Determining the location and capacities of the warehouses is the crux of the task. On this depends the firmâ€™s customer service level its competitive advantage in distribution and its inventory cost structure. While one might point out that it is the inventory turnaround that primarily determine inventory costs, the fact remains that the costs are also influenced by the locations and spread of the inventories — at how many places and in what sizes are stocks kept. Moreover, inventory turnaround itself is partly the outcome of the manner in which the inventory is spread.
Determining the number: The optimum number will depend upon the nature of the product, the size and geographical spread of the market serviced by each warehouse, the current and potential sales in the territory, the extent of seasonality of demand if applicable, the level of peak demand, the trade patterns, the number of distributors/retail outlets to be serviced by each warehouse, the acceptable order-execution time, the possible speed of replenishment of stocks and the cost involved in operating warehouses. Future requirements and pattern of competition are also relevant in deciding the number and sizes of the warehouses.
Choosing the size:
The decision on the sizes of the Warehouses must be taken in alignment with the decision on their total number. After a firm assesses the sales potential in each warehouse territory, the question to be decided is: What is the optimum inventory holding needed for realizing the sales projected for the territory?
Warehouse size and costs are inversely interrelated. So, as a general rule, small-sized warehouses are uneconomic compared to larger ones. At the same time, if the sales projected are small, warehouse size has to be small. Customer convenience and channel service will call for a large number of small-sized warehouses spread extensively all over the marketing territory. There will also be the additional consideration of future requirement. As a general rule, it can be said that by reckoning the volume of sales and the desired market share in the area covered by the warehouse, and by applying the factors of transit time and speak season demand, the optimum warehouse capacity at a given location can be worked out.
Choosing the exact locations: Choosing the exact locations of the warehouses is as important as choosing their number and capacity. The locations must be suitable in terms of market factors and availability of transport facility. Rent rates, commercial suitability of the location, implications of local levies, etc. have also to be looked into. Above all, availability of suitable warehouse space has to be considered.