Warehousing

Improving Warehouse Productivity

Having yourself familiarized with all the productivity/performance measures used in warehouse
operations management, here we are going to tackle how to improve warehouse productivity
incorporating the financial dimensions of warehousing. Bringing together all the topics from prelims
period up to final period, everyone is expected to see and predict the future of warehousing.

1. Introduction

Objectives. At the end of the term, you should be able to:

1. evaluate productivity of various warehouses;

2. examine the financial dimension of warehousing; and
3. illustrate the future of warehousing.

An integrated warehousing, due to its specificity, the variety of functions and tasks, does not have one
homogenous model. Basically, they differ among themselves in terms of the amount of stages and
complexity degree. Most models focus on three stages: 

 Baselining (establishing key objectives, requirements and commitment to their

implementation); 
 Benchmarking (comparative research or comparative analysis); and 
 Business process re-engineering. 

A. Baselining is a process in which all key participants of warehousing agree on a detailed description of
objectives and efficiency requirements, and declare their proper execution. It also refers to defining,
locating and understanding the logistics processes of warehousing to be able to synchronize them and
create added value. 
Baselining is: 

 Finding out about the current state of warehousing strategies, the logistics system and the
functional activities, performed in the warehouse; 
 Evaluation of the physical distribution network and the flow of materials between: the points of
supply, production, distribution, returns and utilization; 
 Creating an information system accompanying all flows of material goods and services.

B. Benchmarking, in professional literature, is defined as: 

 A continuous evaluation process of products, services and practices with respect to the strongest
competitors or companies considered to be leaders; 
 Learning from the best, by comparison; 
 Searching for most effective methods for a given activity, allowing to achieve competitive
advantage. 

The key activities and objectives of benchmarking are:

  To identify the strengths and weaknesses of the warehouse, by means of confrontation; 
 To change the current operational strategy as regards finding out about the best solutions and
practices; 
 To change the course of action and the behaviors of the warehousing participants with respect for
partnership and trust; 
 The development of business skills of the warehousing participants (action initiates the process of
‘learning’ for an organization). 

Whole using benchmarking, one should: 

 Gain an in-depth understanding of their own processes realized within the warehouse; 
 Concentrate on best solutions and choose a partner to compare to (the partners may be other
services or branches of one’s own warehouse, direct competition from other industry sectors,
which in an especially effective way realize similar processes or analogical functions); 
 Entrust the benchmarking stage to persons responsible for the processes carried out within the
warehousing process, or to its operators, within outsourcing, as “3P” and “4P” services (attempts
to involve them after this stage are belated; the benchmarking studies are not done by a single
person); 
 Not concentrate on the results; one needs to learn well the applied solutions and processes of all
partners within the warehouse; 
 Obey the legal and ethical rules – benchmarking needs to be based on mutual trust; 
 Provide reliable information; 
 Share the data from one’s resources; 
 Treat the information obtained as strictly confidential; 
 Remember that the first contacts with benchmarking partners should be done via the
management; 
 Prepare for questions and answers concerning data, measures, applied metrics and indices; 
 Get rid of hidden methods, such as tapping or knowledge theft from warehousing participants;
 Treat the partner as oneself; 
 Verify the results achieved and choose best solutions concerning e.g. planning, forecasting,
inventory maintenance or data integration; 
 Analyze the discrepancies and gaps; and 
 Benchmarking should be treated as a continuous process, competition “does not sleep”.

Integrating warehousing throughout its length requires the use of different types of benchmarking: 

 Internal benchmarking is about comparing one’s own operations with other, similar ones (e.g.
database creation, the manner of product or cargo identification, digitalization of circulation of
documents) performed within the same organization between the warehousing participants.

In theory, every participant should realize the processes in the best possible way, however, for many
reasons (psychological ones, old habits, and fear against introducing something new) they often stand out
from their partners. An effective cure is a more positive approach, e.g. ask every warehousing participant
to point out their strengths, as each of them should an expert in some area and contribute to the progress
in the creation of the added value along the entire supply chain. 

