Warehousing & Distribution Chapter 4

Chapter 4: Warehousing and Distribution

1 PURPOSES OF WAREHOUSE

1.1 DEFINITION

All companies hold certain level of inventory. Chapter 2 talks about controlling inventories to
find the best patterns for orders. This chapter is going to look at the way inventory is actually
stored.

Inventory occurs at any point in the supply chain where the flow of materials is interrupted.
Companies hold inventory to give a buffer between supply and demand. Most companies
arrange for inventory to be kept in warehouses. These warehouses might be open fields
where raw materials like coal, ore or vegetables are heaped; or sophisticated facilities that
give the right conditions for frozen or delicate materials [ CITATION Wat03 \l 1033 ].

A warehouse is any location where stocks of material are held on their journey through
supply chains[ CITATION Wat03 \l 1033 ].

1.2 PURPOSES

Most warehouses are designed to receive raw materials before productions, and finished
goods before distribution to customers. To a lesser extent, they store work in progress,
consumables and spare parts [ CITATION Wat03 \l 1033 ].

In addition to storing materials, companies often use warehouse to do a range of related

jobs. Obviously they can be used to inspect, sort materials and break bulk (taking larger
deliveries and breaking larger deliveries into smaller quantities). They might also be used for
finishing products, labelling, packaging and making products ‘store ready” for retailers. The
overall trend is for warehouses to do more tasks, positively adding value rather than being a
pure cost centre [ CITATION Wat03 \l 1033 ].

2 WAREHOUSE ACTIVITIES

2.1 BASIC ACTIVITIES

The basic function of a warehouse is to store goods. This means that the warehouses
receive goods delivered from upstream suppliers, do any necessary checking and sorting,
store the materials until they are needed, and then arrange delivery to downstream
customers.

The warehousing process can be described as a sequence of activities below in Table 1.

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Activities
Receiving (inbound)
Put-away and storage
Inventory control
Order picking/packing
Despatch (outbound)
Table 1 Warehouse basic activities
Steps
 Receiving goods from suppliers
 Unloading materials from delivery vehicles
 Identifying goods, comparing actual to documents
 Doing any necessary checks on quantity, quality and
condition
 Locate storage location
 Move goods to storage area
 Update records
 Supervision of storage and accessibility of storage
 What items, how much of each item, where are the
items
 Pick materials to meet orders
 Move materials to staging area
 Sort and assemble materials based on order
 Load delivery vehicles
 Update records

2.2 OTHER ACTIVITIES

2.2.1 Consolidation and Break-Bulk

The economic benefits of consolidation and break-bulk are to reduce transportation costs by
using warehouse capability to increase the size of shipments [ CITATION Bow13 \l 1033 ].

In consolidation, the warehouse receives inventory, from a number of sources that are
combined into a large single shipment going to a specific destination. Consolidation helps
company to reduce freight costs, ensure timely delivery and reduce congestion at a
customer’s receiving dock [ CITATION Bow13 \l 1033 ].

Suppliers Warehouse Transport Customers

Figure 1 Consolidation

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A break-bulk operation receives a single large shipment and arranges for delivery to multiple
destinations. Economy of scale is achieved by transporting the larger shipment from origin to
destination. The break-bulk warehouse sorts or splits the larger shipment into individual
orders for customer delivery [ CITATION Bow13 \l 1033 ].

Suppliers Transport Warehouse Customers

Figure 2 Break-bulk

2.2.2 Cross Docking

Warehouses are more often places for sorting and doing work on materials rather than
storing them. A warehouse that has the facility to transform an inbound load of goods into a
number of outbound orders without the items being stocked is a cross-dock facility
[CITATION oak12 \l 1033 ].

The objective of cross-docking is to combine inventory from multiple origins into a

customized assortment to meet the needs of a specific customer. Retailers make extensive
use of cross-dock operations to replenish fast-moving stored inventories. Cross-docking
requires precise on-time delivery from each manufacturer. As products are received and
unloaded at the cross-dock, they are sorted by customer destination. In most instances, the
customer needs to inform the facility the precise volume requirements of each product for
each delivery destination [ CITATION Bow13 \l 1033 ].

