CHAPTER 2

WAREHOUSING STRATEGY
AND MATERIALS-HANDLING

• Objectives
– To establish the role of warehousing as a strategic competitive advantage
– To understand the importance of warehouse design for improving productivity
– To establish the role of material handling equipment in warehousing
….

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Warehousing – An integrated logistics component

Order
processing

Facility
Inventory
Network

Warehouse
Materials handling Transportation
Packaging
 • Strategic Warehousing
- In the self sufficient economy, storage performed by households
- Later warehousing performed by retailers and manufacturers and it
was considered as element adding costs to the distribution process.
Warehouse provided inventory for production and retailing - role of
middlemen wasn’t highly appreciated.
- Forecasting and production scheduling techniques improved =>
decreased the need of keeping big inventory
- Retail challenges: customers required more assortments of
products => it’s difficult to maintain purchasing and transportation
economics when buying from manufacturers

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 • Strategic Warehousing

Suppliers Manufacturer’s
Retailer’s WH
warehouse
 • Strategic Warehousing

Suppliers Retailers/
Manufacturers

Holds no parts inventory

What are challenges for retailers?

Oversea suppliers
what are the solutions for them?
 • Strategic Warehousing

Suppliers

Retailers/
Manufacturers

Intermediate
warehouse

Oversea suppliers
 • Strategic Warehousing

Suppliers Retailers/
Manufacturers

Intermediate
Warehouse

Short to moderate distance

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 • Strategic Warehousing
- In manufacturing, strategic warehousing enables to reduce quantity and
holding time of materials and parts, to support JIT and lean production
strategy.
+ JIT
+ Lean/Stockless production
- Role of warehousing has changed – Warehouse becomes value adding
element of SCM offering diversified services beside storage: mixing,
sorting, consolidation, assembling….as a vital extension of manufacturing
- Application of IT in warehouse management makes it flexible, creates new
and better ways to perform storage and handling, quickly and efficiently to
respond to changing customer requirements…

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• Distribution Facilities

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 Retailer
Retailer
supplier
Retailer
supplier Retailer
distribution
center
supplier

Global Regional National

Manufacturer Consolidation Consolidation Consolidation
Center Center Center

supplier
Manufacturer Manufacturer
Retailer
supplier distribution
supplier center
supplier
supplier Retailer

supplier supplier

Retailer Retailer

A typical map of warehouse operation in a global SC

 Warehouse benefits

Economic benefits Service benefits

Consolidation and Reverse logistics
break-bulk

Assortment Spot stocking,

(cross-docking, mixing Full line stocking
and assembly)
Production support
Postponement
Transportation support
(unitization)
Stockpiling for seasonal
production or demand Market presence
• Consolidation and Break-bulk
– Reduce transportation cost by using warehouse capability to increase
economies of scale

Consolidation
Plant A
Customer
Plant B Consolidation
A B C
warehouses

Plant C

Break - bulk
Customer A

Plant A Break-bulk Customer B

warehouses

Customer C

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• Assortment
- Cross-docking: Combine inventory from multiple origins into an
assortment for a specific customer; It is used extensively by
retailers
- Mixing: Mix an arriving inventory with some inventory stored at
the warehouse before delivering to the last customer
- Assembly: To support manufacturing –products and components
from a variety of second-tier suppliers are assembled at a
warehouse located in close to the manufacturing plant

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 Plant A Cross - Dock Customer A
Distribution
Plant B Customer B
warehouses
Plant C Customer C

Mixing Customer X
Plant A
A B C D
Plant B Transit Mixing
point Customer Y
Plant C A B D
Product D
Customer Z
A D
Vendor A Assembly
Lead supplier
Vendor B Customer
warehouse
Vendor C

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• Processing / Postponement
- Postpone finalizing product configurations by delaying packaging, labeling
and light manufacturing….
- Economic benefits
• Reduce risks as products are finalized only when customers place an order
• Reduce total inventory
- Overall reduction of warehousing cost and therefore cost per unit of product
will be reduced

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• Stockpiling
- Accommodates seasonal production or demand
- Is Required to support marketing efforts
- Provides an inventory buffer which allows production efficiencies
within constraints imposed by material sources and consumers
- Serves as safety stock, in-transit stocks
Examples of need for stockpiling
- Lawn furniture is produced year round but is sold only during a short
marketing period
- Agriculture products are harvested at specific times but are consumed
throughout the year.

