Since warehouses house inventory (or wares), warehousing adds business and supply chain value in all the same ways including facilitating production economies of scale, optimizing factory utilization via seasonal inventory builds, and mitigating supply chain and business risk by holding contingency and disaster inventory.
Despite all efforts to reduce setup and changeover cost and time, there will always remain expensive and time consuming setups. In those situations it would be economically foolish to produce short runs. When long production runs are economical, the resulting lot size inventory must be housed; most effectively in a warehouse. For example, one of our large food and beverage clients was running lot sizes 50% below optimal, incurring excessive changeover and production costs as a result. Once corrected, an additional 150,000 square feet of warehousing space was required yielding a significant return on investment in warehousing.
Many corporations have significant peaks and valleys in their demand. One of our clients, Hallmark Cards, is an extreme example. The large majority of the demand for greeting cards falls in the Christmas and Valentines seasons. If their production capacity was designed for those peaks, their production capacity would be cost prohibitively under-utilized for 75% of the year. To balance the production and optimize their supply chain costs, Hallmark produces greeting cards at a fairly balanced pace during the year resulting in a large storage requirement for a majority of the year. That “seasonal inventory” is stored in a large seasonal warehouse pictured below.
The Schwan’s food company is another one of our clients. One of their flagship products is frozen pie. They are the world’s largest manufacturer of frozen pie; the majority of which are consumed between Thanksgiving and Christmas. As was the case with Hallmark, to optimize their supply chain costs they must balance production throughout the year and utilize third-party frozen warehousing to hold seasonal build inventory January through September.