What Warehouses Do

When you think of a warehouse, what do you imagine? For many folks, the typical image is something like a wide, nondescript building surrounded by trucks. It stores stuff.

This image isn’t wrong. But on closer inspection, there’s much more going on in a warehouse, and its purpose is more nuanced than “storing stuff.” More generally, they provide flexibility. And flexibility is indispensible for dealing with the increasing demands that are being placed on supply chains.

To illustrate, let’s look at some of the distinct roles warehouses play.

Inventory buffers

Perhaps most obvious is that businesses use warehouses to buffer their inventories. Retailers and suppliers keep extra product around to avoid running out of stock.

Until recently, it was really hard to tell how much of a product would be bought. So distribution managers had to keep lots of inventory to avoid stock-outs.

But these days, businesses try to limit inventory because it’s costly. Inventory ties up capital, and it may be wasted if demand for a product is overestimated or changes suddenly.

Insights and predictions from computer systems make it possible to forecast demand. Using these techniques, warehouse managers can meet customer demands while keeping inventory low. Still, buffer stocks are important because there’s always a certain amount of uncertainty.

Consolidation and deconsolidation

Warehouses can also be used as sites where the form of shipments is changed through consolidation or deconsolidation.

Consolidation is combining small shipments into a larger package or truckload. This lets you combine things that are going to the same retail store or assembly plant and ship them together.

Deconsolidation is unpacking the contents of a large shipment before storing it. This is important in e-commerce because individual items have to be sent to customers. So they get stored individually in the warehouse and later packed into the customer’s order.

Postponement

Warehouses also enable postponement, or storing components until they’re actually needed. This lets companies increase product variety and flexibility without extra inventory costs.

For example, Dell pioneered the business model of build-to-order computers. They assembled computers partway and sent them to a warehouse. Only once they got a specific customer order did they put together the finished project. This made orders fast and customizable.

Cross-docking

Cross-docking is a technique where goods are transferred but not stored. This is ideal for food with an expiration date, luxury items that could be risky to store, or simply for minimizing inventory costs. The downside is that inbound and outbound shipments have to be synchronized, which puts more complexity and cost on transportation. The need for fast delivery and low inventory is making cross-docking more popular.

Cross-docking underscores the point that warehouses aren’t all about storage. They might be used to change the mode of transportation, or to change transportation providers entirely. In both cases, the facility acts as a joiner piece in the supply chain. It helps make the logistics ecosystem robust, despite being considerably fragmented.

Customs

Warehouses also play a special role in international logistics. Bonded warehouses let you store imported goods before they’re taxed. This flexibility helps you save money and delay paperwork.

For example, you can ship your product to another country in bulk, but only import items once they’re purchased. You can even export those items to another country without incurring a duty in the first one.

The details vary by country, but bonded warehouses are ubiquitous and an important tool for multinational companies.

Return processing

Return processing is another function that’s become more important with the rise of e-commerce. 20% of all orders are returned, and that number’s even higher for expensive products and during the holidays.

Returns should typically be identified and returned to the front of the stock queue for resale. This process has its own challenges, and some facilities are now designed to be dedicated entirely to return processing.

Warehouses are crucial building blocks in a functioning supply chain. They provide not only storage but also opportunities to transform and transfer products, and even intentionally delay their downstream use. As consumer demands continue to challenge supply chains, we can expect to see many more innovations in this space.