4

Warehousing: A Role Beyond Storage

After reading the chapter, the students should be able to understand:

• Role of warehousing in logistics
• Warehouse functions and options
• Strategic decisions in warehousing (site, layout, type, storage)
• Warehousing strategies
• Warehousing performance measures

Modern warehousing is in the process of an evolutionary change from an emphasis on storage to emphasis on flow through, from inventories at rest to inventories at motion. In logistical systems the role of a warehouse is that of a switching facility rather than a storage facility. The effectiveness of the supply chain can be considerably enhanced through proper decision making on warehousing.

“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

4.1 WAREHOUSING—A LOGISTICAL CHALLENGE

A warehouse acts as a supporting function for logistics and plays a key role in attaining the overall objectives of the firm’s logistical supply chain system. In today’s context, a warehouse is used as a switching facility rather than a long-term storage house. The attention is paid to higher inventory turnover, lower operating costs and shorter cycle times. The performance of a warehouse is judged by its productivity and cost performance, to achieve two polemic goals of customer satisfaction and lower cost of operation. Today, it is possible to redesign a warehouse using simulation models for maximum space utilization and increased material flow by automation to achieve productivity gains and cost reduction to fit into the overall objectives of the supply chain.

One of the most important steps in the selection of a logistics network is deciding on a centralized or decentralized warehouse system. A warehouse can act as mother warehouse, or a distribution warehouse depending on the distribution system adopted by the company. The centralized warehouse ensures tight control on inventories and can operate on economies of scale resulting in lower operating cost. The decentralized warehouse operations with multiple distribution centres ensure the best services to the customers. The site section for locating the warehouse is the next step which depends on the type of product, consumption centres, transportation cost, customer service needs etc. Looking at the warehouse objectives of profit improvement through cost reduction and enhancing customer service level for gaining a competitive edge, the following needs to be taken care of:

• Maximum utilization of storage space (floor and cubic space)
• Higher labour productivity
• Maximum assets utilization
• Reduce material handling
• Reduce operating cost
• Increased inventory turnover
• Reduced order filling time

The latest advancements in information technology and communication network play a vital role in bringing effectiveness and efficiency in warehousing systems through speedy information processing and internal and external connectivity. However, the degree of usage of the latest IT tools and communication systems depends on the management policy, product type, market competition and customer expectations. After all, the gains should justify the investment in the warehousing system. Hence, designing a proper warehousing system is not a simple task looking at the variables which are to be balanced to get the best performance on the cost and customer service fronts.

4.2 WAREHOUSING FUNCTIONS

A warehouse is an integral part of a logistical system. The effectiveness of customer service to a great extent depends on the way the warehouse operations are carried out. Broadly speaking, a warehouse is a service function that plays a pivotal role in the supply chain of a company and it has the following functions.

Material Storage Function

The primary task of a warehouse is to store any material until it has been delivered to the customer or the end user. As the manufacturing and consumption cycle never match, the manufactured material has to be stored somewhere till the demand for the same is generated and the delivery is confirmed. In fact, the storage facilities are designed around the following four functions.

Hold. The holding function 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. At the warehouse there is a continuous inflow and outflow of material. 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. The allocation of area for materials at different points of time is necessary to retrieve those materials as and when required for further delivery to particular customers or markets. Hence, the material-holding function has to be carefully planned looking at variables such as product categories, product mix, product characteristics, shipment arrival time, expiry dates, etc.

Consolidation. If the supplies are originating from various sources in small quantities, it may be economical to collect these small shipments at one centre and combine them into a large shipment for sending it to the customer. The consolidation will ensure cost saving on freight.

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 savings will offset the cost of setting up a place for consolidation.

Break Bulk. In contrast to the consolidation warehouse, here the material arriving in bulk is divided into small shipments for delivering it to the end customer. The bulk cargo of fertilizers, oil, chemicals coming form a source is broken into small consignments for buyers as per their requirement.

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 centres, where it is divided into small packets and dispatched to the end user as per the demand.

