By Arnold Maltz and Nicole DeHoratius
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 good and chemical manufactures 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 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.
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.
An excerpt from Warehousing: The Evolution Continues, sponsored and published by the Warehousing Education and Research Council (2004).
Arnold Maltz, PhD, associate professor, teaches logistics and supply chain management at Arizona State University. Nicole DeHoratius, DBA, is an assistant professor of operations management at the University of Chicago. For more information, contact the Warehousing Education and Research Council, 630-990-0001 (www.werc.org).