The 12 Principles of High Performance Warehousing #3. Match storage systems with inventory and order profile

Choose storage systems that match the order and inventory profiles of your value stream to maximise space utilisation and picking efficiency

Part 3 of a series on the 12 Principles of High Performance Warehousing.  The eBook can be downloaded for free by joining the High Performance Warehouse Network on the Logistics Help website.

Your inventory and order profile will derive from the value chain of the market you are serving.  For example an online business serving individual customers will usually have many orders selecting from a large range of SKUs with only one or two lines per order and usually small to medium sized items that are easily shipped door to door and internationally.  A manufacturer may only make a small range of products (less than 50 SKUs) but ship them in volume to wholesalers and markets around the world.  These two extremes demand very different solutions in the warehouse.

I have identified two dimensions of inventory profile - (total number of SKUs and size of SKU), and three dimensions of ordering pattern - (order frequency, average lines per order and average units per line).  Each different combination of inventory and order dimensions will require a particular storage solution that will provide the best fit for storage density and process productivity in the warehouse.

Different types of products selling through different channels will require different
warehousing solutions.  It sounds simple but the answer is not always obvious.

There is an additional inventory dimension that I have left out for the sake of simplicity.  This is storage conditions.  Storage conditions requirements are typically temperature (cold chain, cool and frozen for food and pharmaceuticals, security for bonded items or dangerous drugs and high value items like electronics or jewellery and dangerous goods such as flammables, toxic chemicals, corrosives, explosives etc.  These are not insignificant factors in the design of warehousing operations but are beyond the scope of this eBook.  I will address them in future updates and the extended version of this work.

The table below indicates a recommended storage system for each of the thirty two combinations across the five dimensions of inventory and order profile.  This is a simplification but will serve as a guide to what you might need when setting up a new business channel you may not be familiar with.  The reality is there is a continuum of inventory and order profiles from bulky pallet based activity through to high volume orders for a long tail of small items.  There is also a very wide range of racking, shelving and storage equipment that can be configured specifically to suit any conceivable range of product sizes and volume.  The detailed selection of a storage system should be considered very carefully to ensure that you get the best fit without sacrificing flexibility to grow or adapt the system as both your inventory profile and order profile changes over time.

It is also quite common for a company to have a SKU range that requires different categories of storage systems.  So for example the same customers might be ordering full pallet loads of a high volume bulk item as well as case picks of moderately sized items and unit picks from a long tail of small items.  In these cases the warehouse will need to be configured in different zones for each different storage system.  As the picking methods and equipment will be different then these picks are usually split so that they can be processed separately and then consolidated on the dock for delivery.

I have summarised the use of the most commonly used storage systems below.

• Block stack: (the original storage system!) fast to access storage for bulk quantities of a limited range of SKUs. Fairly dense storage but beaten by drive in racking for maximum space utilisation. Usually configured as Last In First Out (LIFO) access which means that lanes must be emptied before refilling to ensure stock rotation.
• Drive in racking:  Same use as block stack, slightly slower to use due to the need to drive the forklift carefully.  Very good storage density.  Can be set up as LIFO or FIFO as for block stack if access aisles are provided at each end.
• Pallet flow & push back racking: pallet shuttle systems:  These are also dense storage for bulk palletised stock.  They ensure that stock is always at the rack face and so speed access for picking over drive in racking.  Push back is LIFO access only.  Pallet flow is FIFO only and requires an aisle each end.  Shuttle systems can be configured either LIFO or FIFO and are expensive but do provide very dense and fast access bulk storage.
• Pallet racking (single selective): The near universal warehouse pallet storage solution.  Provides good storage density and complete selectivity of each pallet.  Allows the height of the building to be used to increase density.  Fast to access and very flexible.  Normally accessed with a reach type forklift it can also be accessed with a man-up stock picker for fast case picking of a large SKU range.
• Pallet racking (double deep).  Significantly more dense storage than single selective racking above whilst also maintaining good selectivity.  Each location holds two pallets of the same item with LIFO access.  Good for pallet and case picking of bulk high volume items.
• Long span shelving: Pallet racking with shelves, this is a good storage method for shelving bulky but slower moving items.  Two to three levels can be set up or access by pedestrian pickers for case and item level picking.  Good storage density and selectivity.   Good for creating a unit or inner picking area for items that are normally case picked out of pallet racking or block stack.
• Steel shelving:  Along with single selective pallet racking steel shelving is the most commonly used warehouse storage system.  Available in abundant sizes and shelf configurations and can be obtained very cheaply second hand.  Used for storage of small items accessed by pedestrian pickers.  Use of carefully matched shelf spacing and dividers within shelves can provide very dense storage.  Shelf storage can be stacked as a multi-level pick module of typically 2-3 levels to use the building height and store a large range of SKUs.
• Carton Live Storage:  Good for medium to fast moving items with a wide range of SKUs.  Perfect stock rotation with FIFO replenishment from the rear of the unit.  Not so good for very high volume items as replenishment will be required too frequently.  Often used with Pick To Light systems to speed order picking.
• Drawer systems: very high density storage for a large range of SKUs with generally low movement frequency.  Excellent for spare parts and long tail small items.  Fairly expensive but provides good stock protection as items are enclosed in the drawer units.
• Vertical carousels:  The next level up from drawer systems and for a similar purpose.  Good storage density if they are tall and use the building height. The main aim of a carousel is that if provides automated goods to the storeperson put-away and picking for highly productive picking of long tail large SKU range such as spare parts. Carousels have their own proprietary control systems that guide the operator through put-away and picking functions.  These systems require an interface to a business system or warehouse management system.

