and

transportation to boardrooms of the successful leading

companies across the world. Due to increasing

importance of business logistics, it becomes necessary

for the student pursuing management education from

IILM- Graduate School of Management, to understand

logistics, its basic framework and practical utility.”

IILM-GSM

Importance of this course

International Trade Logistics

07/06/10 3

Course: International Trade Logistics

1. Logistics - At the Centre of World Trade

2. Supply Chain Management

3. Warehousing: A Role Beyond Storage

4. Material Handling & Storage System

5. Transportation: Backbone of Logistics

6. Logistics Packaging

7. Logistics Information System

8. Global Logistics & Outsourcing

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International Trade Logistics

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IILM-GSM

International Trade Logistics Warehousing- A Role Beyond Storage

07/05/10f4t 5

Contents

• Warehousing- A logistical Challenge• Warehousing Practices• Functions & Benefits of Warehousing

• Economic Benefits ,Service Benefits• Case of Wal-Mart- The King of Store Logistics

• Warehouse Options- A Strategic Decision• Private, Public, Contract Warehouses

• Designing a Warehouse System• Warehousing Strategy• Warehouse Decision Model• Warehouse Performance Parameters• Case Study: Snowman Frozen Food Ltd.-Providing One-

Stop Logistics Solution in Cold Distribution

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Modern warehousing is in the process of an evolutionary change from emphasis on storage to emphasis on flow

through, from inventories at rest to inventories at motion.

In a logistical system the role of warehouse is that of a switching facility rather than a storage facility.

Introduction: Warehousing

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“ Because of the value of strategic storage was not well understood, warehouses were often

considered ‘necessary evils’ that added cost to the distribution process”.

- Donald J. Bowersox


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Warehousing is the major component of physical distribution.

Warehousing management has two distinct and equally

important parts:

1. The physical job of creating and running the network of storage points.

2. The managerial task of controlling inventory levels without sacrificing service level.


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1. Warehouse means any building structure or other protected enclosure which is used or may be used for the purpose of storing goods on behalf of the depositors but doesn’t include cloakroom attached to hotels, railway stations and the premises of other public carriers alike.

2. Depositors means a person who deposits goods with a warehouseman for storing in his warehouse and includes any person who lawfully holds the receipts issued by the warehouseman in respect of the goods and derives title too by endorsement or transfer from the depositor or his lawful transferee.

Bombay Warehouse Act, 1959

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Warehousing Practices

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• The Central Warehousing Corporation (CWC), a government of India undertaking and the largetst public warehousing company in India, was set up in 1957, under the Warehousing Corporation act.

• The main objective of CWC is to provide scientific storage facilities for agricultural inputs and other commodities.

• Presently CWC runs 467 warehouses spread across the country, having a total storage capacity of 8.56 million tonnes including 111 customs bonded warehouses with a capacity of 0.75 million tonnes to cater the needs of importers and exporters.

Warehousing PracticesPublic Warehousing

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• CWC along with its 16 state subsidiaries accounts for 11.39 million tonnes of storage capacity spread across more than 1400 warehouses.

• CWC runs a number of cold storage facilities at strategic locations for perishable cargo and maintains liquid cargo warehouses at major Indian ports.

• The average storage capacity utilization at CWC is 74%.

• CWC operates 30 container freight stations and inland container depots and plays a major role in multi-modal transportation in the country.

Warehousing PracticesPublic Warehousing

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• Snowman Frozen Food Ltd., a consortium of Hindustan Lever, Amalgamated Food and Mitsubishi group, operates a chain of cold storage facilities in India for marine products, processed food products and fruits.

• Each of their cold storage facilities, built at a cost of INR 3.5 crores each, has a storage capacity of more than 1000 MT and is equipped with ultra modern storage and material handling facility.

• They operate chillers at 2 degree C and freezers at 10 to 15 degree C for different product applications.

Warehousing PracticesStored Cold and Fresh

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• IMC Ltd. is the country’s largest third-party liquid storage facility service provider in private sector.