The high degree of precision required for effective cross-docking makes successful
operation highly dependent on information technology.

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Suppliers Warehouse Customers

R S D
e o e
c r s
e t p
i i a
v n s
i g t
n c
g h

Figure 3 Cross-docking

2.3 REVERSE LOGISTICS PROCESSING

A great deal of the physical work related to reverse logistics is performed at warehouses.
Reverse logistics includes the activities to support (1) return management, (2)
remanufacturing and repair, (3) remarketing, (4) recycling, and (5) disposal.

Returns management is designed to facilitate the reverse flow of product that did not sell or
to accommodate recalls. Remanufacturing and repair facilitates the reverse flow of product.
Refurbished product can be reused or sold as appropriate [ CITATION Bow13 \l 1033 ].

Figure 4 Reverse logistics flow [CITATION Rob14 \l 1033 ]

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3 LAYOUT

3.1 GENERAL LAYOUT

Warehouse layout describes the physical arrangement of storage racks, loading and
unloading areas, equipment, offices, rooms and all other facilities [ CITATION Wat03 \l
1033 ].

The essential elements in a warehouse are:

 An arrival bay, where goods coming from suppliers are delivered, checked and
sorted.
 A storage area, where the goods are kept as inventory.
 A dispatch bay, where customers’ orders are assembled and sent out.
 A material handling system, for moving goods around.
 An information system, which records the location of all goods arrival from suppliers,
departures to customers and other relevant information.
[ CITATION Wat03 \l 1033 ]

The layout of storage areas of a warehouse should be planned to facilitate product flow.

A typical warehouse layout is illustrated in Figure 5.

Figure 5 Warehouse layout [CITATION The15 \l 1033 ]

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3.2 LAYOUT OF RACKING

The most basic storage layout is blocks stacking, by which pallets of a product are placed on
the floor in groups of four, eight and then stacked to a height allowed by regulations, floor
loading, safety and lifting equipment capability[ CITATION oak12 \l 1033 ].

Pallet storage racks are used for products more liable to damage. The racking consists of
vertical frames and load beams for each shelf of elevation[ CITATION oak12 \l 1033 ].

There are different types of pallet racking, depending on the needs of the business.

Selective pallet racking – the most common type of racking and it forms the basic structure
in general warehouses.

Narrow aisle pallet racking – it is used for high density storage and requires special forklift
trucks and stacker cranes.

In practice, the details of the layout are determined by the existing building, height, or some
physical constraint. The layout for racking depends, to a large extend, on the type of goods
being stored and the handling equipment used. If the goods are small and light, such as
boxes of pills, they can be moved by hand, and the warehouse must have low shelving and
be small enough to walk round. If the goods are large and heavy, such as engines, they
need heavier handling equipment such as cranes and forklift trucks. Then the aisles must be
big enough for these to maneuver[ CITATION Wat03 \l 1033 ].

4 TYPES OF WAREHOUSE AND MATERIALS HANDLING

A lot of the work in a warehouse moves materials from one location to another. Everything
has to be taken from delivery vehicles, moved around the warehouse – often several times –
and eventually put onto departing vehicles. The activities involved form part of materials
handling [ CITATION Wat03 \l 1033 ].

Every time an item is moved it costs money, takes time, and gives an opportunity for
damage or mistake. Efficient warehouses reduce the amount of movement to a minimum,
and make the necessary movements as efficient as possible[ CITATION Wat03 \l 1033 ].

In some warehouses most of the materials handling is done by hand. Other warehouses
have forklift trucks and cranes for moving heavy items. A third level gives automated
warehouses, where all materials handling is managed by a central computer[ CITATION
Wat03 \l 1033 ].

4.1 MANUAL WAREHOUSES

This is the easiest arrangement and still one of the most common form. Items are stored on
shelves or in bins. People go around and pick items from the shelves, and put them into

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some sort of container for movement. There may be some aids, like hand trucks for moving
pallets, or carousels to bring materials to pickers, but essentially people control all aspects of
movement[ CITATION Wat03 \l 1033 ].

