An exploration into warehouse facility design and capacity

DHL Warehouse Facility Design

The more customers that DHL serves in a certain region, the bigger the warehouse in that area will have to be in order to have adequate room to store inventory. DHL's headquarters are located in Germany. DHL is the country's main international courier. As a result of this, the DHL warehouses located in Germany are some of the largest the company owns to satisfy the countries large customer service levels. DHL only operate private warehouses because the company serves so many different products and industries.

Because of this the organisation needs to have a higher degree of control over its inventory in order to ensure consumers' needs are fulfilled. By operating private warehousing, DHL has over time been able to reduce the overall costs of the company as a result of consistently achieving optimal utilisation of its inventory.

DHL requires large warehouses as a result of high service levels and a wide range of products that the organisation brings into its facilities on a daily basis.

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As service levels increase, companies require bigger warehousing facilities in order to keep up with consumer demand and to provide more storage space for its products.

Economies of scale is a huge factor affecting the size of the warehouses that DHL decides to build. The more warehouses that DHL decides to build, the more building material the organisation needs. Therefore, if the organisation decides that it wants to build 100 new facilities across Europe by 2020, they can purchase the raw materials required to build these warehouses in bulk.

This in turn will drastically reduce the cost of the raw materials as the more the organisation purchases in bulk, the less they pay for the materials.

When deciding on the number of warehousing facilities an organisation needs, one must consider a number of factors as outlined by Stock (2001):

· Cost of lost sales

· Inventory costs

· Warehousing costs

· Transportation costs

Cost of lost sales

Cost of lost sales is defined as the money lost from potential sales for whatever reason. An example of a cost of lost sale for DHL would be if the organisation was to deliver a phone to a consumer. However, if during transit the phone were to break, DHL would therefore have to reimburse the customer for the cost of the phone which would ultimately result in the loss of the sale for that particular device. Lost sales are very important to an organisation and they can be difficult to calculate as they can vary by company, industry, product and customer. In the case of DHL, the cost of lost sales for the company would be extremely difficult to calculate as the number of warehouses the organisation operates is constantly increasing. DHL (2019) notes that the organisation operates 1400 warehouses and offices worldwide. The cost of lost sales for each warehouse is very different as a result of operating many different types of warehouses.

Inventory costs

The more warehouse facilities that an organisation operates, the more expensive the inventory costs are going to be. Inventory costs are one of the most significant costs for a logistics company like DHL. The more warehouses DHL owns, the more inventory costs the company has to pay for capital costs, service costs, storage costs and risks costs. Capital cost is the cost of the physical products stored in the warehouses. As DHL has specific warehouses dedicated to products and industries, the turnover rates are both fast and slow, which requires more space. In DHL's case, capital costs are the largest elements of inventory cost for the organisation. The main reason for this is because the company operates over 1400 warehouses and offices worldwide, the company must also pay capital costs on every product in all of its facilities all over the world.

Warehousing Costs

Rushton et al (2017) notes that maintaining and operating warehouses account for roughly 20-30% of logistics costs. The more warehouses an organisation owns, the more fixed costs they will have to pay. Fixed costs are the overall business costs such as rent, handling equipment or government taxes. As DHL operates over 1400 warehouses and offices worldwide, the fixed costs for the organisation are massive. An example of how DHL managed to dramatically reduce its warehousing costs is when the company merged two warehouses into the one facility. DHL were given the task of improving the supply chain efficiency of a leading medical device company. DHL decided to merge the two warehouses into one facility, they then decided to integrate its IT platform with the medical devices ERP system. This integration gave the customer access to its inventory and supply chain. DHL (2019) explains how the company was able to reduce the operating footprint in half to almost 29,000 square feet as a result of merging the warehouses. By working towards completing the objectives the customer set, DHL managed to reduce warehouse costs for the company as now they would only have to pay insurance costs and government taxes on one warehousing facility, rather then two. This is an example of why the organisation continues to thrive as one of the world's leading logistics providers as not only did, they satisfy the customers' needs but managed to reduce its warehousing costs in the process.

Transportation Costs

Generally, transportation costs decline as the number of warehousing facilities increases. Transportation typically amounts to over 40% of most logistics company's expenses. In DHL's case, the organisation's transportation costs are the company's largest expense every year. However, they are able to recuperate the funds spent on transporting the goods to customers through the delivery and shipping rates they charge. According to Frazelle (2018) the overall goal in transportation should be to connect sourcing locations and customers at the lowest cost. DHL are able to achieve this goal as a result of having so many warehousing facilities located all across the world meaning that products never have to travel too far to reach the customer as there are enough warehouses to meet customer demands and in turn minimizes transportation costs. The company pays less on transporting goods because the vehicles spend less time travelling to warehouses. This is a good example of why having a vast number of warehouses benefits DHL as they save money on transportation costs.

Capacity Management

Capacity management is ensuring that a business maximises its production output under any conditions. Successful organisations will thrive to work to the best of their abilities in order to satisfy consumers which in turn will make more profits for the company. For an organisation to maximise their capacity management, they must be able to understand changes in product demand. Slack et al (2016) states that seasonal periods are one of the main reasons for changes in demand for products and services. Changes in certain products demands occur as a result of what season is coming up. DHL prepare for this by ordering more than enough stock and having safety stock of products to cope with any potential supply shortages. Measuring capacity utilisation provides an insight for companies into how well the business is utilizing its resources. Capacity utilisation allows businesses to evaluate their performance based on the process's maximum capacity.

Capacity utilisation can be calculated as:

Capacity Utilisation = Actual Output

Design Capacity

While DHL will aim to run at full capacity throughout all of its operations, this will prove very difficult as the company will eventually run into problems at some point. Examples of avoidable causes for DHL: Error in order picking, low levels of stock, damage to stock etc. Examples of unavoidable causes for DHL: planned maintenance of handling equipment, unforeseen weather conditions etc.

Measuring of warehouse performance and productivity is very important for an organisation like DHL. Just because an organisation is performing well financially, does not mean that its maximising its productivity levels. It is essential for all businesses to monitor their warehouse performance so that improvements can be made. Many logistics companies use KPI's (Key performance Indicators) to monitor warehouse performance. Listed below, are the four key quality indicator for warehouse performance as outlined by Frazelle (2002):

· Putaway accuracy

· Inventory accuracy

· Picking accuracy

· Shipping accuracy

DHL wanted to deliver accurate and automated inventory tracking in order to maximise the organisations capacity management. Intel (2019) notes that DHL tested an Intel based RFID inventory and tracking solution. The goal of implementing this system at one of its major facilities was to improve inventory visibility and accuracy, while lowering capital and operating costs. RFID tags are applied to the outside of each product. The items are then input into the system and placed into large trolleys. The trolleys are then stored away before they are moved into the put-away station. The items are then taken out of the trolley and placed on a conveyor belt. As the items pass down the conveyor belts, Intel sensors scan the RFID tags and the items are offloaded and ready for delivery. While trialling this system, DHL recorded all the data of the various products scanned by the Intel sensors. DHL discovered whilst using these sensors that inventory and picking accuracy improved drastically as a result. When orders are first scanned by the intel compute device, the information is input into the system. When the items finally pass on the conveyor belt the sensors scan the items a second time. This acts almost as a reassurance for DHL that it's the same product being scanned twice which helps eliminate error in order picking. This information can then be accessed by employees whose job it is to send the products for delivery. By implementing this new RFID system, DHL were able to reduce human error throughout the supply chain, whilst also succeeding in aiming to maximise the organisations capacity management.