The Nature and Importance of Warehousing - Research Paper Example

Table of Contents Table of Contents Introduction 2 Definitions 2 a. Warehousing 2 b. Inventory 3 2. Brief History of Warehousing 3 3. Supply Chain Reality 5 4. The nature and importance of warehousing 6 5. The role of warehousing - a basic conceptual rationale 7 6. The purpose of warehousing 8 7. Basic Warehousing operations 8 8. Types of warehousing 9 9. Principal forms of ownership i.e. public, private and contract 9 10. Warehousing - an evolving discipline, then and now 13 11. Added Value functions 14 12. Industry trends 14 13. Recommendations 15 14. Conclusions 15 Bibliography 16 Introduction The business environment is becoming increasingly challenging. In certain countries like India, firms have to deal with several bottlenecks such as outdated technology, underdeveloped infrastructure, inappropriate payment systems and ineffective scheduling and control systems, which have hampered their progress. The opening up of economies across the world to global competition has increased the level of competition has increased the level of competition that domestic companies have to face. Domestic companies operating in automobiles, steel, electronic and other manufacturing sectors have to overcome the threat to their market share posed by foreign companies. The need for operations managers to reduce manufacturing costs, optimize productivity and improve product quality in order to stay in the market has become imperative. Many organizations now recognize the importance of automation, optimization of scheduling and a proper inventory management system, and are incorporating total quality management and total quality in their operations. 1. Definitions a. Warehousing Every organization invests a considerable amount of capital on materials. In many cases, the cost of materials exceeds 50 percent of the total cost of goods produced ((ICMR), 2003). Such a large investment requires considerable planning and control so as to minimize wastage. Even before we talk about planning and control it is inevitable that the material is stored in a safe place and such place of storing materials is termed as a warehouse. Hence, Warehousing can be defined as the process of storing goods or merchandise safely (Answers.com, 2004). b. Inventory Inventory refers to a stock of goods, commodities, or other economic resources that are held by firms at a particular time for their future production requirements and for meeting future demands. Inventories can be direct or indirect. Direct inventories include goods that play an important role in manufacturing of a product and become a part of the finished product. Direct inventories include raw materials, work-in-progress goods, etc. Indirect inventories include goods that are necessary to run the production process but do not become part of the end product. For example, lubricants, grease, oils, stationery etc, are indirect inventories. 2. Brief History of Warehousing As defined above, a warehouse is a commercial building used for storage of goods. Warehouses are used by people like manufacturers, importers, exporters, people in the logistics industry etc. They are usually large plain buildings in industrial areas of cities and towns. They come equipped with loading docks to load and unload trucks; or sometimes are loaded directly from railways, airports, or seaports. They also often have cranes and forklifts for moving goods, which are usually placed on ISO standard pallets loaded into pallet racks (Answers.com, 2004). With advent of globalization and information technology, now-a-days, warehouses are being fully automated. In such automated warehouses, there are hardly any workers found working inside. The pallets and product are moved with a system of automated conveyors and automated storage and retrieval machines coordinated by programmable logic controllers and computers running logistics automation software (Answers.com, 2004). With the introduction of new and recent technologies like Just-in-time (JIT) and ABC classification systems, traditional warehousing techniques have started declining since the recent past. Firms use thousands of varieties of materials that vary in prices, usage and lead-time. It is neither desirable nor possible to exercise the same degree of control over all the materials. So, it is necessary that firms pay more attention to those items whose usage value or consumption value is high and less attention to those items whose usage value is low. The ABC classification system is used to alter the expenses associated with controlling the materials according to their usage value. This kind of classification was not possible in the traditional warehousing mechanism. The concept of JIT purchasing was developed by the Japanese. The method advocates reduction in the size of the purchased quantities to the extent so that materials reach the production point directly. This results in reduction in wastage, storage and maintenance costs. In this kind of system, the firm ensures that the high value components and materials arrive only when they are required. This reduces the maintenance costs that are involved in storing the materials in warehouses. 3. Supply Chain Reality For any supply chain to be successful or beneficial to the organization, it is necessary that the company is clear about its objectives and aims of its existences. Along with clarity in objectives, it is also necessary that the organization is innovative and adaptable in nature. The major driving forces of any innovative supply chain are the focus of the business and the synergy from an integrated functional approach which the business generates over a period of time. The supply chain can be described as the network, covering the various stages in the provision of products or services to customers. It includes not only manufacturers and suppliers, but also transporters, warehouses, distributors, retailers, etc. The number of stages in the supply chain depends on the customers' needs, and the role each stage plays in fulfilling their needs. Supply Chain Management (SCM) integrates procurement, operations and logistics to provide value added products or services to customers. Effective management of the supply chain helps organizations