Introduction to warehousing

Have them gather all the food produced in the good years that are just ahead and bring it to Pharaoh’s storehouses. Store it away, and guard it so there will be food in the cities. Genesis 41:35–36

Learning objectives

Define a warehouse and explain its value-added role.
Explain how warehousing operations have evolved.
Evaluate why supply chains hold inventory.
Connect warehousing to customer service, inventory, sourcing, and transportation.

What is a warehouse?

Traditionally, a warehouse has been defined as

a building where large quantities of goods are stored, especially before they are sent to stores to be sold Oxford Dictionary

a structure or room for the storage of merchandise or commodities Merriam-Webster Dictionary

Warehouses add value

With the onset of e-commerce, the definition has broadened:

Today, warehouses operate not only as centers for storage but also as centers for value-addition. Several warehouses have assembly, packaging and repair operations within their premises. De Koster and Delfmann (2017)

Evolution of warehousing

Warehousing has evolved from a simple activity devoted primarily to material storage in the 1950s and 1960s. With the adoption of JIT principles in the 1970s and 1980s came smaller order sizes more often, less inventory, and a greater need for order-assembly activities occupying the space made available by inventory reductions. Warehouses were transformed into distribution centers, beginning the reimaging of warehousing from a career-killing profession to a career-making profession.

With the adoption of postponement, mass customization, supply chain integration, and global logistics in the 1990s, a number of cross-docking and value-added service activities were added in the warehouse. Logistics centers were created out of distribution centers, combining customized labeling and packaging, kitting, international shipment preparation, customer-dedicated processes, and cross-docking with the traditional activities of storage and order assembly. The distinctions between manufacturing, transportation, and warehousing activities blurred. The margin for error is minimal.

All these changes accumulate to put warehouse managers in duress. Under the influence of e-commerce, supply-chain collaboration, globalization, quick response, and JIT, warehouses today are being asked to:

Execute more smaller transactions.

Handle and store more items.

Provide more product and service customization.

Offer more value-added services.

Process more returns.

Receive and ship more international orders.

At the same time, warehouses today have:

Less time to process an order.

Less margin for error.

Fewer young, skilled, native-speaking, literate personnel.

Less warehouse management system capability (a by-product of Y2K investments in enterprise resource planning systems).

I call this rock-and-a-hard-place scenario the plight of the warehouse manager. Never has the warehouse been asked to do so much and at the same time been so strapped for resources. This makes it even more important to understand the fundamentals and best practices of warehousing. Such an understanding begins with a basic classification of the roles of warehousing in a logistics network.

— World-Class Warehousing and Material Handling (Frazelle 2016, 12–14).

Distribution center warehouses are located much closer to the customer base than are plant warehouses. Distribution centers typically receive product from many plant warehouses and serve customers with same- or next-day delivery. The delivery point for the distribution center determines its name. Home delivery distribution centers deliver to homes. Retail distribution centers deliver to retail stores. Omni-channel distribution centers deliver to a mix of homes and retail stores. Cross-dock distribution centers do not hold product but simply mix and sort.

— World-Class Warehousing and Material Handling (Frazelle 2016, 15–16).

E-commerce, new retail, and other changes have highlighted the requirement of high efficiency and accuracy in logistics service. The “smart warehouse” system, which is equipped with emerging warehousing technologies, is increasingly attracting the attention of industry and technology giants as an efficient solution for future warehouse development. Smart warehouse operations can be characterized from the perspectives of information interconnection, equipment automation, process integration, and environmental sustainability.

Equipped with automatic facilities, smart warehouses can achieve high automation levels in warehouse activities. Equipment automation can improve warehouse productivity while reducing the need for manual labor. Smart-warehouse operations management also considers equipment characteristics in strategic decisions and product characteristics in tactical decisions, providing a holistic view of technology and improving decision precision.

— A Literature Review of Smart Warehouse Operations Management (Zhen and Li 2022, 31–32).

Warehousing through the years

Warehousing has accumulated new functions rather than simply replacing storage.

1950s--1960s Storage-oriented warehouse

Storage and buffering

Scale economies
Longer planning cycles

1970s--1980s Flow-oriented distribution center

Order assembly

Storage and buffering

JIT diffusion
More frequent flows

1990s--2000s Integrated logistics center

Value-added services

Order assembly

Storage and buffering

Global integration
Postponement

2010s--present Omnichannel fulfillment center

Digital coordination and automation

Value-added services

Time-critical order assembly

Storage and buffering

E-commerce
Omnichannel fulfillment

Figure 1: The warehouse’s functional portfolio broadens as response times tighten.

Warehousing has evolved from a simple activity devoted primarily to material storage in the 1950s and 1960s. With the adoption of JIT principles in the 1970s and 1980s came smaller order sizes more often, less inventory, and a greater need for order-assembly activities occupying the space made available by inventory reductions. Warehouses were transformed into distribution centers, beginning the reimaging of warehousing from a career-killing profession to a career-making profession.

With the adoption of postponement, mass customization, supply chain integration, and global logistics in the 1990s, a number of cross-docking and value-added service activities were added in the warehouse. Logistics centers were created out of distribution centers, combining customized labeling and packaging, kitting, international shipment preparation, customer-dedicated processes, and cross-docking with the traditional activities of storage and order assembly. The distinctions between manufacturing, transportation, and warehousing activities blurred. The margin for error is minimal.

— World-Class Warehousing and Material Handling (Frazelle 2016, 12–13).

External change drivers

From the 60s to the 80s, warehousing was viewed as a back-office operation:

Little to no added value.
Undesirable but necessary cost center.

As lean thinking and just-in-time (JIT) inventory management spread through manufacturing:

“Eyes looking for waste” turned to warehouse.
Warehousing started to be seen as a dead-end career.

Global competition and the onset of e-commerce deeply impacted warehousing activities.