• They have expertise in the storage of hazardous liquid cargo such as petroleum and petrochemical products having flash point 23 and 93 degree C. They also provide storage facilities for liquefied gases.

• These facilities are located at 12 major seaports in India built along 210 storage tanks as per the stringent DIN and ISO standards for storage of hazardous products.

Warehousing PracticesBulk Liquid Cargo Storage

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• They offer value-added services such as complete automation in loading and unloading of the cargo, and provisions for safety, health and environmental protections.

• They are also the storage partners to leading names such as Caltex, ESSO, Exxon, elf, Cargill etc. for the past 35 years.

Warehousing PracticesBulk Liquid Cargo Storage

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• Softage Information Technology Ltd., New Delhi, is a third-party service provider that offers documentation management solution to business corporations in India.

• The documents may be in the form of physical or digital media.

• They have a state-of-the-art warehousing facility to scientifically store, handled and retrieve business documents that otherwise business firms find difficult to pay attention to, as this is neither their core concern nor they have any expertise in preserving documents.

Warehousing PracticesDocument Warehousing

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• Softage Information Technology Ltd., has dedicated warehouses and a fleet of specially designed vehicles to transport documents from clients place to their warehouse and vice-versa.

• They ensure delivery of any preserved document to the client within shortage possible time.

• Their customer base covers leading banks, corporate business houses and insurance companies.

Warehousing PracticesDocument Warehousing

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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.

1. Economic Benefits

2. Service Benefits

Functions and Benefits of Warehousing

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• Holding is the most important function of a warehouse for the finished products ready for delivery.

• Depending on the demand or order booking pattern and the delivery schedules promised to the customer by the marketing department, the goods are dispatched from the warehouse.

• A proper record of the material, which gets in and out, has to be maintained to know the inventory levels at any point of time.

Economic Benefits: Hold

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Warehouse(Finished Goods)

CustomerManufacturingPlant

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If the supplies are originating from various sources in small quantities, it may be economical to collect these small

shipments at one center and combine them into a large shipment for sending it to the customer.

The consolidation will ensure cost saving on freight.

Economic Benefits: Consolidation

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ConsolidationWarehouse

Plant A(Vendor-1)

Buyer X

Buyer Y

Plant B(Vendor-2)

Plant C(Vendor-3)

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• For import or export of goods for large buyers whose requirement does not warrant for enough volumes for shipment from each source, there is potential cost saving on the freight with consolidated shipment.

• In such cases planning a warehouse for shipment consolidation may be a better proposition.

• The cost saving will offset the cost of setting up a place for consolidation.

Economic Benefits: Consolidation

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• In contrast to the consolidation, here the material arriving in bulk is divided into smaller shipments for delivering it to the end customer.

• The bulk cargo of fertilizers, oil, chemicals coming from a source is broken into smaller consignments for buyers as per their requirement.

Economic Benefits: Break Bulk

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Break BulkWarehouse

Customer A

Customer B

Customer C

Plant-1

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• Normally the distribution warehouses of manufacturing firms have break bulk as the common activity.

• The firm saves substantially on freight by dispatching the shipment in bulk to its regional distribution centers, where it is divided into small packets and dispatched to the end user as per the demand.

Economic Benefits: Break Bulk

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Break BulkWarehouse

Customer A

Customer B

Customer C

Plant-1

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A cross-dock facility is similar to break-bulk except that it involves multiple suppliers. The uses of a

warehouse is for very short time.

• The material arriving in bulk in fully loaded trucks is broken into smaller consignments for further dispatch to the customers.

• The stay of material in the warehouse in not more than 48 hours.

Economic Benefits: Cross Dock

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Retail chains make extensive use cross-dock operations to replenish fast-moving store inventories.

Company Analysis : WAL-MART

• Sam Walton Founded the company in 1962 with a simple goal: Offer low prices to everyone. His notion of hard work and thrift continue to permeate Wal-Mart today, although he died in 1992.Employees see their job as a mission ”to lower the world’s cost of living”.

