Warehouse and Inventory Management - Essay Example

? Warehouse and Inventory Management Logistics is a 20th century phenomenon and now it is widely recognized as a key to a company’s success. Logisticimprovement methods require a strategy and definition of logistics fronts (warehousing, third-party logistics, distribution, transportation and information technology). Warehouse: Warehouse is a place where goods are stored by manufactures, importers and exporters, and wholesalers. Goods that can be stored in a warehouse include raw materials, finished goods, and manufacturing material, depending on the type of goods being produced or material used by a business. It is that part of the firm’s logistics system that stores products at and between point of origin and point of consumption. It provides information to the management about the status, condition and disposition level. Warehousing provides the place utility and works as a balance between production and meeting customer needs. Warehouses also support manufacturing, mix products from multiple facilities for shipment to a single customer, break-bulk and are used as a ‘flow-thru’ point along with “hoarding” point. Warehousing functions include; material handling, customer services, information transfer, and storage. Other purpose is to identify goods, dispatch for storage, hold inventory, recall goods, dispatch the shipment and prepare records and advices. Warehouses also provide services like Co-packing kitting and repair to its customers. With advancement in information technology and changing needs of businesses, Warehouse Management Systems (WMS) have been designed. These WMS are a key part of supply chain management and aim at controlling the movement and storage of materials within a warehouse and processing of associated transactions. Third-party Warehousing: Tompkins,A., Jerry, D (1998) wrote that third party logistics has gained considerable importance and recognition in today’s business world. The recent trend of downsizing and rightsizing has pushed these organizations to outsource their business functions previously managed on their own. Warehousing is one of these functions that now organizations transfer to third party rather than having personal warehouse. Typically, a main company providing services or products is considered the first party; the customer (or customers) the second party. A third-party, then, is a firm hired to do that which neither the first or second party desires to do. Third-part warehousing is defined as the warehousing services provided by a party other than the manufacturer, seller, buyer and receiver of the goods (Skjoett & Larson, 2007). A firm that provides outsourced logistic services to companies is called third-party logistics. These companies undertake all or a part of the supply chain management task of their client. Previously small warehouses were established in order to store the products mainly of food industry but with the passage of time manufacturing industry also started warehousing their material and products. Now warehousing is a vast area and short term contracts are now replaced with long term warehousing arrangements. Reasons: Drucker (1989) mentioned in an article that businesses today are outsourcing their warehousing function because of the following reasons: Now businesses are inclined towards having limited workforce in order to reduce their cost and liabilities associated with these employees. Third-party warehousing reduces need of work force rather than employing people to manage personal warehouse. As warehouses are now operated with advanced information technology and warehouse management systems, it needs to have professional experts which ultimately raise work force and cost. Third-party warehousing help to maintain source of supply without breaking the chain of supply and provide goods in time to the customers. As the main focus of any business is on customer services, third-party warehouses support the policies designed by a business for customer services. As market conditions change rapidly in today’s environment, these warehouses help an organization to keep pace with changing market conditions and situations. There are various types of warehouses which are available to businesses and they can choose one which meets their needs. Third-party warehousing minimizes the cost and efforts of setting own warehouse and making all types of services available at one place. The trend of third-party warehousing is so much in practice that it is necessary for a business to get services from them in order to make their products available to the ultimate customer and also the manufacturer itself (in case of storing raw material). Third-party warehouses help to achieve production and transportation economies by making the product available to customers located in different areas. As competition in global economy has increased, there is need that businesses outsource warehousing function to third party. Using a third-party warehousing facility is flexible. Even if a company owns and runs its own warehouses, it may have extra inventory to be stored in some time of the year. There would be extra space to remain vacant for whole year if third-party services are not used. As there is stiff competition between different third-party warehouses, it makes them provide standardized services to their customers, hence competing positively in the markets, both domestic and global. Advantages: There are many advantages of third-party warehouses to the business rather than setting a personal one. According to Farris (2004) these advantages are as under: Outsourcing of warehousing helps a business to penetrate in the markets where they were not before and introduce their product there and make new customers. Third-party warehousing reduces the cost of a business to be spent on establishing a personal warehouse along with hiring separate workforce. Storage capacity and facilities are much more advanced and well-designed in third-party warehouses as it is their core business to make storage spaces. Third-party warehousing also helps a business to have different packaging for domestic and global customers, thus attracting a large share of market. With the current trend toward reducing inventories, there is a constant demand for variable space, labor, and equipment required to support the business during peak season or large growth cycles which is possible through hiring services of public warehouses. If adequate lead time is provided then public warehouses are able to offer manufacturers total flexibility to either increase or decrease their space, equipment, and human resources requirements. Third-party warehouse facilitates the company to remain competitive without owning many assets and resources which minimize cost of operation for the client company thus increasing profitability. Regional public warehouse operators - that are owned and operated by entrepreneurs who have been in the business for generations -- provide a unique value and make a significant contribution to the smooth execution of a company's supply chain strategy. Manufacturers who consolidate their materials and merchandise in a public warehouse are able to realize significant cost savings due to the high percentage of total distribution or logistics costs associated with transportation.  