Innovation could be recognized as a key success factor in increasing competitiveness in this complex environment. The act of innovating can provide a firm with the capability to capture a substantial level of market share or create an entirely new market opportunity that enables a firm to reap supernormal profits. Warehouses are in an exciting era where design and innovation is shaping the industry for the better. Technology, productivity and sustainability are a few of the main driving factors. Warehousing is becoming more and more a critical activity in companies. Competition and high customer demands force companies to hold less inventory, react faster to market changes and lead times and costs. In this study our aim is to illustrate the innovation strategies role in improving warehouse operation efficiency, enhancing the utilization of warehouse capacity, increasing inventory accuracy. This study will help managers and practitioners to understand the role of innovation management tools in structuring warehouse management and how to gain a competitive advantage through successfully planned and implemented innovation strategies. Organizations need to differentiate themselves from other players in the market. In most cases, leading companies continuously use innovative strategies to create an edge over their competitors. One way is to update its warehouse management through innovation strategies. These strategies will help them to have less inventory, react faster to market changes and lead times and costs.
The major functions of a warehouse are to store products in order to make an assortment for customers, to assemble customer orders, sometimes to add value to the orders by customization activities, organize transport to the customers, and ship orders timely, in the way desired by the customer. Warehouse performance, therefore, has multiple dimensions. Often, performance is measured in terms of ratios of output and input factors. Output factors include production (shipped orders, lines and units), quality (for example, order completeness, error-free and on-time delivery), flexibility (possibility to cope with changes in customer demand), agility (process adaptation to changing environment), and innovativeness (use of new supply-chain concepts yielding competitive advantage).
Distribution centres have been considering warehouse locations that will make their transportation routes more efficient. The proximity of the warehouse to its distribution points has the greatest impact on sustainability. The warehousing industry is undergoing dynamic changes. Centres that embrace and adopt the changes early should benefit from reduced costs, better operational efficiency, warehouse operational profits and a leader when it comes to minimizing their warehouse’s impact on the environment.
Many trends and developments in supply chain management, like same-day or free delivery, do not have a huge impact on warehouse processes. An important development in warehouses is the move from supplying stores (few large orders) to supplying consumers directly (many small orders). This asks for different processes: batch picking, single-line / single-item picking, etc.
Another important trend in warehousing is the use of technology. Many (smaller and larger) warehouses still use no or very simple technology and are starting to invest in paperless picking, connected processes and better systems.
In context of polymer industry, where the main inputs as raw materials are chemicals and additives, warehousing is of primary importance due to proper inventory management of hazardous chemicals for its usages and disposal. Another major concern is limited availability of these chemicals around the world which leads to greater sourcing lead times and transportation hurdles. Most of these chemicals are having limited life span which requires planned sourcing and consumption to avoid redundancies and disposal.
M/s Polymer Limited is the polymer plant with capacity of 480000 TPA of HDPE and Polypropylene. The plant runs on naphtha and natural gas as dual feed for production of polymer granules. Apart from naphtha and natural gas, the plant requires lots of chemicals, additives, catalysts on a regular basis for keeping it operational. Other support materials are electrical, instrumentation, mechanical and full-fledged plant maintenance services.
In consideration with regular sourcing of thousands of chemicals, additives and catalysts, sourcing planning is made in line with the Sales and Operational planning to meet the requirements of the business. Parallel to the planning and execution of the activities related to procurement, warehousing activities are also considered as a primary activity for inventory management and logical distribution to the Operations team for operating the plant.
In order to understand the changes that were necessitated for the establishment of central warehouse in the plant, the current procurement process needs to be elaborated for understanding.
Procurement objectives of M/s Polymer Limited are as follows:
- to supply the organization with a steady flow of materials and services to meet its needs.
- to ensure continuity of supply by maintaining effective relationships with existing sources and by developing other sources of supply either as alternatives or to meet emerging or planned needs.
- to buy efficiently and wisely, obtaining the best value for every dollar spent
- to manage inventory so as to give the best possible service to users at the lowest cost.
Following strategies are followed for procurement process in lowering purchase prices have proved outstandingly successful:
- Purchase price economy through placing larger orders.
- Purchase price economy through a change in supplier on condition that the goods supplied continue to be of the prescribed quality and the new supplier guarantees equal or better compliance with delivery date and service, and that the incidental purchasing costs (transport, packing, etc.) do not eliminate the economy in purchase price.
- Purchase price economy through negotiation with suppliers.
A Central Warehouse is meant to deal with the physical receipt, storage, consolidation, and issue of consumable material for the purpose of security, control, lower cost through volume buying and efficiency of operations. Building a new warehouse may not be necessary because either the current facility can be used or a no-cost facility obtained. Whichever avenue is chosen, cutting the cost of the procurement system requires some investigation to show factual and documented evidence to support the available solutions.
We as a team investigated the costs and benefits of using the present facilities, building a new one, or obtaining a facility free of charge. It includes recommendations for optimizing inventory purchasing, storage and management and personnel requirements. Activities include suggestions regarding the economic gains that may be realized through changes in the current method of procurement. These changes include warehouse and procurement alternatives that may not require establishing a new warehouse facility.
New warehouse set-up and operating costs estimations
There are six major elements that constitute the throughput activities of the typical warehouse: Transfer, Receiving, Storage, Handling, Expediting and Packing.
