A Longitudial Study of Private Warehouse Investment Strategies

Abstract

INTRODUCTION During the last decade of the 20th century, conventional purchasing and logistics functions expanded into a broader strategic approach to include materials and distribution management known as supply chain management (Tan, 2001). Warehousing, as part of this larger system, enables companies to store purchases, work-in-progress, and finished goods while simultaneously performing break bulk and assembly activities. The ability to complete these functions rapidly results in providing faster delivery and better customer service (Wisner, et al 2009). The consequence of this capability is the establishment of a competitive edge in the marketplace. Traditionally, manufacturers fabricated products for storage in warehouses and then sold from inventory. Several warehouses were required to maintain inventory levels of 60 to 90 days supply in order to meet productions needs, customer needs, and avert stock outs. Warehousing of the past appeared to be an inescapable cost center that functioned like a large stock-keeping unit (Coyle et al, 2003). According to De Koster (1998) strong global competition that has emerged caused warehousing to assume a considerably more important competitive role in delivering high quality customer service, in a timely fashion, and within budget allocations. Warehouses have been redesigned and automated for high speed, high throughput rate, and high productivity in order to shrink processing and inventory carrying costs. With the arrival of innovative management ideas such as just-in-time inventory control, strategic alliances, and integrated logistical supply chain thinking in the 1990s, the function of warehousing changed to facilitate the goals of a shorter cycle times, lower inventories, lower costs, and better customer service. At present, warehouses are less likely to be long-term storage facilities. They are more than likely to be high-speed technologically equipped facilities with greater attention focused on high levels of stock turnover and meeting customer service objectives. The contemporary approach to the movement of goods allows product to remain in a warehouse for only a few hours or days, at most (Nynke et al, 2002). Extra emphasis is now directed towards flow-through warehouses where products stay in the warehouse for a short period of time and then move on to their destination (Nynke et al, 2002). Another area of warehouse management that has become an important focus of supply chain management is financial performance. Stock and Lambert (2001) use a Strategic Profit Model, which highlights the importance of logistics/supply chain management as an important part of organizational financial performance. They show the impact of investments in inventory, warehouse assets, fixed and variable costs, and cost of goods sold on return on net worth. In this context, one of the management decision's that can affect a firm's financial performance is whether to use private or for-hire (public or contract) warehousing. Stock and Lambert's (2001) discussion of the advantages and disadvantages of these two warehousing strategies can be summarized as follows: private warehouses provide a.) higher levels of control, b.) flexibility of design, c.) opportunity to operate the facility to meet specific product and customer needs, d.) lower costs if utilization is high, e.) greater use of specialized human resources, and f.) tax benefits. However, private warehouses offer less flexibility to respond to fluctuations in demand and require substantial investment. Conversely, public (for-hire) warehousing can: a.) conserve capital, b.) provide flexibility in responding to changes in market demand, c.) avoid the risk of obsolescence of private facilities, d.) offer a wide range of specialized services, e.) provide tax advantages, and f.) enable a manufacturer to better manage its storage and handling costs. Disadvantages of public (for-hire) warehousing include communication problems, uneven availability of specialized services, and space availability problems during peak demand. …