Inventory Profile		Order Profile			Storage System
No. SKUs	Item Size	Order Frequency	Lines/ Order	Units/ Order line
Low	Small	High	Low	Low	Carton live storage
Low	Small	High	High	Low	Carton live storage
High	Small	Low	High	Low	Carton live storage, vertical carousel, drawer systems
High	Small	High	Low	Low	Carton live storage, vertical carousel, drawer systems
High	Small	High	High	Low	Carton live storage, vertical carousel, drawer systems, multi-level shelving
High	Small	Low	Low	Low	Drawer systems, multi-level shelving installation, shelving
Low	Large	Low	Low	Low	Long span shelving
Low	Large	Low	High	Low	Long span shelving
High	Large	Low	Low	Low	Long span shelving
High	Large	Low	High	Low	Long span shelving
Low	Large	Low	Low	High	Pallet racking, double deep racking
Low	Large	Low	High	High	Pallet racking, double deep racking
Low	Large	High	Low	Low	Pallet racking, double deep racking
Low	Large	High	Low	High	Pallet racking, double deep racking
High	Large	Low	Low	High	Pallet racking
High	Large	Low	High	High	Pallet racking
High	Large	High	Low	Low	Pallet racking
High	Large	High	Low	High	Pallet racking
High	Large	High	High	Low	Pallet racking
Low	Small	Low	Low	High	Pallet racking, long span shelving or shelving
Low	Small	Low	High	High	Pallet racking, long span shelving or shelving
Low	Small	High	Low	High	Pallet racking, long span shelving or shelving
Low	Small	High	High	High	Pallet racking, long span shelving or shelving
Low	Large	High	High	Low	Pallet racking or long span shelving
High	Small	Low	Low	High	Pallet racking or long span shelving, multi-level shelving
High	Small	Low	High	High	Pallet racking or long span shelving
High	Small	High	Low	High	Pallet racking or long span shelving
High	Small	High	High	High	Pallet racking or long span shelving
Low	Large	High	High	High	Pallet racking, block stack, drive in racks
High	Large	High	High	High	Pallet racking, block stack, drive in racks
Low	Small	Low	Low	Low	Shelving
Low	Small	Low	High	Low	Shelving

Need some help to set up your warehouse for high performance?

What is the internet doing to the supply chain?

Universal supply chain model

We all know that the internet has had a huge impact on our lives but we seldom give much thought to what this is doing to business relationships and the supply chain.

Traditionally the distribution of products from agriculture and manufacturing would be aggregated by wholesalers who distributed in bulk to retailers who sold goods in suitable package sizes to customers who then have their own micro supply chain to end users within their family or business site.

Manufacturers, wholesalers and farmers did not usually sell direct to the public consumer because they had significant barriers to doing so:

1. They have no relationship with the customer.
2. They could have little market penetration due to limited number of distribution sites.  One or two warehouses full of pallet racking in an industrial park does not make for a pleasing customer experience.
3. They were set up for bulk distribution not the small package supply typical of retail stores.