• Wal-Mart succeed in competitive American retail market for several reasons. First, its low prices, vast selection, and superior service keep the customer coming in the door. But one of the Wal-Mart’s biggest strengths is not even inside the store.

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Company Analysis : WAL-MART

• One of the Wal-Mart’s biggest strengths is not even inside the store. Its unrivaled logistics ensure that it can keep prices low while keeping the right goods on the shelves. As the biggest retailer in USA, Wal-Mart’s logistics demand is considerable. The company must coordinate with more than 85,000 suppliers, manage billions in inventory in its warehouses and bring that inventory to its retail shelves.

• To streamline these tasks, Wal-Mart set up a “hub-and-spoke” network of 103 massive distribution centers (DC). Strategically spaced across the country, no store location is more than a day’s drive away from a DC. Wal-Mart is known as “ the king of store logistics” for its ability to effectively manage such a vast network.

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• Warehouses can also be used to postpone, or delay, production by performing processing and light manufacturing activities.

• A warehouse with packaging or labeling capability allows postponement of final production until actual demand is known.

• Once a specific customer order is received, the warehouse can complete final processing by adding the label and finalizing the packaging.

Economic Benefits: Processing/ Postponement

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It provides two economic benefits.

1. First, the risk is minimized because final packaging is not completed until an order for a specific label and package has been received.

2. The required level of total inventory can be reduced by using the basic product (Brights) for a variety of labeling and packaging configurations.

The combination of lower risk and inventory level often reduces total system cost even if the cost of packaging at the warehouse is more expensive than it would be at

the manufacturer’s facility.

Economic Benefits: Processing/ Postponement

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• The direct economic benefit of this warehousing is secondary to the fact that seasonal storage is essential to select businesses.

• For example, lawn furniture and toys are produced year-round and primarily sold during a very short marketing period.

• In contrast, agricultural products are harvested at specific times with subsequent consumption occurring throughout the year.

• Both situations require warehouse stockpiling to support marketing efforts.

Economic Benefits: Stockpiling

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• Under this concept, a selected amount of firm’s product line is placed or ‘spot stocked’ in a warehouse to fill customer orders during a critical marketing period.

• Suppliers of agricultural products to farmers often use spot stocking to position their products closer to a service-sensitive market during the growing season.

• Following the sales season, the remaining inventory is withdrawn to a central warehouse.

Service Benefits: Spot Stock

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• Assortment warehouse which may be utilized by a manufacturer, wholesaler, or retailer- stock product combinations in anticipation of customer orders.

• The assortments may represent multiple products from different manufacturers or special assortments as specified by customers.

• In first case, for example, an athletic wholesaler would stock products from a number of clothing suppliers so that customers can be offered assortment.

• In the second case, the wholesaler would create a specific team uniform including shirts, pants and shoes.

Service Benefits: Assortment

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A Warehouse sometimes is used as a product mixing point for a company having a number of plants manufacturing

different ingredients, which are mixed at a convenient place to make final products.

Service Benefits: Mixing Warehouse

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MixingWarehouse

Plant A(Ingredient-1)

Buyer 1

Buyer 2

Buyer 3

Plant B(Ingredient-2)

Plant C(Ingredient-3)

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• Production support warehousing provides a steady supply of components and materials to assembly plants.

• Safety stocks on items purchased from outside vendors may be justified because of long lead times or significant variations in usage.

Service Benefits: Production Support

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• The market presence factor is based on the perception or belief that local warehouses can be more responsive to customer needs and offer quicker delivery than more distant warehouses.

• As a result, it is also thought that a local warehouse will enhance market share and potentially increase profitability.

Service Benefits: Market Presence

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Warehouse Option- A Strategic Decision

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The warehouse option is a strategic decision having long-term effects on the efficiency and

effectiveness of the system.

