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You are here9. Physical Distribution / Warehouses


By Anonymous - Posted on 15 January 2012

Warehouses provide a place to store , handle and protect goods. They form an integral part of the business functions of an organization and contribute to the competitive advantage of a company by improving customer service levels and reducing transportation costs.Warehouses include plant warehouses, regional warehouses and local warehouses. They may be owned and operated by the supplier or intermediaries such
as wholesalers, or may be public warehouses.

The general activities carried out by warehouses can be broadly classified as follows :

  1. Receiving
  2. Put-away / Storing
  3. Order Picking
  4. Shipping
  5. Maintaining an Information System

The service functions warehouses perform can be classified into 2 kinds:

- The general warehouse where goods are stored for long periods and where the prime purpose is to protect goods until they are needed. There is minimal handling, movement and relationship to transportation. It is also the type used for inventories accumulated in anticipation or seasonal sales;
- The distribution warehouse has a dynamic purpose of movement and mixing. Goods are received in large-volume uniform lots, stored briefly,
and then broken down into small individual orders of different items required by the customer. The emphasis is on movement and handling rather than on storage. This type of warehouse is widely used in distribution systems.

Warehouses represent an interruption in the flow of material and thus add cost to the system. Items should be warehoused only if there is an offsetting benefit gained from storing them.

Role of Warehouses in the Distribution System
In a physical distribution system, the primary activities of the distribution warehouses / distribution centers include product mixing, handling and moving goods to meet customer requirements at reduced costs.
To be effective in their functioning, distribution warehouses should perform the following roles :

Consolidation :

 Usually products shipped to the distributors from various sources are in less-than-truckload (LTL) shipments. Consolidation function helps to convert many such small shipments into full / truckload (TL) shipments and in transporting these truckloads to the deployment warehouses. From the deployment warehouses, the shipments are broken down into smaller, less-thantruckload (LTL) shipments to cater to the local market requirements and this process is called break-bulk.

Product mixing. Product mixing deals with the grouping of different items into an order and the economies that warehouses can provide in doing this. When customers place orders, they often want a mix of products that are produced in different locations.

Service. Distribution centers improve customer service by providing place utility. Goods are positioned close to markets so the markets can be serve more quickly.

Warehousing and transportation costs
The particular shipping pattern will depend largely upon the following:

- Number of customers,
- Geographic distribution of the customers,
- Customer order size,
- Number and location of plants and distribution centers.

Suppliers have little or no control over the first 3 but do have some control over the last. With respect to transportation, it then becomes a question of the cost of serving customers direct from the central distribution center or from the regional distribution center. A company can now supply customers in other locations directly from the factory or through the distribution center. The question is to decide which locations
should be supplied from each source. The answer is the source that can service the location at least cost.

Laid-down cost (LDC) is the delivered cost of product to a particular geographic point. The delivered cost includes all costs of moving the goods from A to B.
           LDC = P + T*X            
Where: P = Product costs,
              T = Transportation cost per mile,
              X = Distance.
The product cost includes all costs in getting the product to the supply location and storing it there (TL cost to point B, inventory cost at B,...).

Market boundary. The market boundary is the line between 2 or more supply sources where the laid-down cost is the same. There are 2 sources of supply: A and B. Y marks the market boundary between A and B, where the LDC from A is the same as B. Assume the product cost at A is $100 and product cost from B is $100 plus the TL transportation from A to B and inventory carrying costs at B ($10 per unit).

Transportation costs from either A or B are $0.40 per unit per mile:
100 + 0.40X = 110 + 0.40 (100-X)
X = 62.5 Miles

Effect on transportation costs of adding more warehouses

Generally, as more distribution centers are added to the system, we can expect
the following:

- The cost of truckload shipments to the distribution centers to increase,
- The cost of LTL shipments to customers to decrease,
- The total cost of transportation to decrease.
- The total cost of warehousing to increase.
- The total cost of logistics(warehousing + transport) to decrease for first few warehouses but increase after a certain number of warehouses.

As expected, the major savings is from the addition of the first few distribution centers.

Eventually, as more distribution are added, the saving decrease.

The number of customers served by additional distribution centers decreases and the volume that
can be shipped TL to the additional distribution centers is less than to the first ones.

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