Cross-Docking. This is similar to break-bulk activity except that it involves multiple suppliers. The usage 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 is not more than 48 hours. Cross-docking is most commonly used in retail chains wherein the mother warehouse receives different materials from multiple suppliers, which is broken, assorted and consolidated for dispatch to various retail stores as per the requirements.

Mixing. 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.

The process involved is a simple mixing. The customer order can be fulfilled without mixing, by sending the ingredients in small uneconomical volumes from individual plants to the customer. However, the transportation cost becomes prohibitive, for shipments of individual ingredients to the customer. A common mixing point permits volume shipments of ingredients at a single location. These shipments are then assembled into an order and dispatched to the customer in sizable lots to economize on transportation cost.

Postponement. With postponement the anticipated risk of maintenance of the finished goods inventory is reduced considerably. The parts and components are warehoused at strategic locations. The final assembly is kept on hold till the customer places or modifies the order. The strategic suppliers in the supply chains are asked to postpone the delivery of parts till other critical items required for assembly arrive in the manufacturing plant. Thus, the postponement function of a warehouse reduces the risk of finished goods inventory and space blockage.

Packing. This is an important function that is carried out in a warehouse after the break-bulk operations. The repackaging of the material as per the ordered quantities of the individual customer is done. The packs are labelled and marked as per the packaging regulations or as per requirements of the customer.

Material Handling Function

This function is divided into the following three activities:

Loading and Unloading. The unloading activity is performed when the goods arrive in a warehouse. The material is offloaded from the transportation vehicle. Loading is the last function performed in a warehouse. The material packed in boxes is loaded on to the transportation vehicle at the loading area. Loading includes the additional efforts of bracing the load to prevent the damages.

Material Movement (To and From the Storage Area). These activities are carried out either manually or with the help of the material handling equipment. The incoming material that is unloaded has to be moved to an assigned place in a warehouse for temporary storage, while during order pickup the material is to be moved from the storage to the packing area and then to the loading area. For material movement, the most common equipment in use are trolley, crane, conveyor or forklift.

Order Filling. The final material handling activity is order filling. This includes the selection of material from various lots at various locations in a warehouse as per the customer order. This activity is done manually or with the help of robots. The order cycle time, which is the most critical parameter in customer service, is very much dependent on the speed of material picking.

Information Handling Function

For an effective and efficient customer service, it is essential for the marketing persons to know the availability of stocks and the likely dispatch schedule. Also the inventory level at any point of time is of crucial importance to the top management to know its impact on cash flow of the firm. This is possible with a proper warehouse information system. Information is also required on the following:

• Goods inwards
• Inspection and auditing
• Goods outwards
• Stock outs
• Excess stocks
• Invoicing
• Warehouse expenses
• Transit damages and breakages
• Consignment tracking

Information is the power and it helps in taking a speedy decision in a highly competitive environment for building a competitive edge over the rival. Hence, a proper warehouse information system can considerably enhance the quality of customer service to both internal and external customers of the organization leading to customer satisfaction.

4.3 WAREHOUSE OPTIONS—A STRATEGIC DECISION

For acquiring warehouse space the following three options are available:

• Private warehouse
• Public warehouse
• Contract warehouse

The considerations for exercising these options depend on various factors such as product characteristics, demand fluctuations, investments, cost of operation, degree of control, scale economics, etc.

 

Table 4.1 Warehouse Options

The warehouse option is a strategic decision having long-term effects on the efficiency and effectiveness of the system (see Table 4.1). The option may be exercised after thorough evaluation of the logistics system design mix. The firms invariably go in for a combination of the above three options for different locations.

Private Warehouse

Private ownership of a storage facility refers to the entire facility under financial and administrative control of the firm. The firm owning the product operates these warehouses. The facilities may either be owned by the firm or taken on lease for a period of three or five years. These facilities may include a production oriented captive warehouse or a distribution warehouse located in the field for customer service. 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 options.
• Volumes handled are high ensuring full capacity utilization and benefits of scale economics.
• High degree of control over the operations is required.