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Service benefits
• Reverse logistics
+ Physical work related to product recall, refurbishment, disposal of
overstock and damaged, defective inventory as well as recall of
controlled inventory that is performed at warehouses
+ Controlled inventory = hazardous materials, products that have
potential consumer health and environmental consideration
+ Reverse movement consists of non-uniform individual packages and
cartons => manual sortation and inspection to determine appropriate
disposal
=> Reverse logistics provide economic, environmental and service
benefits to companies

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Service benefits …..
- Spot stocking: to support market distribution of highly
seasonal products – usually just prior to a maximum period
of seasonal sale rather than maintaining inventory in
warehouse year-round. Companies can use temporary
warehouses
Ex?
- Full line stocking: deploy at a few strategic locations and
operates year-round. Full line stocking improves service by
reducing the number of suppliers that customers must deal
with and combined assortments to make economical larger
shipment.

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Service benefits …..
- Production support: stock inventory to support manufacturing
operations due to long lead time and/or potential supply disruption
and/or variation in demand
Production support warehouses usually have higher average
inventory level and slower inventory turnover
- Market presence: Local warehouse can respond faster to
customers requirements=> increase customer service level, sales
and profitability.
Technology-based order processing and reliable transportation
shorten response time gap regardless distance => Companies will
consider establishing local warehouse unless it is economically and
service justified

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 Additional material

• Which operations are executed at Amazon DC

https://www.youtube.com/watch?v=Yiafb0-gqF4

• How Amazon provides fast delivery of goods to it’s customers?

https://www.youtube.com/watch?v=Y-lBvI6u_hw

Seller requirements from Amazon

https://sellercentral.amazon.com/gp/help/external/200978400
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• Warehouse Operations

Analysis

Information

Receiving Put away Storage Picking Shipping

Data
Base

Data
Stock-taking
Maintenance

System for Warehouse Information Flow

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 • Warehouse operations
• WH = place where inventory on the move.
• 3 typical handling activities:
+ Receiving inbound inventory and put away
+ In-storage operations
+ Shipping outbound inventory.
• Goal of WH: to facilitate efficient material handling.
+ Movement continuity: Provides longer moves of inventory from
place to place .
+ Scale Economy through out the warehouse: move unitized
shipment (pallets, containers instead of separate cases)

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What should we do when shopping
bags arrive?

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Warehouse layout for effective handling
3 considerations driving WH layout: product volume-weight,
product demand and specific storage requirements.
Example:
+ high volume and heavy product should be positioned so that the
movement distance is minimum
+ high-velocity products should be positioned near doors, at
primary aisles and at lower racks
+ Receiving docks and shipping docks should be separated and
convenient for transport vehicles to move in and move out

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 • Warehouse Operations

Receiving
Storage space for docks
Storage space for high-volume product Storage space for
low-volume product low-volume product

Primary
aisle

Shipping
docks

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 Receiving docks

Shipping docks
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 • Receiving
- Characteristics of arrived inventory: large quantity of similar
products
- Activities:
+ unloading from arriving transportation – performed by
mechanized equipment or mix of a lift truck/conveyors and
manual processes
+ Breaking bulk
+ Sorting inbound inventory
+ Recording information about inbound inventory

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• In-Storage operation: In-storage handling and storage
- In-storage handling involves lower volume movement than receiving but still relatively
similar products.
- In-storage handling includes Transfer movement and order selection
+ Transfer movements:
(1) From place of unloading -> place of storage;
(2) From place of storage to
(a) shipping docks or
(b) From the place of storage => the place of order selection => to the shipping
docks.
+ Order selection: according to specific customer order requirements.