Eyes looking for waste: plenty of excess inventory, kept in endless rows of tall racks.

During the 1960s through the 1980s, back when manufacturing dominated the agenda for many private and public sector companies, warehousing was generally viewed as a back-office operation that added little or no value, and in many cases it was treated as an undesirable but necessary cost-center. As the power of lean thinking and just-in-time inventory management spread through the manufacturing sector, one might even say that many ‘’eyes looking for waste’’ turned to the warehouse, where plenty of excess inventories (considered one of the primary sources of ‘’waste’’ in lean thinking) were kept in endless rows of racks, reaching heights of 40 ft (12 m) and more. Many individuals, who embarked on applying lean thinking to manufacturing, started to view warehouse design/management as a dead-end career.

However, two fundamental changes started to take shape, and it is not clear that either one of the changes were anticipated by the research or the industrial community. At least, it seems no one anticipated how fast the changes would occur, and how deep their impact would be.

— Warehousing in the Global Supply Chain (Manzini 2012, xi).

The emergence of global supply chains

Before: Regional competition, confined to continents or limited by geography.

Now: Global competition for:

Reaching large numbers of customers (existing and new markets)
Identifying/using low-cost labor sources.

Today, designing and managing global supply chains is a top priority for industry and academia.

First, competition, which traditionally was mostly a regional phenomenon, confined primarily to continents or limited by geography, became global. Well-established, multi-national corporations as well as new companies just entering the market began to compete on a global scale never seen before. And the competition was not only for reaching large numbers of customers in existing and new markets, but it was also for identifying and utilizing sources of low-cost labor in every corner of the world. As a result, the manufacturing sector underwent a tremendous transformation, and in the process, global supply chain design and management emerged as a top-priority topic for many companies as well as the research community. In fact, a quick Google search on ‘’global supply chain’’ generates over 750,000 hits on the web. Based only on articles, and excluding patents, a search of the same subject in Google Scholar generates over one million results! A global supply chain, however, is not just an abstract entity composed of policies, supplier contracts, purchasing agreements, etc. that exist on a computer network or database. Rather, a global supply chain, in order to function properly, is an entity supported by a logistics system that makes it possible to move a variety of goods through the system in a timely and cost-effective manner. When the supply chain is viewed as a network, transportation systems such as trucking, railways and shipping/air lines represent the ‘’arcs’’ in the network, while the facilities that handle the goods through the network represent the ‘’nodes.’’ Such facilities include:

Manufacturing facilities

Warehouses and distribution centers

Container terminals (or seaports)

Consolidation/deconsolidation centers

Rail yards

Crossdocks

Airports (handling freight) When viewed in the above context, warehousing—which takes place in all of the above facilities, to one extent or another—suddenly becomes a critical component of the global supply chain. In other words, as their supply chains extended around the globe, companies began to recognize that where and how raw materials, components and (semi) finished goods are stored in the network have a major impact on their operations, their agility/flexibility, their service levels and responsiveness to their customers, and their overall costs. The above recognition by no means implied that storing excess inventories became acceptable or desirable. Rather, as companies watched their supply networks get longer and more complex, and as they learned to apply lean thinking to their supply networks, they realized that warehousing the right amount/type of inventory in the right/most strategic locations can be a major competitive advantage. In the process, many companies also learned that warehousing is not only a point of storage in the network but also a point of critical information. That is, as supply chains became leaner, timely and correct information, especially inventory visibility and accuracy, which is a key function in warehousing, became essential for success.

— Warehousing in the Global Supply Chain (Manzini 2012, xi–xii).

Growth of online shopping

Designing and operating warehouses has become a front-and-center concern for companies competing for a slice of the growing e-tail market.

Stocking, picking, packing, and shipping the items that customers need/want on time, with maximum accuracy, transformed the warehouse from a back-office cost center to a front-office profit center.

The second fundamental change that impacted warehousing is the emergence of online shopping or e-tailing, especially in the United States and other developed/ developing countries around the world. For example, according to CNNMoney.com and Virginia-based comScore, consumers in the United States spent a record 30.8 billion dollors shopping online during the month of December 2010. This figure represented a 13% increase from the same period in 2009, despite the recession. The growth in e-tail in Europe has been equally impressive. According to a BBC News article, for example, under the heading ‘’online shopping defies slowdown,’’ it is reported that the e-tail growth rate is about ten times that of the growth rate of the traditional retail market in the United Kingdom as a whole, and it is forecast that online retail sales would reach almost 45 billion pounds by 2012, which represents roughly 14% of the total spending. Other projections on e-tail are equally startling. According to Forrester Research, web-based sales in the United States will reach 249 billion dollors by 2014, and in western Europe, online retailsales are projected to increase by 68% from 68 billion euros in 2009 to 114 billion euros by 2014! The phenomenal growth in e-tailing has had (and will continue to have) a major impact on warehousing and parcel/package delivery systems from the warehouse to the customer. That is, stocking the items that the customers need/want, picking, packing and shipping these items to the customers on a timely basis, and doing so with maximum accuracy, has now become a big and very viable business model, which transformed the warehouse from a back-office cost-center to a front-office profit-center! As a result, designing and operating a warehouse, and its various functions such as storage, order picking, sortation and so on, in the most efficient and effective manner has become a front-and-center concern for companies that are competing for a slice of the growing e-tail market. Given the above changes, and the renewed focus on warehousing, a book concerned with advanced models, tools and applications for storage systems could not have been more timely. In the pages of this book, the reader will find a rich collection of insightful and practical models and algorithms presented in a series of chapters arranged in a logical, easy-to-follow manner. The models and algorithms presented cover a wide range of topics, such as order picking/batching and warehouse layout, and a wide range of systems, including automated systems (such as Automated Storage/Retrieval Systems), semi-automated systems (such as carousels) and manual systems (such as walk-and-pick systems). The book is further enriched with a section devoted to applications and case studies that show how theory is applied in practice. I congratulate the editor and the authors for their hard work and for putting together a book that is going to serve as an excellent reference for researchers and warehousing professionals alike.

