2.1.3 Warehousing and storage
Warehouses are, typically, one storey facilities allowing for receiving, storage, order picking and shipping of goods, providing at the same time office and related space. They have an effective storage plan, use efficient material handling equipment and information systems and make maximum use of the height of the building.
Warehousing and storage can vary widely in what they provide, depending on the commodity stored. On the one hand, there is the storage of iron ore or coal. On the other, there is the warehousing of temperature and climate sensitive goods such as foodstuffs, computers and pharmaceuticals. In the logistics context, warehouses are points on the logistics chain where commodities or goods are held before they are used in the next process or consumed. Warehousing happens on both sides of the production function. Raw materials can be stored in warehouses prior to use in manufacturing; and finished product can be stored in warehouses before distribution to retail outlets and other customers (Figure 3.3).
Figure 3 Warehousing and storage are usually required on both sides of the production equation.
The main functions of warehousing or storage are:
- consolidation for onward transport
- product mixing for specific customer orders
- cross-docking (transferring goods from one to the other through the warehouse) between suppliers and consumers
- contingency stocks to overcome delays or peaks and troughs in the normal transport chain.
Warehousing and storage costs can be quite high, depending on the level of inventory that is being maintained and the nature of the material being stored. Generally, the more valuable or perishable the commodity, the higher are the costs. Organisations aim to reduce their costs as much as possible. This is the main motivation to use JIT supply of goods for production purposes.
The relationship between the level of inventory maintained and the amount of transportation used is direct: the greater the amount of transportation, the less need for inventory, and vice versa. The level of inventory is then related to the amount of warehousing that is used. There are obvious trade-offs to be considered.
If the inventory is required to be high, perhaps through unpredictable delivery schedules or long distance of delivery, warehousing capacity and usage has to be high. Warehousing costs go up with increased inventory holding. At the same time, there are economies of scale in maintaining large warehouses. Two warehouses of 50,000 square meters are more expensive to operate than one of 100,000 square meters.
On the other hand, an increase in the number of warehouses would allow an increase of production and a reduction in transport costs, reducing overall costs. These costs will decrease as long as the inventory costs remain lower than the cost of increased warehousing. Once that point is reached, increasing the number of warehouses will result in an increase of total costs.
This argument works effectively in reverse as well. Reducing warehouses can also contribute to reducing overall costs through economies of scale and focused transport movements. Better transport results in reduced inventory costs.
The decision on the number of warehouses that a firm maintains depends on the level of service it requires. If the warehouses are used for holding goods that are then called upon to service customers quickly, particularly those who require shipments in various locations and in small quantities, a number of warehouses are obviously cost-effective. Another situation in which large number of warehouses is recommended is when customers do not allow sufficient lead time or demand is erratic.
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