 Competitive benchmarking is about a specific kind of comparison with the competitors in terms
of product quality, method or a process. It is difficult to carry out, since the competitors are
reluctant to disclose their data. One should mention here that benchmarking should be viewed as
a partnership-based method, not a kind of economic espionage. Cooperation between the
competitors with significant market share may bring about adverse legal consequences associated
with suspicions of collusion or other prohibited practices. Comparing with the completion does
not provide large benefits also because it uses similar technologies and similar organizational
 solutions, typical for the industry. Finding truly innovative solutions requires going beyond the
industry. 
 Functional benchmarking is about searching for organizations suitable for comparisons within
other industries, except that it compares only selected areas, which function similarly to those in
your warehouse. The fields for comparison may be, among others, shipment tracking, control and
management of interrelated processes within the warehouse, forecasting and complementation of
inventories, internal communication, organization of transport in manufacturing departments,
the supply processes. Due to the lack of common markets, partners are more willing to exchange
information. It is also possible to find new solutions that will significantly increase functional
effectiveness. Functional benchmarking is regarded as best by many authors, for its potential
effects of application . 
 Generic benchmarking concerns the comparison of processes and working methods used by
warehouses in different economic sectors. It is a more effective method, as it may bring an
increase in profits of at least 35%. 

C. Business Process Re-engineering (BPR) as a method of thorough transformation of the overall

warehousing processes, in order to optimize the three basic efficiency indicators: quality, costs and
realization time, is regarded as a new paradigm in the structure of processes and resources necessary to
maintain flexibility and competitiveness. The idea behind this method is the need to introduce
comprehensive changes in the functioning processes, and re-designing the entire warehousing process; so
that it maintained profitability, solvency, and that its customer service was improved. The changes
introduced in warehousing are imposed by the development of telecommunication, automation, flexible
manufacturing systems, IT technologies, transport systems and devices, which create progress in the
process of dislocation of persons, raw materials and other materials. What does not remain without
significance for the functioning of warehousing is global communication, continuous shortening of the
product life cycle, introducing effective technical, economical and organizational innovations as well as
new solutions in management methods.

The overall objective is to define the vision of warehousing, the dream of the supply chain participants. It
is this vision that outlines the planned path of the company development and determines the degree of
ambition in strategic development. The vision also combines current interest with the organizational
culture of the supply chain participants, creating common values for the work of particular companies.

What remains of significance for warehousing operations, are the market conditions, such as: 

 Customers require better quality for lower price; 

 Technological evolution facilitates the penetration of the markets; 
 Different states have a policy of lowering barriers to market entry; 
 Customers require direct contact and understanding their needs. 

An important question to be decided in warehousing operations is to find the best solution, which would
take account of parameters such as competitiveness, risks, costs, benefits and future leaders to guide the
entire project. 
The new proposal should not ignore the analysis of issues that have a significant impact on the
functioning of the warehouse. These include: 

 Identification and definition of all warehousing processes (plan, supply, production, delivery,
return etc.) and relationships between them; 
 Determination of the relationships between the executive, support and development processes
that occur in the organization; 
 A description of applications necessary for the supply chain support, including data and
performance measures used for the decision-making, information and control purposes. 
 A description of the manner of application integration, including the type of data exchange
frequency. 
The adopted concept of warehousing re-design should be the most advantageous one, which includes the
solutions of “the strongest link” (or: “the strongest on the global scale”), at the same time remaining in
total respect for others.

Improving Warehouse Productivity

Having yourself familiarized with all the productivity/performance measures used in warehouse
operations management, here we are going to tackle how to improve warehouse productivity
incorporating the financial dimensions of warehousing. Bringing together all the topics from prelims
period up to final period, everyone is expected to see and predict the future of warehousing.

2. The Financial Dimensions of Warehousing

The financial and economic aspect of warehousing needs to be considered from two perspectives. Firstly,
one of the overall objectives of warehousing is to optimize total warehousing cost and investment[1].
Warehousing costs represent a varying but significant proportion of the total cost base of companies in
different industry sectors. The optimization of total warehousing cost, therefore, contributes directly (and
often very significantly) to overall profitability. Similarly, optimization of warehousing investment
contributes to the optimization of return on the capital employed in a company. Secondly, warehousing is
concerned with the management of financial flows across a supply chain. As shown in Figure 1 below,
financial funds flow from the final consumer, who is usually the only source of “real” money in a supply
chain, back through the other links in the chain (typically retailers, distributors, processors and
suppliers). The integrated management of this flow is a key warehousing activity[2], and one which has a
direct impact on the cash flow position of companies in the chain.