— Warehousing in the Global Supply Chain (Manzini 2012, xii–xiii).

Warehousing today

Under the influence of e-commerce, supply-chain collaboration, globalization, quick response (QR¹), and JIT, warehouses today are expected to do more with fewer resources.

Expectations

Execute more smaller transactions
Handle and store more items
Provide more product and service customization
Offer more value-added services
Process more returns
Receive and ship more international orders

Constraints

Less time to process an order
Less margin for error
Fewer young, skilled, native-speaking, literate personnel
Less warehouse management system capability

All these changes accumulate to put warehouse managers in duress. Under the influence of e-commerce, supply-chain collaboration, globalization, quick response, and JIT, warehouses today are being asked to ■ Execute more smaller transactions ■ Handle and store more items ■ Provide more product and service customization ■ Offer more value-added services ■ Process more returns ■ Receive and ship more international orders At the same time, warehouses today have ■ Less time to process an order ■ Less margin for error ■ Fewer young, skilled, native-speaking, literate personnel ■ Less warehouse management system capability (a by-product of Y2K investments in enterprise resource planning systems) I call this rock-and-a-hard-place scenario the plight of the warehouse manager. Never has the warehouse been asked to do so much and at the same time been so strapped for resources. This makes it even more important to understand the fundamentals and best practices of warehousing. Such an understanding begins with a basic classification of the roles of warehousing in a logistics network.

— World-Class Warehousing and Material Handling (Frazelle 2016, 14).

Why warehouses exist

I wrote the first edition of World-Class Warehousing in 1995. Back then, people asked me why I was writing a book on warehousing when the just-in-time (JIT) movement was aimed at eliminating warehousing. Today, it’s the lean movement. The question is a legitimate one and one I ask seminar attendees every time I teach a warehousing seminar. “Why should we devote our time and energy to studying an activity that every supply-chain professional and the lean literature is trying to eliminate?” A better question might be, “In what ways does warehousing add value in business and in supply chains?” If we can’t come up with good answers, then writing this book really was a waste of time, and reading it likewise. As we will see, warehousing plays an indispensable role in business and supply-chain strategy.

I developed the RightChain model in the mid-1990s. The model integrates and optimizes walks through the five components of supply chain strategy: customer service, inventory management, supply, transportation, and warehousing. Through those eyes, the value of warehousing is demonstrated in each component clearly visible.

— World-Class Warehousing and Material Handling (Frazelle 2016, 1–2).

Why have warehouses?

How does warehousing add value to supply chains?

A supply chain strategy coordinates five components:

Customer service
Inventory management
Supply

Transportation
Warehousing

Warehouses often reveal gaps in supply-chain coordination, integration, and planning.
Optimizing the first four components determines and can minimize the need for warehousing.

The last logistic activity to be considered is warehousing: I wrote the first edition of World-Class Warehousing in 1995. Back then, people asked me why I was writing a book on warehousing when the just-in-time (JIT) movement was aimed at eliminating warehousing. Today, it’s the lean movement. The question is a legitimate one and one I ask seminar attendees every time I teach a warehousing seminar. “Why should we devote our time and energy to studying an activity that every supply-chain professional and the lean literature is trying to eliminate?” A better question might be, “In what ways does warehousing add value in business and in supply chains?” If we can’t come up with good answers, then writing this book really was a waste of time, and reading it likewise. As we will see, warehousing plays an indispensable role in business and supply-chain strategy. Warehousing in the Supply Chain I developed the RightChain model in the mid-1990s. The model integrates and optimizes walks through the five components of supply chain strategy: customer service, inventory management, supply, transportation, and warehousing. Through those eyes, the value of warehousing is demonstrated in each component clearly visible (Figure 1.1).

Warehousing and Warehousing The fifth and last set of RightChain supply chain strategy decisions has to do with warehousing. It’s my personal favorite, but I have to admit that it’s the last logistics activity that should be considered when developing a supplychain strategy. First, a clever trip through the first four RightChain initiatives may eliminate, should minimize, and will correctly determine the need for warehousing as opposed to letting the warehouses play their normal role of being the physical manifestation of the lack of supply-chain coordination, integration, and planning. Second, the warehouse is like a goalie in a soccer game. Like it or not, it’s the last line of defense and needs to be designed accordingly. Third, we need the customer-service, inventory management, supply, and transportation mission requirements from the supply chain strategy to properly plan and operate the warehouse. Thus, despite all the initiatives of e-commerce, supply-chain integration, efficient consumer response, quick response, lean Six Sigma, and JIT delivery, the supply chain connecting manufacturing with end consumers will never be so well coordinated that warehousing will be eliminated completely. In fact, the length of supply chains owing to global sourcing and the potential for disruption as a result of increasing numbers and severity of climatic and security incidents are increasing the need for warehousing and the value warehousing adds in businesses and supply chains. As all these disruptions take hold, the role and mission of warehouse operations are changing and will continue to change dramatically.

— World-Class Warehousing and Material Handling (Frazelle 2016, 1–2, 12).

What can we learn from the COVID-19 pandemic?

Table 1: Warehouse responses to pandemic disruption.

Flow segment	Change	Warehouse role
Supplier to manufacturer	Supply interruption	Buffer inventory to protect service
Warehouse to consumer	Physical retail constrained; fulfillment shifts online	Serve demand as channels change
Consumer to warehouse	Returns flow back	Process reverse logistics as part of fulfillment

The rationale for holding stock

One of the major challenges in managing a supply chain is that demand can change quickly, but supply takes longer to change. Bartholdi and Hackman (2019)

Warehouses are expensive (labor, land, storage/handling equipment, ICT systems)…

…but, supply chains connecting manufacturing with end consumers will never be so well coordinated that warehousing will be eliminated completely:

(Long) global supply chains are more prone to disruptions such as climatic/security incidents, pandemics, and political disputes.
Initiatives such as lean Six Sigma, and just-in-time (JIT) delivery, are not robust in face of supply chain disruptions.
Goods must be stored either at:
1. the source of production,
2. the consumption point, or
3. at an intermediate location.

