Warehouse operating principles

Once it has been determined to use a warehouse, the next step is designing it. Whether the warehouse is a small manual operation or a large automated facility, the following three principles are relevant in operating a warehouse

• Design criteria
• Handling technology
• Storage plan

Design Criteria

Warehouse design criteria address physical facility characteristics and product movement.

Three factors to be considered in the design process are: the number of stories in the facility, height utilization, and product flow.

Number of stories in the Facility

The ideal warehouse design is limited to a single story so that product does not have to be moved up and down. The use of elevators to move product from one floor to the next requires time and energy. The elevator is also often a bottleneck in product flow since many material handlers are usually competing for a limited number of elevators. While it is not always possible, particularly in central business districts where land is restricted or expensive, warehouses should be limited to a single story.

Height usage

Regardless of facility size, the design should maximize the usage of the available cubic space by allowing for the greatest use of height on each floor. Most warehouses have 20- to 30-foot ceilings          (1 foot = 12 inch; 1 inch = 2.54 cm), although modern automated and high-rise facilities can effectively use ceiling heights up to 100 feet. Through the use of racking or other hardware, it should be possible to store products up to the building’s ceiling.

Maximum effective warehouse height is limited by the safe lifting capabilities of material-handling equipment, such as forklifts.

Product flow

Warehouse design should also allow for straight product flow through the facility whether items are stored or not. In general, this means that product should be received at one end of the building, stored in the middle, and then shipped from the other end. Straight-line product flow minimizes congestion and confusion.

Handling technology

The second principle focuses on the effectiveness and efficiency of material-handling technology.

The elements of this principle concern: movement continuity and movement scale economies.

Movement continuity

Movement continuity means that it is better for a material handler or piece of handling equipment to make a longer move than to have a number of handlers make numerous, individual, short segments of the same move. Exchanging the product between handlers or moving it from one piece of equipment to another wastes time and increases the potential for damage. Thus, as a general rule, fewer longer movements in the warehouse are preferred.

Movement sale economies

Movement scale economies imply that all warehouse activities should handle or move the largest quantities possible. Instead of moving individual cases, warehouse activities should be designed to move groups of cases such as pallets or containers. This grouping or batching might mean that multiple products or orders must be moved or selected at the same time. While this might increase the complexity of an individual’s activities since multiple products or orders must be considered, the principle reduces the number of activities and the resulting cost.

Storage plan

According to the third principle, a warehouse design should consider product characteristics, particularly those pertaining to volume, weight, and storage. Product volume is the major concern when defining a warehouse storage plan. High-volume sales or throughput product should be stored in a location that minimizes the distance it is moved, such as near primary aisles and in low storage racks. Such a location minimizes travel distance and the need for extended lifting.

Conversely, low-volume product can be assigned locations that are distant from primary aisles or higher up in storage racks. Similarly, the plan should include a specific strategy for products dependent on weight and storage characteristics. Relatively heavy items should be assigned to locations low to the ground to minimize the effort and risk of heavy lifting. Bulky or low-density products require extensive storage volume, so open floor space or high-level racks can be used for them.

On the other hand, smaller items may require storage shelves or drawers. The integrated storage plan must consider and address the specific characteristics of each product.

Alternate warehouse strategies

Warehouse alternatives include

• Private warehouses,
• Public warehouses, and
• Contract warehouses.

A private warehouse facility is owned and managed by the same enterprise that owns the merchandise handled and stored at the facility.

A public warehouse, in contrast, is operated as an independent business offering a range of services     -such as storage, handling, and transportation- on the basis of a fixed or variable fee.

Public warehouse operators generally offer relatively standardized services to all clients.

Contract warehousing, which is evolving from the public warehouse segment, provides benefits of both the private and public alternatives. Contract warehousing is a long term, mutually beneficial arrangement which provides unique and specially tailored warehousing and logistics services exclusively to one client, where the vendor and client share the risks associated with the operation.

Important dimensions that differentiate contract warehousing operators from public warehouse operators are the extended time frame of the service relationship, tailored services, exclusivity, and shared risk.

