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Chapter Six Warehousing

I. Learning objectives and requirements

1. to know how strategic warehousing serves to achieve a competitive advantage 2. to know how a warehouse can provide economic and service benefits 3. to know how to establish the warehouse operations 4. to understand how warehouses are classified based on ownership

II. Learning contents Section I. Warehouse Strategy and Functionality

1. Main contents 1) Strategic Warehousing Storage has always been an important aspect of economic development. For manufacturers, strategic warehousing offered a way to reduce holding or dwell time of materials and parts. On the outbound side of manufacturing, warehouses can be used to create product assortments for customer shipment. An important charge in warehousing is maximum flexibility. 2) Warehouse Functionality Ideally a warehouse will simultaneously provide economic and service benefits. a) Economic Benefits Five basic economic benefits are: (1) consolidation and break- bulk, (2) assortment, (3) postponement, (4) stockpiling, and (5) reverse logistics. i) Consolidation and Break-Bulk The economic benefits of consolidation and break-bulk are to reduce transportation cost by using warehouse capability to increase shipment economies of scale. ii) Assortment The basic benefit of assortment is to reconfigure freight as it flows from origin to destination. Three types of assortments-cross-docking, mixing, and assembly-are widely used in logistical systems iii) Postponement Warehouses can also postpone commitment to final product configuration by completing final packaging, labeling, and light manufacturing. Postponement provides two economic benefits. First, risk is minimizedSecond, total inventory can be reduced by using inventory of the base product to support multiple customers' labeling and package requirements. iv) Stockpiling The direct economic benefit of stockpiling is to accommodate seasonal production or demand. Stockpiling provides an inventory buffer, which allows production efficiencies within the constraints imposed by material sources and consumers. v) Reverse Logistics Reverse logistics is concerned with controlled and regular inventory. Controlled inventory consists of hazardous materials and product recalls that have potential consumer health or environmental considerations. Less attention has traditionally focused on reclamation of regular inventory. b) Service Benefits

Warehouse service can provide benefits through enhanced revenue generation. When a warehouse is primarily justified on service, the supporting rationale is that sales can be increased, in part, by such logistical performance. i) Spot Stocking Spot stocking is typically used to support market distribution. Manufacturers of highly seasonal products often spot stock. Rather than maintaining inventory in a warehouse year-round, or shipping to customers direct from manufacturing plants, responsiveness in peak selling periods can be enhanced through temporary inventory positioning in strategic markets. ii) Full Line Stocking The full line stocking warehouse is more often restricted to a few strategic locations and operates year-round. Full line stocking warehouses improve service by reducing the number of suppliers that a customer must deal with. The combined assortments also make economical larger shipments possible. iii) Product Support Production support warehouses stock inventory to support manufacturing operations. Safety stocks on items purchased from outside vendors may be justified because of long lead times, potential supply discontinuity, and significant variations in usage rates. In production support warehousing, average inventory is higher and turnover is lower. iv) Market Presence While the market presence factor is a frequently discussed strategy, little solid research exists to confirm or refute its existence. In addition, more reliable transportation and technology-based order processing are closing the response time gap regardless of distance. Unless a warehouse is economically or service justified it is unlikely that local market presence will favorably influence operational results. 2. Key concepts and points Strategic Warehousing, Warehouse Functionality, Economic Benefits, Consolidation and Break-Bulk, Assortment, Postponement, Stockpiling, Reverse Logistics, Service Benefits, Spot Stocking, Full Line Stocking, Product Support, Market Presence 3. Issues of application While effective logistics system should not be designed to hold inventory for extended times, there are occasions when inventory is justified on the basis of cost and service. Students shall understand that an important change in warehousing is maximum flexibility, and know how such flexibility can be achieved through information technology.

