Strengthening your supply chain one link at a time.
This is a common challenge for supply chain professionals. Reasons for this warehouse capacity challenge are numerous. What do you do when you run out of capacity or are projected to run out of warehouse capacity in the near term?
Let’s set up the situation. A company has a production facility with an accompanying warehouse at the same location. The plant warehouse stores raw materials and finished goods. Inbound raw materials are received in this warehouse, and finished goods from the production plant are moved into the warehouse to ship to customers. You are receiving warning signals and communication that the warehouse is running out of space.
Short term solution
The common short-term response to put out this fire is to start looking for available warehouse space nearby. Raw materials and or finished SKUs would be moved to this location. Shuttles to and from the off-site warehouse location would need to be established. The problem is temporarily fixed.
But this temporarily fix is really just a band aid to the real challenge within the company’s supply chain. The underlying situation of warehouse capacity will continue to get expensive with an increasing number of warehouse issues such as damage and lost items. Offsite storage near the plant warehouse is a short-term fix because there could be better cost-effective options.
Longer Term solutions – Internal Analysis
There are two main common areas of analysis that a company can perform internally when looking at options for managing warehouse capacity. These areas are something that can be performed periodically by the company depending on the task and depending on the size and expertise of the company. But these targeted methods will help provide capacity as long as the analysis is accompanied with a follow up execution of the analysis plan.
1) Longer Term Solutions – Internal Analysis > Inventory Analysis
An inventory analysis can be used to identify SKUs that may have out of whack levels of inventory. This analysis will look at both the raw material inventory as well as the finished goods inventory.
How many days or weeks on hand do you have? Do you simply have too much raw materials? Do you have too much finished goods? A break down of these SKUs are required to see if there are clear outliers. There may be a small percent of SKUs that are completely out of whack where you might have many extra weeks of inventory on hand.
The next question is why these outliers. Are these slow-moving items? Are these discontinued? Maybe there are other reasons for this extra inventory. Identifying SKUs with excess days on hand is the first step. Developing a plan to reduce or get rid of this excess inventory is the necessary follow up. This analysis and process is an ongoing process.
2) Longer Term Solutions – Internal Analysis > Supplier relationships and supplier management
Having dialog with suppliers that provide raw materials to the plant is crucial. Discussion of timely deliveries to match with production scheduling at the plant helps with reducing warehouse congestion. Working with your suppliers to eliminate uncertainty in ordering and delivery is a good step to help reduce inventory.
Forward buys for raw materials need to be scrutinized, especially during times of high warehouse capacity. A deal for three months of inventory might not be a good deal if it contributes to forcing a need for short term warehouse space. Any flows from raw material suppliers need to be analyzed on shipment sizes, lead times, fill rates, and how these all correspond to warehouse capacity and inventory.
Longer Term solutions – External Analysis
There are two types of external analysis that one can complete at when looking at options for managing warehouse capacity. These external analysis solutions could be done internally if a company has this expertise. But frequently these analyses require a different set of skills and tools that may not be available to small and medium size companies that a consulting company may possess. Many larger companies also lean on consulting companies for this type of expertise.
1) Longer Term Solutions – External Analysis > Warehouse Design
When looking for long term solutions to warehouse capacity a factor to consider is how your warehouse is set up. Is the racking optimized to your raw materials? Do you have enough racking? Do you have the correct racking? Is there large percent of raw materials in pallets? Is this product used right away and thus not put on racks? Same questions for finished goods. Are SKUs with different velocities located in optimal areas of the warehouse to reduce picking and put away?
Optimized slotting and racking systems designed for your space can provide some solutions and reduced your warehouse footprint for this facility. It is also important in this analysis to forecast future space needs based on future demand.
2) Longer Term Solutions – External Analysis > Network Optimization Study
A very powerful analysis for looking at a warehouse capacity situation is a network optimization study. Network optimization studies are end to end landed cost analyses with the ability perform targeted what if analysis. Landed costs for a network study may include production costs, production input costs, transportation costs, handling costs, and inventory costs. A network study would consider supplier locations, and supplier production quantities and customer locations and customer demand. All of a company’s locations such as plants and warehouses are included in the study.
A network optimization study will reveal long term options that the company would be confident for preparing for the future warehouse space needs. Long term studies need to include future growth of the company. Thus, customer demand is adjusted annually over a 3, 5, or 7-year period. Is annual growth 5%? More? This is an important input because results in the study will truly be forward looking vs current state, and the warehouse capacity challenge will be set for future growth and not simply fix the current situation. The power of this study is one can develop a scenario for any necessary what if question. And each scenario will have corresponding total landed costs to compare.
Some of the questions answered in a network optimization study in the example of a plant warehouse capacity issue may include the following.
Conclusion
There are many things that can be done when a plant warehouse runs out of capacity. Many companies perform some of the internal inventory analysis and supplier management as described above. Follow up and execution of any resulting analysis is key.
But the single most powerful analysis is performing a Network Optimization Study. This type of study can be combined with a Warehouse Design study to help companies truly prepare for long term growth. Realize the power of network optimization and be prepared for warehouse capacity challenges now and in the future.
—Tom Schaefges, St. Onge Company