Warehouse Option- A Strategic Decision

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Private Public Contact

Investment High None Very Little

Flexibility in Material handling, storage & throughput

planning

Location Location

Cost per unit stored

Inversely related to volumes

Low Inversely related to volumes

Level of controls

High Low Medium

Adequacy of goods stored

High Low High

Risk Due to change in market demand

Minimal Minimal

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• It refers to the entire facility under financial and administrative control of the firm.

• The firm owning the product operates these warehouses.

• It may include a production oriented captive warehouse or a distribution warehouse located in the field for customer service.

Warehousing Alternatives

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Private Warehouses

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• Flexibility• Full management control• Lower operating cost• A private warehouse facility can be planned close to the

markets to provide efficient and effective service to the customer.


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Private Warehouses: Benefits

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Private warehouses are attractive propositions under

certain circumstances such as:• Product specific material handling and storing facilities

are required which are not available with other two options.

• Volumes handled are high ensuring full capacity utilization and benefits of scale economics.

• High degree of control over the operations is required.


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• The firms having warehousing space, storage facility and material handling equipment, for the most general usage, provide these services.

• Extensively used in logistics system.• Designed for handling the most general packaged

products or commodities, which do not require specialized storage or handling arrangement.

Such as food grains, paper rolls, bulk material (cements, fertilizers), furniture, chemicals etc


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Public Warehouses

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Bonded warehouses under the customs control are mostly public warehouses licensed to store goods, meant for exports or imports, till the time they are

cleared by the customs authority for further movement.


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Public Warehouses

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• A public warehouse provides financial flexibility. A newly formed firm desirous of expanding its distribution

network need not invest in developing a private warehouse. The option is to hire some space in a public warehouse and

use the money for other productive activities.

• It allows flexibility of location. Due to geographical changes in consumption centers, a firm

can close a facility in one market and open at other place without any financial losses.


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Public Warehouses: Benefits

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• The greatest disadvantage is absence of control on operations.

• As a product specific facility is not available, product damages during storage and handling may be on a higher side.

• The speed of order fulfillment is slow resulting in a lower level of customer service.


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Public Warehouses: Disadvantages

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• These are the product specific warehouse facilities acquired for use for a specific period against fixed charges.

• A contract warehouse can provide the benefits of both private and public warehouses.

The resources such as labor, material handling equipment, storage arrangement, communication equipment can be

used on sharing basis with depositors from the same industry to economize on operating cost.


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Contract Warehouses

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In designing a warehousing system, the following basic

questions relating to this flow become significant.

1. How many warehouses should we have?

2. Where should we locate them?

3. What should be the size or capacity of each of them?

Designing a Warehousing System

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The cost of warehousing is directly proportional to the number of warehouses, while the transportation cost goes down with an increase in warehouse

numbers as shown:


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CostCostTotal CostTotal Cost

Warehousing CostWarehousing Cost

Transportation CostTransportation Cost

No. of WarehousesNo. of Warehouses

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Quantitative techniques for warehouse site selection:

1. For Single Depot Location Center of Gravity of Area Model Center of Gravity of Load Model Center of Gravity of Tonnes-Kilometers Model

2. For Multiple Depot Location


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1. For Single Depot Location Center of Gravity of Area Model

A map of marketing areas may be drawn and a sheet representing the area may be balanced. The point

where the sheet gets balanced is the site for warehouse location. This point is expected to be at minimum

average distance from all the locations in the area.


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1. For Single Depot Location Center of Gravity of Load Model

This may be illustrated visually by imagining a sheet having holes representing the customer locations and their

demand load of annual purchases. Weights are hung on each hole in proportion to the demand load. The points

at which the model sheet gets balanced gives the center of weights.


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1. For Single Depot Location Center of Gravity of Tonnes-Kilometers Model

This model takes into consideration both loads and distances to arrive at the optimum transportation cost. The final solution is obtained after applying trail and

error methods several times.


