May 2006 | Commentary | Viewpoint

Warehousing Bounces Back, Shows New Vitality

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More than 100 years ago, Mark Twain said rumors of his death had been greatly exaggerated. As a veteran supply chain management professional, I see a parallel between Twain's quote and erroneous reports about warehousing's decline.

During the late 1990s and early 2000s, as information systems grew more advanced, pressure to eliminate or minimize the use of warehousing intensified. It was tacitly understood that warehouses were slowly being superseded by more "modern" logistics practices, such as just-in-time operations.

At one point, the prognosis was so grim that even a well-known national warehousing organization reported, "stored product is now seen as an indication of slack in the supply chain."

Times have changed, and I no longer think there's even a remote chance of reading warehousing's obituary any time soon. In fact, I believe the role of warehousing has never been more vital.

Here are several key reasons why.

The continued growth of Asian manufacturing. Manufacturing in Asia is nothing new, as any of us who drive Japanese cars or wear clothes sewn in Vietnam can attest.

China's entry into the World Trade Organization, however, is the pivotal event that made Asian manufacturing so dominant. Since 2002, an estimated $50 billion in manufacturing has moved to Asia, and many companies suddenly find themselves dealing with a new world of logistical challenges.

Today, the typical U.S. supply chain is thousands of miles long and dependent upon a wide mix of transportation modes. That adds up to more potential volatility, especially when you throw in uncertain factors such as customs inspections.

Warehouses can be an effective hedge against such volatility.

The congestion situation. It's not just the increased length of supply chains that proves problematic for global companies. During 2003 and 2004, Asia-to-U.S. shipments grew by 25 percent. And much of the world's transportation infrastructure and many transportation providers struggle to keep up.

Global shipping companies have customers clamoring for space on their vessels, including the ones that have yet to be built. Railroads, which watched business steadily decline in the 1990s, expect more than six-percent annual growth over the next four years. Trucking is experiencing a well-publicized capacity shortage. Even some of the country's most remotely located ports are discovering that their ships have come in.

International transportation congestion is a huge problem, and the public and private sectors are working diligently to correct it. Solving landside infrastructure constraints and intermodal bottlenecks, however, could take years.

Until these solutions are complete, warehousing may well be one of the most practical ways companies can help restore consistency and equilibrium.

Higher transportation costs. The rising cost of transportation also makes warehousing more viable. Skyrocketing fuel expenses make it especially important to wring prime utilization from transportation providers and assets.

Accordingly, some companies find that shipping raw materials and finished goods in higher volumes allows them to better optimize their transportation buy—even if it means having to store some of those raw materials and finished goods in additional warehousing space until they're needed.

If something can go wrong... Warehousing also plays a clear role as a contingency management tool. Unfortunately, we're all well-acquainted with the kinds of contingencies I'm talking about.

Using part of the inventory in warehouses as safety stock can be an effective way to cover your bases and ensure products or raw materials are properly positioned where you need them—as long as that stock is factored into a company's time-to-market targets and strategic objectives.

This is especially critical in industries such as retail, where timing is everything, or when shipment delays could result in lower profit margins due to penalties and lost sales.

Better warehousing savvy. More companies finally realize how to effectively deploy warehousing as a strategic, rather than tactical tool—and as an enabler to create a more efficient supply chain.

Much the same way our personal computers have more power and functionality than we ever take the time to explore, most warehouses were at one time merely diamonds in the rough, with incredible but largely untapped potential.

Today, thanks to sophisticated information technology systems and advances in supply chain practices, more companies understand the importance of integrating their warehouses into the greater whole of their supply chains.

Just as important, they know how to make those facilities interface well with their suppliers and factories, end users, and all the transportation providers in between. This results in stronger and better supply chains.

If you don't believe me, consider this: When you review analysts' lists of the best-run supply chains, you'll note that most of those chains include several strategically linked distribution centers.

Origin warehousing. Finally, consider how warehouses are being used at the source, whether that source is located in Asia or other parts of the world.

While many companies have discovered that manufacturing in Asia is economical, they've also discovered that managing the flow of raw materials and components into and within their new Asian venues poses formidable challenges.

Many Asian countries' infrastructure and logistics processes are still works in progress, although they are improving. Companies that manufacture there will have to deal with challenges such as low-quality roads, insufficient infrastructure, and a fragmented transportation industry for a long time to come.

When you weigh such limitations against the potentially costly consequences of a production line's late or missed delivery, it's understandable that warehousing now plays a vital role in many companies' Asian supply chains.

By now, you probably understand why I relate so well to Mr. Twain, who was obviously still very much alive when he heard the rumor that he was no longer around.

As long as raw materials and finished goods remain tangible, they must eventually be handled via tangible means. In many cases—especially in today's world—they must be moved and managed with the help of at least one warehouse along the way.

If you hear rumors that warehousing is a tool whose time has come and gone, don't believe it for one minute. Warehousing is finally being understood as a key enabler of the supply chain, and, like Mark Twain, is truly a classic.

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