meet customer requirements on time, with the desired quality specifications, in a cost-effective manner, through the coordination of different activities which transform raw materials into final products or services. Supply Chain Management can provide both tangible and intangible benefits to an organization. Tangible benefits include revenue growth, improved facility utilization, optimized inventory management, etc. Intangible benefits include improvement in quality, improvement in customer satisfaction, and enhanced customer and supplier techniques. Supply Chain Management has become one of the key areas that organizations are focusing on to reduce costs and improve the efficiency of the production process. Four key drivers of supply chain performance are inventory, transportation, facilities and information. They help determine not only the responsiveness and effectiveness, but also the strategic fit of the supply chain. In order to service the needs of customers and fulfil their expectations and to meet the organizations' growth and profitability objectives, managers focus on improving the effectiveness of the supply chain. 4. The nature and importance of warehousing Distribution centres and warehouses are those physical facilities that are used to store and ship inventory. Warehouses serve customer directly but are commonly used to store raw materials that are needed to be shipped to the manufacturing firm and finished goods that are shipped to the retailing firms. Value addition in warehousing takes place in terms of consolidation, product mining, service and smooth flow of operations. The goods that enter the warehouse or rather the inbound goods are safeguarded in the warehouse until the outbound process for these goods is initiated. The warehousing process involves controlling the flow of goods in and out of the warehouse through proper documentation and recording. Certain important activities of warehousing are receiving, storing, packing, marking, and shipping and so on. Receiving the goods is considered a crucial activity of warehousing. The person in charge at the warehouse should be watchful of the goods entering the warehouse. Proper verification of the delivery documentation has to be done prior to the acceptance of the goods. 5. The role of warehousing - a basic conceptual rationale As already discussed, the role of warehouse in a supply chain is to store goods safely and at the same time aids in transportation or shipping of the goods to various destinations. The various functions of warehousing include consolidation of transportation, service needs in the logistics process, protecting the goods from any kind of contingencies and above all helping in the smooth flow of operations (john, 2007). Transportation consolidation - the following figure clearly depicts how this takes place in warehousing. Source: http://www.psu.edu/dept/NK/ba/bl301/ch7/sld004.htm 6. The purpose of warehousing The main purpose of warehousing is to store or hold raw materials or finished goods until that particular raw material or good is used or despatched for its respective destination. It is a physical system that comprises a set area or space, tools and labourers to handle the stored goods. 7. Basic Warehousing operations As mentioned earlier, a warehouse holds either raw material or finished goods. This function of warehousing of holding goods in storage provides economies in purchasing and production. Some seasonal goods are also held in warehouses to facilitate a smooth flow when demand arises. Another function of warehousing is stock mixing, which involves sorting out bigger shipments into smaller ones and vice versa. This process helps firms reduce the total transportation costs of delivering finished goods to the customers. Stock mixing also facilitates release of several components at a time for the smooth flow of the production process. Transloading, another function of warehousing uses the warehouse as a station for transferring goods from one place to another. This function of warehousing is also called as cross docking. On one side of the warehouse the shipments are delivered and on the other side, these are split according to the destinations to which they have to be sent. This process reduces storage and multiple handling costs. Yet another function of warehousing is protecting the production process from contingencies, such as employee strikes by locating the warehouses away from the production plants. 8. Types of warehousing Normally, warehousing is of two types, storage warehousing and distribution warehousing. The function of a storage warehousing is to store the raw material, other components, and finished goods ((ICMR), Marketing Management, 2004). The function of a distribution warehousing is to act as a temporary port for transfer of goods from one location to another. Distribution warehouses do not stock goods for long periods of time, but only serve as a kind of stop gap arrangements, where the goods are stored for very short periods of time before they are dispatched to their respective locations. 9. Principal forms of ownership i.e. public, private and contract In 1992, firms stored approximately 70% of finished goods in private warehouses, 20% in public warehouses and 8% in transportation vehicles. By the year 2000, it is estimated that private warehousing will decrease to 63%, and public and transit vehicle warehousing will increase to 22% and 13%, respectively (john, 2007). The costs involved in public warehousing are most commonly variable costs. They are more flexible when compared to the private warehousing and they also involve limited capital investment. The public warehousing rates are based upon certain aspects like value, fragility, potential damage to other goods, volume and regularity and services required etc. When it comes to private warehousing, a lot of fixed cost component is involved and also this requires a higher and constant volume (john, 2007). There are a number of factors that are to be considered when taking ownership decisions with regard to warehousing. First and foremost, the density and the area of the market that is to be served are to be carefully considered. Then comes the consideration of the service needs of the security and at the same