FINANCIAL MANAGEMENT
Financial management is fundamentally concerned with two things. Firstly, financial resources must be
secured from one or more of a number of sources (the raising of funds). Secondly, the effective
deployment of these resources must be ensured (the use of funds).

In relation to the raising of funds it is generally recognized that there are three main sources – share
capital, loan capital (or interest debt) and reserves. Each comes with expectations and power on the part
of the provider. Providers of share capital (i.e. shareholders) expect dividends and capital growth in share
value. Generally, the ability of a company to pay dividends depends on short-term profitability while
growth in share value is dependent on the re-investment of profits generated back into the business.
Striking the balance between dividend and re-investment levels is a critical strategic issue in most
companies. In any case, the power of shareholders derives from their ownership of the company.
Providers of loan capital (e.g. banks) expect repayment with interest. Their power often derives from
collateral (i.e. assets put up by the company as security against the loan). Reserves are profits from
previous trading retained within the business with no expectation on the part of the provider in terms of
dividend or interest. There is, however, an opportunity cost associated with this form of capital (i.e. the
opportunity of investing this capital to generate a “safe” rate of return has effectively been foregone).
Nonetheless, capital cost advantage can often be derived through the use of reserves as a source of
finance.

Finance raised by a company is used in either of two ways. Firstly, it may be invested in fixed assets such
as land, buildings, plant and equipment. From a warehousing perspective this is investment in processes.
Alternatively, it may be invested in working capital (e.g. raw materials, labor, equipment, etc.) - this is
expenditure on products stored and handled. The balance between fixed assets and working capital
depends largely on the supply chain model adopted by a company. Traditionally in manufacturing-based
companies the classical make-versus-buy decision was the major determinant of this balance. A company
which carried out much of its manufacturing in-house had relatively high levels of fixed assets as a result
of the need for significant investment in factories, plant, warehouses and equipment. On the other hand,
companies which had subcontracted much of its manufacturing to external suppliers tended to have lower
levels of fixed assets, but proportionately higher working capital requirements. As companies concentrate
on those supply chain activities and processes regarded as being core, “non-core” activities and processes
are outsourced. This has resulted in a move away from vertically integrated architectures to more virtual
configurations, with an associated shift in the fixed asset/working capital balance. Finally, the key
strategic issue relating to the raising of finance is the need to ensure that the necessary funds for
investment are available, whilst simultaneously ensuring that day to day financial commitments are met.

THE INTEGRATED FINANCIAL MODEL

Combining the two aspects of financial management - the raising and the use of funds – gives rise to the
integrated financial model, as shown in Figure 2 below.
The three main sources of funds are spent on either fixed assets or working capital. Fixed assets often
reduce in value over time leading to depreciation. Working capital leads to sales and revenue. Calculation
of profitability (before and after interest and tax) is carried out based on these revenues and the costs
incurred in achieving them. These earnings are either paid out in dividends to shareholders or retained
within the business (thus adding to reserves), thereby integrating the model. This model forms the basis
of the standard systems of accounting practice, in particular the profit and loss account. The overall
warehousing objective of optimizing total supply chain cost and investment contributes directly to the
overall profitability of a business. Figure 3 below indicates how good SCM practice can impact on
shareholder value, as measured in the form of profit generated for every peso invested.
Good warehousing practice, first and foremost, aims to improve customer service. Improved customer
service, for example in the form of greater product availability, results in greater sales revenue streams.
Costs are reduced through lower costs across the supply chain (for example improved transport,
warehousing and distribution costs) through the minimization of non value-adding activities (NVAs).
NVAs add cost to warehousing processes without necessarily adding value from a customer perspective.
In relation to invested capital, good warehousing practice has the potential to improve performance in
relation to both working capital and fixed assets. The major potential saving in working capital
requirements results from lower inventory levels (raw materials, work in progress and finished goods
stock). Furthermore, good warehousing practice can improve order-to-cash cycle times. This releases
working capital tied up in inventory and allows it to be used productively elsewhere in the business.
Finally, warehousing operations aims to make more efficient use of fixed assets such as trucks and
warehouses. This reduces the amount of investment required in fixed assets.
Of particular interest in warehousing is the way working capital is used within a business. This is often
referred to as the working capital cycle (as shown in Figure 4 above). The working capital cycle indicates
that suppliers (i.e. creditors) supply raw materials which are subsequently converted into work in
progress and finished goods. These products are sold to customers (debtors) whose cash is used to pay
suppliers. There are a number of warehousing issues which relate directly to this cycle.

