Introduction to Warehousing

Mai Thuy Dung, MSc

[email protected]
Room A2.603

International University
Vietnam National University HCMC
Contents

1. What is warehouse? And why do we need

it?
2. Types of warehouses
3. Warehouse strategy

International University
Vietnam National University HCMC
1. What is Warehouse?
Why do we need Warehouse?

International University
Vietnam National University HCMC
What is Warehouse?
There are several ways to define Warehouse
• Functioning perspective: A warehouse is a large building where
goods are stored, and where they may be catalogued, shipped, or
received, depending upon the type.
• Supply chain/ Logistics perspective: A warehouse is part of a
company’s logistics system that stores products – including raw
materials, parts, work-in-progress and finished goods – at and
between the point of origin and the point of consumption. In
addition, warehousing provides information to management on
the status, condition and disposition of items being stored (Stock
and Lambert, 2001: 390-91)

International University
Vietnam National University HCMC
Why do we need warehouses?
Considering the following flows of goods, where can you put
warehouses?

Warehouse

Warehouse
Warehouse Warehouse

A warehouse interrupts the direct flow of goods. In other

words, the holding of goods in a warehouse generally adds costs
to a products.
Why do weUniversity
International need warehouses in the physical distribution system ?
Vietnam National University HCMC
 Economic Benefits of warehouses (1 of 3)
Economic benefits: Consolidation, Break bulk, Cross dock,
processing postponement, stock piling (seasonal storage)
Consolidation vs. Break bulk

Plant A Customer
(Product A) X

Customer X
Plant B Consolidation (Product A+ Plant A Break bulk Customer
(Product B) warehouse Product B+ (Product A) warehouse Y
Product C)

Plant C Customer
(Product C) Z

Both offer University

International cost saving on freight. But which should be used on which case?
Vietnam National University HCMC
Economic Benefits of warehouses (2 of 3)
Cross-dock
Customer W
Plant A (Product A+
(Product A for Product B)
Customer W, X, Z)

Customer X
(Product A+
Plant B Cross-dock Product C)
(Product B for warehouse
Customer W, Y, Z)
Customer Y
(Product B+
Product C)
Plant C
(Product C for
Customer X, Y, Z) Customer Z
(Product A+
International University Product C)
Vietnam National University HCMC
Economic Benefits of warehouses (3 of 3)
Processing/ Postponement
• A warehouse with packaging/ labeling capability allows postponement of
final production until actual demand is known.
• The combination of lower risks 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 manufacturing facility.

Stockpiling
• Toys are produced year-round and primarily sold during a very short
marketing efforts. Meanwhile, agricultural products are harvested at
specific times with subsequent consumption occuring throughout the
year.

Both situations
International University require warehouse stockpiling
Vietnam National University HCMC
Service Benefits of warehouses (1 of 3)
Service benefits: Spot stocking, assortment, mixing, production
support, market presence.
Spot stocking
• A selected amount of a firm’s product lines is selected or spot stocked in
a warehouse to fill customer orders during a critical marketing period.
• After the sales season, the remaining inventory is withdrawn to a central
warehouse

Assortment
• The assortment may represent multiple products from multiple
manufacturers or special assortments as specified by customers.
• Assortment warehouses may be utilized by manufacturers, wholesalers,
retailers to stock product combination in anticipation of customers’
International University
demand
Vietnam National University HCMC
Service Benefits of warehouses (2 of 3)

Mixing warehouse
• For a company having a number of plants manufacturing different
ingredients, a warehouse is used as a product mixing point to make final
product.

Plant A Customer X
(Ingredient 1)

Plant B Mixing
Customer Y
(Ingredient 2) warehouse

Plant C
(Ingredient 3) Customer Z
International University
Vietnam National University HCMC
Service Benefits of warehouses (3 of 3)

Production Support
• Production-support warehouses provide a steady supply of components
and materials to assembly plants

Market Presence
• The market presence factor is based on the perception/ belief that local
warehouse can be more responsive to customer demand and offer quicker
delivery than distant warehouses.
• Local warehouses are believed to enhance market share & potentially
increase profitability.

International University
Vietnam National University HCMC
Functions of warehouses
• A warehouse has the following functions:
- Storage of goods
- Protection of goods
- Risk bearing
- Financing
- Processing
- Grading and branding
- Transportation
• Warehouse can be a strategic tool for:
- Inventory management
- Customer Service
- Compliance,
International document
University management, and information request.
Vietnam National University HCMC
2. Types of Warehouses

