1.1 Why have a warehouse?
Why have a warehouse at all? A warehouse requires labor, capital (land and storage-and-handling equipment) and information systems, all of which are expensive. Is there some way to avoid the expense? For most operations the answer is no. Warehouses,or their various cousins, provide useful services that are unlikely to vanish under the current economic scene. Here are some of their uses:

To better match supply with customer demand: 

 One of the major challenges in managing a supply chain is that demand can change quickly, but supply takes longer to change. Surges in demand, such as seasonalities strain the capacity of a supply chain. Retail stores in particular face seasonalities that are so severe that it would be impossible to respond without having stockpiled product. For example, Toys R Us does, by far, most of its business in November and December. During this time, their warehouses ship product at a prodigious rate (some conveyors within their warehouses move at up to 35 miles per hour). After the selling season their warehouses spend most of their time building inventory again for the following year. Similarly, warehouses can buffer the supply chain against collapsing demand by providing space in which to slow or hold inventory back from the market.

In both cases, warehouses allow us to respond quickly when demand changes. Response-time may also be a problem when transportation is unreliable. In many parts of the world, the transportation infrastructure is relatively undeveloped or congested. Imagine, for example,sourcing product from a factory in Wuhan, China for retail sale within the US. After manufacture, the product may travel by truck, then by rail, by truck again, and then be loaded at a busy port; and it may repeat the sequence of steps (in reverse order) within the US. At each stage the schedule may be delayed by congestion, bureaucracy, weather, road conditions, and so on. The result is that lead time is long and variable. If product could be warehoused in Los Angeles, closer to the customer, it could be shipped more quickly, with less variance in lead time, and so provide better customer service.Warehouses can also buffer against sudden changes in supply. Vendors may give a price break to bulk purchases and the savings may offset the expense of storing the product. Similarly, the economics of manufacturing may dictate large batch sizes to amortize large setup costs, so that excess product must be stored. Similarly, warehouses provide a place to store a buffer against unreliable demand or price increases.

To co solidate product to reduce transportation costs and to provide customer service.
There is a fixed cost any time product is transported. This is especially high when the carrier is ship or plane or train; and to amortize this fixed cost it is necessary to fill the carrier to capacity. Consequently, a distributor may consolidate ship- ments from vendors into large shipments for downstream customers. Similarly, when shipments are consolidated, then it is easier to receive downstream. Trucks can be scheduled into a limited number of dock doors and so drivers do not have to wait. The results are savings for everyone.Consider, for example, Home Depot, where more than a thousand stores are sup- plied by several thousands of vendors. Because shipments are frequent, no one vendor ships very much volume to any one store. If shipments were sent direct, each vendor would have to send hundreds of trailers, each one mostly empty; or else the freight would have to travel by less-than-truckload (LTL) carrier, which is relatively expensive (Figure 1.1). But there is enough volume leaving each vendor to fill trailers to an intermediate crossdock. And each crossdock receives product from many vendors, sorts it, and prepares loads for each store, so that the total freight bound for each store is typically sufficient to fill a trailer. The result is that vendors send fewer shipments and stores receive fewer shipments. Moreover, the freight is more likely to travel by full truck-load (TL) and so pay significantly less transportation costs (Figure 1.2).
A warehouse also provides opportunities to postpone product differentiation by enabling generic
product to be configured close to the customer. Manufactur- ers of consumer electronics are
especially adept at this. Country-specific parts, such as keyboards, plugs, and documentation, are
held at a warehouse and as- sembled quickly in response to customer order. This enables the
manufacturer to satisfy many types of customer demand from a limited set of generic items, which
therefore experience a greater aggregate demand, which can be forecast more accurately.
Consequently safety stocks can be lower. In addition, overall inventory levels are lower because
each item moves faster.
Another example is in pricing and labeling. The state of New York requires that all drug stores
label each individual item with a price. It is more economical to do this in a few warehouses,
where the product must be handled anyway, than in a thousand retail stores, where this could
distract the workers from serving the customer.

Figure 1.1: With m vendors and n stores the transportation plan consists of mn direct shipments, each relatively small and likely subject to the higher, less-than-truckload rates.

Figure 1.2: There are only m + n shipments through an intermediate aggregator, such as a distribution center or crossdock. Furthermore, each shipment is larger and more likely to qualify for the lower, full-truckload rates.