Global Supply Chain Management

1. Global Supply Chain Management

2. Chapter #7 Warehousing

3. The Logistics System

4. Overview • We will examine the functional nature of warehouses • We will discuss some reasons for having warehousing as a component of our logistics system • We will review several different ways of accomplishing the warehouse function • We will briefly discuss the warehouse location problem and solution approaches

5. Introduction • A warehouse is more than just a place to store inventory while we wait to use it or ship it • The warehousing function can have a significant impact on both the cost and operation of our logistics system and thus the firm’s business

6. Introduction • Warehousing is involved in four supply-chain process: • Sourcing/inbound logistics • Processing/manufacturing • Outbound distribution • Reverse Logistics

7. Strategic Role of Warehousing • We invest in warehouses or a distribution center (DC) to: • Provide local inventory • Perform value-added services for our customers • Operate near vital suppliers • Consolidate outbound orders • Protect against manufacturing lead-times • Handle reverse logistics • Perform quality inspections • Enable manufacturing economics • Enable procurement efficiencies, etc.

8. Strategic Role of Warehousing • As with any other function of the logistics system, management must make decisions about warehousing based on the overall system impact • Benefits must outweigh the costs • If the cost are greater than the benefits…find another way to do business

9. Functions of Warehousing • Receiving • Put-Away • Storage • Replenishment • Order Selection/Order Picking • Checking • Packing and Labeling • Staging and Consolidation • Shipping • Clerical/Office Administration

10. Functions of Warehousing

11. Functions of Warehousing • Not all functions are necessarily performed in every warehouse • Notice that the majority of these functions revolve around the movement of product • The layout in the previous diagram is aimed at minimizing wasted product movement

12. Functions of Warehousing • A warehouse strategy that minimizes inventory results in requirement for less storage and smoother flows • Warehouses with “0” inventory are essentially cross-docking operations • FedEx, UPS, DHL, etc. do a good job of this

13. Warehousing Roles • Gathering facilities • Smaller quantities gathered for manufacturing or repackaging • Less-Than-Load quantities from a variety of sources reshipped as Full-Load (TL originally Truck-Load) • Freight forwarding operations

14. Warehousing Roles • Breakdown centers • Bulk quantities broken down, repackaged and shipped in smaller quantities (typical of DCs) • May be TL inbound and TL or LTL outbound • Wal-Mart DCs for example

15. Warehousing Roles • Multi-functional roles • Both gathering and breakdown may be necessary in a global logistics environment

16. Warehouse Location Issue • Whether you are operating globally or domestically, managers must decide on a warehousing strategy with respect to warehouse location that best serves their customers • There are two basic strategies: • Centralized facility • Facilities in each markets served

17. Warehouse Location Issue • Of course, in reality, a mix of these strategies may be necessary in order to deliver the appropriate level of customer service in varied specific markets

18. Warehouse Location Issue • Centralizing the warehouse function has a number of advantages and disadvantages • Advantages include: • Simplified order processing • Elimination of nationally (locally) based operations • Reduced capital requirements • Reduce inventory holding costs • Reduced outbound shipping costs • Increased opportunity for use of intermodal transport • Opportunity to simplify channel network

19. Warehouse Location Issue • Disadvantages to centralization include: • Increased inbound shipping cost • Possibly means larger, more complex and thus more costly warehousing facilities and systems • Market specific product packaging • Market specific safety and physical requirements • Negative customer perceptions • Negative marketing, sales and channel associate perceptions • Increased dependence on channel intermediaries

20. n = 2 X X 2 1 n 1 where : º n number of existing facilities 1 º n number of future facilities 2 º X total inventory in existing facilities 1 º X total inventory in future facilities 2 Warehouse Location Issue • In general, centralization can results in decreased inventory holding costs • Square Root Law of inventory

21. Warehouse Location Issue • Basically a management decision that should be made under the same constraints as all other logistics system decisions (i.e. total system cost minimization, profit maximization and customer service constraints) • However, once again, government laws and regulations may dictate what approach we take in any single market

22. Warehouse Location Issue • For a global company, the decision can become extremely complex • Like all other strategies, warehouse location is one that must be reexamined on a period basis

23. Selecting the Warehouse Location • Once the firm decides on a strategy, one still must choose specific locations for each facility • Numerous variables must be considered, but the task not too difficult if you only have one product…but with even a small variety of products, the problem can become unwieldy very quickly