Why have a warehouse at all? A warehouse requires labor, capital (land and storage-and-handling equipment) and information systems, all of which are expensive. Is there some way to avoid the expense? For most operations the answer is no. Warehouses, or their various cousins, provide useful services that are unlikely to vanish under the current economic scene. Here are some of their uses:

To better match supply with customer demand: One of the major challenges in managing a supply chain is that demand can change quickly, but supply takes longer to change. Surges in demand, such as seasonalities strain the capacity of a supply chain. Retail stores in particular face seasonalities that are so severe that it would be impossible to respond without having stockpiled product. For example, Toys R Us does, by far, most of its business in November and December. During this time, their warehouses ship product at a prodigious rate (some conveyors within their warehouses move at up to 35 miles per hour). After the selling season their warehouses spend most of their time building inventory again for the following year. Similarly, warehouses can buffer the supply chain against collapsing demand by providing space in which to slow or hold inventory back from the market.

In both cases, warehouses allow us to respond quickly when demand changes. Response-time may also be a problem when transportation is unreliable. In many parts of the world, the transportation infrastructure is relatively undeveloped or congested. Imagine, for example, sourcing product from a factory in Wuhan, China for retail sale within the US. After manufacture, the product may travel by truck, then by rail, by truck again, and then be loaded at a busy port; and it may repeat the sequence of steps (in reverse order) within the US. At each stage the schedule may be delayed by congestion, bureaucracy, weather, road conditions, and so on. The result is that lead time is long and variable. If product could be warehoused in Los Angeles, closer to the customer, it could be shipped more quickly, with less variance in lead time, and so provide better customer service.

Warehouses can also buffer against sudden changes in supply. Vendors may give a price break to bulk purchases and the savings may offset the expense of storing the product. Similarly, the economics of manufacturing may dictate large batch sizes to amortize large setup costs, so that excess product must be stored. Similarly, warehouses provide a place to store a buffer against unreliable demand or price increases.

— Warehouse & Distribution Science (Bartholdi and Hackman 2019, 5–6).

How warehousing supports supply chains

Warehousing adds value in customer service, by facilitating high inventory availability, shorter response times, value-added services, returns, customization, and consolidation among others. Fill rate is the portion of a customer’s demand satisfiable from on-hand inventory. In most cases, a significant investment in safety stock is required to provide high customer fill rates. That safety stock must be housed somewhere, and that somewhere is typically a warehouse.

Because warehouses house inventory (or wares), warehousing adds business and supply-chain value in all the same ways as inventory. Warehouses and their inventory facilitate production economies of scale, optimize factory utilization via seasonal inventory builds, and mitigate supply-chain and business risk by holding contingency and disaster inventory.

Warehouses can help to provide transportation economies of scale by working as consolidation points for accumulating and assembling small shipments into larger ones, less-than-truckload shipments into full truckloads, less-than-container-load shipments into full container loads, transloading 40-foot containers to 53-foot containers, and so on.

— World-Class Warehousing and Material Handling (Frazelle 2016, 2–8).

Warehousing and customer service

Warehousing facilitates:

High inventory availability
Shorter response times
Value-added services
Returns
Customization
Consolidation

High inventory availability

How to provide high customer fill rates¹?

Investing in safety stock² (typically stored in warehouses)!

Shorter response times

How to reduce response times?

Reduce warehouse order cycle times (WOCT)¹.
Set up warehouses closer to customers.
Increase the number and capacity of warehouses.

Customization

How to postpone¹ customization?

The warehouse is the natural place to execute value-adding services:

Labeling
Assembling
Special packaging
Monogramming

Kitting
Coloring
Pricing
Countrifying

Following the mass customization movement, the likelihood that an order will require customization in some form is increasing exponentially. The ability to execute the requisite value-added services such as custom labeling, special packaging, monogramming, kitting, coloring, and pricing is and will continue to be a competitive supply-chain differentiator. Warehouses are uniquely equipped with the workforce and equipment to execute these value-added services. In addition, by holding the noncustomized inventory and postponing the customization, overall supply chain inventory levels may be reduced. As the physical facility closest to the customer location, a warehouse is also a natural place to customize, kit, assemble, or countrify products in accordance with the principle of postponement—minimizing overall inventory investments throughout a logistics network by delaying customization. For example, one of our health and beauty aids clients puts its shampoo in blank bottles for storage. Once an order is confirmed from a specific country, the labeling required for that specific country is applied in line with the picking and shipping process.

— World-Class Warehousing and Material Handling (Frazelle 2016, 3).

Consolidation

How to avoid split deliveries?

Warehouses house products from different suppliers and can consolidate orders.

Returns

How to guarantee convenient/cheap returns?

Convenient returns = higher sales and customer satisfaction ratings.

Warehouses are typically located nearby the customer base.
Warehouses have the workforce and material-handling equipment uniquely suited to handling returns.

Physical market presence

How can companies build trust and credibility?

Physical market presence = cultural competitive differentiator.

Warehouses signal customers and partners that the business is real and that it has invested in its operations.

Warehousing and inventory management

Inventory (wares) housed in warehouses:

Facilitates production economies of scale
Fulfills seasonal demand
Mitigates supply-chain and business risk (contingency¹/disaster inventory)

Production economies of scale

How to reduce setup and changeover costs and time?

Long production runs are more economical in some cases.

The resulting lot-size inventory¹ must be housed!

Demand seasonality

How to balance yearly production to fulfill seasonal demand?