The benefits of a private warehouse are flexibility, full management control and lower operating cost. The operating cost of a private warehouse is less as private warehouses do not have a profit mark up. The material handling and the storage facility can be changed as per the product mix, which is not possible in the case of public or contract facilities. Hence, complete flexibility. A private warehouse facility can be planned close to the markets to provide efficient and effective service to the customer. This enhances the confidence of customer in the supplier.

Public Warehouse

A public warehouse is similar to a private carrier in transportation service. The firms having warehousing space, storage facility and material handling equipment, for the most general usage, provide these services. These types of warehouses are extensively used in logistical systems. Public warehouses are designed for handling the most general packaged products or commodities, which do not require specialized storage or handling arrangement. The products normally stored are food grains, paper rolls, bulk material (cements, fertilizers), furniture, chemicals etc.

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.

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. This will substantially increase the performance related to return on investment of the depositor firm. A public warehouse allows flexibility of location. Due to geographical changes in consumption centres, a firm can close a facility in one market and open at other place without any financial losses.

The greatest disadvantage of a public warehouse is the 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 fulfilment is slow resulting in a lower level of customer service.

The economies of scales can be achieved with a public warehouse because of volumes generated through a large number of facility users. The transportation cost can be considerably brought down leveraging the volume shipments of assorted products from various depositors.

Contract Warehouse

These are the product specific warehouse facilities acquired for use for a specific period against fixed charges. A contact warehouse can provide the benefits of both private and public warehouses. This facility provides the economies of scales, flexibility and customizes a facility. The resources such as labour, material handling equipment, storage arrangement, communication equipment, can be used on sharing basis with depositors from the same industry to economize on operating cost. As the facilities are product specific product damages are less. The large volume will apportion the fixed costs with the co-users.

Obviously, the choice between the above options depends on the demand pattern of the product, volumes handled, geographical location, seasonality of the product and standardization of product packaging, financial strength of the firm, service level expectations of the customer, competition etc.

4.4 WAREHOUSE SITE SELECTION

The considerations of warehouse site selection revolve around two major factors, i.e., service and the cost. Product availability can greatly be enhanced by locating the warehouse close to a market place. Smaller and frequent deliveries, which nowadays the customer prefers, can be organized. This will enhance the confidence of the customer in the supplier. However, transportation cost, which is a major element in logistical cost, depends on the location of the warehouse. The other factors affecting site selections are:

Infrastructure The availability of proper infrastructure such as approach roads, utilities (water, electricity, communication), and labour has a great effect on the efficiency and the effectiveness of warehouse operations. For a cold storage warehouse, availability of electric power is a major factor influencing site selection. The non-availability of a proper road or rail siding facility will have a serious impact on the operations of a warehouse and as a result the transportation cost may go up considerably. The lack of infrastructure such as wagon platform, material-handling equipment may pose a problem in loading and unloading of the materials and special provisions may cost more.

Market The distribution warehouses are planned in close proximity to the markets or consumption centres for offering better service to the customers. Frequent deliveries with small quantities as required by the customers can be organized due to limited geographical area coverage.

Access The location of the warehouse has the greatest effect on the primary transportation cost. The difficulty in access will have an influence on the transportation cost.

Primary Transportation Cost Transportation cost is the largest component in the product cost, particularly for low unit price products. The location of the warehouse will have the greatest influence on the primary transportation cost. The product demand pattern will influence the transportation cost in two ways, first, on the frequency of truck trips and, second, on the loading pattern (full or partial) of the transportation vehicles.

Availability The availability of warehousing space in an urban area, particularly in metros at cheaper rates, is a remote possibility. In such cases the site has to be shifted beyond the municipal city limits where storage space is available at a considerably cheaper rate. However, this arrangement may add to the transportation cost.

Product The type of product will have a profound effect on the number of warehouses and their locations. For example, perishable products need to be delivered to the customer within their expiry period and hence they should be located near consumption centres. Warehouses with a delivery limitation and geographical reach should be small and numerous. Usage of a warehouse as a common storage room for many street shops fits into the above category.