❑ Value - Value is added as raw materials are converted into finished product. Value-based accounting
methods attempt to measure this in financial terms.

❑ Speed - A key objective is to increase the speed of the cycle or to maximize the “working capital cycle
circulation velocity”.

❑ Creditor/debtor days - Ensuring that customers pay in a timely manner, so that cash in available to pay
suppliers on time, is an important element of liquidity.

❑ Liquidity - The very existence of any business is dependent on its ability to meet short-term debts. The
cycle provides some insights into this.

Companies such as Dell (through the direct model) and the large food retail multiples have the ability to
generate cash from customers before (often quite a long time before) that cash needs to be paid to
suppliers. The corollary of this is that many companies (often suppliers to powerful customers or “channel
masters”) struggle to meet their cash commitments as a direct result of delayed payment by customers. In
the worst case scenario, this has the potential to put even intrinsically profitable companies out of
business. Good warehousing practice has the potential to impact in a positive way on the working capital
cycle through its focus on value and speed. As pointed out earlier, the effective integrated management of
financial flows across the supply chain is a warehousing fundamental. If this can be achieved, working
capital cycle performance can be enhanced.

CONCLUDING COMMENT  
From a financial perspective, companies aim to be both profitable and liquid. warehousing contributes to
profitability through the optimization of total warehousing cost and investment. Financial management is
concerned with the raising and the use of finance. This gives rise to the integrated financial model, which
provides a financial framework for the analysis of the impact of warehousing on overall profitability and
shareholder value. Warehousing contributes to the liquidity and cash flow position of companies through
its focus on the integrated management of financial flows across the warehouse operations. The working
capital cycle provides a useful financial framework for the analysis of these flows. It is often said that an
understanding of customer service sets the specification for warehousing design. In a similar way, as
shown in Figure 5 below, improved financial performance measures the success of warehousing. In
conclusion, every strategic and operational decision taken in a warehouse operation has financial
implications. The approach outlined in this article provides a framework for understanding these
implications.
mproving Warehouse Productivity
Having yourself familiarized with all the productivity/performance
measures used in warehouse operations management, here we are
going to tackle how to improve warehouse productivity incorporating
the financial dimensions of warehousing. Bringing together all the
topics from prelims period up to final period, everyone is expected to
see and predict the future of warehousing.

3. The Future of Warehouse Technology

1. Real-Time Data Gathering and Increased

Interconnectivity. The warehouse and supply chain systems of the
future will be anything but opaque. Blockchain has the potential to
play a pivotal role in achieving transparency at every level. This
technology offers the power to distribute information fast and
securely, thus making real-time data exchange for warehouses
efficient and transparent. Blockchain is incomplete without a key
technology: the Internet of Things (IoT). IoT is an ecosystem of
sensory devices (e.g. for location, humidity, temperature) that are
interconnected across digital networks. These can collect and transmit
data in real time without human intervention. 

2. Warehouse Mobility Solutions. The transition from fixed

desktop workstations to smartphones and mobile devices is a major
step forward in gaining warehouse efficiency. Today, devices and apps
substantially reduce walking time and allow warehouse employees to
work and access data on the go within as well as outside of the
warehouse. Smartphones are not only liberating warehouse clerks
from deskbound activities but also adding new dimensions of
capability to standard workstations. Today’s warehouse mobile
solutions can deliver excellent operational efficiency and
computational power that warehouse operators need. The advantages
of functions such as imaging (pictures & video), tracking, cloud
integration, video-conferencing, voice/face recognition, and even
personal assistants open new frontiers for transformations that these
technologies can bring to warehousing operations. The more we look
towards the future, the more that mobility proves to be of the essence.
Warehouse mobility is one of the most secure areas to invest in so long
as it is well planned and strategically aligned with operational needs.