Demand may have significant peaks and valleys:

Greeting cards (Christmas and Valentine’s)
Oliebollen (New Year’s Eve)

How to prevent stockouts?

Design production capacity for peaks.
- Cost prohibitive, underutilized most of the year.
Balance production and store the lot-size seasonal inventory.
- Trades offs production and storage costs of seasonal buildup.

Frozen pie (Thanksgiving and Christmas) Many corporations have significant peaks and valleys in their demand. One of our clients, Hallmark Cards, is an extreme example. Most of the demand for greeting cards falls in the Christmas and Valentines seasons. If the company’s production capacity was designed for those peaks, its production capacity would be cost prohibitively underutilized most of the year. To balance the production and optimize supply-chain costs, Hallmark produces greeting cards at a fairly balanced pace during the year, resulting in a large storage requirement for most of the year. This seasonal inventory is stored in the large warehouse, in Figure 1.3. The Schwan’s Food Company is another one of our clients. One of its flagship products is frozen pie. The company is the world’s largest manufacturer of frozen pies, most of which are consumed between Thanksgiving and Christmas. As is the case with Hallmark, to optimize Schwan’s supply-chain costs, the company must balance production throughout the year and use third-party frozen warehousing to hold the seasonal buildup in inventory from January through September.

— World-Class Warehousing and Material Handling (Frazelle 2016, 4–5).

Contingency/disaster inventory

How to plan for unexpected situations?

Beyond traditional safety-stock inventory, companies may need to maintain service in the event of:

Hurricanes, floods, snowstorms
Supply-chain disruptions

Warehousing and sourcing

Warehouses help save costs by holding:

Cheap raw materials/products
Large inventory batches
On-site vendor-managed inventories¹

Vendor-managed inventory (VMI) is a supply-chain initiative where the supplier is authorized to manage inventories of agreed-upon stock-keeping units at retail locations. The benefits of VMI are well recognized by successful retail businesses such as Wal-Mart. In VMI, distortion of demand information (known as bullwhip effect) transferred from the downstream supply-chain member (e.g., retailer) to the upstream member (e.g., supplier) is minimized, stockout situations are less frequent, and inventory-carrying costs are reduced. Furthermore, a VMI supplier has the liberty of controlling the downstream resupply decisions rather than filling orders as they are placed. Thus, the approach offers a framework for synchronizing inventory and transportation decisions.

In this paper, we present an analytical model for coordinating inventory and transportation decisions in VMI systems. Although the coordination of inventory and transportation has been addressed in the literature, our particular problem has not been explored previously. Specifically, we consider a vendor realizing a sequence of random demands from a group of retailers located in a given geographical region. Ideally, these demands should be shipped immediately. However, the vendor has the autonomy of holding small orders until an agreeable dispatch time with the expectation that an economical consolidated dispatch quantity accumulates. As a result, the actual inventory requirements at the vendor are partly dictated by the parameters of the shipment-release policy in use. We compute the optimum replenishment quantity and dispatch frequency simultaneously.

— Stock Replenishment and Shipment Scheduling for Vendor-Managed Inventory Systems (Çetinkaya and Lee 2000, 217).

By postponing title transfer, on-site vendor-managed inventories are another means by which warehousing can add value in business and supply-chain logistics. Figure 1.8 shows one of our mining client’s maintenance parts vendor management inventory warehouse locations. The warehouse is located near the large maintenance shops in one of the world’s largest copper mines.

— World-Class Warehousing and Material Handling (Frazelle 2016, 8).

We conclude that the VMI collaboration effect is both beneficial for the suppliers and for the customers as is shown in Table 1 and quantified in Figure 1. The current VMI collaboration in Heineken results in 15% higher transport utilisation compared to deliveries to DCs without VMI. A new VMI design (2B) is recommended that results in a superior supply chain performance for Heineken and the customer compared to the current VMI implementation. The benefits are a 7% higher utilisation and a 70% reduction of the average stock levels in the customer DCs, while maintaining a 0% out-of-stock performance. The developed simulation-based searching model is proven to be an adequate method to consistently identify robust settings that enhance supply-chain performance.

— Searching for the VMI-effect within the Dutch Heineken supply chain (Van der Plas-Rolf et al. 2019, 4).

Raw-material and sourcing cost

Warehousing lets a company buy and hold materials when the total landed cost is favorable.

Purchase raw materials at the lowest cost and store them.
Purchase low-cost foreign materials and position them within the logistics network.

One of our clients is one of the world’s largest chocolate candy companies. Of course, the main ingredients are cocoa and sugar. In addition to production, those raw material costs also make up most of the total landed product cost. To help determine the optimal timing of the purchase of sugar and cocoa, the company maintains advanced proprietary weather-forecasting systems and sophisticated predictors of the future price of sugar and cocoa. When our client believes that the price is optimal, it may literally buy boatloads of sugar and cocoa. That sugar and cocoa must be housed somewhere, and that somewhere is a warehouse.

Another means by which companies seek to reduce material cost is low-cost foreign sourcing. The likelihood of an order entering or departing the warehouse from/to another country has never been higher. Warehouses add significant value in the supply chain by facilitating the efficient inbound and outbound processing of international orders. One example is our client, Payless Shoes, one of the world’s largest shoe retailers and global importers. Most of the company’s shoes are imported from China and arrive in the United States via the Port of Long Beach. Goods arriving there are transloaded into 53-foot containers and trucked to the company’s West Coast distribution center in Redlands, California, or the company’s East Coast distribution center near Cincinnati, Ohio. Similar West Coast distribution center missions are carried out by the massive concentration of distribution centers in or near Redlands known as the “Inland Empire.” A similar empire of distribution centers has grown up around the Port of Savannah, Georgia, where The Home Depot, Ikea, and Pep Boys, among many others, inject imported products into their East Coast logistics networks.

— World-Class Warehousing and Material Handling (Frazelle 2016, 6–8).

