Itl lecture-07 to 10 (warehousing- a role beyond storage)

07/06/10 1
By :
Prof. Amit Kumar

07/06/10 2
“Logistics has advanced from warehousing and
transportation to boardrooms of the successful leading
companies across the world. Due to increasing
importance of business logistics, it becomes necessary
for the student pursuing management education from
IILM- Graduate School of Management, to understand
logistics, its basic framework and practical utility.”
IILM-GSM
Importance of this course
International Trade Logistics

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Course: International Trade Logistics
1. Logistics - At the Centre of World Trade
2. Supply Chain Management
3. Warehousing: A Role Beyond Storage
4. Material Handling & Storage System
5. Transportation: Backbone of Logistics
6. Logistics Packaging
7. Logistics Information System
8. Global Logistics & Outsourcing
IILM-GSM
International Trade Logistics

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IILM-GSM
International Trade Logistics Warehousing- A Role Beyond Storage

07/05/10f4t 5
Contents
• Warehousing- A logistical Challenge
• Warehousing Practices
• Functions & Benefits of Warehousing
• Economic Benefits ,Service Benefits
• Case of Wal-Mart- The King of Store Logistics
• Warehouse Options- A Strategic Decision
• Private, Public, Contract Warehouses
• Designing a Warehouse System
• Warehousing Strategy
• Warehouse Decision Model
• Warehouse Performance Parameters
• Case Study: Snowman Frozen Food Ltd.-Providing One-
Stop Logistics Solution in Cold Distribution
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Modern warehousing is in the process of an evolutionary
change from emphasis on storage to emphasis on flow
through, from inventories at rest to inventories at
motion.
In a logistical system the role of warehouse is that of a
switching facility rather than a storage facility.
Introduction: Warehousing
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“ Because of the value of strategic storage was not
well understood, warehouses were often
considered ‘necessary evils’ that added cost to the
distribution process”.
- Donald J. Bowersox
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Warehousing is the major component of physical
distribution.
Warehousing management has two distinct and equally
important parts:
1. The physical job of creating and running the network of
storage points.
2. The managerial task of controlling inventory levels
without sacrificing service level.
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1. Warehouse means any building structure or other
protected enclosure which is used or may be used for
the purpose of storing goods on behalf of the depositors
but doesn’t include cloakroom attached to hotels,
railway stations and the premises of other public
carriers alike.
2. Depositors means a person who deposits goods with a
warehouseman for storing in his warehouse and
includes any person who lawfully holds the receipts
issued by the warehouseman in respect of the goods
and derives title too by endorsement or transfer from
the depositor or his lawful transferee.
Bombay Warehouse Act, 1959
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Warehousing Practices
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• The Central Warehousing Corporation (CWC), a
government of India undertaking and the largetst public
warehousing company in India, was set up in 1957,
under the Warehousing Corporation act.
• The main objective of CWC is to provide scientific
storage facilities for agricultural inputs and other
commodities.
• Presently CWC runs 467 warehouses spread across the
country, having a total storage capacity of 8.56 million
tonnes including 111 customs bonded warehouses with
a capacity of 0.75 million tonnes to cater the needs of
importers and exporters.
Public Warehousing
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• CWC along with its 16 state subsidiaries accounts for
11.39 million tonnes of storage capacity spread across
more than 1400 warehouses.
• CWC runs a number of cold storage facilities at
strategic locations for perishable cargo and maintains
liquid cargo warehouses at major Indian ports.
• The average storage capacity utilization at CWC is
74%.
• CWC operates 30 container freight stations and inland
container depots and plays a major role in multi-modal
transportation in the country.
Public Warehousing
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• Snowman Frozen Food Ltd., a consortium of Hindustan
Lever, Amalgamated Food and Mitsubishi group,
operates a chain of cold storage facilities in India for
marine products, processed food products and fruits.
• Each of their cold storage facilities, built at a cost of INR
3.5 crores each, has a storage capacity of more than
1000 MT and is equipped with ultra modern storage and
material handling facility.
• They operate chillers at 2 degree C and freezers at 10
to 15 degree C for different product applications.
Stored Cold and Fresh
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• IMC Ltd. is the country’s largest third-party liquid
storage facility service provider in private sector.
• They have expertise in the storage of hazardous liquid
cargo such as petroleum and petrochemical products
having flash point 23 and 93 degree C. They also
provide storage facilities for liquefied gases.
• These facilities are located at 12 major seaports in India
built along 210 storage tanks as per the stringent DIN
and ISO standards for storage of hazardous products.
Bulk Liquid Cargo Storage
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• They offer value-added services such as complete
automation in loading and unloading of the cargo, and
provisions for safety, health and environmental
protections.
• They are also the storage partners to leading names
such as Caltex, ESSO, Exxon, elf, Cargill etc. for the
past 35 years.
Bulk Liquid Cargo Storage
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• Softage Information Technology Ltd., New Delhi, is a
third-party service provider that offers documentation
management solution to business corporations in India.
• The documents may be in the form of physical or digital
media.
• They have a state-of-the-art warehousing facility to
scientifically store, handled and retrieve business
documents that otherwise business firms find difficult to
pay attention to, as this is neither their core concern nor
they have any expertise in preserving documents.
Document Warehousing
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• Softage Information Technology Ltd., has dedicated
warehouses and a fleet of specially designed vehicles to
transport documents from clients place to their
warehouse and vice-versa.
• They ensure delivery of any preserved document to the
client within shortage possible time.
• Their customer base covers leading banks, corporate
business houses and insurance companies.
Document Warehousing
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Benefits realized from strategic warehousing are classified
on the basis of economics and service. From a
conceptual perspective, no warehouse should be
included in a logistical system unless it is fully justified
on a cost-benefit basis.
1. Economic Benefits
2. Service Benefits
Functions and Benefits of Warehousing
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• Holding is the most important function of a warehouse
for the finished products ready for delivery.
• Depending on the demand or order booking pattern and
the delivery schedules promised to the customer by the
marketing department, the goods are dispatched from
the warehouse.
• A proper record of the material, which gets in and out,
has to be maintained to know the inventory levels at any
point of time.
Economic Benefits: Hold
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Warehouse
(Finished Goods)
CustomerManufacturing
Plant