24. Selecting the Warehouse Location • Basic questions to be addressed in a location decision include: • How many warehouses? • How will we allocated customer demand? • How will we allocated production/supplier output? • Notice that all the issues address customer service

25. Selecting the Warehouse Location • Early location theory focused on transportation cost minimization…after all, we still did not think of logistics as a competitive tool • Focus was on minimizing time of transport or cost of transport • Can’t ignore these factors, but it is customer service that must come first

26. Selecting the Warehouse Location • Three basic approaches: • Optimizations • Mathematical models (Linear Programming) • Provide an optimal solution • But, require a great deal of abstraction to develop the model and the resulting solution must be critically reviewed • Very good approach for well understood systems and particularly where transportation cost are a primary consideration, e.g. for Sears Logistics Services

27. Selecting the Warehouse Location • Three basic approaches: • Optimizations (continued) • Extremely expensive if you must develop a custom application/solution • May lose some important focus when using an existing solution software package including contribution to revenue, lot-sizing and timing, for-hire vs. private transportation, issues pertaining to customer service and dynamic considerations

28. Selecting the Warehouse Location • Simulations • Mathematical/logical models generally implemented on a computer • They don’t provide an optimal solution except by chance • Very flexible and capable of addressing many of management’s “what-if” questions…if properly constructed • Can be a significant undertaking to develop and maintain in both time and money • Excellent approach for organizations that are expanding either in terms of markets and/or products/services

29. Selecting the Warehouse Location • Heuristics • Systems that are highly dependent on management (or other expert) opinion/input • May be effectively used to bound optimization and simulation modeling efforts • Increase the probability of missing a “good” solution

30. Selecting the Warehouse Location • Warehouse location has a direct impact on the entire logistics system • Number of warehouses affects overall level of safety stock • Allocation of markets to warehouses affects the level of inventories at each warehouse • Location of warehouses affect all transportation times

31. Selecting the Warehouse Location • Most significantly, location affects customer service • Order cycle times and variability of that time • Product availability • Replenishment lead times and their variability

32. Warehousing Alternatives • Private Warehouse (company owned and operated) • Advantages: • Custom designed to meet our needs • Highest level of management control • Conveys a commitment to the market • Can house other organizational functions • Disadvantages: • High capital cost and operations costs • Decreased flexibility to meet product mix and market changes

33. Warehousing Alternatives • Contract Warehousing (operated by a 3rd party) • Advantages: • Similar to owner-operated warehouse • Generally contracted for a specific level of activity and services over a specified period of time • Can provide specialized services and handling • Dedicates personnel to the company’s products thus assuring some level of customer service commitment

34. Warehousing Alternatives • Contract Warehousing (operated by a 3rd party) • Disadvantages: • Somewhat less direct managerial control • Sharing of customer information • Risk associated with a deteriorating relationship, rapidly changing market/customer needs, and/or evolving product lines

35. Warehousing Alternatives • Public Warehousing operated by a 3rd party receiving, storing and shipping goods for multiple customers • Advantages: • Only pay for what you use • Capital and operating cost are of no concern • Know what the cost will be each month

36. Warehousing Alternatives • Public Warehousing operated by a 3rd party receiving, storing and shipping goods for multiple customers • Disadvantages: • Little control over operations • Higher cost on a unit basis (generally) • Less emphasis on your customers’ service requirements • Lower level of customization for your goods • Risk with respect to flexibility

37. Warehousing Strategies • Decision to utilize private, public or contract warehousing should be based on the total system cost and benefit considerations • Must assess the firm’s ability to perform the function • Compare to outsourcing based on factors such as: • Cost • Ability to meet customer needs • Control • Environmental concerns • Confidentiality • Market conditions • Level of service assurances

38. Concerns in Overseas Markets • Myriad of issues facing new market development for any company • Finding facilities may be challenging • May not be able to legally own the facilities • Quality of care in public/contract facilities • Quality of customer service from 3rd party providers

39. Concerns in Overseas Markets • In general, for a company servicing a global market, warehousing policy will inevitably vary from market to market. • Those just going international are often confounded when trying to implement the same warehousing strategy they use domestically, e.g. building a warehouse in Baku

40. Summary • Warehousing is an important logistics function • Long term cost and customer service impacts • Location of facilities involves more than just the cost/time minimization of transportation • Outsourcing of the warehousing function is an increasingly attractive alternative strategy for many organizations, but you must understand the total cost of alternatives