International University
Vietnam National University HCMC
Types of Warehouses (1 of 3)
Based on ownership, there are 4 types of warehouses:
• Private warehouse: owned and managed by the channel suppliers
(manufacturers/ traders) and resellers, and exclusively used for their
own distribution activities.
• Public warehouse: owned by the government or semi-government
bodies, and lease private firms to store goods.
• Bonded warehouse: owned, managed, and controlled by the
government as well as private agencies. They are used to store import
goods for which import duty is still to be paid.
• Cooperative warehouse: owned, managed and controlled by
cooperative societies. These societies provide storage facilities on the
most economical rates to their members only. The basic purpose of
running such warehouse is not for profit, but for their members’ sakes.
International University
Vietnam National University HCMC
Types of Warehouses (2 of 3)
Based on functions in a supply chain, there are 4 types of
warehouses:
• Production warehouse: Typically located within a manufacturing
or production site, this type may hold stocks of raw materials and/or
components used in the manufacture of goods, primarily to ensure
that the manufacturing/production process is not disrupted by
material shortages.
• Storage warehouse: This type is often used for long-term storage
of finished goods as part of a company’s outbound supply chain
operation. At one time, storage warehouses were extremely
common, as many companies employed a make-to-stock or “push”
strategy in their supply chains. Today, they are used to a lesser
degree.
International University
Vietnam National University HCMC
Based on functions in a supply chain, there are 4 types of
warehouses:
• Fulfillment warehouse: Often known as distribution centers
(DCs), a typical DC:
- Acts as a center for value added services, such as order fulfillment, labeling,
packaging, cross-docking, and transportation.
- Focus as much (if not more) on customer service excellence as on efficient
storage.
- Utilize a lot of technology to improve service, cost, and efficiency.
- Serves as the primary supply chain link between suppliers and customers..
• Sorting & consolidation warehouse: This warehouse type is not
principally used for storage, but rather for receiving large inbound
shipments and then breaking them down into smaller outbound
loads. They might also be used for consolidating small inbound
shipments
International into larger ones for dispatch to customers such as retail
University
chains
Vietnam National University HCMC
.
Types of Warehouses (3 of 3)
Based on special use, there are 3 types of warehouses:
• Special commodity warehouse: constituted for storing a particular type
of commodity, e.g., tobacco, cotton, wheat etc. Mature of commodity is
important in selecting the type of warehouse. For storing petrol, storage
tanks are needed and for storing agricultural products, godowns are
needed..
• Cold storage warehouse: used for storing perishable commodities like
eggs, butter, fruits, vegetables, fish, fresh meat etc. In fact, cold storages
have made possible the regular supply of certain commodities throughout
the year.
• Institutional warehouse: Different institutions and bodies have their own
warehouses on account of the nature of their operations. For example,
Banks, Railways, Food Corporation, etc. has their own warehouses for
conducting their activities. Banks keep the stock of the parties in these
warehouses as security against the loans advanced.
International University
Vietnam National University HCMC
3. Warehouse strategy

International University
Vietnam National University HCMC
Warehouse strategy

International University
Vietnam National University HCMC
The ownership decisions (1 of 3)

• Public warehousing costs mostly all variable.

• Private warehousing costs have a higher fixed cost component.
• Thus private warehousing virtually requires a high and constant
International University
volume.
Vietnam National University HCMC
The ownership decisions (2 of 3)

Firm characteristics Private Public

Throughput volume High Low
Demand variability Stable Fluctuating
Market density High Low
Special physical control Yes No
Customer service required High Low
Security requirements High Low
Multiple use needed Yes No

International University
Vietnam National University HCMC
The ownership decisions (3 of 3)
• Public warehousing rates are based on: value, fragility, potential
damage to other goods, volume and regularity, weight density,
services required.
• Contract warehousing:
- Increasing phenomenon;
- Compensation for seasonality in products
- Increased geographical coverage.
- Ability to test new markets.
- Managerial expertise and dedicated resources.
- Less strain on the balance sheet.
- Possible reduction of transportation costs.
International University
Vietnam National University HCMC
The number of warehouses (1 of 5)
Components of costs

International University
Vietnam National University HCMC
 The number of warehouses (2 of 5)

Warehousing configurations

Customer 1 Local Customer 1

Warehouse 1

Manufacturer Centralized
Manufacturer
Warehouse
Customer 2 Customer 2
Local
Warehouse 2
Centralized warehousing Decentralized warehousing

International University
Vietnam National University HCMC
The number of warehouses (3 of 5)
Centralized warehousing

Advantages Disadvantages
- Improving operation - Extending lead time to fulfill
efficiency and inventory customer orders.
control. - Bearing heavy outbound
- Reducing the risk of stock- transportation costs.
outs, which results in high
service level.
- Lowering operational cost by
reducing utility expenses, and
overhead costs.
- Lowering inbound
transportation costs.
International University
Vietnam National University HCMC
The number of warehouses (4 of 5)
Analyze the advantages and disadvantages of the decentralized
warehousing

Advantages Disadvantages
- Shortening lead time to fulfill - Increasing operation costs by
customer orders. pushing administrative costs
- Lowering outbound to manage a number of
transportation costs. warehouses distantly
- Facilitating product located.
movement by block rates. - Increasing the inventory
- Increasing ability to level in the system.
customize the storage volume - Increasing inbound
to local demand. transportation costs.

International University
Vietnam National University HCMC
The number of warehouses (5 of 5)

Factor Centralized Decentralized

Substitutability Low High
Product value High Low
Purchase size Large Small
Special warehousing Yes No
Product line Diverse Limited
Customer service Low High

International University
Vietnam National University HCMC
Reference
1. Coyle, John J., Bardi, E. J., Langley, C. J. Management
of Business Logistics: A Supply Chain Perspective.
South-Western College Pub, 7th ed, chapter 8.

2. Wang, Jingli, Pettit, S. E-Logistics: Managing your

digital supply chains for competitive advantage.
Kogan Page: 2016, chapter 10.

International University
Vietnam National University HCMC