time the security needs of the warehouse. Last but not least, firms also need to consider the multiple uses that can be enjoyed through the particular warehouse. The following are few of the characteristics of a firm that may affect the ownership decisions of a warehouse. Source: http://www.psu.edu/dept/NK/ba/bl301/ch7/sld004.htm Contract warehousing is another form of ownership which has its own advantages (john, 2007). The following are the advantages of contract warehousing: Up to 5.7% in 2000 from 4.4% in 1992 Compensation for seasonality in products Increased geographical coverage Ability to test new markets Expert managerial expertise and dedicated resources Less strain on the balance sheet Possible reduction of transportation costs (john, 2007) 10. Warehousing - an evolving discipline, then and now In olden days, businesses were not used to be so customer focused as it is happening in today's globalized world. In those days, customers used to go in search of products as there were limited resources. That is the not the case at present. The wide availability of resources has made anything available everywhere and anywhere. The current trend is that manufacturers and businessmen are going in search of the customers due to the increased competition. Today, the ordinary customer has become more sophisticated and demanding, and expects more variety, lower costs and better quality. Customers therefore drive demand and the industry has to meet this demand. Inter-firm rivalry and competition have also increased manifold. In line with these changes, organizations are replacing production-driven systems involving mass production, by market-driven systems to enable them to corner market share. This scenario has increased the importance of operations management in an organization, as it is directly responsible for the final product. As a result, operations management is gaining more significance and has become a key discipline in management science. Until recently, the field of operations of management was considered relevant only to the manufacturing sector. But with the increasing influence of service industries, the scope of operations management has widened ((ICMR), Operations Management, 2003). 11. Added Value functions The latest technologies have brought about revolutionary changes in materials management especially in warehousing. Technologies such as Robots and Automated Storage and Retrieval Systems (AS/RS) make execution of materials convenient, easy and economical. Robots are re-programmable and multi-functional manipulators designed to move materials, parts, tools and other specialized devices through variable programmed motions to perform a variety of tasks. They are versatile, computer controlled machines programmed to perform various tasks independently without any kind of human support. Several robots are stationary and mounted on the floor, with an arm that can reach different locations. The AS/RS systems are computer-controlled and mechanically-operated materials handling systems. The functioning of these systems is similar to functioning of physically operated robots, but these systems can also perform complex operations of loading and unloading the inventory with their dozens of automated pallet movers. Storage and retrieval activities were the specific storing and order picking functions of inventory items. Now, AS/RS refers to the execution of inventory stocking and picking functions, and automated material handling functions, which are integrated and controlled by a computer. 12. Industry trends With the passage of time, even the operations management has undergone a considerable change. Now-a-days organizations are adopting new technologies in their manufacturing process to improve productivity, reduce labour cost, provide safe work environment for their workers, improve material handling and manage inventory better. A number of significant developments have taken place in various fields in the recent past, which include the digital computers, improvements in data-storage technology, sophistication of software, advances in sensor and optical technology, artificial intelligence and many more. All these developments have contributed in the progress of technology in field of operations management on a whole. 13. Recommendations Organizations must improve their products as well as productivity to retain their market share. The long-term success of an organization requires investments in technology because new technologies can improve efficiency and productivity. 14. Conclusions Today's organizations are benefiting from automation. Some of the recent technological developments in the field of operations management, which include computer-aided design (CAD), AS/RS systems, JIT and ABC systems etc. Artificial Intelligence is another development in the field of technology. AI enables computers to exhibit some of the characteristics of human intelligence, like capacity for learning, understanding language, reasoning and problem solving. Bibliography 1. (ICMR), I. C. (2004). Marketing Management. Hyderabad: ICMR. 2. (ICMR), I. C. (2003). Operations Management. Hyderabad: ICFAI Center for Management Research (ICMR). 3. Answers.com. (2004, June 23). Warehouse. Retrieved May 14, 2008, from Answers.com: http://www.answers.com/topic/warehousecat=technology 4. ICFAI Center for Management Research (ICMR). (2005). International Marketing and International Business. Hyderabad: ICFAI Center for Management Research. 5. john, D. P. (2007, September 5). Role of warehousing. Retrieved May 14, 2008, from Business Logistics Management: http://www.psu.edu/dept/NK/ba/bl301/ch7/sld003.htm 6. Limitedmanagement.com. (n.d.). OUTSOURCING OFFSHORE SUPPLY CHAIN MANAGEMENT . Retrieved 01 31, 2008, from Limitedmanagement.com: http://www.ltdmgmt.com/mag/offshore-scm.htm 7. M. Kalwani, N. N. (1995). Long-Term Manufacturer-Supplier Relationships. Journal of Marketng, Vol: 59 , 1-16. 8. Monks, J. G. (1996). Operations Management. New York: McGraw Hill Inc. 9. Nonaka, I. a. (1995). The knowledge-creating company: how Japanese companies create the dynamics of innovation. New York: Oxford University Press. 10. Schonberger, R. J. (1997). Operations Management - Customer Focused Principles. Irwin publications. Read More