Production cost

Large production runs can be economical when:

Margins are high.
Inventory carrying rates are low.
Obsolescence risk is low.
Shelf lives are long.

Warehousing holds the resulting inventory batches until they are needed.

Vendor-managed inventory (VMI) warehouse

How can partners use VMI to reduce supply-chain cost (Çetinkaya and Lee 2000)?

Customer shares

Inventory levels
Actual demand
Forecast demand

Supplier decides

Replenishment quantity
Replenishment timing
Production plan

In practice: Nijhof Wassink lets suppliers monitor silo-level stock. In a Heineken case, VMI increased transport utilization by 7% while reducing customer-DC stock by 70% (Van der Plas-Rolf et al. 2019).

One of our clients is one of the world’s largest chocolate candy companies. Of course, the main ingredients are cocoa and sugar. In addition to production, those raw material costs also make up most of the total landed product cost. To help determine the optimal timing of the purchase of sugar and cocoa, the company maintains advanced proprietary weather-forecasting systems and sophisticated predictors of the future price of sugar and cocoa. When our client believes that the price is optimal, it may literally buy boatloads of sugar and cocoa. That sugar and cocoa must be housed somewhere, and that somewhere is a warehouse.

After raw materials, the next most expensive cost component of the company’s total landed cost is production. To help keep those costs low, the company operates with extremely long production runs. Because margins are high, inventory carrying rates are low, the risk of obsolescence is low (I have never personally refused a candy bar because of technical or packaging obsolescence), and shelf lives are long, total landed supply-chain costs are optimized with long production runs. Those long production runs create large batches of inventory that must be housed somewhere. That somewhere is a warehouse.

Another means by which companies seek to reduce material cost is low-cost foreign sourcing. The likelihood of an order entering or departing the warehouse from/to another country has never been higher. Warehouses add significant value in the supply chain by facilitating the efficient inbound and outbound processing of international orders. One example is our client, Payless Shoes, one of the world’s largest shoe retailers and global importers. Most of the company’s shoes are imported from China and arrive in the United States via the Port of Long Beach. Goods arriving there are transloaded into 53-foot containers and trucked to the company’s West Coast distribution center in Redlands, California, or the company’s East Coast distribution center near Cincinnati, Ohio. Similar West Coast distribution center missions are carried out by the massive concentration of distribution centers in or near Redlands known as the “Inland Empire.” A similar empire of distribution centers has grown up around the Port of Savannah, Georgia, where The Home Depot, Ikea, and Pep Boys, among many others, inject imported products into their East Coast logistics networks.

By postponing title transfer, on-site vendor-managed inventories are another means by which warehousing can add value in business and supply-chain logistics. Figure 1.8 shows one of our mining client’s maintenance parts vendor management inventory warehouse locations. The warehouse is located near the large maintenance shops in one of the world’s largest copper mines.

— World-Class Warehousing and Material Handling (Frazelle 2016, 6–8).

Warehousing and transportation

As supply chains aim at reducing inventory by shipping more frequently in smaller quantities, warehousing can reduce transportation costs by:

Working as consolidation points.
Delaying customs duties.

Small inbound shipments enter a consolidation center and leave as combined outbound loads.

Figure 2: Consolidation center (source: Freight consolidation - Travelwest)

Warehousing and Transportation As supply chains reduce inventory by shipping more frequently in smaller quantities, warehouses can help to provide transportation economies of scale by working as consolidation points for accumulating and assembling small shipments into larger ones, less-than-truckload shipments into full truckloads, less-than-container-load shipments into full container loads, transloading 40-foot containers to 53-foot containers, and so on (Figure 1.9). A frequently overlooked transportation expense is customs duties. Bonded warehouses allow consignees to delay duty payment until their goods are withdrawn from the bonded warehouse. Bonded warehouses located in free-trade zones also permit in-transit goods to pass through without duties being charged at all.

— World-Class Warehousing and Material Handling (Frazelle 2016, 8).

Transportation economies of scale

How to favor transportation economies of scale?

Warehouses are consolidation points for accumulating and assembling small shipments into larger ones:

Less-than-truckload (LTL) shipments into full truckloads (FTL).
Less-than-container-load (LCL) into full container loads (FCL).
Transloading 40-foot containers to 53-foot containers.

Bonded warehouses

How can warehousing help to delay customs duties?

Bonded warehouses allow consignees to:

Delay duty payments until goods are withdrawn from the bonded warehouse.
Avoid duties (if located in free-trade zones).

Synthesis and application

Inventory reasons: Service and flow

According to Lambert et al. (1998):

Achieve transportation economies.
Achieve production economies.
Take advantage of quality purchase discounts and forward buys.
Support the firm’s customer service policies.
Meet changing market conditions and uncertainties.
Overcome the time and space differences that exist between producers and customers.

Accomplish the least total cost logistics commensurate with a desired level of customer service.
Support the just-in-time programs of suppliers and customers.
Provide customers with a mix of products instead of a single product on each order.
Provide temporary storage of material to be disposed or recycled.
Provide a buffer location for transshipment.

According to Lambert et al. (1998), the missions of a warehouse system could be to (1) achieve transportation economies, (2) achieve production economies, (3) take advantage of quality purchase discounts and forward buys, (4) support the firm’s customer service policies, (5) meet changing market conditions and uncertainties, (6) overcome the time and space differences that exist between producers and customers, (7) accomplish the least total cost logistics commensurate with a desired level of customer service, (8) support the just-in-time programs of suppliers and customers, (9) provide customers with a mix of products instead of a single product on each order, (10) provide temporary storage of material to be disposed or recycled, (11) provide a buffer location for trans-shipment.

— Warehousing in the Global Supply Chain (Manzini 2012, 89; see also Lambert et al. 1998).

