Warehousing Today

Firms rely on their warehouses to coordinate the flow of material and information among multiple
supply chain participants and, when necessary, to modify the material. The pressure on
warehouses to be both cost effective and responsive in this role continues to increase. Advances
in information technology are driving expectations for total inventory visibility throughout the
supply chain. At the same time, supply chains and warehouses face increased product
proliferation, globalization, and consolidation among retailers and manufacturers resulting in
additional complexity.

Customers continue to expect more from the warehouse, whether firm-owned or operated by a
third party. Modern warehouses are expected to handle more than 99 percent of all transactions
perfectly and react immediately to special requests. Same-day shipments of orders is routine in
many warehouses.

The number of firms that fully appreciate the cost of inventory continues to grow. In addition, there
has been a surge of merger and acquisition activity among food, consumer packaged goods and
chemical manufacturers and distributors in the last five years. Both of these trends contribute to
an ongoing rationalization of the U.S. warehouse network, which manifests in the following trends:

Increased Outsourcing. Manufacturers are increasing their use of third-party warehousing to

take advantage of third-party resources, such as access to cheaper labor and the ability to share
space among multiple users. Manufacturers also value the ability to change networks without the
burden of fixed expenses. For these warehouse users, space utilization and flexibility should
increase while overall costs declines.

Distributors and retailers do not seem to be increasing their use of third-party warehouses. They
believe that outside warehousing would result in an unacceptable loss of flexibility, inventory
control and quality, and that the effort required to monitor third-party providers to ensure that they
react to market changes and meet the appropriate quality and service targets is substantial.

More Value-Added Activities. Manufacturers, distributors and retailers are shifting more
activities to the warehouse. Here again, the driver is warehouse access to the key resources of
space, labor and knowledge at a reasonable cost. Since the warehouse is positioned closer to
customers with relatively inexpensive resources, it often makes sense to move final packaging,
labeling and configuration to the warehouse location.

Additional activities also imply additional performance measures including, for example,
manufacturing efficiency and return on assets. Third-party warehouse companies are very
receptive to taking on new responsibilities since they perceive flexibility as a major part of their
offering to customers.

Shrinking Networks. All users—manufacturers, distributors and retailers—are shrinking the

number of stocking locations in their networks, and increasing the size of remaining warehouses.
Smaller networks require less safety stock and are easier to manage. Companies report very
large inventory reductions as safety stock is reduced through "risk pooling" across multiple service

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areas. There are two exceptions to this trend: 1) Retailers and distributors continue to open new
facilities to support new territories. 2) Warehouses may be opened to handle imports.

As networks shrink, warehouse space is becoming concentrated around large population centers.
Repercussions of this include saturated labor markets, higher delivery costs, and increased land
costs.

Critical Success Factors

Interviews with retailers, manufacturers and distributors revealed a number of critical success
factors. These success factors can be organized into three categories: human resource
management, technology management, and performance management.

Operating a warehouse remains a hands-on, people-intensive task, and modern warehouses still
see front-line labor and supervision as critical to successful performance. Warehouse managers
are primarily concerned with employee selection and retention, process training and measuring
and rewarding employee performance.

Most warehouse managers seek front-line employees and supervisors who have strong
interpersonal skills, and are energetic, communicative and have a desire to learn. These
characteristics are even more important as the emphasis in the warehouse has changed from
storage and shipping to offering value-added services that often require coordination of several
warehousing activities and communication with suppliers and customers.

There is heavy interest in training throughout the warehouse community. Training in multiple
activities provides flexibility within the warehouse as employees can move from one position to
the next as needed. Warehouses that have to support highly variable customer demand often rely
on temporary workers. These workers are less likely to receive the training offered to full-time
warehouse employees, which often results in quality problems that impact overall warehouse
performance.

In addition, ongoing improvement depends on measuring their performance and holding them
accountable for their performance. Many interviewed firms involve employees in setting
performance goals and offer incentives like bonuses to motivate employees to achieve these
goals.

Implementing new technologies has been critical as warehouses move from being reactive to
proactive. The objective is to know what is coming, when it is coming, how it is coming, what is
needed once it arrives, and where it is going (if possible). Technologies that enable information
sharing across supply-chain parties, such as EDI, fax or web exchanges, support this effort.

Some warehouses are experimenting with advanced planning and scheduling systems for their
value-added services and light manufacturing, but this is not widespread. Operations are working
to improve information technology capability, whether this is a new or upgraded warehouse
management system (WMS), better communications to outside customers or more precise
tracking of costs and physical material movement within the four walls.

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Many firms are also evaluating hardware options including RF product tagging, improved bar code
scanning (down to the piece level in some cases), pick-to-light and pick-to-bell systems. The
perception in the warehouse community is that all of these, properly implemented, improve
accuracy and control of inventory flows within the warehouse and between the warehouse and
its suppliers and customers.

Cost reduction continues to be a primary indicator of warehouse success, especially among

private operators, both retail and manufacturing. This is not surprising, as the company
warehouse operations are often viewed as cost centers. Annual cost reductions, or at least
increases less than inflation, are certain to be in management's incentive goals and performance
metrics. However, service and other performance measures are increasingly important for
success in today's warehousing environment.

Like any other business asset, the warehouse is necessary only if it can show its value to the
supply chain and the enterprise. Traditionally it has been the warehouse that received multiple
products in large quantities, stored them, and then built the assortments that customers ordered.
As manufacturers and retailers assess their supply chain costs, they are finding less and less
value in the storage function, unless it is critical to transportation consolidation savings. Instead,
warehouses will be asked to use their space and labor for cross-docking, light manufacturing and
customization. The modern warehouse can also prosper if management applies its local
knowledge and assets to provide superb performance that shippers and final customers cannot
find anywhere else.

1) What does the author mean with “outsourcing”? Could you give an example of a
company implementing an outsourcing strategy?

2) Could you explain what “added value” means, giving an example?

3) What do you understand about Shrinking Networks?

4) Please, explain 5 future trends of the warehousing sector.

5) What does the author mean about the term “private operator”?