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.

1. 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.

2. 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 c X S

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, thenA/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:

C = F + A/B + c X √S.                                                           (1)

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:

C = F + A/DS + c X √S.                                                           (2)

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.

3. AMWAY INDIA FROM CENTRAL TO REGIONAL WAREHOUSE SYSTEM

To meet the growing competition and growth of business Amway India Enterprises has redefined its supply chain. Launched in 1998, it has reached a sales turnover of INR 5000 millions in 2001. Amway now has 40 offices catering to 400 cities and towns spread cross the country and which will be increased to 54 offices to provide service to 450 Indian cities. Initially, all supplies from the manufacturing units used to be consolidated at a central warehouse at Nagpur before the finished products being distributed across the country. The growth has resulted in abolition of the central warehouse and the creation of four regional mother warehouses located at Bangalore, Kolkata, Delhi and Mumbai, which will be serviced directly from the manufacturing units. In a bid to enhance the supply chain efficiency and effective­ness, Amway’s all warehouses, offices and manufacturing plants are connected online to have real-time sales data for inventory planning. The company is in process to design a fully integrated and seamless logistics system in which a product sale at one end generates an order for raw material at the other end.

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

One thought on “Warehouse Site Selection

Leave a Reply

Your email address will not be published. Required fields are marked *