Facility Development
1. Size and Location of Warehouse
One of the more important decisions facing supply chain executives is how to the size and
number of warehouses to be utilized by the organization. In addition, should those facilities be
located? Finally, each warehouse must be laid out and properly in order to maximize efficiency
and productivity.
Number of Warehouses
Two issues that must be addressed are the size and number of warehouse facilities. are
interrelated decisions in that they typically have an inverse relationship; as the of warehouses
increases, the average size of each warehouse decreases.
Many factors influence how large a warehouse should be, although it is first necessary to
define how size is measured. Size is often defined in terms of square footage of floor and
sometimes in cubic space of the entire facility. Public warehouses often use footage
dimensions in their advertising and promotional efforts. Unfortunately, square age measures
ignore the capability of modern warehouses to store merchandise Hence, the cubic space
measure was developed. Cubic space refers to the volume available within a facility. It is a
much more realistic size estimate because it considers more of the available usable space in a
warehouse.
Some of the most important factors affecting the size of a warehouse
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Customer service levels.
Size of market(s) served.
Cost of land and buildings.
Number of products marketed.
Size of the product(s).
Materials-handling system used,
Throughput rate (i.e ., inventory turnover rate),
Production lead times.
Economies of scale,
Stock layout.
Aisle requirements.
Office area in warehouse,
Types of racks and shelves used,
Level and pattern of demand.
Inclusion of reverse logistics processing in the facility.
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Future needs for the facility to expand or contract.
Typically, as a company's service levels increase, it requires more to provide storage for higher
levels of inventory, UNLESS the products stored in the warehouse increases.
When an organization has multiple products or product groupings, diverse, larger warehouses
will be required in order to maintain of each product. Generally, greater space requirements
are necessary large; low throughput rates exist; production lead times are long; manual
systems are used; the warehouse contains office, sales, or computer is erratic and
unpredictable.
To illustrate, consider the relation of warehouse size to the used. The type of forklift truck a
warehouse employs can of storage area necessary to store product. Because of trucks, a firm
can justify the acquisition of more expensive units about more effective utilization of space.
The warehouse decision cost trade-offs involved for each of the variety of available systems
and native is most advantageous from a cost/service perspective.
Demand also has an impact on warehouse size. Whenever demand fluctuates significantly or is
unpredictable, inventory levels are higher because of The only exceptions to this are when the
organization can ucts very quickly and meet stated customer service requirements.
In deciding on the number of warehousing facilities, four factors lost sales, inventory
costs, warehousing costs, andtransportation are extremely important to a firm, they are the
most difficult to they vary by company and industry.
If the cost of lost sales is very to expand its number of warehouses. There are always
cost/service must determine what level of customer service it desires and only number of
warehouses to service those customers.
Inventory costs increase with the number of facilities, due to the usually stock a minimum
amount (safety stock) of all products at some companies have specific warehouses dedicated
to a particular product or product grouping.This means that both slow and fast turnover items
are stocked, an thus more total space is required.
Warehousing costs also increase because more warehouses mean more space to be owned,
leased, or rented. The costs tend to increase at a decreasing rate after a number of warehouses
are brought online, particularly if the firm leases or rents space. Public and contract
warehouses often offer quantity discounts when firms acquire space in multiple locations.
Transportation costs initially decline as the number of warehouses increases. But they
eventually curve upward if too many facilities are employed due to the combination of inbound
and outbound transportation costs. Firms must be concerned with the total delivered cost of
their products and not just the cost of moving products to warehouse locations. In general, the
use of fewer facilities means bulk shipments from the manufactur er or supplier. The
shipments typically are rated on a truckload (TL) or carload/container (CL) basis, which
provides a lower cost per hundredweight. When customer orders arrive, products are then
shipped out of the warehouse on an LTL (less-than-truckload) basis but are rated higher. After
the numbers of warehouses increase to a certain point, the firm may not be able to ship its
products in such large quantities and may have to pay a higher rate to the transportation
carrier. Local transportation costs for delivery of products from warehouses to customers may
also increase because of minimum charges that apply to local cartage.
Other factors affecting the number of warehouses are the purchasing patterns of customers,
the competitive environment, and the use of technology. If customers order small quantities
on a frequent basis, an organization will sometimes need more warehouses located closer to
the marketplace. When competitors offer rapid delivery to customers, a firm may be forced to
match the service level unless it possesses some other differential advantage. If fast and
efficient transportation and order communication are not available or are uncertain, then the
only alternative might be additional storage facilities.
Computers and information technology can help minimize the firm's number of warehouses by
improving warehouse layout and design, inventory control, shipping and receiving, and the
dissemination of information. The substitution of information for inventories, coupled with
more efficient warehouses, tends to reduce the number and/or size of warehouses needed to
service customers.