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If the supplies are originating from various sources in small
quantities, it may be economical to collect these small
shipments at one center and combine them into a large
shipment for sending it to the customer.
The consolidation will ensure cost saving on freight.
Economic Benefits: Consolidation
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Consolidation
Warehouse
Plant A
(Vendor-1)
Buyer X
Buyer Y
Plant B
(Vendor-2)
Plant C
(Vendor-3)

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• For import or export of goods for large buyers whose
requirement does not warrant for enough volumes for
shipment from each source, there is potential cost
saving on the freight with consolidated shipment.
• In such cases planning a warehouse for shipment
consolidation may be a better proposition.
• The cost saving will offset the cost of setting up a place
for consolidation.
Economic Benefits: Consolidation
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• In contrast to the consolidation, here the material
arriving in bulk is divided into smaller shipments for
delivering it to the end customer.
• The bulk cargo of fertilizers, oil, chemicals coming from
a source is broken into smaller consignments for buyers
as per their requirement.
Economic Benefits: Break Bulk
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Break Bulk
Warehouse
Customer A
Customer B
Customer C
Plant-1

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• Normally the distribution warehouses of manufacturing
firms have break bulk as the common activity.
• The firm saves substantially on freight by dispatching
the shipment in bulk to its regional distribution centers,
where it is divided into small packets and dispatched to
the end user as per the demand.
Economic Benefits: Break Bulk
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Break Bulk
Warehouse
Customer A
Customer B
Customer C
Plant-1

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A cross-dock facility is similar to break-bulk except that
it involves multiple suppliers. The uses of a
warehouse is for very short time.
• The material arriving in bulk in fully loaded trucks is
broken into smaller consignments for further dispatch to
the customers.
• The stay of material in the warehouse in not more than 48
hours.
Economic Benefits: Cross Dock
IILM-GSM
Retail chains make extensive use cross-dock operations
to replenish fast-moving store inventories.