Manual warehouses only work if the items are small and light enough to lift. Shelves must be
low enough for them to reach and close together to reduce distance walked[ CITATION
Wat03 \l 1033 ].

4.2 MECHANISED WAREHOUSES

Mechanised warehouses replace some of the muscle power of manual warehouses by

machines. Typical examples of mechanized equipment are:

Forklift trucks, come in many different versions and are the standard means of moving
pallets and equivalent loads for short distances. They are very manoeuvrable, flexible, and
can be adapted for many jobs. On the other hand, they need space to work, and are fairy
expense to use.

Conveyors, which are used to move large quantities of goods along fixed paths. You can see
many examples of conveyor belts moving materials that range from iron ore to letters.

Carousels, which are basically a series of bins going round a fixed track. At some point on
the journey items are put into a bin, and the bins are emptied when they pass another chute
or collection point.

These warehouses can store heavier goods and may be much bigger. Some equipment
needs wide aisles to manoeuvre, but racking can be higher – typically up to 12 meters with a
forklift truck and higher with cranes or high-reach equipment[ CITATION Wat03 \l 1033 ].

4.3 AUTOMATED WAREHOUSES

Traditional warehouse, even mechanized ones, tend to have high operating costs. These
operating costs can be reduced by using automation. Unfortunately, this needs a very high
investment in equipment, and is only really worthwhile for very big stores that move large
amounts of materials[ CITATION Wat03 \l 1033 ].

Automated warehouses work in the usual way, but they include the following components:

Storage areas that can be accessed by automatic equipment; these often use narrow aisles
up to, say, 40 m tall to get a high density of materials and minimize the distances moved.

Equipment to move materials around the warehouse; these are usually automated guided
vehicles (AGVs) which use guide wires in the floor, but might include conveyors, tractors, or
a range of other moving equipment.

Equipment to automatically pick materials and put them into storage, including high speed
stacker cranes that can reach any point in the narrow aisles very quickly.

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A warehouse management system to record material locations and control all movements.

5 WAREHOUSE DECISIONS

The basic concept that warehouses provide an enclosure for material storage and handling
requires detailed analysis before the size, type and shape of the warehouse can be
determined. Below focuses on the planning issues that need to be established.

5.1 SITE SELECTION

The first thing is to identify both general area and specific warehouse location. The general
warehouse location concerns the broad geographical area where an active warehouse
makes sense from a service, economic and strategic perspective [ CITATION Bow13 \l 1033
].

The general area decision may be influenced by a number of parameters:

 Lowest cost calculations, such as the center of gravity of the supply network.
This is used to determine the location of a single warehouse that minimize the sum of
customer weighted straight-line distances from each customer to the warehouse.

 Service level requirements

Lead-time expectation by the customers will influence the site location decision.

 Access to infrastructure
Whether the site has easy access to ports, freeways, terminals, as well as the traffic flow
situation in city may dictate the location of the warehouse.

 Business strategy
Company’s business strategy in relation to the centralization of operations and trade-off
between the costs of storage and transport against the lead times for the items will affect the
site selection.
[ CITATION oak12 \l 1033 ]

Once the general warehouse location is determined, a specific building site must be
identified. Typical areas in a community for locating warehouses are commercial
developments. The factors driving site selection are service availability and cost. Land cost
is an important factor. For these reasons and others, the final selection of the site should be
preceded by extensive analysis. [ CITATION Bow13 \l 1033 ]

5.2 SIZING

A projection of the total volume expected to move through the warehouse during a given
period is used to determine the size of a warehouse. Normal and peak inventory should also
be considered when making decision. In addition to this, warehouse space utilization is one

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of the key factors that most of the companies focus on to prevent overbuilding from
happening [ CITATION Bow13 \l 1033 ].

