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Warehouse Management - The Basics

Warehouse management is an essential part of the supply chain, because a warehouse is home to the lion’s share of the company’s working capital and materials. Despite the importance of the warehouse, managers often don't pay enough attention to the warehouse, seeing it as an intermediary ring within the supply chain. The warehouse is considered to be an expense, rather than a value adding unit. In this article, we will try to describe the main principles and functions of a warehouse. We will answer two main warehouse questions:

  • Why do we use a warehouse (what benefit it gives us)?
  • What are the main function of the warehouse?

Why Use a Warehouse?

Basically, there are two main reasons that justify the existence of a warehouse:

  • Item storage - commonly, there is lag time between the demand and supply for an item. The warehouse is a buffer which helps us handle unexpected demand peaks.
  • Item consolidation - usually consolidating items (i.e. ordering them in larger quantity) brings savings opportunities, by receiving an additional volume discount and also by making the transportation cost cheaper per item. For example you have 3 suppliers and 4 customers. If each item is delivered from supplier to customer, this requires 12 routes in total. But if we put a warehouse somewhere between them, suppliers only need to deliver items once (that makes 3 routes). After consolidation, the customer receives all items in only one delivery (which makes 4 routes). In total we pay for 7 routes instead of 12. A warehouse saves money on transportation.

Companies can have various types of warehouses based on their needs. Below is a list of warehouse types:

  • Materials Warehouse - used to store materials and parts. Usually, it is located near the manufacturing facility.
  • Work-in-Progress (WIP) Warehouse - used to store partially assembled details and modules. Located at the manufacturer, or close to it.
  • Finished Products Warehouse - stores finished items ready to ship.
  • Order Fulfilment Center - used to store items and fulfill small orders (common type of warehouse for online stores).
  • Distribution Center – collects and consolidates items from various suppliers and then ships them in large bulks to customers - usually to large department stores or supermarket chains.
  • Mixing Center - similar to the distribution center, but instead of consolidating small amount of items (cartons or individual packages) it mixes pallets to pallets.
  • Local Warehouse - located near the target customer, for faster order response and expedited delivery.

Interesting fact: there is a fundamental trade-off between the warehouse space and time needed to receive or dispatch items. The smaller the place, the more time needed to find space for incoming items or to find the requested product to dispatch. Based on the supply chain needs and requirement, logistics managers choose which one of these two metrics has more priority.


Main Functions of a Warehouse

Any place used to store goods is, in fact, a warehouse - beginning from the fridge in your house all the way to Amazon’s giant distribution centers. A warehouse can have many forms and configurations, but nonetheless, they all have four main functions (additional to the storage of items, that we described above):

1. Receiving Goods

The very first thing that any warehouse does is receive items. This step affects how well all the other steps will perform. There are many ways to optimize this process, here are some:

  • Getting the advanced shipping notification (ASN) from supplier or forwarder - thus knowing exact numbers of items about to show up at the warehouse.
  • Synchronizing warehouse resources (equipment and men) with arriving transport (trucks, trains, planes etc.). Schedule, to avoid the crowding and delays.
  • Preparing items to leave warehouse as soon as received (if we know that they will be soon dispatched).
  • Printing all the labels and stickers in advance to attach them to received items.

2. Item Putaway

Decide where in the warehouse items should be placed. We need a lot of information about the arriving items to store them efficiently, like quantity, size, weight, current and future orders for them etc. There are three main methods used for putaway:

  • Direct putaway – know storage location before goods even arrive to our warehouse.
  • Batched and sequenced putaway – after receiving goods, sort them and place with similar items.
  • Chaotic putaway – items are placed without any logic or rules. Usually put in the first available spot, location is then recorded in warehouse management system. While this method seems highly impractical, it is widely used in certain types of warehouses by companies like Amazon.

3. Order Picking

Picking and gathering ordered items is time-consuming work - some experts estimate up to 50% of total time is spent here. That's why it is very important to optimize this task. Picking complexity depends on the size of an order, for example picking pallets is usually the easiest one, while gathering and sorting individual packages is a long and hard job. Distance is a challenge, especially in large warehouses. Therefore it’s crucial to design warehouse with proper aisles.

There are 3 basic strategies to order picking:

  • One picker - One order. One person gathers order items from various locations. This strategy is widely used in small warehouses.
  • One picker - Multiple orders. One person gets several orders, sorts them based on similar items, and then gathers from various locations. This approach is convenient for a moderate amount of orders with similar items, although an additional effort is needed to re-sort gathered items to individual orders.
  • Multiple pickers - Multiple orders. Incoming orders are divided according to items needed and then distributed to several pickers. Each picker is responsible for his part of the warehouse. This method is widely used with a large amount of orders to reduce the average time of order picking, but time must be spent sorting gathered items into correct orders to avoid rework and low customer satisfaction.

There is a fourth picking strategy which is very new but has already proved efficient. Instead of pickers traversing the warehouse, special robots “deliver locations” to the picker and he picks needed items. This technology requires huge capital investments so it is effective only in extremely large warehouses with a huge amount of orders. That's why big companies like Alibaba are the primary users of this method.

4. Check, Pack, & Ship

This last stage is for final order preparation before sending it to customers. Some tasks include creating and/or verifying dispatch notes and shipping labels, confirming size and weight, and packaging for safe delivery. This stage is essentially a reverse of receiving stage so it needsthe same type of management.

One of the main challenges is assessing warehouse efficiency. This is a very complex field with multiple dimensions, like financial, operational, investment efficiency etc. Nevertheless, warehouse plays a crucial role in global supply chain and with improvement in information technology and robotics it will surely evolve.

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