Introduction to warehousing
Warehousing and Customer Service
One very important area where warehousing adds value in business and supply chains is customer service including facilitating high inventory availability, shorter response times, value added services, returns, customization, and consolidation among others.
Fill rate is the portion of a customer’s demand satisfiable from on-hand inventory. In most cases a significant investment in safety stock is required to provide high customer fill rates. That safety stock must be housed somewhere and that somewhere is typically a warehouse.
Warehouses in close proximity to the customer base and with short internal cycle times help reduce response times to customers. We have one client that provides same-day delivery of critical service parts. They accomplish that with a nationwide network of small warehouses with short order cycle times. One of our financial services clients supports their financial analysts with small warehouses located in the center of major financial districts, serving financial service offices via subway, courier, walking, and bicycles. One of our convenience store clients is increasing product freshness by increasing delivery frequencies to their 14,000 stores supported by a major increase in the number and capacity of their warehouses and distribution centers.
Following from the mass customization movement, the likelihood that an order will require customization in some form is increasing exponentially. The ability to execute the requisite value- added services such as custom labeling, special packaging, monogramming, kitting, coloring, pricing, etc. is and will continue to be a competitive supply chain differentiator. Warehouses are uniquely equipped with the workforce and equipment to execute those value added services. In addition, by holding the non-customized inventory and postponing the customization, overall supply chain inventory levels may be reduced. As the physical facility closest to the customer location, warehouses are also natural places to customize, kit, assemble, or countrify product in accordance with the principle of postponement – minimizing overall inventory investments throughout a logistics network by delaying the customization of product to the latest moment. For example, one of our health and beauty aids clients produces shampoo into blank bottles for storage. Once an order is confirmed from a specific country, the labelling required for that specific country is applied in line with the picking and shipping process. One of our consumer products clients houses large quantities of finished goods which are packaged into customer unique kits and displays of those goods.
One customer service that is so foundational to our culture’s expectations of logistics systems and is often taken for granted is consolidation. For example, if you order a shirt and a pair of pants from a mail order company, rarely would you want the shirt showing up one day in one package and the pants showing up another day in another package. For those items to show up at the same time in the same package they most likely need to be housed under the same roof, i.e. in a warehouse.
Returns is another customer service facilitated through good warehousing practice. The more convenient and inexpensive the returns process for customers, the higher the sales rate and the higher the customer satisfaction ratings. Warehouses and distribution centers are typically already located in close proximity to the customer base and have the workforce and material handling equipment uniquely suited to handling returns.
Though not directly considered a customer service, in many parts of the world physical market presence is an important cultural competitive differentiator. Warehouses and distribution centers are an important and well recognized means of establishing physical market presence.
Warehousing and Inventory Management
Since warehouses house inventory (or wares), warehousing adds business and supply chain value in all the same ways including facilitating production economies of scale, optimizing factory utilization via seasonal inventory builds, and mitigating supply chain and business risk by holding contingency and disaster inventory.
Despite all efforts to reduce setup and changeover cost and time, there will always remain expensive and time consuming setups. In those situations it would be economically foolish to produce short runs. When long production runs are economical, the resulting lot size inventory must be housed; most effectively in a warehouse. For example, one of our large food and beverage clients was running lot sizes 50% below optimal, incurring excessive changeover and production costs as a result. Once corrected, an additional 150,000 square feet of warehousing space was required yielding a significant return on investment in warehousing.
Many corporations have significant peaks and valleys in their demand. One of our clients, Hallmark Cards, is an extreme example. The large majority of the demand for greeting cards falls in the Christmas and Valentines seasons. If their production capacity was designed for those peaks, their production capacity would be cost prohibitively under-utilized for 75% of the year. To balance the production and optimize their supply chain costs, Hallmark produces greeting cards at a fairly balanced pace during the year resulting in a large storage requirement for a majority of the year. That “seasonal inventory” is stored in a large seasonal warehouse.
The Schwan’s food company is another one of our clients. One of their flagship products is frozen pie. They are the world’s largest manufacturer of frozen pie; the majority of which are consumed between Thanksgiving and Christmas. As was the case with Hallmark, to optimize their supply chain costs they must balance production throughout the year and utilize third-party frozen warehousing to hold seasonal build inventory January through September.
Contingency and disaster inventory ensures against unexpected situations outside the realm of those covered by traditional safety stock inventory. Those situations include natural disasters, labor strikes, and other abnormal supply chain disruptions. For example, in our work with telecommunications and utilities clients we often plan for contingency and disaster inventory to maintain service in the increasingly likely event of hurricanes, floods, and snowstorms.