Private warehousing

A private warehouse is operated by the firm owning the product. The actual facility, however, may be owned or leased. The decision as to which strategy best fits an individual firm is essentially financial. Often it is not possible to find a warehouse for lease that fits the exact requirements of a firm. The major benefits of private warehousing include control, flexibility, cost, and other intangible benefits. Private warehouses provide more control since the enterprise has absolute decision-making authority over all activities and priorities in the facility. This control facilitates the ability to integrate warehouse operations with the rest of the firm’s internal logistics process.

Private warehousing is usually considered less costly than public warehousing because private facility costs do not have a profit markup. This perceived benefit, however, may be misleading since public warehouses often are more efficient or may operate at lower wage scales. Private warehousing has also some intangible benefits, particularly with respect to market presence.

A private warehouse with a firm’s name on it may produce customer perceptions of responsiveness and stability. This perception sometimes provides a firm with a marketing advantage over other enterprises.

Public warehouse

On the basis of the range of specialized operations performed, public warehouses are classified as

• General merchandise
• Refrigerated
• Special commodity
• Bonded
• Household goods and furniture

Each warehouse type differs in its material handling and storage technology as a result of the product and environmental characteristics.

General merchandise: These warehouses are designed to handle general package commodities such as paper, small appliances, and household supplies.

Refrigerated warehouses (either frozen or chilled): These warehouses handle and maintain food, medical items, and chemical products with special temperature requirements.

Commodity warehouses: These warehouses are designed to handle bulk material or items with special handling considerations, such as tires or clothing.

Bonded warehouses: These warehouses are licensed by the government to store goods prior to payment of taxes or duties.

They exert very tight control over all movements in and out of the facility since government documents must be filed with each move. For example, cigarettes are often stored in bonded warehouses prior to having the tax stamp applied. This tactic saves the firm money by delaying tax payments; it also reduces inventory value substantially. Finally, a household goods or furniture warehouse is designed to handle and store large, bulky items such as appliances and furniture.

Of course, many public warehouses offer combinations of these operations. From a financial perspective, public warehousing may have a lower variable cost than comparable privately operated facilities. The lower variable cost may be the result of lower pay scales, better productivity, or economy of scale. Public warehouses certainly result in lower capital costs. When management performance is judged according to return on investment (ROI), the use of public warehousing can substantially increase enterprise return.

Public warehousing offers flexibility in that it is easy to change the location, size, and number of facilities, allowing a firm to quickly respond to supplier, customer, and seasonal demands. Private warehouses are relatively fixed and difficult to change because buildings have to be constructed or sold. Public warehousing can also offer significant scale economies since the volume for each customer is leveraged with that of other users. This results in high-volume operations that can spread fixed costs and justify more efficient handling equipment.

A public warehouse can also leverage transportation by providing delivery of loads that represent many public warehouse customers. For example, rather than have vendor A and vendor B each deliver to a retail store from their own warehouse, a public warehouse serving both vendors could deliver a single combined load more efficiently. A public warehouse charges clients a basic fee for handling and storage.

In the case of handling, the charge is based on the number of cases or pounds handled. For storage, the charge is assessed on the number of cases or weight in storage during the month. Such charges normally exceed the cost of private warehousing if adequate private facility volume exists. However, when economies of scale are not possible in a private facility, public warehousing may be a low-cost alternative.

Contract warehouse

Contract warehousing combines the best characteristics of both private and public operations. The long-term relationship and shared risk result in lower cost than typical public warehouse arrangements.

Contract warehouse operations can provide benefits of expertise, flexibility, and economies of scale by sharing management, labor, equipment, and information resources across a number of clients. Although it is common for contract warehouse operators to share resources across clients in the same industry such as grocery products, it is not common that direct competitors will want to share resources. Contract warehouse operators are also expanding the scope of their services to include other logistics activities such as transportation, inventory control, order processing, customer service, and returns processing. For example, Rich Products, a frozen food manufacturer in Buffalo, New York, has increasingly utilized contract warehousing. The nature of the arrangement benefits both parties and allows Rich to expand its distribution network without incurring any fixed facility cost.