Company Analysis : WAL-MART
• Sam Walton Founded the company in 1962 with a
simple goal: Offer low prices to everyone. His notion
of hard work and thrift continue to permeate Wal-Mart
today, although he died in 1992.Employees see their job
as a mission ”to lower the world’s cost of living”.
• Wal-Mart succeed in competitive American retail market
for several reasons. First, its low prices, vast
selection, and superior service keep the customer
coming in the door. But one of the Wal-Mart’s biggest
strengths is not even inside the store.
IILM-GSM

Company Analysis : WAL-MART
• One of the Wal-Mart’s biggest strengths is not even inside
the store. Its unrivaled logistics ensure that it can keep
prices low while keeping the right goods on the shelves. As
the biggest retailer in USA, Wal-Mart’s logistics demand is
considerable. The company must coordinate with more than
85,000 suppliers, manage billions in inventory in its
warehouses and bring that inventory to its retail shelves.
• To streamline these tasks, Wal-Mart set up a “hub-and-
spoke” network of 103 massive distribution centers (DC).
Strategically spaced across the country, no store location is
more than a day’s drive away from a DC. Wal-Mart is known
as “ the king of store logistics” for its ability to effectively
manage such a vast network.
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• Warehouses can also be used to postpone, or delay,
production by performing processing and light
manufacturing activities.
• A warehouse with packaging or labeling capability
allows postponement of final production until actual
demand is known.
• Once a specific customer order is received, the
warehouse can complete final processing by adding the
label and finalizing the packaging.
Economic Benefits: Processing/
Postponement
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It provides two economic benefits.
1. First, the risk is minimized because final packaging is
not completed until an order for a specific label and
package has been received.
2. The required level of total inventory can be reduced by
using the basic product (Brights) for a variety of labeling
and packaging configurations.
The combination of lower risk and inventory level often
reduces total system cost even if the cost of packaging
at the warehouse is more expensive than it would be at
the manufacturer’s facility.
Economic Benefits: Processing/
Postponement
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• The direct economic benefit of this warehousing is
secondary to the fact that seasonal storage is essential
to select businesses.
• For example, lawn furniture and toys are produced
year-round and primarily sold during a very short
marketing period.
• In contrast, agricultural products are harvested at
specific times with subsequent consumption occurring
throughout the year.
• Both situations require warehouse stockpiling to support
marketing efforts.
Economic Benefits: Stockpiling
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• Under this concept, a selected amount of firm’s product
line is placed or ‘spot stocked’ in a warehouse to fill
customer orders during a critical marketing period.
• Suppliers of agricultural products to farmers often use
spot stocking to position their products closer to a
service-sensitive market during the growing season.
• Following the sales season, the remaining inventory is
withdrawn to a central warehouse.
Service Benefits: Spot Stock
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• Assortment warehouse which may be utilized by a
manufacturer, wholesaler, or retailer- stock product
combinations in anticipation of customer orders.
• The assortments may represent multiple products from
different manufacturers or special assortments as
specified by customers.
• In first case, for example, an athletic wholesaler would
stock products from a number of clothing suppliers so
that customers can be offered assortment.
• In the second case, the wholesaler would create a
specific team uniform including shirts, pants and shoes.
Service Benefits: Assortment
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A Warehouse sometimes is used as a product mixing point
for a company having a number of plants manufacturing
different ingredients, which are mixed at a convenient
place to make final products.
Service Benefits: Mixing Warehouse
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Mixing
Warehouse
Plant A
(Ingredient-1)
Buyer 1
Buyer 2
Buyer 3
Plant B
(Ingredient-2)
Plant C
(Ingredient-3)

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• Production support warehousing provides a steady
supply of components and materials to assembly plants.
• Safety stocks on items purchased from outside vendors
may be justified because of long lead times or
significant variations in usage.
Service Benefits: Production Support
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• The market presence factor is based on the perception
or belief that local warehouses can be more responsive
to customer needs and offer quicker delivery than more
distant warehouses.
• As a result, it is also thought that a local warehouse will
enhance market share and potentially increase
profitability.
Service Benefits: Market Presence
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Warehouse Option- A Strategic Decision
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The warehouse option is a strategic decision having
long-term effects on the efficiency and
effectiveness of the system.
Warehouse Option- A Strategic Decision
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Private Public Contact
Investment High None Very Little
Flexibility in Material handling,
storage & throughput
planning
Location Location
Cost per unit
stored
Inversely related to
volumes
Low Inversely related
to volumes
Level of
controls
High Low Medium
Adequacy of
goods stored
High Low High
Risk Due to change in
market demand
Minimal Minimal

