Question

1. In the context of the concept of economies of scale, evaluate three (3) roles that a warehouse could play in facilitating the efficient running of a factory.
(20 marks)

Answer 1

The Economies of Scale can be leveraged by warehousing in the following three particular ways.

Economies of Scale in the inbound side - Since the warehouse aggregates the supply of many suppliers, the transportation cost can be greatly reduced by using consolidation, bulk-break, cross-docking, assembly, or mixing activities. All of these activities primarily convert usage of LTL service for smaller shipments to the usage of TL service at a lower cost for larger shipments.

Economies of Scale in the outbound side - As in the inbound side, the warehouse also aggregates the demand of the customers in an area or region. The transportation charges to different customers are greatly reduced as the last-mile delivery services remain the only difference. While consolidating, a warehouse combines the shipments from different sources to make large shipments according to the customers residing in a common location. These large shipments are then transported taking the advantage of economies of scale or distance using various bulk carriers. In this way, the economic benefit is realized. In the case of break-bulk, large shipments from a single source can be divided into small shipments which are then sent to customers at nearby but different locations. Economies of scale are again achieved by transporting one large shipment rather than operating transportation channels for all the shipments individually.

Economic benefit of storage - Typical products and commodities can be associated with highly variable demand patterns (e.g. winter apparels) or highly variable production schedules (e.g. crops). In both cases, the warehouse provides storage facilities and derives economic benefits by supporting marketing activities. Also, storage provides a buffer to produce at a constant rate throughout the year with stable resources so that productivity goals can be achieved without minimum disruptions.