The 12 Principles of High Performance Warehousing: 1. Align business & warehouse strategy

Align your warehousing strategy with your business strategy to accelerate your overall business performance

This is part 1 of the promised series on the 12 Principles of High Performance Warehousing that I first presented at the 7th ELSC in Mumbai in September 2013.  These ideas are the core that I will expand upon in my book to be released later this year.

Before we get to the warehouse we should consider if you even need one, what it should look like and should you run it yourself or outsource it to someone else.

Supply chains are constantly evolving and have undergone dramatic changes over the last 20 years in particular as the pace of globalisation and technology has created truly global supply chains.  The internet has brought transparency and visibility of product and pricing and the means for individuals to purchase globally and for businesses to sell their products globally.  This trend will undoubtedly continue to affect the nature of the logistics and warehousing operations within increasingly fragmented and personal supply chains.  The diagram on the next page illustrates a simplified model of modern supply chains.

So where does your business fit?  Is your business about generic manufacturing for others or do you have a brand with unique products and services?   The brand originators are now the power players in commerce.  Having a unique value that cannot be replicated by others they can control their own destiny now because there is no need for an intermediary between them and the customer.  A brand and a customer relationship is now all powerful, increasingly relegating wholesale and retail to the role of physical distribution and price taking rather than making.

Are you in wholesale or retail stores?  Transparency and the personalisation of supply chain are currently waging war on traditional wholesale and retail.  Although conventional retail is still very significant, much of the value add of retail can now be done online with better product advice, wider range (limitless in fact) and lower prices.  That retail will be fundamentally re-shaped over the coming years, is inevitable.  Similarly wholesale is under pressure; with razor thin margins, only those with large volume are profitable.  Some wholesalers are moving into 3PL services to leverage their logistics expertise with manufacturers who now seek a more direct relationship with their customers.  3PL services have the added attraction of eliminating inventory carrying cost and risk.

Another wholesale strategy is to source their own branded products.  If they cannot tie up an exclusive distribution agreement with a big brand manufacturer, then they can build their own brand by sourcing from the generic manufacturers and marketing to their existing customer base.  Whilst this can be a very effective strategy, it may also put them in competition with the core brands that support them.  This may damage key supplier relationships and the potential impact of this must be considered.

Universal model of supply chain

Your business strategy will determine where you fit in the supply chain and consequently what type of warehouse you will need. Manufacturers typically require bulk warehouses suitable for storing and shipping large amounts of a limited range of SKUs.  A wholesaler requires a warehouse that can manage a very large range of SKUs in much smaller quantities required by retailers.  A pure-play online retailer may carry very little stock, relying on rapid replenishment from wholesalers and a network of direct ship orders from network partners.   Depending on what business you are in and where in the supply chain you fit.  Some retailers barely have a warehouse and instead run a large cross docking operation with carefully scheduled supplier deliveries in one side and a sophisticated conveyor sortation system to sort inbound deliveries to outbound transport by store. 

If you do have a warehouse then how big should it be and where should you put it?  Given the substantial capital investment required to build a warehouse this is a very important question.  This can be done at a high level with a spreadsheet cost analysis of various options.  A more sophisticated solution is to use special mapping & route optimisation software such as CAST or simulation software such as Supply Chain Guru.  Supply Chain Guru is an all in one design tool that optimises supply chains based on data and constraints and can also run simulations to review the impact of various strategies on the design over time.  Use of these software tools can give you a high degree of confidence in your warehouse location and sizing and technology decisions.

The final question is whether you should run your own warehouse or outsource it.  The only real answer to this question is that whatever choice you make, you commit yourself to managing a positive outcome for your business.  By that I mean that whether most similar companies in your industry outsource or run their own warehouses there will always be successful and not so successful examples of each type of solution.  Both options require real work to make them successful.  If you outsource and forget, you will likely come to regret the decision as high costs and/or poor service will creep up on you until you find the outcome intolerable.

The main reasons to outsource are:

1. To reduce operating costs and increase profit
2. Create a more scalable platform for growing your business
3. Eliminate a non-core business activity to allow you to focus on growing your         business.

You need to watch out for:

• Cost structures that you do not understand or that will not reduce your logistics cost/unit as you increase your sales.  You need to understand your current costs and the impact of any particular outsourcing arrangement on your business as you expect it to change over time.
• Lack of visibility of activity and service level performance.
• Lack of responsiveness to your business needs.  Does the logistics provider understand your industry and have demonstrated experience in similar businesses?

Remember that:

• Once you outsource it is expensive and difficult to go back to doing it yourself. This almost never happens.  As a consultant I can tell you that there are far more outsourcing projects than insourcing projects.
• It is better to outsource than to do it yourself badly. 
• It is usually cheaper to do it yourself well than to outsource.  Following the 12 Principles of High Performance Warehousing will ensure that you do it yourself well.

Need some help with your warehouse?