Regulations For certain types of products (explosives, hazardous chemicals, and radio active materials), which can cause damage to human life, the storage site selection is guided by government regulations. In such cases very little options are left with the firms to choose the site from.

Local Levies Depending on the sales tax and the octroi charges in the region, the location of a warehouse is planned. Due to non-uniformity of sales tax across the Indian states, marketers invariably plan the warehouse to take benefits of the local sales tax disparities.

Quantitative Techniques for Warehouse Site Selection

Single Depot Location. The distribution system of a firm consists of multiple warehouses located at various places. However, the location of a depot for a particular geographical area is decided using the following principles:

Centre 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.

Centre 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 point at which the model sheet gets balanced gives the centre of weights. This is the proposed point where a warehouse may be located.

Centre of Gravity of Tonnes-Kilometres Model This model takes into consideration both loads and distances to arrive at the optimum transportation cost. The final solution is obtained after applying the trial and error method several times.

Multiple Depot Network

The cost of warehousing per unit of inventory is directly proportional to the number of warehouses in the given marketing territory. If the total sales is divided and sent to more number of warehouses, the sales handled by each individual warehouse will decrease and warehousing cost per unit sold will increase. This can be off set by increasing the sales per warehouse. For planning the chain of warehouse the management will have to do a cost-benefit analysis. The factors influencing a decision on planning optimum numbers of warehouses are:

• Market size
• Area coverage by each warehouse
• Product type
• Demand pattern—continuous or seasonal
• Customer service level
• Competition
• Establishment and operating cost

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 in Figure 4.5.

Invariably, many manufacturing companies hold too much inventory stocks in many warehouses spread across a wider geographical area. The reasons are wrong procurement policies, complex transportation systems, and historical ownership patterns, more lenient to customer satisfaction. However, due to cost pressure, firms are trying to find out alternatives. For 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 products, which need to be moved in large quantities and with speed, wherein the system of scattered warehouse is the right solution.

The criticality of the demand and the cost of serving the customer determine the boundary served by the product. If the products are at par on quality and the customer is not deriving any specific advantages using a particular brand of product, then the choice of supplier is based on the landed cost he has to pay for.

The relation between the cost of warehouse operation and optimum area served by the same is best explained by the Bowman—Stewart formula. The major warehouse location criterion is its proximity to the market. However, there is no restriction for the area it may serve. The cost of delivery increases with the distance between the warehouse and the place of delivery. Therefore, the cost of delivery is proportional to the square root of the area covered by the stocking point. Then ‘area covered’ related cost can be expressed as

Thus the choice of location is decided on the basis of the cost of delivery. The other variable affecting the cost is sales off-take. If the cost of delivery is say A and B is the sales volume for a given time period, then A/B cost per unit sales is a part of the total cost element of the warehouse. Considering the fixed cost of a warehouse, F, the total cost of the warehouse operation shall be expressed as:

The formula can be further refined by introducing the sales density, D, that is defined as the sales per unit area (geographical) served by a particular warehouse:

For optimizing the cost, the total cost function has to be differentiated with respect to the warehouse area S:

The warehouse service area can be found out by knowing the variable cost related to the sales volume, i.e. A, the sales density D and the cost of delivery. For a higher cost of warehouse operation, the warehouse service area needs to be enlarged, and in case of an increase in the servicing cost, servicing the area needs to be reduced for optimization.

4.5 WAREHOUSE LAYOUT DESIGN

For planning the layout and operation of a warehouse system the following fundamental principles hold, which embody the philosophy of good practice:

• Making the best use of available space.
• Using a ‘unitized’ load system suitable for storage.
• Minimizing the movement of goods by allotting proper storage area.
• Providing flexibility for changing future needs.
• Providing safe, secure and clean working conditions.