With the fast expanding of businesses in most types of industry in recent years, a major
complaint from the warehouse managers is underestimation of the warehouse size
requirements. A good rule of thumb is to allow for 10 percent additional space to account for
increased volume, new products and new business opportunities [ CITATION Bow13 \l
1033 ].

Some of the most important factors affecting the size of a warehouse are:

 Customer service levels

 Size of market(s) served
 Number of products marketed
 Size of the product(s)
 Material handling system used
 Throughput rate
 Production lead time
 Stock layout
 Office area in warehouse
 Level and pattern of demand

Typically, as a company's service levels increase, it requires more warehousing space to

provide storage for higher levels of inventory. As the market(s) served by a warehouse
increase in number or size, additional space is also required. When a company has
multiple products or product groupings, especially if they are diverse, it needs larger
warehouses in order to maintain at least minimal inventory levels of all products. In
general, greater space requirements are necessary when products are large; a high
throughput rate exists; production lead time is long; manual material handling systems
are used; the warehouse contains office, sales, or computer activities; or demand is
erratic and unpredictable.

6 ROLE OF DISTRIBUTION

The role of distribution is to bridge the geographical and time gaps between the producer
and the consumer.

Geographical Gap

This is the gap between the place of production and the place of consumption.

An example would be:

Coffee beans grown in Brazil  a tin of coffee in the cupboard at home

The distance between producer and consumer may be enormous. Imagine a customer
buying a jar of coffee from a supermarket. The coffee bean is grown thousands of kilometres
away, possibly in Brazil. The beans have to be picked, put into sacks, transported to the

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coast and then across the ocean to Singapore where they are ground, processed and
packed into jars and outer cartons before finally being dispatched to the supermarket.

Time Gap

This is the gap between the time of production and the time of consumption.

Time gap may be short, e.g.

Strawberries picked on Friday  the same strawberries on the tea table on Sunday
Time gap may be long, e.g.
Fireworks manufactured in January  to be used in August during National Day celebration

The time period between the production of goods and their eventual consumption must also
be bridged. It may be quite short for perishable commodities such as fruits. Of course, they
can be canned or frozen, but they still need appropriate care to be exercised before they
reach the consumer. For slower-moving or seasonal goods the time gap may be relatively
long, and appropriate care must be taken until they are sold. For example, fireworks need
protection from dampness, furniture from woodworm and metal goods from corrosion.

7 DISTRIBUTION CHANNELS

As goods move from the producer or manufacturer to the consumers, they are handled by
various distributors. Transport cost, handling cost, storage cost and the profits of
intermediaries increase the price of the goods. However this price increase is justified
because the distributor is fulfilling an essential function by helping to give the consumer easy
access to goods. The distributive system allows a wide variety of goods and services to be
readily available to every consumer.

A channel of distribution is the path through which goods and services travel from the vendor
to the consumer or payments for those products travel from the consumer to the vendor. A
distribution channel can be as short as a direct transaction from the vendor to the consumer,
or may include several interconnected intermediaries along the way such as wholesalers,
distributers, agents and retailers. Each intermediary receives the item at one pricing point
and moves it to the next higher pricing point until it reaches the final buyer. Coffee does not
reach the consumer before first going through a channel involving the farmer, exporter,
importer, distributor and the retailer.

It can also be defined as a collection of organizational units, institutions, or agencies within

or external to the manufacturer, which performs the functions that support product
marketing. The marketing functions include buying, selling, transporting, storing, financing,
bearing market risk and providing marketing information.

7.1 Channel Intermediaries

The manufacturer or producer and the consumer are geographically separated. Consumers
do not want to visit several manufacturers or producers in order to buy the goods they need

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while the producers do not want to deliver to all the outlets stocking their products or to all
their customers. The use of a middleman, or a channel intermediary, contributes to efficiency
as illustrated in Figure 6.

Without a middleman, a total of twelve contacts or transactions are required for each
producer to service each customer. With the introduction of a middleman, only seven
transactions or contacts are required. The introduction of a channel intermediary reduces the
number of contacts or transactions, thereby reducing the total cost to the customer.

