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Warehouse Optimization - A Competitive Edge in Supply Chain!
Author : Alvis Lazarus,Founder, and Executive Director at Hesol Consulting
Thursday, November 03, 2016

Warehousing and Logistics are two key levers and enablers within Supply Chain. To describe each one of them in a single word, I would use the verb ‘Store’ to describe Warehousing and ‘Move’ to describe Logistics. Supply chain will cease to perform without these key verbs (Store and Move) since products have to move through multiple nodes of the supply chain to undergo the transformation from raw material to final product and then move through different distribution channels to multiple channel partners before it reaches the customer. Logistics Management is all about this journey to ensure that the journey happens on time and happens efficiently; Storage (Warehousing) gives the opportunity for consolidation and gives you much needed control to have enhanced service levels.


Customer Expectations keep pushing us to our limits. KANO model best explains the impact of this change.Most of the past Wow moments experienced by customers –which were classified as either ‘Excitement’ factors or‘Performance’ factorsin KANO model have moved to the ‘Basic Needs’ factor in the KANO Model. I have been doing a lot of KANO models through the years. These changes result in a skew to the KANO model. In this article, I have focused on warehousing specifically, and how it can be an organization’s competitive edge.

Warehousing has just become part of top company strategy:

Decades before, Warehousing was never even part of the company strategy and it always took a back seat. The focuswas on Manufacturing and the game is all about running the factory efficiently. As years passed by, competitive edge created by lean manufacturing and other TPS concepts slowly died down and it has become an even game. With that, Warehousing and Logistics started coming to Limelight.

In a supply chain, Warehousing cost is about 1-2% of the total sales. Efficient supply chains operate at < 1% of warehousing cost to total sales. But there is a huge variation between different organizations. For example, current E-Commerce companies operate at 4-8% of the total sales… Yes, E-Commerce industry was not much worried about this leakage in 2010 but today leadership team from E-Commerce industry is under tremendous pressure to monetize and certainly, they cannot leave warehousing costs out. I am sure warehousing and logistics costs are in the top 3 of the priorities.

The lamest argument I have heard is ‘Anyways I can bury this cost in my costing and why do I have to invest on any technology or skills here at warehousing? Investment here won’t break even?’ Answer is simple:

(1) Current market is so competitive and customers can see all competitive info right on their hand-phones.If you are not price competitive, you cease to exist.

(2) We are talking about leakage of 3-4% on total top-line and that’s a huge stake.

When it comes to competitive pricing, healthy bottom line and enhanced service levels, warehousing and logistics have to be part of the core strategy.


There are two main optimization verticals under warehouse optimization.

1.Warehouse Resource Optimization

2.Warehouse Space Optimization

Warehouse Resource Optimization

Warehouse Resource Optimization is all about the efficiency of the people. There are about 10+ measurements on evaluating the efficiency. A single metric called the ‘LPMH’ – Lines per man hour consolidates all these metrics. Warehouses achieve efficiency through eliminating non value added activities. There are multiple methods available – Theory of Constraints (TOC), Waste Analysis, Therblig Study, VSM (Value Stream Mapping), GEMBA Study, Spaghetti Map etc... A combination of the type of problem/requirement and used as stand-alone or as a combination determines the techniques selected.

Out of the total value that can be brought-in through warehouse optimization, Resource optimization contributes around 15-30% of the total value addition as bottom-line savings.

Warehouse Space Optimization

In a business language, it is all about efficiently using each square feet you are paying for.When your business teams are sweating it out on field building the top line, these space inefficiencies silently eat out huge percentage in bottom-line. Unfortunately, most warehouses operate at around 60% or less in cubic space utilization.

On a positive note, once warehouse optimization is on radar and once the organization starts to drive that, there is a lot of potential to make warehouses a key strength and edge. The organization can initiate Space Optimization on a green field project, brown field project, or an existing warehouse.Warehouse Optimization is not a one-time exercise; it is an activity to be done every Quarter.One methodology for Warehouse space optimization is concepting or slotting. Concepting or Slotting is a technique using which we can evaluate storage designs and storage structures needed andallocate products in the right storage zones and bins. To explain it with a simple example, just walk into your kitchen, and ask your Mother or Dad, whoever is cooking, where are all the spices stored? Where are the pans? Where are the vegetables? Where is the red wine? You would see a specific place for each of them and a specific storage container for each of them. It is possible to employ the same technique at a very large scale in the warehouse where there are Millions of products and lakhs of square feet.

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