Private warehouse investment strategies in small versus large manufacturing firms

Abstract

INTRODUCTION Historically, warehousing performed the function of long term-storage for raw materials, goods in process, and finished goods. Manufacturers fabricated products for storage in warehouses and then sold from inventory. Many warehouses were required to have inventory levels of 60 to 90 days supply to meet productions needs, customer needs, and avoid stock outs. Warehousing of the past was perceived as an inescapable cost center that functioned as a large stock-keeping unit (Coyle et al, 2003). As a result of global competition warehousing has become an important function in the supply chain for maintaining a competitive advantage in customer service, lead-times, and costs (De Koster, 1998). 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 just-in-time, strategic alliances, and logistical supply chain philosophies in the 1990s, the role of warehousing changed to faculitate the supply chain's goals of shorter cycle times, lower inventories, lower costs, and better customer service. Warehouses are now less likely to be long term storage facilities. They are more likely to be fast paced facilities with greater attention focused on high levels of stock turnover and meeting customer service objectives. In most cases the product is in the warehouse for only a few days or hours (Nynke et al, 2002). More emphasis is now focused on flow-through warehouses where products remain in the warehouse for a short period of time and then move on to their destination (Nynke et al, 2002). An additional influence on warehouse management is the importance of maximizing financial performance in all areas of the firm. Stock and Lambert (2001) use a Strategic Profit Model which emphasized the importance of logistics/supply chain management to organizational financial performance. They demonstrate the impact of investments in inventory and other assets (including warehouse investment), fixed and variable costs, and cost of goods sold on return on net worth. One choice that can impact the firm's financial performance is whether to use private or for-hire (public or contract) warehousing. In addition to affecting financial performance, Stock and Lambert (2001) discuss the advantages and disadvantages of these two warehousing strategies. This discussion is summarized as follows; private warehouses provide a high level of control, flexibility to design and operate the facility to meet specific product and customer needs, are less costly if utilization is high, may make greater use of specialized human resources, and provide tax benefits. However, private warehouses offer less flexibility to respond to fluctuations in demand and require substantial investment. Public (or for-hire) warehousing conserves capital, provides flexibility in responding to changes in market demand, avoids the risk of obsolescence of private facilities, offers a wide range of specialized services, may provide tax advantages, and may 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. A hybrid of the above choices is contract warehousing. Here the firm and provider enter into a long-term agreement to outsource some, or all, of the manufacturer's warehousing requirements. When contract warehousing works well the advantages of both private and public warehousing can be realized. When it does not work well the disadvantages of both may dominate. In a 1990 manuscript (McGinnis, Kohn, and Myers) examined a wide range of topics related to private warehouse investment decisions in large manufacturing firms. The research examined factors affecting private warehouse investment decisions, private warehouse investment strategies, items affecting private warehouse investment strategies, and the warehouse mix. …