2. Location Analysis
Where would be the best place(s) to build a warehouse(s) that would service the greatest
number of consumers? If a firm wished to locate facilities clos est to its potential customers,
using one or more warehouses in its supply chain network, a number of sites would be possible.
The site selection decision can be approached from both macro and micro perspectives. The
macro perspective examines the issue of where to locate warehouses geographically (in a
general area) to improve the sourcing of materials and the firm's market offering (improve
service and/or reduce cost). The micro perspective examines factors that pinpoint specific
locations within the larger geographic areas.
MACRO
In his macro approach, Edgar Hoover identified three types of location strategies: (1) market
positioned, (2) production positioned, and (3) intermediately positioned.The market positioned
strategy locates warehouses nearest to the final customer. Production posi tioned warehouses
are located in close proximity to sources of supply or production facili ties. The final location
strategy places warehouses at a midpoint between the final customer and the producer.
Customer service levels for the intermediately positioned warehouses are typically higher than
for the production positioned facilities and lower than for market positioned facilities. A firm
often follows this strategy if it must offer high customer service levels and if it has a varied
product offering being produced at several plant locations.
Von Thunen’s model
Ánother macro approach includes the combined theories of a number of economic
geographers. Many of these theories are based on distance and cost considerations. Von
Thunen called for a strategy of facility location based on cost minimization.39 Specifically, he
argued, when locating points of agricultural production, transportation costs should be
minimized to result in maximum profits for farmers. His model assumed that market price and
production costs would be identical (or nearly so) for any point of production. Because farmer
profits equal market price minus production costs and transportation costs, the optimal
location would have to be the one that minimized transportation expenditures.
Webber’s model
Weber also developed a model of facility location based on cost minimization. According to
Weber, the optimal site was the location that minimized total transportation costs: the costs of
transferring raw materials to the plant and finished goods to the market. Weber classified raw
materials into two categories according to how they affected transporta tion costs: location
and processing characteristics. Location referred to the geographical availability of the raw
materials. For items with very wide availability, few constraints on facility locations would
exist. Processing characteristics were concerned with whether the raw material increased,
remained the same, or decreased in weight as it was processed. If it decreased, facilities would
best be located near the raw material source because transpor tation costs of finished goods
would be less with lower weights. Conversely, if processing resulted in heavier finished goods,
facilities would be best located near final customers. If processing resulted in no change in
weight. locating at raw material sources or markets for finished goods would be equivalent.
Hoover’s model
Other geographers included the factors of demand and profitability in the location deci sion.
Hoover examined both cost and demand elements of location analysis. Once again, his
approach stressed cost minimization in determining an optimal location. Additionally, Hoover
identified that transportation rates and distance were not linearly related; that is, rates
increased with distance but at a decreasing rate. The tapering of rates over greater distances
supported the placement of warehouses at the end points of the channel of distri bution rather
that at some intermediate location. In that regard, Hoover did not fully agree with Weber's
location choices.
Greenhut’s model
Greenhut expanded the work of his predecessors by including factors specific to the company
(e.g., environment, security) and profitability elements in the location choice. According to
Greenhut, the optimal facility location was the one that maxi mized profits.
Center of Gravity approach
An approach that is very simplistic locates facilities based on transportation costs. Termed the
center-of-gravity approach, locates a warehouse or distribution center at a point that
minimizes transportation costs for products moving between a manufacturing plant and the
market (s). This approach can be viewed rather simply. Envision two pieces of rope being tied
together with a knot and stretched across a circular piece of board, with unequal weights
attached to each end of the rope. Initially, the knot would be located in the center of the circle.
Upon the release of weights, the rope would shift to the point where the weights would be in
balance. Adding additional ropes with varying weights would result in the same shifting of the
knot (assuming the knots were all in the same place). If the weights represented transportation
costs, then the position where the knot would come to rest after releasing the weights would
represent the center-of-gravity, or position where transportation costs would be minimized.
The approach provides general answers to the warehouse location problem, but it must be
modified to take into account such factors as geography, time, and customer service levels.
MICRO
From a micro perspective, more specific factors must be examined, such as the following:
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Quality and variety of transportation carriers serving the site.
Labor rates.
Quality and quantity of available labor.
Cost and quality of industrial land.
Potential for expansion.
6. Tax structure.
7. Building codes.
8. Nature of the community environment.
9. Cost of construction
10. Cost and availability of utilities
11. Local government tax allowances
Schmenner’s 8 step approach to site selection
Schmenner proposed an eight-step approach to a business location search that we can apply
to the warehouse site selection decision. It has been used to select a site or location for a
facility. The process includes the following steps:
1. After the firm has made the initial decision to establish a facility at a new location (not
yet determined), it solicits input from those persons in the company affected by the
decision.
