Warehousing: The Evolution Continues

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As the evolution of warehousing continues, logistics professionals will have plenty of opportunity to show just what kind of contribution they can make.

Warehouses and distribution centers have become integral parts of the supply chain, and are increasingly pressured to do more with less. These performance pressures won't ease off.

Indeed, they are expected to increase over the next five years, according to a forthcoming report by Arnold Maltz, Ph.D., associate professor at Arizona State University and Nicole DeHoratius, DBA, assistant professor at the University of Chicago.

To get a picture of the current and future state of warehousing, Maltz and DeHoratius interviewed logistics executives at 15 companies, including manufacturers, distributors, retailers, and third-party logistics providers. The professors discussed the findings of their study at the Warehousing Education and Research Council's (WERC) annual conference in April.

"Customers in general want more for less," Maltz said, pointing out that "warehouses keep getting asked to do more things." Because warehousing labor is generally less expensive than manufacturing labor, the warehouse can often perform light manufacturing activities for less. As a result, many facilities are beginning to resemble light manufacturing plants.

The environment in which warehouses and DCs operate has changed from just five years ago, when Maltz conducted a similar study for WERC. Customers today are smarter and tougher. They expect perfect orders, increasing speed, level or decreasing costs, continuous improvement, and greater selection and customization from their suppliers. Information today is better and more readily available than it was five years ago, enabling more accurate analysis. Global competition and pricing pressures mean that companies need to continue to reduce costs rather than increase prices.

The big picture of the warehouse's contribution, including space and location, labor, and knowledge, remains largely the same as five years ago. But the details have changed. For example, performing value-added services in the warehouse is given a greater priority today than ever before, as reflected in the fact that warehouses are beginning to be characterized by the activities they perform, rather than by their storage function.

Because of the continuing quest to minimize inventory, the storage function, once one of warehousing's core components, is de-emphasized in many facilities. "Inventory reduction is the mantra, up and down the supply chain," Maltz observed. Warehouses today are often referred to as distribution centers, operations centers, return centers, or fulfillment warehouses.

"The warehouse is no longer an island—it's an integral part of the supply chain," Maltz noted. "In addition, warehouses are increasingly the place for systems, and for improvement. It's the warehouse that can suggest the next level of improvement."

He described today's warehouse as being customer- and knowledge-driven, full of rich data about customers and their buying practices.

21st Century Warehousing

As the evolution of warehousing continues, logistics professionals will have plenty of opportunity to show just what kind of contribution they can make. Drawing on discussions with Maltz and DeHoratius and the findings of their report, to be published by WERC this fall, Inbound Logistics has developed this snapshot of 21st century warehousing today—and tomorrow.

Services provided. Manufacturers, distributors, and retailers are shifting more activities to the warehouse, thanks to the lower cost of doing so. Activities performed in today's warehouse may include product configuration, finishing, packaging, labeling, ticketing, pricing, and creating shelf-ready product displays. This expansion of activities is taking place in both company-owned-and-operated facilities, as well as those operated by third parties.

The variety of activities being performed today is broad. For example, when asked what services were performed in his warehouse, one study respondent replied, "Anything the customer wants!"

Distribution networks. Users in general are consolidating their distribution networks, to reduce safety stock and make the network easier to manage. Even repair parts depots are looking for ways to centralize slow-moving parts.

The study found, however, that retailers and distributors continue to open stocking locations to support new territories, and that warehouses may be opened to handle imports.

Location. Warehouse space is becoming concentrated in or near large population centers. Saturated labor markets and higher delivery and land costs are leading some companies to locate their facilities in secondary areas within a one-day service area of the major population centers. This gives them comparable accessibility, lower costs, and a larger labor pool.

Space ownership. Manufacturers seem to be increasingly less interested in owning warehouse space at the same time that major third-party providers seek to minimize ownership risks. As a result, ownership of warehouse space may shift to real estate investment trusts (REITs) and insurance companies.

Labor. The soft economy and rising unemployment rates have loosened the market for warehouse labor, especially compared to the years between 1999 and 2001, when many companies struggled to find and keep good warehouse labor.

Some warehouses, however—particularly those that operate in a saturated labor market with a dominant employer—still find recruitment and retention to be a challenge. Many operations, in addition, are looking for technology-savvy employees and/or retraining long-term associates as they implement new systems.

Performance pressures. Warehouses and DCs will face continuing pressure to perform, in terms of reducing inventory, cycle time, and costs. Smart application of information technology, quality initiatives such as Six Sigma, and continuous improvement will be required in order for the warehouse to deliver on these often-conflicting priorities.

Outsourcing. Maltz and DeHoratius found that outsourcing by manufacturers continues to increase, but that many retailers and distributors are performing warehouse activities themselves. Those companies that do outsource look to their third-party providers to perform an increasing amount of work.

Supply chain metrics. The warehouse's increasing integration in the supply chain will drive the need for effective performance metrics. This will be particularly challenging for third-party logistics providers, who have to work with multiple customers' requirements for measurement.

All these factors will add up to make the warehouse of the future a place of opportunity for savvy, forward-thinking managers who take a different approach.

"Warehouses have to stop thinking of themselves as storage facilities and start thinking of themselves as flow centers or crossdock operations," Maltz says. "As part of an integrated supply chain, the warehouse manager has to think beyond the four walls."

"We've been talking about the integrated supply chain for years," DeHoratius observes. Now it's time for managers to deliver. They can no longer fall back on the excuse of not having the necessary information, she says. Instead, managers need to identify how to use the information that is available today to get results.

Long anticipated, "an integrated supply chain is a realistic goal now," Maltz says. To position themselves for success, warehouse managers need to determine what implications the integrated supply chain has for their operation.

"Constantly build relations with the rest of the supply chain," Maltz advises. In addition, make sure that appropriate key performance indicators are in place to reflect the warehouse's role in the integrated supply chain.

"Try to figure out what it means to be judged by total supply chain performance in your company, and what role the warehouse will play in that," he suggests.

Finally, understand that integrated supply chain management may, in some cases, dictate consolidating the distribution network and eliminating warehouses. "Get as involved in that decision-making as you can, and don't be afraid to relinquish ownership of assets," DeHoratius says.

"Like any other business asset, the warehouse is necessary only if it can show its value to the supply chain and the enterprise," Maltz and DeHoratius conclude.

The modern warehouse will prosper, they say, "if management applies its local knowledge and assets to provide superb performance that shippers and final customers cannot find anywhere else."

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