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Type of storage
 Active storage relates to inventory for the periodic
demands of the service area and for achieving
transportation/ handling economies of scale
Active  Material handling processes and technologies for
storage
active storage focus on quick movement,
flexibility

 Extended storage relates to inventory that

excesses normal replenishment of customer
Extended
stocks.
Storage  Example: speculative, seasonal, obsoleted/off-

season, discounted inventory or product

conditioning…

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• Shipping:
+ order verification record of outbound inventory,
+ consolidation for shipment: unitization into standardized units such as pallets, containers
to facilitate quick and more safe handling processes
+ Loading into transportation vehicles.
+ Warehouse Managed System (WMS) can provide real-time visibility of the inventory
flow and the shipment accuracy

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Warehouse operation

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• Warehouse Ownership Classification
– Private
• Operated by firm owning products
• Decision to own or lease is essentially financial, or constrains by
physical nature of an available building
• Benefits of a private WH include control, flexibility, cost, and a
range of intangibles
• Requires substantial investment and depreciation, Private WH
may lead to increase of product unit cost.

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• Warehouse Ownership Classification
– Public warehouse: general merchandise, refrigerated, special commodity, bonded, and
household goods and furniture
+ Able to achieve lower WH operating cost than private facilities
+ Do not require capital investment
+ Offers flexibility of size and number of warehouses, time of storage,
type of products
+ Able to achieve lower transportation cost by combined delivery and
consolidation
+ Disadvantages?

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• Warehouse Ownership Classification
– Contract warehouse
+ Long-term contractual relationship results in lower total cost
+ Offers services such as transportation, inventory control, order
processing, customer service, and return merchandise processing
+ Benefits of contract WH
 Customers: Expertise services, flexibility, lower capital
investment
 WH operator: long-term contract, higher service quality as they

know customer/stored goods very well, having deep

understanding about business specification/needs to provide
customized services
+ Disadvantages?

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• Mixed Warehouse strategy
– Organizations may use a combination of private, public, and contract facilities
– The best WH utilization rate of the time/space is 75-85%
– 15 - 25% of the time/space is reserved for peak requirements
– Private and/or contract warehouse cover 75% requirement while public facilities to
accommodate peak demand

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• Warehouse Planning
1. Site Selection (Processing Zone? Target Marketplace, like DC hub, Hub system,
Time to market & contingency,…group them together to see where to decide)
2. Product-Mix Analysis (DG? Value? Competitor? …)
3. Materials Handling Considerations
4. Layout and sizing
5. Future Expansion

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 Site selection decision

Business strategy New site

Culture, policy, labor

Country, Region
cost, suppliers…

Conditions, policy of
the local authority Province, City

Feasible location City or province

 Considerations for site selection

 Execution, transportation costs

 Labor costs, labor skills, language barrier
 Competitors
 Potential customers
 Reliability of the suppliers
 Infrastructure
 Legal framework for investors
 Potential economic development of the region/city
 …….
 Site selection
• Since 1998 many Japanese companies producing
automobile parts moved to US.
• The competition in the field became more and more
severe, forcing US companies to seek ways to improve
their production lines, capability, reduce costs….
• One American manufacturer of automobile parts facing
the problem of high labor costs and outdated technology
decided to sell its plant in the US and totally moved to the
Philippines. The company built a new production plant
and invested a modern production line
• The Philippines’ government policy for foreign investors:
No taxes for the first six years, low land rental fees
 Principle for site selection

 General principles
- Close to customers
- Close to suppliers
- Intermediate location with labor advantages (low labor cost
and skilled workers), reliable sources of raw materials and
affordable transportation costs
 Marking method

 Site selection is based on criteria that are important for

company
 Prioritize and rank criteria with certain point
according to their importance
 Compare total marks of all sites to choose the best one
 Example
Criteria Maximum A B C D E

Climate 10 8 6 9 7 5

Infrastructure 20 12 16 15 8 13
Accessibility 10 6 8 7 9 9

Establish costs 5 3 1 4 2 1

Relationship with local 10 6 8 7 4 8

authority
Relationship with local 5 2 2 3 4 3
citizens
Closeness to customers 15 10 10 13 13 10