2. Management designates a corporate team to examine potential sites and to collect
information on selected attributes, such as land availability, labor requirements, trans
portation options, utilities, environmental factors, and products to be stored.
3. The firm establishes a separate engineering team to examine potential sites in terms of
topography, geology, and facility design.
4. The corporate team develops a list of key criteria for the new location. Such criteria
take into account the needs of all functional areas of the business.
5. Geographic regions are evaluated in view of the key criteria established; potential
regional sites are identified.
6. Specific sites within acceptable regional areas are identified.
7. The corporate team examines each prospective site, using the set of factors deemed to
be important. The team makes frequent site visits and creates a ranking of potential
locations.
8. A specific site is selected from the recommended locations. This decision is often made
by the person most directly affected, normally the senior logistics or supply chain
executive.
Each step in the process is interactive, progressing from the "general" to the "specific." It may
be a highly formalized or a very informal process. The process can also be centralized at the
corporate level, decentralized at the divisional or functional level, or some combination of
each. What is important, however, is that even with the differences that exist among
companies, most firms follow some type of logical process when making a location decision.
3. Warehouse Layout and Design
Where should things be located in the organization's supply chain? More specifically, where
should products be located within a warehouse? With an average warehouse containing
thousands of SKUs, this is an important decision because it has a critical effect on system
efficiency and productivity. A good warehouse layout can increase output, improve product
flow, reduce costs, and improve service to customers.
The optimal warehouse layout and design for an organization will vary by the type of products
being stored, availability of financial resources, level and type of competition, and customer
needs. Additionally, there are various cost trade-offs between labor, equip ment, space, and
information. For example, the purchase of more expensive, yet more efficient, materialshandling equipment can affect the optimal size of a warehouse facility. Installation of an
automated conveyor system to reduce labor costs and raise productivity can affect the
configuration of a warehouse. Also, "the reduced travel distances from using aisles or tunnels
will improve picking efficiency up to 25%."
Within a warehouse, randomized and dedicated storage are two general examples of how
products can be located and arranged.
Randomized storage.
Randomized, or floating-slot, storage places items in the closest available slot, bin, or rack.
Products are then retrieved on a first-in, first-out (FIFO) basis. This approach maximizes space
utilization, although it requires longer travel times between order-picking locations.
Randomized systems often employ a comput erized automatic storage and retrieval system
(AS/RS), which minimizes labor and handling costs.
Dedicated storage.
In dedicated or fixed-slot storage, products are stored in permanent locations within a
warehouse. Three methods can be used to implement the dedicated storage approach,
including storing items by (a) part number sequence, (b) usage rates, or (c) activity levels (e.g.,
grouping products into classes or families based on their level of activity or throughput rates).
Dedicated storage. In dedicated or fixed-slot storage, products are stored in permanent
locations within a warehouse. Three methods can be used to implement the dedicated storage
approach, including storing items by (a) part number sequence, (b) usage rates, or (c) activity
levels (e.g., grouping products into classes or families based on their level of activity or
throughput rates).
Complementarity refers to how often products are ordered together and therefore stored
together. Computer disk drives, CD-ROMs, monitors; pens and pencils; and desks and chairs
are examples of complementary products that are usually stored in close proximity to each
other.
Popularity relates to the fact that products have different inventory turnover rates or demand
rates. Another term used for this turnover rate is velocity. Items that are in greatest demand
should be stored closest to shipping/receiving docks. Slow-moving items should be stored
elsewhere, at more remote locations within warehouses.
In addition to internal space layout, it is also important to analyze a warehouse's exter nal
configuration. Four aspects of external layout are critical: truck docks, rail require ments,
external security measures, and physical features such as roof and windows.
In summation, once a decision has been made to utilize warehousing, a decision regarding
whether to perform the storage function oneself or outsource it is necessary. Then
determining the size and number of storage facilities becomes important, followed by where
they should be located and what should be their layout and design. Such decisions are needed
whether the firm and its supply chain are local, national, or global in scope.
Measures and Metrics
1. Measures and Metrics
Management experts have stated that "you can't manage what you don't measure." Although
all generalizations have exceptions, it is certain that efficient and effective ware house and DC
management cannot occur without the proper operating and performance measures and
metrics. Often, the following scenario occurs:
They can quote their facilities' order fulfillment rates off the top of their heads. They can recite
line fill rates out to the hundredth of a percentage point. They can reel off stats for worker
turnover, order cycle times, and distribution costs as a percentage of sales. But when it comes
to gauging what really matters-how their customers view their performance-DC managers
seem to rely more on guesswork than on the numbers.
In order to efficiently and effectively manage a warehouse or DC, the supply chain executive
must have measures and metrics for variables such as customers, operations, financials,
capacity/quality, and employees.
