Warehouse strategy

Many firms utilize a combination of private, public, and contract facilities. A private or contract facility may be used to cover basic year round requirements, while public facilities are used to handle peak seasons. In other situations, central warehouses may be private, while market area or field warehouses are public facilities.

Full warehouse utilization throughout a year is a remote possibility. As a planning rule, a warehouse designed for full-capacity utilization will in fact be fully utilized between 75 and 85 percent of the time. Thus from 15 to 25 percent of the time, the space needed to meet peak requirements is not utilized. In such situations, it may be more efficient to build private facilities to cover the 75 percent requirement and use public facilities to accommodate peak demand.

The other form of combined public warehousing may result from market requirements. A firm may find that private warehousing is justified at specific locations on the basis of distribution volume. In other markets, public facilities may be the least-cost option. In logistical system design the objective is to determine whatever combination of warehouse strategies most economically meets customer service objectives.

An integrated warehouse strategy focuses on two questions

• The first concerns how many warehouses should be employed
• The second question concerns which warehouse types should be used to meet market requirements

For many firms, the answer is a combination that can be differentiated by customer and product. Specifically, some customer groups may be served best from a private warehouse, while a public warehouse may be appropriate for others. Other qualitative factors that should be considered include

• Presence synergies
• Industry synergies
• Operating flexibility
• Location flexibility
• Scale economies

Following is the description and its rationale of the qualitative factors stated above

• Presence synergies: It refers to the marketing benefits of having inventory located nearby in a building that is clearly affiliated with the enterprise (e.g., the building has the firm’s name on the door). It is widely thought that customers are more comfortable when suppliers maintain inventory in nearby locations. Products and customers that benefit from local presence should be served from private or contract facilities
• Industry synergies: It refers to the operating benefits of collocating with other firms serving the same industry. For example, firms in the grocery business often receive substantial benefits when they share public warehouse facilities with other suppliers serving the same industry. Reduced transportation cost is the major benefit since joint use of the same public warehouse allows frequent delivery of consolidated loads from multiple suppliers. Public and contract warehousing increase the potential for industry synergy.
• Operating flexibility: It refers to the ability to adjust internal policies and procedures to meet product and customer needs. Since private warehouses operate under the complete control of the enterprise, they are usually perceived to demonstrate more operating flexibility. On the other hand, a public warehouse often employs policies and procedures that are consistent across its clients to minimize operating confusion. There are many public and contract warehouse operations that have demonstrated substantial flexibility and responsiveness.
• Location flexibility: It refers to the ability to quickly adjust warehouse location and number in accordance with seasonal or permanent demand changes. For example, in-season demand for agricultural chemicals requires that warehouses be located near markets that allow customer pickup. Outside the growing season, however, these local warehouses are unnecessary. Thus, the desirable strategy is to be able to open and close local facilities seasonally. Public and contract warehouses offer the location flexibility to accomplish such requirements.
• Sale economies: It refers to the ability to reduce material-handling and storage through application of advanced technologies. High-volume warehouses generally have greater opportunity to achieve these benefits because they can spread technology’s fixed cost over larger volumes. In addition, capital investment in automated equipment can reduce direct variable cost. Public and contract warehouses are generally perceived to offer better scale economies since they are able to design operations and facilities to meet higher volumes of multiple clients.