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• It refers to the entire facility under financial and
administrative control of the firm.
• The firm owning the product operates these
warehouses.
• It may include a production oriented captive warehouse
or a distribution warehouse located in the field for
customer service.
Warehousing Alternatives
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Private Warehouses

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• Flexibility
• Full management control
• Lower operating cost
• A private warehouse facility can be planned close to the
markets to provide efficient and effective service to the
customer.
IILM-GSM
Private Warehouses: Benefits

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Private warehouses are attractive propositions under
certain circumstances such as:
• Product specific material handling and storing facilities
are required which are not available with other two
options.
• Volumes handled are high ensuring full capacity
utilization and benefits of scale economics.
• High degree of control over the operations is required.
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• The firms having warehousing space, storage facility
and material handling equipment, for the most general
usage, provide these services.
• Extensively used in logistics system.
• Designed for handling the most general packaged
products or commodities, which do not require
specialized storage or handling arrangement.
 Such as food grains, paper rolls, bulk material (cements,
fertilizers), furniture, chemicals etc
IILM-GSM
Public Warehouses

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Bonded warehouses under the customs control are
mostly public warehouses licensed to store goods,
meant for exports or imports, till the time they are
cleared by the customs authority for further
movement.
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Public Warehouses

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• A public warehouse provides financial flexibility.
 A newly formed firm desirous of expanding its distribution
network need not invest in developing a private warehouse.
 The option is to hire some space in a public warehouse and
use the money for other productive activities.
• It allows flexibility of location.
 Due to geographical changes in consumption centers, a firm
can close a facility in one market and open at other place
without any financial losses.
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Public Warehouses: Benefits

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• The greatest disadvantage is absence of control on
operations.
• As a product specific facility is not available, product
damages during storage and handling may be on a
higher side.
• The speed of order fulfillment is slow resulting in a lower
level of customer service.
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Public Warehouses: Disadvantages

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• These are the product specific warehouse facilities
acquired for use for a specific period against fixed
charges.
• A contract warehouse can provide the benefits of both
private and public warehouses.
The resources such as labor, material handling equipment,
storage arrangement, communication equipment can be
used on sharing basis with depositors from the same
industry to economize on operating cost.
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Contract Warehouses

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In designing a warehousing system, the following basic
questions relating to this flow become significant.
1. How many warehouses should we have?
2. Where should we locate them?
3. What should be the size or capacity of each of them?
Designing a Warehousing System
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The cost of warehousing is directly proportional to the
number of warehouses, while the transportation
cost goes down with an increase in warehouse
numbers as shown:
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IILM-GSM
CostCost
Total CostTotal Cost
Warehousing CostWarehousing Cost
Transportation CostTransportation Cost
No. of WarehousesNo. of Warehouses

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Quantitative techniques for warehouse site selection:
1. For Single Depot Location
 Center of Gravity of Area Model
 Center of Gravity of Load Model
 Center of Gravity of Tonnes-Kilometers Model
2. For Multiple Depot Location
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 Center of Gravity of Area Model
A map of marketing areas may be drawn and a sheet
representing the area may be balanced. The point
where the sheet gets balanced is the site for warehouse
location. This point is expected to be at minimum
average distance from all the locations in the area.
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 Center of Gravity of Load Model
This may be illustrated visually by imagining a sheet having
holes representing the customer locations and their
demand load of annual purchases. Weights are hung on
each hole in proportion to the demand load. The points
at which the model sheet gets balanced gives the center
of weights.
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 Center of Gravity of Tonnes-Kilometers Model
This model takes into consideration both loads and
distances to arrive at the optimum transportation cost.
The final solution is obtained after applying trail and
error methods several times.
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2. For Multiple Depot Location
• For planning the chain of warehouse the management
will have to do a cost-benefit analysis.
• The factors influencing a decision on multiple
warehouses locations are:
 Market Size
 Area Coverage by each warehouse
 Product type
 Demand pattern- continuous or seasonal
 Customer service level
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Conclusion:
For the cost reduction firms may try to move towards the
centralized warehouse system, but the decision
depends on the nature of the product and its movement
through the supply chain.
For auto manufacturing companies a centralized
warehouse for spare parts is an ideal system but
this is not applicable for FMCG product, which
need to be moved in large quantities and with
speed, wherein the system of scattered
warehouse is the right solution.
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Warehouse Costing
Food Grain Warehouse- Costing
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A typical 140 ft long and 70 ft wide food grain storage
warehouse accommodates 1800 metric tonnes of
food grains in 18000 bags (15 stacks) each having
2*3 square ft size and carrying capacity of 100
kilograms of material.
A. Warehouse construction cost INR 49 lacks
B. Initial investment per
unit storage capacity INR 2700 per MT

