Transportation Planning and the Role

Transportation Planning and the Role of Public Warehouses

Public warehouses are a critical part of many company's reliance on 3rd Party Logistics (3PL) strategies for minimizing costs while attaining the highest levels of supply chain efficiency possible (Jenkins, 1992). The intent of this analysis is to evaluate how public warehouses are significantly reducing the costs of shipping due to the consolidation of products, which leads to the optimization of supply chain performance.

Cost Benefits of Public Warehousing

Manufacturers often seek to minimize the level of investment made in their supply chain operations, with distribution centers being the most expensive to build, maintain and upgrade over time with new technologies and material handling equipment. Public warehouses alleviate the need for building out distribution centers throughout a supply chain to support peak demand periods by giving manufacturers the flexibility of leasing only the space they need for short, often highly in-demand seasons of their products (Jayaram, Tan, 2010). Integral to the benefit of being able to scale to meet the needs of its manufacturing clients, public warehouses' pricing models are designed to pass along the lower variable cost savings to customers in an attempt to gain additional business based on availability, location and size of rental space available. In this sense the business model of public warehouses attempts to gain elasticity by concentrating on its relative advantages vs. substitute services and the use of transportation consolidation techniques. These variable costs also accrue to public warehouses when they are part of a broader and more diverse 3rd party logistics network.

Consolidation of products within warehouses is also a contributor to the variable cost advantage of public warehouses as well. This cost advantage is based on the services 3PL providers provide to optimize inventory management for manufacturers including Just in Time (JIT) techniques for ensuring the maximum number of inventory turns accomplishable. 3PL providers also offer Vendor Managed Inventory (VMI) and Reverse Logistics services for manufacturers as value-added services to protect their gross margins gained from public warehousing as well. VMI is essential for manufacturers who have a diverse distribution network and use product and mass customization as part of their distribution strategies. An example of how VMI is extensively used is when a computer manufacturer, for example IBM, has sold a new series of terminals to a chain of restaurants. VMI planning strategies would provide the necessary coordination for the terminals, their ancillary systems and components, and the timing of installation teams at each restaurant to ensure each system went in reliably. VMI is a highly orchestrated process that can drastically reduce the inventory carrying costs of a manufacturer, and is one that 3PL providers rely on public warehouses to attain.

The cost benefits of reverse logistics also contribute to the cost efficiencies of public warehouses (Berglund, Laarhoven, Sharman, Wandel, 1999). Reverse logistics is a supply chain process that seeks to capture packaging, recyclable components, and potentially toxic materials in products so they can be safely disposed of (Dowlatshahi, 2010). This is extremely expensive for manufacturers to do on their own, and given the compliance regulations globally surrounding electronic goods in particular, 3PL providers and public warehouse are seeing much interest in this specific service (Dowlatshahi, 2010).

Cost Reduction and Service Bundling: The New Strategy of Public Warehouses