Location of the stock in a warehouse directly affects the total material handling expenses of all goods moving through the warehouse. A balance has to be maintained between the material handling cost and utilization of warehouse space. Proper storage and handling equipment should be chosen to improve the utilization of cubic capacity. Effective space utilization includes making good use of building volume and not merely the floor area. The following steps need to be followed while designing the layout of a warehouse for a given space:

• Defining a location for receiving and shipping function.
• Allocating separate area for slow, medium and fast moving items.
• Defining a location of fixed obstacles such as building columns, staircases, elevator shafts, toilets, etc.
• Defining a minimum path for the movement of equipment and personnel for faster storage and retrieval.
• Locating stationary material handling equipment (crane, conveyor) at the assigned places.
• Locating storage equipment at the assigned places.
• Repeating the process for generating an alternative layout.

The evaluation of alternative layouts of a warehouse is done based on the following guidelines normally followed in an industry:

Item Turnover

Amongst the number of items a warehouse stores a few may have very high turnover. Space allocation for such items should be such that storage and retrieval may be quick and the cross-movement of the material handling equipment may be minimum. The throughput rate of the item decides the storage method so the handling equipment can be used more efficiently and effectively resulting in minimum equipment operating cost-to-throughput ratio.

Space Utilization

The ratio of the utilized pace and the open space depends on the degree of mechanization and automation of the warehouse facility. For the semi-mechanized warehouse this ratio varies from 70:30 to 75:25. A large open space is required for manoeuvring the material handling equipment. However, for complete automatic warehouse operation this ratio may reduce to 85:15 depending on the type of products to be stored.

Product Configurations

Heavy and large items should be stored at a place where they can be easily accessed and moved for shipping. The honeycombing movement of these items within the warehouse area should be minimum. The large and heavy items, which are not affected by elements of nature, may be kept in an open yard. The oddly shaped and crushable items subject to stacking limitation need special attention for storage methods and space allocations.

Product Characteristics

The shelf-life of a product has an influence on the layout of a warehouse. The layout of a warehouse should help in good stock rotation so that the shelf-life problem is automatically taken care of.

Good Housekeeping

A clean and safe working condition indirectly helps in increasing labour productivity of a warehouse. Hence, warehouse layout planning should begin with keeping in mind housekeeping as an important objective.

Safety and Security

A layout should ensure safety of the people, product and equipment during product storage and movement. Sharp blind bends in the movement paths of equipment in a warehouse should be avoided. The layout should ensure ease in proper supervision to detect pilferage or stealing of the stored material.

4.6 WAREHOUSE DECISION MODEL

The warehouse decision model helps in identifying the strategic, tactical and operational needs of a warehouse system to fit into the overall objectives of a supply chain (see Figure 4.6).

Product The nature of a product will primarily decide on the type of warehouse required for the storage of goods. For example, perishable agro products will obviously require a temperature-controlled facility, while hazardous or explosive products will call for extra safety and handling requirements 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.

Characteristics 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 very high, the logistic reach is wide and distribution centres are limited in number. Due to high margins and shorter payback period the heavy investments are justified.

Objectives In a selection amongst the various warehouse options, the objectives have to be clearly defined. Volumes will justify private warehouses while the seasonality will justify public or contract storage places. For customer satisfaction through reliable delivery, investment in material handling and information processing system is justified.

Strategic Decisions Strategic decisions on layouts, material-handling systems, and storage schemes are solely dependent on the objectives, available financial resources, return on investment and pay back period. These decisions will have a long-term effect and help in developing a competitive advantage.

Tactical Decisions 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, increasing warehouse productivity, reducing customer complaints, and enhancing the customer satisfaction level.

Operational Decision Operational decisions will bring efficiency in the warehouse operations and will help in reducing the operation cost.

Number of Warehouses This decision will have to be taken in light of the available financial resources, managerial skills to manage product varieties and volumes, and expected market coverage.

Warehouse Options A decision on warehouse options depends on the financial resources, market coverage, and degree of control on the operation. For customized arrangement and scale economics, a private warehouse is the best option. While for generalized bulk goods a public warehouse will reduce the storage cost. It will also help in flexibility in shifting the site.