Inventory reasons: Cost and resilience

According to Richards (2014):

Handle uncertain and erratic demand patterns.
Trade off storage, transport and shipping costs.
Get discounts via bulk buying.
Shorten distance between manufacturer and the end consumer.
Cover for production shutdowns.
Ability to increase production runs.

Manage seasonal production.
Handle high seasonality.
Spare parts storage.
Work-in-progress storage.
Investment stocks (e.g., fine wine).
Document storage.

A supply chain with the minimum amount of stock within its pipeline is utopia. Unfortunately this happens very rarely. Our society and our markets are not predictable and therefore we need to hold stock at various stages within the supply chain. Increased consumer demand for greater choice has resulted in a proliferation of product ranges and sizes leading to unprecedented demands on storage capacity. Reasons for holding stock are as follows.

Uncertain and erratic demand patterns. Suppliers of ice cream, suntan lotion, umbrellas and the like will potentially experience erratic demand patterns based on the changeability of the weather. Other unpredictable sales can revolve around the launch of a new product and the progress of a team in a major competition such as football’s World Cup or baseball’s World Series events.

Trade-off between transport and shipping costs, justifying larger shipments. The ability to move product in large quantities tends to attract lower costs per unit. The trade-off here is between the cost of storing additional units compared with the higher cost of transport for smaller, groupage-type deliveries. If the transport cost is very attractive then additional storage space will be required. There also has to be a strong conviction that all the items purchased will be sold.

Discounts via bulk buying. The possibility of reducing the unit rate through buying in greater quantities is always an attractive proposition for buyers. This can, however, have a negative effect overall if the company fails to sell all of the additional units purchased or has to sell at a loss to clear the warehouse. In this situation it is our contention that the whole-life cost of the item is calculated before the decision is made to purchase additional quantities. These costs will include additional storage and handling costs, working capital interest, possible discounted sales and disposal costs. A trade-off exists between lower unit purchase costs and increased storage costs per unit. I’m sure there are many warehouses out there holding obsolete stock due to the overenthusiasm of procurement and sales staff!

Distance between manufacturer and the end consumer. The distance finished stock has to travel today requires a greater amount of stock to be held in the warehouse. Lead times can be anything between four and eight weeks depending on the manufacturer’s location. The trade-off here is between more expensive local suppliers and producers and increased costs in transport and inventory holding costs.

Cover for production shutdowns. Many manufacturing companies and sectors continue to shut down their operations for vacations, machine maintenance and stock counts. As a result retailers and wholesalers need to build up stock prior to the shutdown period to ensure stock availability for their customers. Manufacturers will also build up a stock of components to ensure that their production lines are not brought to a standstill as a result of supplier shutdowns.

Ability to increase production runs. Changing or adjusting production lines in order to accommodate changes in models, colour, design features, etc is expensive. The longer the production run, the lower the cost per unit to produce. However, the trade-off here is between the lower cost per unit versus the additional cost per unit for storage.

To manage seasonal production. Certain food and drink products are produced at specific times of the year and therefore need to be stored until required.

High seasonality. Seasonality can be a period of time such as summer and winter or a specific date in the calendar such as Easter, Valentine’s Day, Independence Day or the Chinese New Year. Figure 1.2 shows the stock build-up for a chocolate manufacturer in the run-up to Easter. As can be seen, pallet storage ranges from 500 pallets to a staggering 10,000 pallets at peak. Large sporting events can also have an impact on the requirement for additional storage. This includes the World Cup, the Olympics, Super Bowl final and World Series baseball, etc. Figure 1.3 shows the activity of a clothing manufacturer leading up to the two distinct seasons of summer and winter collections.

Spare parts storage. To ensure an uninterrupted production line operation, manufacturers need to hold stock of spare parts just in case an item becomes defective. This can be expensive but the trade-off here is between the cost of the part together with its holding cost and the potential breakdown of the production line and the consequences that brings with it. This doesn’t mean, however, that these items should not be reviewed regularly and decisions taken as to whether to stock them or not. Things to take into account include supplier lead time and machine failure rate.

Work-in-progress storage. Many companies will part-build products in anticipation of orders. The chocolate manufacturer mentioned above produces the two halves of the Easter egg prior to receiving any firm orders. This enables them to complete the process at a later date, once they know the type of packaging, style and insertions required.

Investment stocks. A number of products can increase in value the longer they are held in storage. These include fine wines and spirits, cigars, precious metals and stones, antiques and fine art.

Document storage. Both public bodies and private companies have an obligation to store documents over a period of time. These can include correspondence, invoices, accounts, etc. This can be a legal requirement. Other examples include evidence storage and patient records by the emergency services.

— Warehouse Management: A Complete Guide to Improving Efficiency and Minimizing Costs in the Modern Warehouse (Richards 2014, 12–16).

Warehouses buffer mismatches

Warehouses buffer supply chains when supply and demand do not align.

Table 2: Warehouses absorb timing and quantity mismatches.

Change	Warehouse response
Demand surges	Release stockpiled inventory¹
Demand collapses	Slow or hold inventory
Supply surges	Receive inventory and support sales
Supply collapses	Use stockpiled inventory

Warehouses also buffer variable lead times, price increases, high setup costs, and the bullwhip effect².

To better match supply with customer demand: One of the major challenges in managing a supply chain is that demand can change quickly, but supply takes longer to change. Surges in demand, such as seasonalities strain the capacity of a supply chain. Retail stores in particular face seasonalities that are so severe that it would be impossible to respond without having stockpiled product. For example, Toys R Us does, by far, most of its business in November and December. During this time, their warehouses ship product at a prodigious rate (some conveyors within their warehouses move at up to 35 miles per hour). After the selling season their warehouses spend most of their time building inventory again for the following year. Similarly, warehouses can buffer the supply chain against collapsing demand by providing space in which to slow or hold inventory back from the market.

