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The strategic role of warehouse management in the supply chain

19 July 2023
Article by Alexandra Pinto, Industrial Management and Engineering consultant at INEGI

The warehouse plays a vital role in the management of the supply chain, its main function being to allow the formation and maintenance of stocks, ensuring the availability of the product to the customer, in the optimal balance of cost and service, complying with the defined value proposal. Being part of the Supply Chain, the warehouse suffers the same pressures of speed, high level of service and reduction of operating costs felt in the chain.

It appears, however, that many companies have their expertise in production or in the commercial area, with logistics management, and in particular the warehouse, an area that is often neglected. Historically, the warehouse has been seen as a warehouse for goods as well as costs.

Our experience in consulting projects in this area allows us to state that, quite the contrary, correct storage management adds value in terms of customer service, lowers total logistical costs and facilitates flow in the Supply Chain.

Is the warehouse a key element of the supply chain?

In the current context, however, there is a set of factors that have been contributing to an increasingly decisive role for the warehouse in the success of supply chain management and in the implementation of the company's strategy.

With the accelerated growth of B2C sales and online channels, faster delivery is required, with greater flexibility and at minimal cost. Delivery time pressure spreads upstream in the supply chain, also impacting industrial companies. This often happens in contexts where companies already have reduced commercial margins and where other cost elements, namely transport, have suffered significant increases. In general, customer expectations regarding the level of service are high and companies face difficulties in meeting this expectation, without significantly changing their logistical operations and without reflecting cost increases on the customer. Orders have typically tended towards low quantities and multi-products, which significantly impacts their preparation cost, particularly if the storage operation has not been adjusted to this reality.

At the same time, in recent years there has been a significant increase in demand for storage spaces in a scenario of scarce supply, and the difficulties of attracting and retaining talent for logistical functions in a transversal way are growing.

Added to the requirements requested from the warehouse is the fact that in a market where the demand for customization is increasing, and where this demand is often uncertain, there is a growing tendency towards models of the «assemble and ship to order» type, where priority is given to generic stocks that can be customized in the warehouse according to the customer's final requirements.

In this fast-paced and changing context, the warehouse plays an even more decisive role in the success of the operation, with the risk of becoming a bottleneck, without the capacity to meet the levels of service expected internally and communicated to the customer. It is typical in industrial companies to carry out investment projects to gain a few seconds in production processes, so that minutes, hours and days are lost in non-optimized processes in the warehouse.

How is the performance of a warehouse evaluated?

Warehouse performance significantly influences a company's ability to differentiate itself, for example, through its potential to reduce costs and optimize service levels, or by allowing final value-added operations to be carried out that can contribute to the increase product value and improve the customer experience. Or even serving as cross-docking, consolidation or transshipment platforms that allow you to reduce transport costs.

The storage operation must therefore be designed in full alignment with the company's strategy, taking into account dimensions such as:

  • Location
  • Layout and use of space
  • Storage and handling equipment
  • Reception, checking, storage, picking, packing and shipping processes
  • Automatisms
  • Information systems and technologies
  • Defined service levels
  • Seasonality in production or demand
  • Customization requirements or final value addition

A recent study by McKinsey & Company1 points to the following causes as the main causes for poor performance in the storage operation:

  • Absence of a technology-focused strategy to improve efficiency and quality
  • Lack of methodologies and a structured approach to identifying root causes for low levels of performance
  • Non-existence of a continuous improvement project for the excellence of the storage operation
  • Lack of an end-to-end perspective of the supply chain that considers all of its processes, costs and interfaces with external supply chains

It is essential to continuously evaluate the performance of the storage operation with the aim of identifying misalignments in relation to the defined objectives and defining solutions in this regard. This performance assessment is usually carried out through the clear definition of indicators and their continuous monitoring, namely:

Productivity indicators - Assess the team's ability to operate with high levels of performance – that is, whether the teams deliver results within the deadlines defined by management. By monitoring these indicators it's possible to identify operational bottlenecks and optimization opportunities.

Capacity indicators - Identify the level of available operational capacity and make it possible to identify, for example, if there are overloads in any area, or on the other hand, if there is capacity that is not being used.

Quality indicators - Measure the compliance of the work carried out in relation to the standards defined by the management and expected by the client. These indicators are used to understand whether the current service meets the customer's expectations. They allow the optimization of service levels and the creation of differentiation in the market.

Strategic indicators – Directly related to the strategic objectives of the business, to assess whether the storage operation is in full alignment and supporting the business strategy.

Can technology help?

The potential impact of technology on productivity and efficiency levels, as well as on reducing risks and promoting greater ergonomics in different functions, is enormous. This is one of the priority axes of consideration when trying to optimize the storage operation.

With record investments in the last 5 years, innovation at this level has been remarkable and there are numerous case studies of success. The solutions portfolio is broad and with relative maturity in several areas, such as, for example, the use of to help picking operations, implementing WMS systems (Warehouse Management Systems) with dynamic optimization solutions for picking routes, or implementing automatic solutions for sorting items, among countless others.

Among the technologies with the greatest potential for application to storage operations, the following stand out:
  • Robots / Cobots
  • Exoskeletons
  • AGVs – Automated guided vehicle / AMRs – Autonomous Mobile Robots
  • AI – Artificial Intelligence / ML – Machine Learning
  • Blockchain
  • VR – Virtual Reality / AR – Augmented Reality
  • IoT – Internet of Things
  • Digital twins
  • WMS – Warehouse Management System / WES – Warehouse Execution System
  • Automatic storage systems
  • Pick To Light / Put To Light Solutions
  • Voice Picking
  • RFID
  • Drones

When defining automation or digitalization initiatives for the storage operation, it is essential to ensure that these initiatives are aligned with the company's strategy, focusing on selected use cases with a clearly identified return on investment, and for which there is buy-in from the different stakeholders. . Existing success stories confirm that there is greater value in surgical and strategic digital transformation initiatives than in mega-projects of excessive complexity that, in most cases, make their success unfeasible at a very early stage.

Related Pages


Model Warehouse, McKinsey & Company, Inc.

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