2. Warehouse Efficiency and Effectiveness Metrics
Warehousing is an important part of most supply chains. It has been estimated that ware
house operations account for 30 to 50 percent of most companies' supply chain costs.53 Thus,
it is vital that these storage facilities operate at peak efficiency and effectiveness so that supply
chain partners and customers achieve a "win-win" situation. This involves breaking down the
warehousing process into components and determining if any of them can be done better.
The Warehousing Education and Research Council (WERC) periodically conducts a study of
warehouse metrics. As the marketplace changes, so do the metrics used to evalu ate
warehouse efficiency and effectiveness. Popular metrics that seem to remain important and
are widely used by companies include average warehouse capacity used, order-picking
accuracy, on-time shipments, percent of supplier orders received damage free, and order fill
rate.
In an era of "lean" manufacturing, "lean" supply chain management, and "lean" every thing
else, aspects of warehousing can typically be improved collectively, that is, a number of
functions or processes can be improved rather than just one or a few. Organizations that have
implemented successful lean programs report cost savings of 20 to 40 percent.55
"Lean warehousing" can be viewed from either a strategic or tactical/operational perspective.
With a strategic focus, supply chain executives would consider warehousing vis-à vis overall
supply chain strategy. "In strategic warehousing, we recognize the supply chain is an overall
system, with many moving parts. Warehousing plays a key role in that system. The second
vantage point is... tactical lean warehousing. In this case, we focus inside the four walls of the
warehouse and ask, 'How can lean principles and tools help us to run a more efficient
warehouse?' Here we have made the assumption we need the warehouse and therefore want it
to run as effectively and efficiently as possible."
In terms of "best practice," warehousing excellence can be achieved by developing optimal
strategies in the following 11 areas:
1. Set up a vendor compliance program.
2. Electronically transmit advanced shipping notifications (ASN).
3. Utilize automatic data collections technology such as RFID or RF barcode.
4. Utilize hands-free selection such as wrist-mounted RF units, voice pick, pick- or put-to light
order fulfillment systems.
5. Utilize a WMS for preplanned picking waves.
6. Record every movement as a transaction to determine if unnecessary activities are
occurring.
7. Minimize touches of the inventory.
8. Schedule shipments to arrive simultaneously.
9. Practice ongoing cycle count.
10. Use cross-docking given its cost savings and other benefits.
11. Implement dynamic slotting, which locates products based on demand.
For each of the 11 areas, specific metrics can be developed and data collected to ensure that
performance standards are being achieved. Typically, firms will measure a multitude of factors,
but only a few will be key performance indicators (KPIs).
Practically speaking, supply chain executives responsible for warehousing need to know the
answers to four basic questions, each of which can be measured in many different ways: First,
where is my stuff? Second, how much of my stuff remains in stock? Third, when will I get my
order? And fourth, how much lead time do I need?
3. Key Performance Indicators
Supply chain executives responsible for warehousing need to know the answers to four basic
questions, each of which can be measured in many different ways: First, where is my stuff?
Second, how much of my stuff remains in stock? Third, when will I get my order? And fourth,
how much lead time do I need?
Warehouse executives are often asked which metrics they most often use. The KPIs consider
the warehouse, suppliers, and customers.
In order of frequency of use, the most popular measures are:
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Percentage of on-time shipments
Percentage of shipments delivered on time
Overtime as a percentage of total paid hours
Percentage of inbound received on time
Percentage of orders shipped complete
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Order cycle time
Fill rate, measured both by lines and by orders
Inventory count accuracy
Percentage of storage capacity used
Days of finished goods inventory on hand
Annual workforce turnover
When each of the above metrics is combined and a warehouse or DC does everything right,
what you get is something called the "perfect order," defined as an order "that arrives
complete, on time, free of damage, with the perfect documentation." However, because no
system or warehouse is "perfect," something less than the perfect order results most of the
time. To illustrate, if a warehouse or DC has 93.57% on-time delivery, ships complete orders
93.30% of the time, has 98.35% of shipments damage free, and is accurate on invoicing the
customer 98.27% of the time, the perfect order index (POI) score is only 84.46% [93.67 x 93.30
x 98.35 x 98.27 84.46].
Interestingly, as seen from the listing of KPIs and the definition of a perfect order, "on time" is
an important aspect of warehouse management. Complicating the calculation of the POI is the
fact that on time means different things to different people and in different situations. For
example, most of us would not be troubled with having to wait an extra five minutes to get a
seat at our favorite restaurant. However, if we were to be involved in a life-threatening traffic
accident, a five-minute wait would be unacceptable. In a survey of warehouse executives,
individuals indicated six different ways that they defined on time: on or before appointment
time; +15 minutes from the appointment time; +30 minutes from the appointment time; +1
hour from the appointment time; on the requested day; and on the agreed-upon day.64
Therefore, depending on the particular definition used for on time, many different POI scores
could be calculated, and each one could be right!