In both cases, warehouses allow us to respond quickly when demand changes. Response-time may also be a problem when transportation is unreliable. In many parts of the world, the transportation infrastructure is relatively undeveloped or congested. Imagine, for example, sourcing product from a factory in Wuhan, China for retail sale within the US. After manufacture, the product may travel by truck, then by rail, by truck again, and then be loaded at a busy port; and it may repeat the sequence of steps (in reverse order) within the US. At each stage the schedule may be delayed by congestion, bureaucracy, weather, road conditions, and so on. The result is that lead time is long and variable. If product could be warehoused in Los Angeles, closer to the customer, it could be shipped more quickly, with less variance in lead time, and so provide better customer service.

Warehouses can also buffer against sudden changes in supply. Vendors may give a price break to bulk purchases and the savings may offset the expense of storing the product. Similarly, the economics of manufacturing may dictate large batch sizes to amortize large setup costs, so that excess product must be stored. Similarly, warehouses provide a place to store a buffer against unreliable demand or price increases.

— Warehouse & Distribution Science (Bartholdi and Hackman 2019, 5–6).

Apply the buffering logic

How can warehouses help mitigate the impact of the following business challenges*?

Scenario 1

You run a manufacturing company that imports products from overseas. What would you do if one of your inbound shipments is lost at sea, impounded by customs, captured by pirates, or caught in a port strike?

Scenario 2

You work for a wholesaler that has been selling a product at a steady rate for months, and one month, the company sells twice as much as normal. You don’t have enough inventory to fill all your customer orders, and now you also have back orders to fill. You may even be at risk of losing sales and customers. How can you prevent customer dissatisfaction?

I can explain this concept with a few practical examples:

You run a manufacturing company that imports products from overseas, so you need to consider what you’d do if one of your inbound shipments is lost at sea, impounded by customs, captured by pirates, or caught in a port strike. Your sensor could be a notification system that sends alerts about your shipments. One plan might be shutting down your factory until the issue is resolved. You might also consider placing a new order with a different supplier. In an extreme case, you might declare force majeure and tell your customers that you won’t be able fulfill your commitments to them.

Force majeure is a legal term that means you are free from liability if you are unable to meet obligations due to an extraordinary circumstance.

You work for a wholesaler that has been selling a product at a steady rate for months, and one month, the company sells twice as much as normal. You don’t have enough inventory to fill all your customer orders, and now you also have back orders to fill. You may even be at risk of losing sales and customers. You might decide to place bigger orders in the future and keep more inventory on hand. That means you’ll be investing more working capital in inventory.

You work for a transportation company. The company’s customers pay you to deliver their products around the world, and they count on your deliveries to help them meet their commitments to their own customers. Therefore, your ability to deliver on time is essential to them. Suddenly, a volcano in a distant part of the world spews ash far into the sky, making it dangerous for airplanes to use a heavily traveled flight path. You could reroute your planes, but this is expensive because you would need to develop new flight plans, reschedule airplanes, and find available crews. Alternatively, you could tell your customers that their deliveries are on hold until normal operations can resume.

Thousands of companies have had to face every one of these scenarios in the past few years. In every case, making the right decision about how to respond required understanding supply chains and supply chain management.

— Supply Chain Management for Dummies (Stanton 2022, 10–11 (PDF pp. 28–29)).

References

Bartholdi, J. J., and S. T. Hackman. 2019. Warehouse & Distribution Science. 0.98.1 ed. Georgia Institute of Technology. https://www.warehouse-science.com/book/editions/wh-sci-0.98.1.pdf.

Boysen, Nils, and René de Koster. 2025. “50 Years of Warehousing Research: An Operations Research Perspective.” European Journal of Operational Research 320 (3): 449–64. https://doi.org/10.1016/j.ejor.2024.03.026.

Boysen, Nils, René de Koster, and Florian Weidinger. 2019. “Warehousing in the e-Commerce Era: A Survey.” European Journal of Operational Research 277 (2): 396–411. https://doi.org/10.1016/j.ejor.2018.08.023.

Çetinkaya, Sila, and Chung-Yee Lee. 2000. “Stock Replenishment and Shipment Scheduling for Vendor-Managed Inventory Systems.” Management Science 46 (2): 217–32. https://doi.org/10.1287/mnsc.46.2.217.11923.

De Koster, René, and Werner Delfmann. 2017. Warehouse Design and Management. Springer International Publishing. https://doi.org/10.1007/978-3-319-69310-1.

De Koster, René, Tho Le-Duc, and Kees Jan Roodbergen. 2007. “Design and Control of Warehouse Order Picking: A Literature Review.” European Journal of Operational Research 182 (2): 481–501. https://doi.org/10.1016/j.ejor.2006.07.009.

Frazelle, Edward. 2016. World-Class Warehousing and Material Handling. Second Edition. McGraw-Hill Education.

Lambert, Douglas M., James R. Stock, and Lisa M. Ellram. 1998. Fundamentals of Logistics Management. The Irwin/McGraw-Hill Series in Marketing. Irwin/McGraw-Hill.

Manzini, Riccardo, ed. 2012. Warehousing in the Global Supply Chain. Springer London. https://doi.org/10.1007/978-1-4471-2274-6.

Richards, Gwynne. 2014. Warehouse Management: A Complete Guide to Improving Efficiency and Minimizing Costs in the Modern Warehouse. Second edition. Kogan Page Limited.

Stanton, Daniel. 2022. Supply Chain Management for Dummies. 3rd ed. John Wiley; Sons.

Van der Plas-Rolf, Jeroen, Ton De Kok, and Jan Fransoo. 2019. “Searching for the VMI Effect: Evidence from Dutch Supply Chains.” International Journal of Production Economics 211: 1–12. https://doi.org/10.1016/j.ijpe.2019.01.001.

Zhen, Lu, and Haolin Li. 2022. “A Literature Review of Smart Warehouse Operations Management.” Frontiers of Engineering Management 9 (1): 31–55. https://doi.org/10.1007/s42524-021-0178-9.