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Warehouse Costing
Food Grain Warehouse- Costing
IILM-GSM
Cost Head Rs per bag per
month
C. Capital cost (at 10% bank interest rate) 0.45
D. Depreciation over 50 years of warehouse life 0.45
E. Warehouse employs wage bill (for 5000 MT monthly
warehouse through put)
1.50
F. Repairs and maintenance (Average) 0.15
G. Overheads (electricity, telephone, stationery) 0.50
H. Transportation, fumigation and handling 0.30
Total Cost (C+D+E+F+G+H) 3.35
(INR 8.30 per sq ft per month)

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It is observed that the leading firms adopt and implement
the following warehousing strategies:
• Hub Networking
• Cobbling
• Outsourcing
• Capacity Switching
Warehousing Strategies
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Capacity Switching
• For a given market there will be a monthly demand pattern
for a product. This demand may be greatly fluctuating in
certain months due to seasonality in consumption.
• Under such circumstances the capacity of a warehouse may
be planned on the basis of average demand pattern per
month over the year and for additional space requirement
(for seasonal requirements), a public or contract warehouse
may be used for a short period during the season.
• This may reduce the quantum of investment in a private
warehouse if planned on the basis of the peak demand.
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Hub Networking
• To reduce the level of inventory and exercise better control
on the distribution, warehousing hubs are planned at a few
strategic locations to serve the entire market spread over a
vast geographical area.
• This is practiced more in FMCG, pharmaceutical industries,
where the distribution network consists of a large number of
dealers, stockiest and retailers.
• A regional hub will cater to the needs of several states
covered under respective regions.
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Hub Networking: Advantages
• Reduction in operating cost
• Minimization of transporting cost
• Better control on inventory
• Improved customer service
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Cobbling
• This strategy works well with players who are not competitors
but cater to the needs of similar groups of users or
customers and have a similar distribution channel.
• FMCG products manufactured by HLL,J&J and Nestle can
be cobbled together to reduce wasteful practices in storage
and transportation. The operating cost will considerably be
reduced benefitting all the cobbling partners.
• Some 3PL operators in India are offering these services to
leading companies in the FMCG sector.
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Outsourcing
• Most of the firms (manufacturing and marketing) do not have
expertise in warehousing operations.
• Moreover, it is not a core activity in their business process.
Hence, this area of operation remains neglected for
investment decisions.
• For gaining logistical competitiveness, leading firms are
outsourcing entire warehousing operations to 3PL providers
who bridge the gaps through their expertise, technology and
infrastructure.
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Warehouse Decision Model
IILM-GSM
Product Type
• Solid
• Liquid
• Gases
Product Characteristics
• Value density
• Logistical reach
• Perishability
• Hazardous
Objectives
• Cost reduction
• Stock turnover
• Customer
• Productivity
Resources
• Finance, System
•Competency

65
IILM-GSM
Resources
• Finance, System
• Competency
Warehouse Network (Numbers and Locations)
Warehouse Facility Planning Decision
Private Public Contract
Strategic
• Layout
• Handling equipments
• Storage schemes
Tactical
• Storage allocation
• Order picking
• Packing
Operational
• Work allocation
• Job scheduling
• Performance monitoring

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IILM-GSM
Product Type
• Solid
• Liquid
• Gases
Product Characteristics
• Value density
• Logistical reach
• Perishability
• Hazardous
Resources
• Finance, System
•Competency
Objectives
• Cost reduction
• Stock turnover
• Customer
• Productivity

