Ramlee Ibrahim & Associates

Article after article is written about improving warehouses. There are robots, carousels, retrieval systems, theories of layout, and computer models to simulate flow. Then textbooks and consultants tell you warehouses are obsolete. Instead, build to order and ship directly to the customer. As always, there are two attractive, totally opposite theories, as the following examples illustrate.

• While working at a large multinational conglomerate, I saw management approve and build a multimillion-dollar chemical storage facility. It was state-of-the-art, and it met every Safety, Health and Environmental (SHE) requirement. But it shouldn’t have been built. It would have been better to have the chemicals delivered directly to the line on a Just_in-Time (JIT) basis.
• A large medical electronics firm had eliminated 90% of its parts and subassembly warehouse by implementing JIT. But this same firm maintained several distribution centers stocking spare parts and subassemblies because it was critical for their customers to have spare parts available on an emergency basis.

A warehouse is  tool for management to use to meet customer needs. But a tool depends on the user using it appropriately – a hammer can be used to build a beautiful house or smash a finger. Management must carefully think throough the cost/benefit decision for putting in a warehouse. Finally, building a warehouse is both a tactical and strategic decision.

An example is a large supplier of parts to the equipment and truck industry. The company’s US plant was in California, with feeder plants in Mexico and Ireland. Suppliers were in the Midwest and the Southwest. The customers and assembly plants were in the Midwest. The plant built and delivered several thousand assemblies daily.

The company’s senior management had committed to 24-hour delivery on a JIT basis. The problem was that the physical layout of the process couldn’t support it, due to the following conditions:

• Delivery time of raw material castings took two to three days by truck
• Fabrication and assembly in the plant took two to three days
• Delivery to the customer took two to three days by truck
• Air freight was out of the question because of the weight of the product

Another complication was that the forecasts from marketing never matched the actual orders coming in from the customer. The plant was adjusting the schedule daily.

However, it was doing quite well by most standards. Quality was excellent, costs were under control, and they were meeting the schedule 95% of the time. But the customer was still not satisfied – 95% isn’t good enough in a JIT situation.

The company considered installing a new ERP planning system because management believed the problem was in the forecasting, master scheduling, and shop scheduling areas. My analysis brought me to a different conclusion: Solve the problem by putting in two warehouses, one for raw materials and the other for finished goods, as follows:

• Set up one warehouse across from the plant to consolidate all supplier raw materials. It would carry no more than three to five days’ worth of parts, delivered to the plant on a daily JIT basis. The warehouse would be run by a logistics company jointly contracted by the suppliers and the assembler, and the company would not be charged until the materials was delivered to the plant.
• Set up a second warehouse across from the plant to house three to five days’ worth of finished goods delivered daily to the customer’s assembly plant. Again, the customer woould not pay until the material was delivered to the plant.

The decision for the two warehouses was based on physical processes – shipping material across the country. An alternative would be to relocate the plant and its suppliers near the customers. However, senior management rebuffed this idea.

Once the decision is made to have a warehouse, a state-of-the-art, competitive operation must be put in. The proper layout, equipment, and personnel must be used. Attention to detail and willingness to spend money, especially on people, is critical.

So, warehouses are still necessary in today’s JIT world. Where and when they are used is a combination of long-term strategy and daily operations necessity. Putting them in takes detailed planning and a commitment to training and personnel development. When done correctly, warehouses give an organization flexibility and increased profit; when done poorly, they simply cost a lot of money.