Section II. Warehouse Operations

1. Main contents 1) Handling The first consideration focuses on movement continuity and scale economies throughout the warehouse.. Movement continuity means that it is better for a material handler with a piece of handling equipment to perform longer moves than to undertake a number of short handlings to accomplish the same overall move. Scale economies justify moving the largest quantities or loads possible. a) Receiving Receiving is usually the unloading of a relatively high volume of similar product. b) In-Storage Handling

In-storage handling consists of movements within the warehouse. Order selection is one of the major activities within warehouses. c) Shipping Shipping consists of order verification and transportation equipment loading 2) Storage The second consideration is that warehouse utilization should position products based upon individual characteristics. The most important product variables to consider in a storage plan are product volume, weight, and storage requirements. a) Active Storage Regardless of inventory velocity, most goods must be stored for at least a short time. Storage for basic inventory replenishment is referred to as active storage. b) Extended Storage A somewhat misleading term, refers to inventory in excess of that required for normal replenishment of customer stocks. 2. Key concepts and points Warehouse Operations, Handling, Receiving, In-Storage Handling, Shipping, Storage, Slots, Flow-Through, Cross-Dock Distribution, Active Storage, Extended Storage 3. Issues of application Warehouse operations consist of break-bulk, storage, and assembly procedures. The objective is to efficiently receive inventory, possibly store it until required by the market, assemble it into complete orders, and initiate movement to customer. This emphasis on product flow renders a modern warehouse as a mixing facility. As such, a great deal of managerial attention concerns how to perform storage to facilitate efficient materials handling.

Section III. Warehouse Ownership Classification

Warehouses are typically classified based on ownership. A private warehouse is operated by the enterprise that owns the merchandise handled and stored in the facility. A public warehouse, in contrast, is operated as an independent business offering a range of for-hire services, such as storage, handling, and transportation. Public warehouse operators generally offer a menu of relatively standardized services to customers. 1. Main contents 1) Private warehouse A private warehouse is typically operated by the firm owning the product. The building, however, may be owned or leased. The decision concerning ownership or lease is essentially financial. Sometimes it is not possible to find a warehouse for lease that fits specialized logistical requirements; The major benefits of private warehousing are control, flexibility, cost, and a range of intangibles. 2) Public warehouse Public warehouses are used extensively in logistical systems. Public warehouses have traditionally been classified based on operational specialization such as (I) general merchandise, (2) refrigerated, (3) special commodity, (4) bonded, and (5) household goods and furniture. A public warehouse charges clients a basic fee for handling and storage. In the case of handling, the charge is assessed on the cases or pounds moved. For storage, the charge is assessed on the cases or weight in storage over a designated time period. Special or value-added services are typically priced on a negotiated basis.

3) Contract warehouse Contract warehousing combines characteristics of private and public operations. Contract warehouse operations can provide benefits of expertise, flexibility, scalability, and economies of scale by sharing management, labor, equipment, and information resources with multiple clients. 4) Deployment Strategy Developing a warehouse strategy requires answers to two questions. The first is how many warehouses should be established. The second question focuses on which warehouse ownership types should be used in specific markets. 2. Key concepts and points Private warehouse, Public warehouse, Contract warehouse 3. Issues of application As would be expected, many firms utilize a combination of private, public, and contract facilities. Full warehouse utilization throughout a year is rare. As a managerial guideline, a typical warehouse will be fully utilized between 75 and 85 percent of the time; so from 15 to 25 percent of the time, space needed to satisfy peak requirements will not be used. In such situations an attractive strategy may be the use of private or contract warehouses to cover the 75 percent requirement while using public facilities to accommodate peak demand. Students shall understand this concept.

III. Review Questions

1. Provide a definition and an example of strategic storage from a logistical system you are familiar with. 2. Under what conditions could it make sense to combine private and public warehouses in a logistical system? 3. Discuss and illustrate the economic justification for establishing a warehouse. 4. Why would a warehouse be described as a necessary evil? 5. How do warehouses perform assortment? 6. What is the concept of market presence, and how does it relate to the functionality of warehousing? 7. What role can a warehouse play in postponement strategies?

IV. Teaching approaches

1. Lecture; 2.Case Study; 3.Group Discussion 4.CAI (Computer-aided instruction); 5. Network-Aided Teaching; 6.Bilingual Teaching Approach