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The nature of a product will primarily decide on the type of
warehouse required for the storage of goods.
• Perishable agro products will obviously require a
temperature-controlled facility.
• While hazardous or explosive products will call for extra
safety and handling equipments during storage as per
the regulations. The location of such a facility will be
subject to the approval of the government authority.
• A warehouse for pharmaceutical products attracts FDA
approval.
Warehouse Decision: Product
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For any product, the value density (unit price per unit weight
or volume of a product) and logistical reach will influence
decision making on investing in a warehouse facility.
• For example, investment in a storage facility is justified
for products such as computers, jewellery, luxury goods
where the unit price is high, the logistic reach is wide
and distribution centers are limited in numbers.
• Due to high margins and shorter payback period the
heavy investments are justified.
Warehouse Decision: Characteristics
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In a selection amongst the various warehouse options, the
objectives have to be clearly defined.
• Volumes will justify private warehouses while
seasonality will justify public or contract storage places.
• For customer satisfaction through reliable delivery,
investment in material handling and information
processing system is justified.
Warehouse Decision: Objectives
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IILM-GSM
Resources
• Finance, System
• Competency
Warehouse Network (Numbers and Locations)
Warehouse Facility Planning Decision
Private Public Contract
Strategic
• Layout
• Storage schemes
Tactical
• Order picking
• Packing
Operational
• Work allocation
• Job scheduling
• Performance monitoring

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• Strategic decisions are solely
dependent on the objectives,
available financial resources, ROI
and pay back period.
• These decisions will have a long-
term effect and help in developing a
competitive advantage.
Warehouse Decision: Strategic
IILM-GSM
Strategic
• Layout
• Storage schemes

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Tactical decisions will have an effect on
the warehouse performance parameters
such as:
• Reduction in the order processing cycle
• Efficiency in material handling
• Packaging to reduce product damages
• Reducing customer complaints and
enhancing the customer satisfaction
level.
Warehouse Decision: Tactical
IILM-GSM
Tactical
• Order picking
• Packing

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Operational decisions will bring efficiency in
the warehouse operations and will help in
reducing the operation cost.
Warehouse Decision: Operational
IILM-GSM
Operational
• Work allocation
• Job scheduling
• Performance
monitoring

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The most common parameters that indicate the efficiency
and effectiveness of warehouse operations are:
• Stock Turn-Over Ratio
• Warehouse Cost-to-Sales Ratio
• Warehouse Cost per Unit Handled
• Occupancy rate of Warehouse Space
Warehouse: Performance Parameters
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Stock Turn-Over Ratio:
• This is a ratio of value of sales volume in a given time to
value of stocks in that period.
For example, sale value of goods supplied from a
warehouse was INR 100 lakhs last year and the
average inventory level at any point of time during last
year in the warehouse was INR 10 lakhs, the ratio is 10.
• The more you turn out the stocks, the better the efficiency
and effective utilization of warehouse space. In Japan, auto
giants have achieved a stock turnover ratio of 60 while
in India it is between 20 and 30.
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Warehouse Cost-to-Sales Ratio:
• This ratio has a direct link with the throughput of a
warehouse or goods handled.
• Higher the volumes, lower will be the fixed cost of
operations, which is distributed over the number of units
dispatched.
• A lower ratio indicates the efficiency of a warehouse.
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Warehouse Cost per Unit Handled:
• The ratio indicates the total warehouse cost incurred
divided by the number of pallets or boxes handled
during the period.
• The higher ratio indicates the lower throughput or lower
material handling efficiency of warehouse operation.
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Occupancy rate of Warehouse Space:
• This ratio indicates the actual space used as a
percentage of available warehouse storage space
available throughout a year.
• The average of the ratios taken periodically throughout
the year will indicate the occupancy rate.
IILM-GSM

07/05/10 79
Case Study
IILM-GSM
Snowman Frozen Food Ltd.-Providing
One-Stop Logistics Solution in Cold
Distribution

07/05/10 80
Analysis Questions
IILM-GSM
Snowman Frozen Food Ltd.-Providing One-Stop
Logistics Solution in Cold Distribution
1. What logistics services are offered by Snowman to its
clients?
2. Discuss the various issues in managing a cold chain
logistics.
3. How the cost-effectiveness and system efficiency can
be achieved in cold chain?

Itl lecture-07 to 10 (warehousing- a role beyond storage)

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