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.

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.

1. 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.

2. 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.

3. 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. TEN 21ST CENTURY WAREHOUSE TRENDS

Practices as just-in-time (JIT), quick response, efficient consumer response, direct-store delivery and continuous flow distribution will reduce the dependence on warehouse in distribution. But in the real world, warehousing will still link suppliers with consumers. The following are some warehouse trends for the 21st century:

  1. Focusing on the customer: Retailers for holding the customer through service differentiations need to create efficient and responsive warehouses.
  2. Compression of operations and time: For bigger Distribution Center (DC) with more orders to process daily, i.e., frequent shipments of smaller sizes resulting in more activity in receiving, put­ting away, picking and shipping will place greater demands on material-handling systems.
  3. Continuous flow: The focus will be on pulling a product through a logistics system to avoid huge inventories resulting in daily order processing. With an accelerated information flow material flow is enhanced to meet on-line or real-time information systems to replace batch systems
  4. Cross-docking: Fewer warehouses handling more orders will transform most warehouse operations to predominantly cross-docking practices in the 21st century. Collaboration and the ability to exchange information real-time will facilitate handling a product in this manner.
  5. Electronic transactions: Warehouse professionals consider tracking goods the most critical func­tion in their operations. Using electronic tracking systems for all product movement will eliminate traditional errors associated with product recognition, confirmation of locations, data entry and picking accuracy. This paperless warehouse will simplify and streamline transactions, while reduc­ing overall labour requirements and training.
  6. Customized warehousing: Companies failing to prepare their warehouses for customized packag­ing requests stand to lose millions of dollars. Customized services include generic products in the warehouse (on-demand packaging), compliance labelling, ticketing and bagging, dunnage and palletization. Floor-ready merchandise will allow retailers to implement rapid stock-replenishment strategies that reduce inventory while increasing stock turns.
  7. Third-party warehousing: Companies returning to their core competencies or refusing to build more space to store peak inventory have driven the rise of third-party warehousing. In the near future, small and medium companies will use third-party warehousing to leverage capital and increase service levels. Despite the advantages of third-party warehousing, however, some products and organizations simply will not be compatible with this practice.
  8. The incredible shrinking order: Many factors are shrinking order sizes and accelerating order fre­quency: better information availability improved technology, vendor managed inventory programs and the elimination of on-site retail warehouses. The days of mixed pallet shipments will soon seem like utopia. These changes are only the first step in the information explosion coming in the 21st century. The ability to ship orders of any size is more than a problem—it is the future.
  9. Automation: Warehouses will need to increase automation, not add labour, to handle burgeoning work volumes. More conveyors, for example, will be needed to move small packs and cases across long distances and sort to the appropriate re-packing station or loading dock. More automated picking equipment, such as A-frames and dispensers, will improve throughput capacity without building additional space. Automation will also continue to replace human beings in heavy lifting, but a human workforce must still complement automation. 
  10. The human factor: The rising prominence of automation means that workers must continue to enhance their technical skills, especially computer skills. To improve the quality and education of the workforce, companies must retain the best workers, train them in new technologies and cross­train them in all warehouse job functions. Those unwilling to learn probably are not worth retaining.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.

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