There have always been odd exceptions to these rules.  We have all stopped at roadside produce stalls next to the farm whilst on a country drive.  Manufacturers often have a seconds outlet attached to the factory or warehouse that sells direct to the public, but that was about it.  So what has the internet done that has changed this?

The internet has eliminated barriers 1 and 2.  The internet allows potentially deep connection and relationship between a manufacturer, or any vendor at any point in the supply chain, and the customer of their products (barrier 1).   This is way beyond anything that an old style mail order catalogue could achieve.  The advent of social media is just extending this connection even further and making it more personal.  

The internet also eliminates the need for physical retail store network.  We no longer need the retailer to explain the product to us.  Now when we walk into a retail store we usually know more than the retailer about the product we want to buy, all they need to do is show it to us and ring up the sale.  If all we are doing is going to the retail store to pick up the products we have already decided to buy, then we may as well have them shipped out to us.  Barrier 2 is now gone.  If retail is going to survive then it needs to have new reasons for existing in addition to physical distribution and product advice.

The third barrier is not impacted by the internet and is the hardest, and usually the last one addressed.  That is the organisational changes required to perform small order distribution direct to customer.  For a manufacturer, wholesaler or agricultural producer this means a fundamental change in business operations, marketing and sales that extends throughout the organisation.  Way beyond simply setting up a website and putting up product information and a shopping cart.  It means going from having only a handful of customers who buy in bulk to many thousands, tens or hundreds of thousands of customers who buy in single units and retail packs.  This means customer service, and sales support, individual marketing strategies, credit card payments, all those customer accounts and interactions when things go wrong. It is a fundamental change in business practice, and if you are not ready for it, you will fail.

The addition of an online D2C channel for a retailer would seem to be a smaller step.  After all they already have the customer relationship and the product range, all they need is a website and a distribution infrastructure.  However the number of large retailers who have been slow to embrace this strategy would indicate that this may be a bigger mental hurdle than a physical or business one.

An online sales strategy also requires a significant change in warehousing infrastructure and technology.  Bulk distribution requires pallet racking, and forklifts and stock pickers to pick pallets and cases.  A single order can have hundreds of lines and fill a semi trailer.  By contrast in a typical direct to customer business 20-30% of your orders will have a single line and ship in a post pack.  This requires a change in warehouse layout, picking methods and technology and freight arrangements.  Failure to invest in the correct warehouse processes and systems to support an online eCommerce based business will result in very high cost per transaction  This will result in either an unprofitable business or an over-priced one that will fail to gain traction in the market.

Although the organisational and operational changes required to run a successful direct to customer online business are not simple, they are not new.  They are really a re-use of existing business systems and strategies in a new context and are achievable by any business that sets its course in this direction.

In the universal supply chain diagram I have highlighted four online Direct To Customer (D2C) channels in use today in addition to the traditional customer pick up channel from the retailer.  So it is now possible for anyone to go direct to the customer.  When you combine this with the rise of contract manufacturing you have a powerful combination - isn't that right Mr Kogan?

I have described here what is possible and happening now in the supply chain. However deciding to go direct to your customers will dramatically change your business model and will of course have an impact on your current downstream distribution channels.  If you are a manufacturer then what will your retailers think if you start shipping direct and how could this damage your business in other ways?  

The classic conundrum here is when the retailers service and support for your products is intimately tied to their distribution of your products.  If you go direct, would you put your retailers (and your product support model) out of business?  Would your retailers (and wholesalers for that matter) find alternative sources of supply to their customers? (remember you may not yet have a well established relationship with your customers).  

You must expect that if you decide to compete against your upstream or downstream supply chain partners that this will have an impact on them and they will develop a competitive response.

For this reason traditional retail still works very well in a lot of industries.  This will likely change as the market gets more used to paying for services that they used to get for free.  We will come to understand that when the cost of support is no longer built into the price of the product, we will have to do it ourselves or pay for it when we need it.  Increasingly we get product knowledge and support much better from online resources or by asking friends.  This is not only free but much better.

We are still in the early stages of online commerce and the impact of the internet on the supply chain, new business models are being developed all the time and there is still a lot of room for innovation and change.  We live in interesting times!

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