Your Warehouse: A Vital Link to Profitability and Cash Flow, Pt. 1

Supply Chain

By, Pat Murphy – Partner

Develop a Sound Warehouse and Distribution Strategy

unnamed (6).jpg

“There is nothing so useless as doing efficiently that which should not be done at all.”
– Peter Drucker

Often, particularly in manufacturing, a warehouse is seen purely as a cost center.  Most efforts to improve profitability focus on reducing inefficiencies and inaccuracies in order-picking, typically the highest cost area in warehouse operations.  However, in today’s fast-paced, competitive business environment, the warehouse can be vital to improving the top-line as well, by delivering precisely what customers order, on-time and with perfect quality.  Customers expect this and will quickly take their business elsewhere if expectations are not met.

This is the first of three short articles on warehousing and focuses on the first and most important step in making sure your warehouse is profitable: developing a sound warehouse and distribution strategy.  The next issue will discuss the importance of and a high level approach to developing a warehouse design that supports your business objectives.  The third and final article will be on using Lean to eliminate waste and continuously improve your warehousing operations.


A natural and common approach to improving profitability is to start by cutting obvious wasted resources.  And, of course, that’s a good thing to do.  Lean implementation, or the relentless and continuous elimination of waste, began in manufacturing and is now widely employed in other areas, including warehousing.  But improving existing processes without first developing strategy that will set priorities and objectives for the warehouse, followed by optimizing the design of the warehouse and the processes that support those objectives, can greatly limit improvement opportunities.

So we start with the company’s business plan and objectives.  This will include industry trends and where the business positions itself in the market, new markets and growth opportunities, competitive analysis, and financial factors such as capital investment policies.  These plans and objectives will drive a supply chain strategy that includes the location, purpose and size of warehouses, inventory policies, supplier policies, number of SKU’s, pricing strategy, and customer service levels.

In developing a warehousing strategy, the first and most important consideration is establishing the proper role of the warehouse to support the business strategy.  Warehouses can perform a variety of roles, including holding inventory, consolidation of product (demand), efficient distribution/sortation of product to customers, value-added services, walk-in sales and service, and returns processing.  The reasons for holding inventory can be to smooth the variation between supply and demand, to achieve economies of scale from suppliers or in manufacturing, and to reduce risk of out-of-stocks due to unforeseen events.

A warehousing strategy that supports these plans includes recommendations and specifications on warehouse size and location, inventory levels, cost structure, sales and service personnel and facilities, along with material flow requirements such as order to dock time, potential cross-docking or flow through designs, value-added services, returns processing, and yard control.  As to size and location, a network optimization analysis may identify significant improvement opportunities.   According to Logistics Management’s “2015 Warehouse & DC Operations Survey Results”, 44 percent of respondents now evaluate their networks at least every three years, and 26 percent do it as needed.

The strategy should also outline requirements of the warehouse management system (WMS) to enable the warehouse to efficiently support the objectives of the business, as the WMS is the backbone of the warehouse/distribution operation.

When developing a business strategy (or refining an existing one), it is often helpful to conduct a SWOT analysis.  Your analysis would show specific strengths you can leverage, weaknesses you can address, opportunities you can capitalize on, and threats you can mitigate.  Here are some sample questions to get you started:

What are your Strengths?

What facilities, equipment, technology, people and culture best support the cost and service goals of the business?  What specifically makes you better than your competition?

What are your Weaknesses?

Is there waste in the value stream?  Are all SKU’s profitable?  Are customers loyal?  Do the current facility and processes limit productivity?

What are your Opportunities?

How do you differentiate yourself from your competition?  Are there other products or services you could offer?  Could the top line grow or margins improve through warehouse design changes or expansion?

What are your Threats?

What are competitors doing that you should be doing better?  What are the risks to continued success?  Are there inventory management issues like product obsolescence/shelf life, or slow turnover?

Finally, your strategy should be periodically updated to address new market conditions, changing economics, updated processes and available technology.

Key question:  Does your warehouse or distribution facility have a strategy and objectives that fully support the top line and bottom line goals of the business?

Next month’s article will address the second step to improve warehouse profitability: developing the right warehouse design and processes to support your warehouse and distribution strategy.

For more information on how to improve warehouse and distribution profitability, contact Pat at or call 314-304-1602.