The carrying cost of warehouse inventories was also be taken into account. Costs that are relevant to the proposed type of inventory was carried with inclusion of interest for the use of money invested in the inventory, freight costs to get the inventory to the warehouse and the cost of loss and damage. These cost elements was examined in detail in which the cost of each of the warehousing activities were incorporated into the cost/benefit analysis.
The warehouse building is distinct from the process of warehousing and has its own. These costs include the cost of building a new structure or renovating an existing one, utility costs and upkeep costs. The size of the structure depends on its intruded contents which, in turn, be determined by the monetary savings that carrying that inventory will yield.
- Costs related to a warehouse facility:
The costs discussed below were obtained from either published standards or calculated using the cost-estimating method of analogy. Where standards were not available, estimating by analogy was used because the data did not lend itself to statistical methods. In using the costs developed through analogy for this model, we have considered that analogy is only useful for rough estimates.
- Costs to erect a new facility:
Galvanized, corrugated sheet steel buildings are generally the most economical to build. The material is relatively low-priced and application costs are lower than for many other types of construction. The availability of this type of material and the speed at which a building made of it can be erected make it desirable for some warehousing uses.
Total costs of erecting new facility were Rs. 67, 00,000.00
- Warehouse labor requirements and cost:
The major duties of warehouse workers (71 nos) would encompass receiving and picking up supplies, checking quantities against shipping documents, documents management and reporting stocks and irregularities. Total labor costs calculated per year is approximate Rs. 15, 00,000.00.
- Building utilities and maintenance costs:
The Materials division is required to pay for the utilities used in a warehouse as well as upkeep of the building. Electricity and water are used; combined, they have minimal expense. Electricity costs have been calculated with information provided by the State Electricity Division of the location and Municipality Board. Total operating costs calculated per year is approximately Rs. 72,000.00.
- Miscellaneous costs which is approximately Rs 20, 00,000.00:
- Annual procurement savings:
BCPL procures various types of materials in small and bulk quantities on regular basis for the smooth operation of the plant and its facilities. The procurement process is made through tendering and consignments are stored in the warehouse as per the designated locations.
In order to determine if it is economically justifiable to build a warehouse, the annual costs associated with operating the facility is compared with the annual savings (details attached as per Annexure D) that would be generated by purchasing standardized products and distributing them through a warehouse system, in economic order quantities.
The expected annual savings of Rs 17, 28,000.00 is compared to the cost of building a warehouse, which is Rs 67, 00,000.00. For purposes of this study, the amount of savings is considered to be an annuity. The present value (PV) of that annuity is then compared to the cost of building the warehouse. The warehouse is initially assumed to have a total useful life of 40 years, hence, the annuity will run for that length of time as well.
The present value (PV) of the savings over 40 years is calculated as follows:
The following calculation shows that in order for the warehouse to be built at even a break-even cost, Rs. 5,95,026.64 in savings would have to be generated on an annual basis for over 40 years. The computation assumes an 8% interest rate with a PV factor of 11.26.
= Rs 67, 00,000/ 11.26 = Rs 5,95,026.64
Based on the cost analysis carried out by Materials and Sales division as stated above considering the issues faced by the organization, proposal for setting a new central warehouse is proposed with the savings as calculated on PV for 40 years to avoid wastage of time, man-hours and unproductive activities related to maintaining warehouses situated far off distances from the Plant.
Innovation to the setting of new Warehouse
Considering the wastage of productive man-hours and precious time, there was a lot of deliberations made after and getting instructions from the management to make arrangements for constructing warehouses inside or near to the plant on a priority basis. Based on the guidelines and business requirements of the plant and also with constructive effort of the team, a “New Central Warehouse” for the plant has been constructed with modification of few existing buildings at the Plant Terminal and additional warehouse of open sheds for the first time.
Initiatives taken towards innovation in design of warehouse and its operations:
- Tracking of returnable transport package (RTP) has been developed in house and implemented to facilitate timely return and monitoring of chemicals and gas cylinders during rent free period thereby reducing the overall cost and enhancing overall stores control mechanism.
- System for controlling shelf life of chemicals and other consumables are developed in SAP system and implemented for perishable goods and chemicals. Upon activation, the system issues auto alerts to Inventory Manager as well as Users intimating balance shelf life of the material so as to consume timely. It also gives option to issue materials on FIFO basis to Stores.
- Installation of racking system.
- Re-rolling of cables onto drums to avoid normal wear and tear of wooden drums and a lot of cables.
- Drive-in Pallet system implemented for storing bulk chemicals (i.e. vertical storage) like Activated alumina, Calcium stearate, Zinc stearate etc.
- Segregation of warehouse space into hazardous, non-hazardous, returnable, damage sections for better visibility and proper handling of materials.
Major Mile Stone was achieved for M/s Polymer Limited as the earlier stores were operating since inception of the Plant. 100% physical verification with reconciliation of shifted materials was completed. Cost-benefit in curtailing travelling time, freight charges, ease in operation, savings in man-hour, increase in operation and maintenance planning, scheduling, proper inventory control, preservation, all inspection at one place, better up-keeping of stores, etc. amounts to approximately Rs 2 crores per annum.
The analysis of available data indicates that it is economically justifiable to establish a new warehouse facility in order to make bulk quantity purchases with receiving, storage and inspection at a single location and subsequent distribution to operations activities thereby savings in costs due to earlier distant locations of warehouses.