4.7 WAREHOUSE COSTING

The elements of warehousing cost normally accounted for are transportation, storage and administration. The inventory carrying cost is not included in warehousing cost. The warehousing cost includes fixed and variable cost elements. The fixed cost covers, rental, capital cost, salary wages of the employees, and utilities while the variable cost covers repair and maintenance, material handling, transportation, and packaging which is related to the load on the warehouse etc. Wide variations are observed in proportion of variable and fixed cost across the different warehouse. In general the ratio of fixed cost varies from 25 to 45 per cent of the total cost of the warehousing operation. The higher fixed is observed in case of a newly constructed warehouse through bank loans.

4.8 WAREHOUSING STRATEGIES

Warehousing network plays a major role in the success of the physical distribution of products. However, with the proliferation of a number of warehouses, the cost of logistics operation goes up. Hence, it is a tight-rope walk for the logistics manager to meet the expectations for cost and customer service. Under these circumstances, to strike a balance between the two and to remain competitive, it is observed that the leading firms adopt and implement the following warehousing strategies.

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 of a product. Under such circumstances the capacity of a warehouse may be planned on the basis of average demand per month over the year and for additional space requirement (to take care of the seasonal requirement), 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.

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 and white goods industries, wherein the distribution network consists of a large number of dealers, stockiest and retailers. In the context of India most of the leading firms have their warehousing hubs located near or around the four metros (Mumbai, Kolkata, Chennai and Delhi) catering to the demand of four regions (West, East, South and North) in the country. The hubs are responsible for secondary distribution to dealers, stockiest or wholesalers in the specified region. A regional hub will cater to the needs of several states covered under respective regions. These hubs will eliminate the need of having distribution centres located in each state which is the practice followed by many firms. The advantages of hub strategy are:

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

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. For example, FMCG products manufactured by the companies such as HLL, J&J and Nestle can be cobbled together to reduce wasteful practices in storage and transportation. The operating cost will considerably be reduced benefiting all the cobbling partners. Some 3 PL operators in India are offering these services to leading companies in the FMCG sector. Here the benefits are the cost reduction thorough scale economy and speedy customer services because of synergy between users.

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 and as result it becomes a bottleneck in overall system productivity, efficiency and effectiveness. For gaining logistical competitiveness, leading firms are outsourcing entire warehousing operations to 3 PL providers who bridge these gaps through their expertise, technology and infrastructure.

4.9 VIRTUAL WAREHOUSE

The concept of virtual warehousing surfaced due to emerging networking and communication technologies in the 1980s. This helped very large organizations operating in the global markets to evolve a framework of competitiveness with effective and efficient logistics operation to develop an advantage over their business rivals. It is defined as a single storage system located at a convenient place to take care of worldwide requirements of products and services thereof, based on the information in a real-time environment. However, the effectiveness of a virtual warehousing system depends on the speed and accuracy of information flow and analysis . The success of a virtual warehousing system will depend on the availability of the following:

• Alternative and efficient transportation system
• Speedy communication and computing systems
• Networking facilities
• Real-time tracking system
• Inventory management software for demand management to handle product volumes and varieties.

The concept is still in its early stages of development and application. It is implemented only in few places in a phased manner.

4.10 WAREHOUSE CHARTER

Majority of the firms do not give due importance to warehousing operations. A warehouse is treated as a place for storage of goods till they are shipped. The top management treats a warehouse as a variable in make-and-sell equation and expect to align with production demands to meet sales promises. Often warehouse management do not get clear signals from the top management regarding their performance criteria but they are vulnerable to criticism and blamed for performance gaps. Hence, it is wiser for the warehouse management to have a charter to avoid errors, perform better and meet customer satisfaction. A warehouse charter should incorporate the following:

• Place of warehouse in supply chain and the reporting system
• Span of authority and responsibilities of a warehouse manager
• Empowerment to perform day-to-day functions without permissions/sanctions from top management
• Expenditure limits for capital equipment acquisition
• Warehouse performance measurement parameters.

Hence in an integrated supply chain where a warehouse is a strategic link in the customer-value chain, it has an important role to play, which may be performed with clear-cut guidelines in the form of warehouse charter.

