Supply Chain Management II

Illustration of Warehouse Economic Benefits

Economic Benefits

In this session, we are going to focus on some graphical representation of the economic benefits of
warehousing. We categorize economic benefits, we put them into four categories: consolidation and
break-bulk, cross-docking, and in-transit mixing, seasonal storage and stockpiling, and reverse logistics.
We will talk about each of them. In some cases, we will provide some graphical illustration of what the
flows are and why it provides value to the firm in terms of operations.

Consolidation

Let's start off by looking at the consolidation example, which is a major benefit of having a warehouse.
So, we see the warehouse in the middle. On the left-hand side, we see three plants producing Product A,
B, and C, and then on the right-hand side, we see three different customers: A, B, and C. Although here,
they are illustrated as one facility, but these are the smaller customers.

So, we could directly ship from Plant A to each customer, and then from Plant B to each customer, and
then from Plant C to each customer. Since we have three plants and three customers, that would, in
effect, be nine shipments, three times three. By inserting a warehouse in here, we have three inbound
shipments from Plant A to the consolidation warehouse, Plant B to the consolidation warehouse, and
Plant C to the consolidation warehouse, and then three shipments out to the customer: Customer A, B,
and C. So, instead of nine shipments, we have six shipments. And if we remember back to our discussion
of transportation, we know that transportation is very economy of scale oriented. So, if we have fewer
shipments, we are going to have larger shipments, which means transportation cost is going to be less.
So the rationale for a consolidation warehouse is to obtain better economy of scale and be able to use
larger trucks, and also, larger trucks will usually give us better delivery times. So that gives us overall
better performance with a consolidation warehouse than having nothing in between the plants and the
customers. So this is a common example of why we have warehousing.

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Break-Bulk Warehouse

Another example is what is called a break-bulk warehouse. In this case, we have one plant on the left-
hand side, we have a series of customers — A, B, and C — on the right-hand side, and we could have the
plant shipped directly to the customer. So in this case, we would have three rather long shipments going
from Plant A to the three customers. By putting in a break-bulk facility, we ship a large quantity from
plant to the break-bulk warehouse, and at the warehouse, we break it down into smaller packages and
then ship it to the customer in a much shorter distance at a much lower price.

The example that I often use here is what I experienced with a company that was working with contact
lenses. Rather than ship the contact lenses in small packages that you or I would use to buy the product,
so that will go from Customer A, B, and C, they will ship a large box of contact lenses to the break-bulk
warehouse. At the break-bulk warehouse, they will pull the smaller boxes out of the large box and then
transport those to the individual customers. It is much less expensive, and again, it often provides value
in terms of quicker delivery because larger shipments usually can be delivered more quickly.

Cross-Dock

The next example is a cross-dock facility. Cross-dock facilities are very common in retail supply chains,
and they involve moving product, often from a manufacturer. If we have here Plant A, B, and C again,
and we have Customer or Retailer A, B, and C again, we could ship products directly from the plant to
the customer on the right-hand side, but a cross-dock facility is a little bit different than a regular
warehouse because typically, they do not stock product, they do not hold any inventory. The inventory
literally moves across the dock and into the truck towards the store.

So on the right-hand side in this case, we would have a lineup of trucks targeted for each of the three
stores or each of the three customers. We would have the truck going to Customer A, Customer B, and
Customer C. On the left-hand side, we would have the arrivals from my various suppliers: A, B, and C.
And the arrival from A would come in and they would unload that truck, take the product across the
dock, and place it in the Customer’s A, B, or C trucks. So there is no formal loading process, there is not a
very sophisticated technology related to it in most cases, and it is fantastic for moving fast-moving
products. Why? Because it doesn't make sense to unload a product, put it in a storage facility, and the
next day, pull it out of the storage facility and then put it on the truck departing.

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The usage of cross-dock warehousing is fantastic, as I said, for fast-moving product or high-value
product. It also works great for very bulky products like paper products where they are expensive to
handle. So, many retailers use cross-docking as the method to reduce supply chain storage and retrieval
costs.

In-Transit

Another example of an economic benefit of warehousing is in-transit mixing. In this particular case, we
still have our three customers on the right-hand side. Our customers take different product mixes, and
that is illustrated by the different product combinations on the right-hand side as well. The plants on the
left-hand side, again A, B, and C, bring the product in and deliver the product to the mixing warehouse.
The mixing warehouse does what the name implies, mixes product, and could perhaps take A, B, and C
and make Product D. So we are customizing the product. And that could be changing the product
formulation. It also could be changing the packaging of the product or another type of value-added
activity. So in this case, the mixing warehouse is providing those value-added activities or changing
formulas or changing packaging and then delivering to the customers in the right-hand side the product
in exactly the form that they want to see.

Economic Benefits

So, those are the major economic benefits of warehousing. Two others that we identified earlier were
seasonal storage or stockpiling. In this case, we use a warehouse to store products when we make it
prior to the season, for example, lawn care products: lawnmowers, lawn utensils, fertilizer, and that
type of thing.

Stockpiling

We might want to make the product year-round, stockpile it in a warehouse, but only ultimately ship it
out to the store in the early spring. We certainly do not want to have lawnmowers and lawn products
out there in the stores around Christmastime, at least in most of the country. So that would be seasonal
storage or stockpiling, in that case where we want to have a level production and then be positioned to
deliver the product when the demand is going to be there.

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Reverse Logistics

Another example of economic benefits of warehousing is reverse logistics. Reverse logistics

accommodates for returns and recycling of product. We design supply chains to move product from the
manufacturer or the distributor to the retailer and to the customer. They are designed to move product
towards the customer. When we have to return and deal with reverse logistics, they are not designed to
do that. So sometimes we create reverse logistics facilities to handle products such as electronic
products, such as car parts, such as beverage containers, and in many parts of the country, we bring
product back towards the manufacturing process, but we have to design that process to facilitate fewer
economy of scale. It is not that we have a lot of product coming back, it is actually relatively much less,
but how can we efficiently do it. So in many cases, firms design their reverse supply chain to be
completely different than their forward-facing supply chain or demand-facing supply chain. But it is still
a very important thing to have intermediate warehouses to provide the economic benefits of
warehousing.

Conclusion

So, I hope this helps you understand the economic value of having warehouses, the opportunities to
reduce cost.

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