Simply put a warehouse is a pretty large building used to store material components and finished goods
until they are needed.
Pretty straightforward definition for sure but perhaps not so straightforward when we consider how important
warehouses are for business success.
A warehouse differs from a distribution center and that we store stuff in warehouses before we are ready
to distribute those items whatever they may be.
Certainly a small business can use the same building for both storing and distributing and many small
businesses do so for our purposes though.
Let’s consider the warehouse as a separate entity.
Certainly warehouses are expensive to build and expensive to operate.
So we have to consider four distinct tradeoffs among different aspects of our business before making
decisions about how many warehouses we need and where they should be located.
Can you operate with no warehouses at all.
Certainly you can of course your transportation costs will be considerably high because you’ll have
to store all products at the factory and then ship to each individual customer as orders are placed.
Likewise with materials coming into the factory from your suppliers with warehouses in the right places
you are able to move material and products in large quantities from the factory and save on shipping
Goods can be sent by rail and in full truckloads.
Of course you can have too many warehouses also then your transportation costs will increase because
you are now moving everything by truck requiring more trucks to deliver to more warehouses spread across
And many of those trucks will only be partially full.
Thus increasing your operating costs.
There’s also a tradeoff between number of warehouses and the amount of inventory you have to keep on
In general the more warehouses you have the higher your inventory levels will be.
Many companies will segregate their inventory needs into distinct warehouse operations.
For example I might provide regional warehouses for materials and finished goods that make up the bulk
of my business.
Those items that move on a regular on a steady basis but for the low velocity items like specialty products
and the materials to make them I might have just one domestic warehouse.
The savings on inventory carrying costs often outweigh the additional transportation expenses.
This is certainly a calculation you want to make for yourself and your products.
Customer service is another consideration for my warehousing decisions.
More warehouses provide better service to your factories and to your customers because they’re going
to be holding inventory closer to the people who need it.
But as most of us realize 100 percent service levels are often just not affordable.
We have to balance our service goals with the cost of building and operating the network of warehouses.
Our last trade off consideration here is within the warehouse itself the size the equipment and the
people the larger the facility the more equipment will be in it and the more people will be required
to operate it.
Now robotics and automated handling equipment can certainly change that people ratio based upon your
service level requirements and goals.
You must build equip and staff the right sized warehouse.
The key to warehouse management is to find the right balance among these factors.
You must design a network of the right sized warehouses in the right locations to provide the needed
service levels while holding down your inventory costs.
Certainly this is not an easy assignment.
So where do you begin analyzing your entire warehousing system at once may be too daunting task but
looking at the warehousing requirements for one major product might uncover some opportunities for improvement
within your logistics system and simply walking around the warehouse with the question why on your mine
could yield some interesting results also.
Try it for yourself.
A friend of mine recently retired from a large electronics distribution company.
When I first met him several years ago I remember asking him what exactly his company does.
He said We make large boxes into small boxes.
Pretty simple response to a rather complex question.
What my friend described is certainly a primary function of distribution centers large retailers like
Wal-Mart provide a good example of this.
Wal-Mart may buy a shipping container full of flat panel TVs from a producer in China.
Those TVs are shipped by ocean carrier to Los Angeles by rail to Dallas and by truck to the Dallas distribution
center at the distribution center.
They will break down that large shipment into smaller batches to be shipped to individual stores within
the area based on the needs of each store.
Distribution centers work very hard to make this process as efficient as possible.
One way to do this is use the cross docking method and Wal-Mart was one of the early adopters that have
truly perfected this technique.
Back to my example of distributing TVs I might load those TVs onto an equal sized pallets before I put
them in the container.
When my truck pulls up to one side of the distribution center I can have smaller trucks waiting on the
other side to be loaded with cross docking.
I simply move each pallet directly from the large truck onto the smaller trucks and off they go to the
individual retail stores.
The TVs never touch the floor.
They are moved directly across the distribution center from one doc to another.
No storage is required and handling is minimized and goods are processed through my center in a just
in time manner as they are needed.
Pretty efficient operation.
And that is one of the key differences between a warehouse and a distribution center although I might
store him in Torreon a distribution center.
It is only temporary storage usually to facilitate customer service needs.
And these same principles also apply to inbound distribution centers as they’re moving materials and
components into my factories and assembly plants nowadays distribution centers continuously look for
ways to add value for their company and their customers holding small amounts of inventory on a temporary
It is one way of adding value in my Wal-Mart example.
This certainly helps to ensure the right mix of products go to the retail store on time and if possible
in full truck loads which decreases my transportation costs another way to add value.
The concept of killing if a particular assembly job required 12 specific items to complete a part of
the process a distributor would collect them in the kits for the assembler making that job faster and
This is a big value add to the assembly company because of the time savings and because they do not
have to hold the inventory required to make the kits themselves.
There are several different decisions required to create an operate in effective distribution system.
First and foremost you have to decide if you will own the distribution network yourself or outsource
this function to a professional distribution company.
This is the classic make or buy decision I next need to determine how many distribution centers I need
based upon the needs of my organization to effectively move material and products through my supply
The next factor is location and that is totally dependent upon where my customers are whether they’re
are my factories and plants or the actual customer of my finished goods.
I need to be close to the people to whom I am distributing whether they are internal or external to
The number and location of my distribution centers will help me to determine the size of each facility.
Once I have made all these decisions I have a pretty good handle on my distribution center costs but
I really need to look carefully at total costs to make sure I have the most efficient distribution network
The size number and location of distribution centers will largely determine my transportation costs
my inventory costs and my cost of lost sales because I did not have the product to fill a customer’s
I have to consider all these costs to optimize my distribution function.
Is distribution optimized at your company who owns and operates the distribution centers.
Are they located to provide the highest service levels at the lowest cost or are they adding value to
your organization and aligned with company strategies.
These are the types of questions logistics managers should be answering.