4.11 PERFORMANCE PARAMETERS

A warehouse is an integral part of a supply chain and its objectives should align with those of the overall supply chain of a firm. In the absence of a goal congruence, the element of risk in sub-optimizing the operations of a warehouse at the expense of performance of the overall supply chain will creep into the system. The objectives of a warehouse are to be quantified for measurement to check and rectify the operations in case of deviations. The most common parameters that indicate the efficiency and effectiveness of warehouse operations are discussed below.

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. Then this ratio works out to be 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.

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.

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.

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.

4.12 WAREHOUSING IN INDIA

In India warehousing in general is a neglected area and it is used to the extent of storage of goods until they are delivered. However, multinational and few professionally managed companies are exceptions to this. Unlike in developed countries, in India a warehouse is not used as a strategic area for developing a competitive advantage. Most of the warehouses in India still use manual material handling system and are smaller in size as compared to those in the Western countries, where they operate on economies of scale and use sophisticated material handling equipment and storage scheme and make use of the latest IT and communication technologies.

Indian business firms practice a number of different types of warehousing arrangements. The following are the important amongst them:

• Captive warehouse located in manufacturing premises of a firm.
• Network of distribution warehouses at different geographical locations by hiring space from private warehouses.
• Network of stock points by hiring warehouse space from the CWC or State Warehouse Corporations (SWCs).
• Utilizing godowns available with the stockiest, distributors or dealers at major market centres.

Each pattern has its associated cost, benefits, merits and demerits. Different firms prefer patterns based on their unique situations and their perceptions of relative cost and benefits. The storage of industrial products is mostly done in company-owned private warehouses, third-party public warehouses under private ownership, or storage places owned by the wholesaler, dealers or retailers. The warehousing industry catering to the industry sector is highly fragmented. There is no central government agency to look after the growth of this industry.

Central Warehousing Corporation and State Warehousing Corporation are the main public warehousing agencies in India. They are the statutory agencies having network of warehouses all over the country and are mainly catering to the needs of government bodies such as Food Corporation of India for storing grains, spices, fertilizers, cotton seeds etc. They also provide warehousing space to the private sector firms. They perform functions such as storage, stock accounting, insurance and outward delivery. These agencies are governed by the Warehousing Corporation Act, 1962. Currently, CWC and SWCs together have a total storage capacity of 19.95 million tones spread across 1800 warehouses in the country (Table 4.2).

 

Table 4.2 Food Grain Storage Capacity in the Country

Public warehousing agencies	Storage capacity (million tonnes)
Food Corporation of India	13.07
Central Warehousing Corporation	9.80
State Warehousing Corporation	11.39
Agricultural Rural Dev. Corporation	3.50
Government Godowns	0.05
Private Parties	4.61
Totals	41.18

 

At mandi (market place) level for storage of food grains, warehousing space is provided by the cooperatives. These are called marketing godowns. The last layer of warehouse at village level is called rural godowns. These are mostly in cooperative sectors and are run by respective cooperatives. These godowns mainly cater to the storage of agricultural commodities. In addition to this, private retailers also have storage facilities, but these are ‘kaccha’ (for very short span of time) arrangements.

For the distribution of food grains in the country, the Food Corporation of India (FCI) has its own network of warehouses with 13 million tonnes of storage capacity. The total food grain storage capacity (FCI, CWC, SWCs, ARDC and private storages together) is around 19 per cent of the total food grain production (202 million tones) in the country, which is grossly inadequate. The government has recently allowed the participation of the private sector in food grain storage. However, the distribution of food grains is still under the control of the government.

Manufacturing companies have their network of warehouses, which includes their own establishments, public warehouses and contract storage places. Warehouses in India do not operate on economies of scale. High-rise, multistoried and fully automated warehouses are very rare in India. Warehouses are treated as variables in a make-and-sell equation and the management does not pay much attention to this functional area. In majority of the cases warehouses in India are staffed with unqualified people. The warehouse productivity is much below their counterparts in developed countries. However, due to liberalization of the Indian economy, third-party logistics service providers have realized the logistics requirements of their clients due to emerging competition in the market. They have started building and creating a network of high-capacity automated warehouses at strategic locations in the country to fulfil the logistics needs of their corporate clients.