As manufacturers strive to receive their raw materials, parts or components on a just-in-time basis, they are turning to public warehouses for consolidation of inbound materials destined for points of production. As customers demand more and more value-added services public warehouses are offering final assembly, labeling, testing, configuration of products and many others. This allows companies to maintain product in a generic form until they know the exact product and quantity required by their customer. Utilizing services of third-party warehouses supports are firm to concentrate greatly on its core business rather than the warehousing, hence strengthening its core competencies and working on attainment of its goals. It saves the cost of hiring professionals with expertise in setting a warehouse, managing its functions and monitoring all the activities. A majority of public warehouses are privately owned and operated by people who live and work in the area; they can attain a level of customer contact that is near impossible for any company who is located in another region. A benefit of this is the customer intimacy and resulting intelligence on how a company is perceived by its customers, along with a more complete understanding of their exact requirements. It is a difficult task for a company to keep a regular record of their inventory. It becomes a complex task without hiring “high-tech warehouse softwares” and trained experts. But public warehousing companies are well equipped with everything on providing company with regular updates regarding stocks.  By using a public warehouse, a company does not have to use its capital to acquire and operate a distribution center such as buildings, systems, or equipment. Instead, this capital can be freed up and redirected to areas that make a higher contribution to increasing profits such as research & development, marketing, or employee education, among others. Disadvantages: Other than numerous advantages of third-party warehouses there are few disadvantages as well. According to Farris, B. (2004) these disadvantages are as under: In case of outsourcing the function of warehousing to third party, the business looses authority of controlling logistic activities. Any difference of opinion between third-party warehouse and client may create conflicts which may affect the warehousing function. Another disadvantage of third party ware housing is that it creates a distance between the client company and its customers thus losing contact with them. In case of discontinuity of services by third-party warehouse, the company has to make quick arrangements for storage of goods and it might raise costs. It is concluded from the facts mentioned above that due to increasing focus of business expansion into the global market; companies need to have an efficient supply chain to achieve success in new markets. Third-party warehouses can help provide services to these companies and assist them in cutting operational costs and focus on core competencies Inventory: Inventory includes the goods and services that businesses hold in stock. Inventory can be classified into materials, work in process, distribution, finished goods, maintenance, repair and operating supplies. Materials usually consist of the essential items needed to create or make a finished product. Work in process refers to items that are partially completed, are not considered totally finished product but are on their way to becoming whole items. Finished goods are the final products that are ready to be purchased by customers and consumers. Inventory objectives are to provide best customer services, low-cost plant operation and minimum inventory investment. Reason for Carrying Inventory: A business always carries a certain level of inventory in its stock whether in form of raw material, finished goods or any other type. Businesses carry inventory because of the following reasons provided by Armony & Plambeck (2005): Any business carries inventory to decouple demand from supply. It implies that owner would not go to market every time there is need of a picture tube for making a television, rather he/she will buy picture tubes in bulk so that there is inventory kept in factory for manufacturing TVs. Cost of buying in bulk is always less than purchasing a single item that’s why businesses carry inventory. Another reason is that retailers invest in inventory and it is part of their marketing strategy to create or shift demand. Carrying a certain level of inventory helps a business to save cost in case prices go high after they have maintained a certain level of inventory. Carrying inventory also helps in items when there is shortage of a raw material or even finished good in the market. In such situation stored inventory would be able to meet demand. The time interval is always present in the supply chain, from supplier to user at every stage. So it requires that business maintain a certain level of inventory to use in this "lead time." Inventories are carried in order to face the uncertainties in demand, supply and movement of goods. Carrying inventory provides business with economies of scale by creating an ideal situation of “unit at a time, at a place, where and when a user needs it". So bulky movement and purchase offer business with economies of scale. Safety stock is held in individual workstations beside the probability of the “upstream workstation” being somewhat deferred in long setup or change over time. Advantages: There are certain advantages which a business gets by carrying inventory. These advantages are as under: Properly defined and well monitored inventory control policy helps improvement of services provided to the customers. Proper inventory control policies help reduction of labor costs on workforce that is employed for managing the inventory. There is involvement of labor each on every order of buying inventory and managing it. Another definite advantage for a business is lower inventory cost if inventory is controlled effectively. Inventory carrying cost includes expenses like the cost of capital, storage and risks costs. Effective inventory control reduces inventory carrying cost. If a company manages its inventory effectively, it gets a competitive edge over other companies which have weak policies for inventory control procedures and rules. Implementation of computerized inventory control system can also help a company with inventory management techniques (Reamer & Nayyer, 2008). Disadvantages: There are also some disadvantages that a business faces while keeping a level of inventory. These disadvantages are as under: Carrying inventory is not advantageous when carrying cost is higher than the benefit that can be gained by carrying an inventory. If the decision of what and how much inventory is to be carried is made wrong then all the profit estimations and predictions go in the wrong way. There might be fall in the prices of the finished goods carried in stock, causing business to suffer loss. There is also a chance that demand for carried goods decreases due to some uncertain and sudden change in market condition. If inventory is not properly kept and monitored then there are chances of spoilage causing business to face loss. If proper inventory management system is not implemented then carrying inventory would be of no use. References list: Armony, Mor & Plambeck, E.L. (2005). "The Impact of Duplicate Orders on Demand Estimation and Capacity Investment". Management Science, 51 (10), October 2005, pp. 1505-1518. Drucker, P.F. (1989). Sell The Mailroom. The Wall Street Journal, July 25, 1989. Farris, B. (2004). Dedicated Contract Carriage. Presentation before the Food Marketing Institute. Retrieved from: http://www.fmi.org/events/2004_Distribution/Outsourcing_Transportation.pdf (Accessed January 3, 2011). Reamer, D. & Nayar, R. (2008)The benefits of inventory control-Computerization is the key to maintaining proper inventory level. The small business inventory group. Retrieved at: http://www.growingsmallbusiness.com/News/content_inventory.html(Accessed January 3, 2011). Skjoett-Larsen, T. (1999). Third Party Logistics- From an Interorganizational Point of View. International Journal of Physical Distribution and Logistics Management, 30(2), pp. 112-127. Tompkin, J.A. & Smith, J.D. (1998) Warehouse Management Handbook. Tompkin Press, business & Economics. Read More