3. Autonomous Guided Vehicles. Although not yet widely

adopted, AGVs (Autonomous Guided Vehicles), as potential
substitutes for the forklift, promise to revolutionize the way cargo is
transported inside and outside the warehouse. Giants such as Amazon
are making the most of this technology and substantially reducing
costs, time, and human effort by adding 15000 Kiva robots every
year. Drones are set to disrupt the warehousing industry, too. They are
safe and economical when it comes down to locating cargo, conducting
inventory, cycle counting, and performing stock-taking operations. A
drone equipped with sensors, cameras, barcode scanners, or RFID
technology can reach even the innermost spaces within a warehouse.
These can complete checks and manage inventory in less than one
third of the time needed to do it manually. AGVs are also capable of
moving goods in the warehouse, speeding up the picking process, and
contributing to inventory management operations. The good news is
that if you are looking for warehouse management for small
businesses, AGVs can be as handy for those as they can be for large
enterprises. This is one reason why AGVs are certainly a part of the
future.

4. Smart Analytics and Machine Learning. Warehouses are

expected to play a key role in increasing customer satisfaction,
effectively predicting product demand, and making better use of the
resources at hand. As a result, the demand for forecasting and
accurate decision making is on the rise. An increasing number of
warehouse managers are now keen to interpret data trends to not only
anticipate stocks but also to optimize warehouse capacity and asset
utilization. This is where predictive analytics come in. Predictive
analytics make use of statistical techniques such as predictive
modeling, big data, and data mining to analyze historical trends and
make predictions about the future. Predictive analytics, together
with artificial intelligence (AI), can be very effective for recommending
optimized inventory levels, replenishing inventory, and increasing
operational efficiency as well as warehouse optimization as a
whole. This is proof enough that not only warehousing but also all
sorts of industries find smart analytics and machine learning worth
investing in.

5. The People-Technology Connection. One of the striking

features of a digitized modern warehouse is the interconnection
between people and warehouse technology. This is enabled by
wearables. Such technology provides warehouse clerks and managers
access to a wide spectrum of information in real time, irrespective of
their location, environment, and physical constraints. Wearables small
computers that can be strapped to the wrist, head, or any part of the
body. Devices such as smart glasses, augmented reality, and voice-
enabled devices are becoming more popular by the day as means of
achieving effective interaction with systems. The result will be better
flow of information, greater visibility, decrease in error rates, superior
safety, and increased service levels at lower operating costs. Wearables
can help optimize efficiency in processes such as order picking,
receiving, handling, high-value asset handling, cycle counting, safety,
and workforce training, to name only a few.

6. Animation and Robotics. Warehouse automation is a present

reality and one that is certainly a part of the future digital
transformation. Automation and robotics can simplify performance of
manual tasks, with much less time and cost (cumulative) and
increased efficiency. Robotics are expected to become more human-
like in the aspects of memory, sensing, skill, and affinity for learning
without being programmed for particular skills (AI).  A survey
conducted in 2015 by Zebra to study advancement in warehousing in
the next 5 years concluded that as many as 70% of respondents were
looking to automate their warehouses/warehouse
processes. Automation is one indispensable aspect without which
warehouses are unlikely to survive in the future.

 7. Real Time Inventory Management. The highly successful state

of commerce is exerting heavy pressure on warehouse managers for
more efficient inventory management. They need more visibility and
control over inventory. Automatic identification systems such as smart
sensors, RFID (Radio Frequency Identification), GPS, etc., not only
provide end-to-end visibility of inventory but also operational
intelligence through the data that these sensors collect in the
process. This helps in optimizing inventory management as well as in
making the warehouse safer while increasing visibility. Many
warehouses are likely to adopt these systems in less than two years
from now. With the increasing number of smaller orders and the
omnichannel trade, real-time inventory management systems will
become a staple of the future warehouse.

For a visual explanation of the warehouse technologies above, watch

this video:

https://www.youtube.com/watch?
time_continue=2&v=u7yMcO6qStQ&feature=emb_logo

Warehouse digitalization is a reality that the warehousing industry

must come to terms with in order to sustain and thrive among the
increasing competition and market pressures. The smart warehouse,
which appears only as a disruptive force as of now, is likely to become
the norm within the next ten years.