 

Table 4.3 Services Provided by CWC and SWCs

Services Provided by CWC and SWCs
Scientific Storage
Insurance of Stocks
Bonded Warehouses
Central Freight Stations
Container Freight Depot
Cold/Air Conditioned Storage
Credit Facilities to Depositors
Free-Trade Zone Warehousing
Public Distribution of Food Grains
Special Storage for Hygroscopic Storage
Training and Consultancy on Warehousing
Disinfections & Fumigation Extension Services

4.13 COLD CHAIN INFRASTRUCTURE

The term cold storage refers to a refrigerated chamber for storage of perishable commodities such as fruits, vegetables, fish, eggs, meat, dairy products, etc. In these storage structures, the temperature is controlled so that the quality of the stored perishable products does not deteriorate. In cold storage the temperature is maintained in the range of -1 to 10°C and in the freezer zone the temperature is at sub-zero level.

Due to inadequate cold storage infrastructure in the country, the post harvest losses of perishable agricultural products such as fruits and vegetables are to the extent of 33–35 per cent. Currently, the available capacity of cold storage in the country is 9.7 million tonnes (7–6 per cent) as against the fruits and vegetables production of 127 million tonnes in the country. The other users of the cold chain infrastructure are pharmaceutical, processed food products, fast food chains and floriculture products. The roadblocks in the development of cold chain infrastructure in India are:

• High capital cost in setting up the facility
• Low returns with longer pay back period
• High operating cost due to high power tariff
• High import and excise duties on cold storage equipments.

There is a huge potential for the cold chain as a service industry in India. Immediate measures need to be taken by the government to boost the cold storage industry.

SUMMARY

Warehousing is a strategic element in logistics system. The effectiveness of marketing operations of a company can be considerably enhanced by proper decision on warehousing. A warehouse is an important linkage in the supply chain of the manufacturing company. The objective of warehousing should be in line with the strategy framework of the supply chain.

The warehouse functionality covers operations such as holding, consolidation, break bulk, crossdocking, postponement, and mixing, packaging, material handling an information handling. Depending on the requirements and strategic moves of a company, there are three warehouse options available to choose from which are private, public or contract storage facility. Each one has merits and demerits associated with it.

The network planning of a warehouse network is a complex exercise. The decision on warehouse locations and numbers is based on product characteristics, logistics objectives and resources available. The decision on the warehouse facility planning can be divided into three groups, i.e., strategic, tactical and operational which will help in enhancing effectiveness and efficiency of the entire logistics system of the organization. The control on warehousing is exercised, using the performance parameter ratios such as stock turnover, cost to sales, occupancy rate, etc.

In public warehousing, CWC and SWCs have a large network of warehouses spread over the country. Invariably these warehouses are deployed for storage and distribution of food grains by FCI including its own network of warehouses. The current storage capacity both (dry and cold) is grossly inadequate as compared to the level of agro products production in the country.

REVIEW QUESTIONS

1. The effectiveness of marketing in the organization can be considerably enhanced by proper a decision on warehousing. Explain.
2. Describe the various warehousing options available, with their merits and demerits.
3. Discuss the site selection criteria for the warehouse location.
4. Which are the warehousing strategies the business organizations normally adopt, based on the their product-market characteristics?
5. Discuss the various warehouse performance parameters.

INTERNET EXERCISES

1. Visit Central Warehousing Corporation (http://www.ceacor.nic.in)—a premier warehousing Agency in India for logistics support in agricultural sector and the biggest public warehousing operators. Find out how they are managing warehousing activities.
2. Godrej Eface Automation & Robotics Ltd is a joint venture setup between Godrej Boyce Mfg Co. Ltd and Eface Automacaoe Robotica of Portugal for warehousing solutions and equipment. Visit. http://www.godrej.com/GodrejNew/GodrejHome/OurCompanies/GNB/Industrial-Products/StorageSolutions, to find out more information on automated warehouse solutions and equipment.
3. Here is a nice link to a website http://www.inzone.org that explains the difference between Free-Trade Zone and Bonded Warehouse.

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