Reduce Costs with the Right Warehouse Storage Strategy

3 min read

Tags: Blog, Demand forecasting, Inventory management, Purchasing & replenishment

Daniel Fritsch   July 15 2015


Right Warehouse Storage Strategy

Index

  1. Three types of storage strategies
  2. Advantages and disadvantages of process
  3. Requirements for a storage strategy
  4. Conclusion - Stay ahead of the competition

Anyone who operates a warehouse, whether in trade or production, always strives for optimal delivery times on one hand while keeping storage costs as low as possible on the other. An optimized “storage strategy” for your warehouse will include managing optimal inventory levels, order quantities, and delivery lead-times while taking into account all internal and external factors such as seasonality, market trends and consumer demand shifts..

Three types of storage strategies

There are three storage methods to consider for evaluating when, how often, and in what quantity a product should be stored in your warehouse. Below are the three different storage methods:

  1. Order Pattern Method: should be used for consistent purchases of either a fixed amount or the warehouse is only filled to a specified stocked item or inventory.
  2. Reorder Point Process Method: is a process most commonly used in supply chain and logistic which is when stock is always ordered when it falls below a certain level, typically below the specified safety stock level.
  3. Control Rhythm Method: which is a combination of the first two methods, is when inventory is checked at fixed intervals and ordered for shorter stays if the minimum holding or fixed amounts fall below the desired stock levels.

The objective of a storage strategy is to minimize costs and reduce inventory while maintaining the highest possible level of service. When choosing a suitable storage strategy, factors such as actual inventory, interest costs, procurement costs and lead-times need to be taken into account as well as the expected demand and resulting shortages of cost.

Advantages and disadvantages of process

The simplest storage strategy, regularly ordering a fixed amount, does not require significant effort in the procurement process. It is also the only method where a current stock is not needed. The use of this storage strategy, however, should be limited to the continuous production or distribution of mass-produced goods. This option is often times the most risky and least flexible of the three options.

Examples include the production of raw materials for the chemical and wholesale food industries. Recurring seasonal variations can be compensated for by manual adjustment of amounts to the ordering schedule. However, the increase of excess inventory in the warehouse due to unforeseen events is unfortunately hard to prevent and can lead to large quantities of inventory on hand which ties up working capital and tightens operating cash flow.

For inventory control, a storage strategy is necessary since it generates consistent order patterns and stock replenishment parameters. With a storage strategy, a target stock is set for each item of inventory and it is easily monitored to flag safety stock reorder points, which will automatically generate order proposals for replenishment saving manual labor requirements for order processing.

For even greater flexibility and accuracy with changing distribution, the Reorder Point Process is the best strategy. Here an item is only ordered if it reaches or falls below a specified minimum inventory. As a result, not only the stock in the warehouse, but also the order amount will be considered and optimized. However, relatively high security stocks have to be planned with this kind of storage strategy.

Finally, the Control Rhythm Method combines the advantages of inventory-related ordering with the regular review of all stocks to prevent them from reaching reorder levels. Fluctuations in sales and thus in the inventory can be detected earlier than in just the pure reorder process. Every supply chain is different and each unique business model should evaluate which storage strategy is the best fit.

Requirements for a storage strategy

While the pressure on logistics to minimize the internal storage costs increases, new procurement markets are simultaneously opened by the globalization and flattening of supply chain logistics. The implications mean that companies still face potentially longer lead-times and more uncertainty than the present.

At the same time, products have become increasingly individualized and markets now demand a very high level of service. These strategies represent higher complexity for warehouses, because more flexibility and automation is required to keep up with the competition. Permanent inventory control and parameter adjustments of the selected storage strategy are necessary to meet the constantly changing requirements.

Conclusion – Stay ahead of the competition

Globalization is unstoppable but companies that adopt the warehousing storage strategies can effectively manage cost levels while maintaining or even increasing service levels and order fill rates. Regardless of geography, industry focus, size or revenues, companies in the developed world and in developing countries are globalizing to gain new customers and access new markets. Having the right product, in the right place, at the right time will make all the difference on the bottom line.

To get more tips and best practices for lowering your inventory levels in order to cut costs, download your free copy of our white paper here!





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