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2. For Multiple Depot Location• For planning the chain of warehouse the management

will have to do a cost-benefit analysis. • The factors influencing a decision on multiple

warehouses locations are: Market Size Area Coverage by each warehouse Product type Demand pattern- continuous or seasonal Customer service level


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Conclusion:

For the cost reduction firms may try to move towards the centralized warehouse system, but the decision

depends on the nature of the product and its movement through the supply chain.

For auto manufacturing companies a centralized warehouse for spare parts is an ideal system but

this is not applicable for FMCG product, which need to be moved in large quantities and with

speed, wherein the system of scattered warehouse is the right solution.


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Warehouse CostingFood Grain Warehouse- Costing

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A typical 140 ft long and 70 ft wide food grain storage warehouse accommodates 1800 metric tonnes of food grains in 18000 bags (15 stacks) each having

2*3 square ft size and carrying capacity of 100 kilograms of material.

A. Warehouse construction cost INR 49 lacks

B. Initial investment per

unit storage capacity INR 2700 per MT

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Warehouse CostingFood Grain Warehouse- Costing

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Cost Head Rs per bag per month

C. Capital cost (at 10% bank interest rate) 0.45

D. Depreciation over 50 years of warehouse life 0.45

E. Warehouse employs wage bill (for 5000 MT monthly warehouse through put)

1.50

F. Repairs and maintenance (Average) 0.15

G. Overheads (electricity, telephone, stationery) 0.50

H. Transportation, fumigation and handling 0.30

Total Cost (C+D+E+F+G+H) 3.35

(INR 8.30 per sq ft per month)

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It is observed that the leading firms adopt and implement

the following warehousing strategies:• Hub Networking• Cobbling• Outsourcing• Capacity Switching

Warehousing Strategies

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Capacity Switching• For a given market there will be a monthly demand pattern

for a product. This demand may be greatly fluctuating in certain months due to seasonality in consumption.

• Under such circumstances the capacity of a warehouse may be planned on the basis of average demand pattern per month over the year and for additional space requirement (for seasonal requirements), a public or contract warehouse may be used for a short period during the season.

• This may reduce the quantum of investment in a private warehouse if planned on the basis of the peak demand.


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Hub Networking• To reduce the level of inventory and exercise better control

on the distribution, warehousing hubs are planned at a few strategic locations to serve the entire market spread over a vast geographical area.

• This is practiced more in FMCG, pharmaceutical industries, where the distribution network consists of a large number of dealers, stockiest and retailers.

• A regional hub will cater to the needs of several states covered under respective regions.


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Hub Networking: Advantages

• Reduction in operating cost• Minimization of transporting cost• Better control on inventory• Improved customer service


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Cobbling• This strategy works well with players who are not competitors

but cater to the needs of similar groups of users or customers and have a similar distribution channel.

• FMCG products manufactured by HLL,J&J and Nestle can be cobbled together to reduce wasteful practices in storage and transportation. The operating cost will considerably be reduced benefitting all the cobbling partners.

• Some 3PL operators in India are offering these services to leading companies in the FMCG sector.


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Outsourcing• Most of the firms (manufacturing and marketing) do not have

expertise in warehousing operations.

• Moreover, it is not a core activity in their business process. Hence, this area of operation remains neglected for investment decisions.

• For gaining logistical competitiveness, leading firms are outsourcing entire warehousing operations to 3PL providers who bridge the gaps through their expertise, technology and infrastructure.


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Warehouse Decision Model

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Product Type• Solid• Liquid• Gases

Product Characteristics• Value density• Logistical reach• Perishability• Hazardous

Objectives• Cost reduction• Stock turnover• Customer• Productivity

Resources• Finance, System•Competency

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Resources• Finance, System• Competency

Warehouse Network (Numbers and Locations)

Warehouse Facility Planning Decision

Private Public Contract

Strategic• Layout• Handling equipments• Storage schemes

Tactical• Storage allocation• Order picking• Packing

Operational• Work allocation• Job scheduling• Performance monitoring

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Product Type• Solid• Liquid• Gases

Product Characteristics• Value density• Logistical reach• Perishability• Hazardous

Resources• Finance, System•Competency

Objectives• Cost reduction• Stock turnover• Customer• Productivity

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The nature of a product will primarily decide on the type of

warehouse required for the storage of goods.• Perishable agro products will obviously require a

temperature-controlled facility.• While hazardous or explosive products will call for extra

safety and handling equipments during storage as per the regulations. The location of such a facility will be subject to the approval of the government authority.