Closeness to suppliers 20 12 10 15 17 10

High quality of labor 5 1 2 4 5 3

Total 100
 Case for discussion
Company A produces Instant noodles. It has a main manufacturing plant
in the South of Vietnam and distribution centers in the South, in the
Central and in the North of VN
- Advantages: (1) keeping the secret of production; (2) having a good
control over quality (3) utilizing economies of scale
- Disadvantages: (1) Transportation by sea (to the Northern DC) and
trucks (To the central DC) can causes noodles to break; (2) The
demand for instant noodles is highly seasonal and unpredictable while
expired date is 3-6 months. Company’s goal is to supply the newest
noodles to their distributors and customers – within 1 month after
production (3) Distributors get a very thin profitability – especially if
noodles are expired or damaged
 Product ABC analysis
• Analyze of product’s annual sale, demand (fast – medium – slow moving),
weight, cube, packaging/handling
• Classify product into group (A,B,C)
• Design WH space, layout, material handling equipment, operating
procedures and control prioritizing the most profitable products.

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 Warehouse design and layout

• 3 consideration for WH design: the number of floors, cube utilization plan

and product flow.
- The general rule is one floor WH except for WH in the business centers
where land is restricted or expensive
- WH should maximize cube utilization – appropriate height is 20-30 feet
- WH design and WH layout should facilitate continuous straight product
flow through the building: Receiving => mixing/order selecting =>
shipping

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• Basic Warehouse Design

Unitization
must be defined

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•Warehouse Layout

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• Initiating Warehouse Planning
Prior to operations, there are activities and work procedures
must be developed
- Stocking (how to store, how many to store,…)
- Training: video
- Installing WMS
- Security and Pilferage Protection plan (internal people, …)
- Product Deterioration (perishable…)
- Safety and Maintenance
- Customer service level

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 Which food are
Which food do you unsure of
you know is about where it is
always at the located?
same place in
the fridge?

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 • Stocking: Which type of inventory, in which quantities and
how to store? https://www.youtube.com/watch?v=ThL9N7mvaiQ&t=361s
- Plan initial stocking before operation: Schedule and sequence of
product arrival and receive inbound inventory => takes 2-4
weeks to complete initial stocking
- Planning the WH: 2 methods of slot assignment
+ Fixed slotting: assign product to a permanent location in the WH.
+ Variable/Dynamic slotting: assign products to different location based on availability of
the WH space at the time of product arrival.
=> WMS with real-time track on inventory

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• Hiring and training
- WH is the single largest labor intensive element:
administrator, supervisor, selectors, equipment operators,
support workers such as maintenance.
- Labor requirements: Physical strong, not addicted to drugs or
alcohol drinks, disciplinary to follow certain rules, able to
interface with computers, honest and hardworking…
- Training both theoretical and practical aspects by simulating
the work of each position to avoid possible mistakes in future

- https://www.youtube.com/watch?v=n9syC93m_cM

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• Security
+ Pilferage Protection (internal people, …)
+ Product Deterioration (perishable…): FIFO, FILO….
+ Safety and Maintenance
+ Customer service level

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 Future expansion
- Future expansion should be considered upon initial
planning stage and provide WH to function at least 5-10
years
- Building design should accommodate future expansion
without seriously affecting ongoing operations (move some
walls, build new spaces….
- Expansion: 45/45/10

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 Options for WH expansion

 Extending the existent site

 Acquiring a new plant/warehouse and keeping the

existent facilities
 Changing to a totally new location

 45/45/10

=> Advantages and disadvantages of each options

• Conclusion on Warehousing:
 Temporary storage of goods before consumption
 Performs movement, storage and information transfer

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1. What are consolidation and unitization?
2. What are the economic/service benefits of WH? Explain 1 of
them.
3. What is the controlled inventory?
4. What are the differences between extended and active WH?
5. What is fixed/dynamic slotting?
6. What are factors that should be considered while designing
warehouse layout?
7. List some risks of inventory storage at the warehouses?
8. What are factors that should be considered while planning
WH layout?

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