Direct distribution channel with no intermediary

Producer 1 Producer 2 Producer 3

Customer 1 Customer 2 Customer 3 Customer 4

Distribution channel with an intermediary

Producer 1 Producer 2 Producer 3

Channel intermediary

Customer 1 Customer 2 Customer 3 Customer 4

Figure 6 Comparison between Distribution Channel with and without Intermediary

7.2 TYPES OF CHANNEL INTERMEDIARIES

Channel intermediaries provide a variety of services, for example, providing variety for the
consumer, breaking down bulk purchases into more easily manageable quantities, assisting
with promotional activities and enabling a much wider geographic dispersion.

There are three main types of channel intermediaries: agents, wholesalers and retailers.

Agents

Agents are used extensively in export markets when any of the following situations arises:
 where the producer does not have a detailed knowledge of the export market
 when the producer’s ambitions are limited
 when the level of sales does not make the cost of a full-time team worthwhile

Agents usually work in one of the following two ways:

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 Obtain orders from customers, pass these to the producer and then take a commission
on the agreed price. Contract is between the producer and the customer and no stock-
holding is required.
 Purchase goods from the producer and sell them directly to consumers or to other
channel intermediaries such as retailers. Agent is required to hold a minimum stock on
behalf of the manufacturer.
Wholesalers

Wholesalers buy large consignments from producers and then sell the products in smaller
consignments to retailers. The advantages of the wholesaling system are that producers
have reduced costs as fewer deliveries are needed, and the retailers can purchase products
in the numbers they require without the need to carry large stocks. The responsibility to
provide storage facilities lies with the wholesaler rather than the producer or retailer.

Retailers

Retailers may perform many functions such as:

 hold a range of related products
 display products in a way that makes them appealing to consumers
 offer advantageous financial terms to their customers, such as hire and purchase
 take on tasks that have been performed by other channel intermediaries

7.3 TYPICAL CHANNEL CONFIGURATIONS

Some typical channel configurations are shown in Figure 7.

Manufacturer
Consumer
or producer

Manufacturer
Retailer Consumer
or producer

Manufacturer
Wholesale Retailer Consumer
or producer
r

Manufacturer
Agent Consumer
or producer

Manufacturer
Agent Retailer Consumer
or producer

Figure 7 Typical Distribution Channel Configurations

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7.4 TYPES OF DISTRIBUTION

In intensive distribution, the product is sold to as many appropriate retailers or wholesalers

as possible. This type of distribution is for products where the primary factor influencing the
purchase decision is convenience. Soft drinks, bread, film and cigarettes are examples of
such products.

In selective distribution, the number of outlets that may carry a product is limited, but not to
the extent of exclusive dealing. By carefully selecting wholesalers or retailers, the
manufacturer can concentrate on potentially profitable accounts and develop solid working
relationships to ensure that the product is properly merchandised.

In exclusive distribution, a single outlet is given an exclusive franchise to sell the product
in a geographic area. Products that enjoy a high degree of brand loyalty are likely to be
distributed on an exclusive basis. Exclusive distribution is undertaken when the
manufacturer desires more aggressive selling on the part of the wholesaler or retailer or
when channel control is important. Exclusive distribution usually enhances the image of a
product and allows the firm to charge higher retail prices.

8 REFERENCES

Bowersox, D. J., Closs, D. J., Cooper, M. B., & Bowersox, J. C. (2013). Supply Chain
Logistics Management (4th ed.). Singapore: McGraw-Hill.
Oakden, R., & Leonaite, K. (2012). A Framework For Supply Chains - Logistics Operations
with an Asia-Pacific Perspective. McGraw Hill.
Robinson, A. (2014, February 19). What is reverse logistics. Retrieved from Cerasis:
http://www.cerasis.com
The Urban Assembly School for Global Commerce. (n.d.). Distribution Center Sketch Up
Design. Retrieved December 19, 2015, from Distribution Center Sketch Up Design:
http://www.uasgctech.com
Waters, D. (2003). Logistics: An Introduction to Supply Chain Management. Basingstoke:
Palgrave Macmillan.

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