• A warehouse for pharmaceutical products attracts FDA approval.

Warehouse Decision: Product

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For any product, the value density (unit price per unit weight

or volume of a product) and logistical reach will influence

decision making on investing in a warehouse facility.

• For example, investment in a storage facility is justified for products such as computers, jewellery, luxury goods where the unit price is high, the logistic reach is wide and distribution centers are limited in numbers.

• Due to high margins and shorter payback period the heavy investments are justified.

Warehouse Decision: Characteristics

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In a selection amongst the various warehouse options, the

objectives have to be clearly defined.• Volumes will justify private warehouses while

seasonality will justify public or contract storage places.• For customer satisfaction through reliable delivery,

investment in material handling and information processing system is justified.

Warehouse Decision: Objectives

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Resources• Finance, System• Competency

Warehouse Network (Numbers and Locations)

Warehouse Facility Planning Decision

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• Strategic decisions are solely dependent on the objectives, available financial resources, ROI and pay back period.

• These decisions will have a long-term effect and help in developing a competitive advantage.

Warehouse Decision: Strategic

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Tactical decisions will have an effect on

the warehouse performance parameters

such as:• Reduction in the order processing cycle

• Efficiency in material handling

• Packaging to reduce product damages

• Reducing customer complaints and enhancing the customer satisfaction level.

Warehouse Decision: Tactical

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Operational decisions will bring efficiency in the warehouse operations and will help in

reducing the operation cost.

Warehouse Decision: Operational

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The most common parameters that indicate the efficiency

and effectiveness of warehouse operations are:• Stock Turn-Over Ratio• Warehouse Cost-to-Sales Ratio• Warehouse Cost per Unit Handled• Occupancy rate of Warehouse Space

Warehouse: Performance Parameters

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Stock Turn-Over Ratio:• This is a ratio of value of sales volume in a given time to

value of stocks in that period.

For example, sale value of goods supplied from a warehouse was INR 100 lakhs last year and the

average inventory level at any point of time during last year in the warehouse was INR 10 lakhs, the ratio is 10.

• The more you turn out the stocks, the better the efficiency and effective utilization of warehouse space. In Japan, auto giants have achieved a stock turnover ratio of 60 while in India it is between 20 and 30.


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Warehouse Cost-to-Sales Ratio:• This ratio has a direct link with the throughput of a

warehouse or goods handled.• Higher the volumes, lower will be the fixed cost of

operations, which is distributed over the number of units dispatched.

• A lower ratio indicates the efficiency of a warehouse.


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Warehouse Cost per Unit Handled:• The ratio indicates the total warehouse cost incurred

divided by the number of pallets or boxes handled during the period.

• The higher ratio indicates the lower throughput or lower material handling efficiency of warehouse operation.


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Occupancy rate of Warehouse Space:• This ratio indicates the actual space used as a

percentage of available warehouse storage space available throughout a year.

• The average of the ratios taken periodically throughout the year will indicate the occupancy rate.


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Case Study

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Snowman Frozen Food Ltd.-Providing One-Stop Logistics Solution in Cold

Distribution

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Analysis Questions

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Snowman Frozen Food Ltd.-Providing One-Stop Logistics Solution in Cold Distribution

1. What logistics services are offered by Snowman to its clients?

2. Discuss the various issues in managing a cold chain logistics.

3. How the cost-effectiveness and system efficiency can be achieved in cold chain?

Itl lecture-07 to 10 (warehousing- a role beyond storage)

Leadership & Management

warehousing management

logistics solution

backbone of logistics

logistics packaging

contents warehousing

modern warehousing

logistics information

role of warehouse