Why have a warehouse at all?

A warehouse requires labor, capital (land and storage and handling equipment), and information systems, all of which are expensive. Is there some way to avoid the expense? For most operations, the answer is no. Warehouses, or their various cousins, provide useful services that are unlikely to vanish under the current economic scene.

Here are some of their uses: -

???To better match supply with customer demand:

One of the major challenges in managing a supply chain is that demand can change quickly, but supply takes longer to change. Surges in demand, such as seasonality strain the capacity of a supply chain. Retail stores in particular face seasonality’s that are so severe that it would be impossible to respond without having stockpiled products. For example, Toys Rus does, by far, most of its business in November and December. During this time, their warehouse's ship products at a prodigious rate (some conveyors within their warehouses move at up to 35 miles per hour). After the selling season, their warehouses spend most of their time building inventory again for the following year. Similarly, warehouses can buffer the supply chain against collapsing demand by providing space in which to slow or hold inventory back from the market. In both cases, warehouses allow us to respond quickly when demand changes. Response time may also be a problem when transportation is unreliable. In many parts of the world, the transportation infrastructure is relatively undeveloped or congested. Imagine, for example, sourcing products from a factory in Wuhan, China for retail sale within the US. After manufacture, the product may travel by truck, then by rail, by truck again, and then be loaded at a busy port; and it may repeat the sequence of steps (in reverse order) within the US. At each stage, the schedule may be delayed by congestion, bureaucracy, weather, road conditions, and so on. The result is that lead time is long and variable. If the product could be warehoused in Los Angeles, closer to the customer, it could be shipped more quickly, with less variance in lead time, and so provide better customer service. Warehouses can also buffer against sudden changes in supply. Vendors may give a price break to bulk purchases and the savings may offset the expense of storing the product. Similarly, the economics of manufacturing may dictate large batch sizes to amortize large setup costs, so that excess product must be stored. Similarly, warehouses provide a place to store a buffer against unreliable demand or price increases.

???To consolidate products:

To reduce transportation costs and to provide customer service. There is a fixed cost any time product is transported. This is especially high when the carrier is a ship or plane or train, and to amortize this fixed cost it is necessary to fill the carrier to capacity. Consequently, a distributor may consolidate shipments from vendors into large shipments for downstream customers. Similarly, when shipments are consolidated, then it is easier to receive downstream. Trucks can be scheduled into a limited number of dock doors, so drivers do not have to wait. The results are saved for everyone. Consider, for example, Home Depot, where more than a thousand stores are supplied by several thousands of vendors. Because shipments are frequent, no one vendor ships very much volume to any one store. If shipments were sent direct, each vendor would have to send hundreds of trailers, each one mostly empty; or else the freight would have to travel by less-than-truckload (LTL) carrier, which is relatively expensive. But there is enough volume leaving each vendor to fill trailers to an intermediate cross-dock. And each cross-dock receives product from many vendors, sorts it, and prepares loads for each store so that the total freight bound for each store is typically sufficient to fill a trailer. The result is that vendors send fewer shipments and stores receive fewer shipments. Moreover, the freight is more likely to travel by full truck-load (TL) and so pay significantly fewer transportation costs. A warehouse also provides opportunities to postpone product differentiation by enabling the generic products to be configured close to the customer. Manufacturers of consumer electronics are especially adept at this. Country-specific parts, such as keyboards, plugs, and documentation, are held at a warehouse and assembled quickly in response to customer orders. This enables the manufacturer to satisfy many types of customer demand from a limited set of generic items, which therefore experience a greater aggregate demand, which can be forecast more accurately. Consequently, safety stocks can be lower. In addition, overall inventory levels are lower because each item moves faster. Another example is in pricing and labeling. The state of New York requires that all drug stores label each individual item with a price. It is more economical to do this in a few warehouses, where the product must be handled anyway, than in a thousand retail stores, where this could distract the workers from serving the customer.