A Tribute to the Ever-evolving Warehouse

Analysts are pointing to 2012 as the year in which warehousing was finally recognized as a competitive weapon for multichannel online businesses.

This milestone was most notably personified by Amazon.com, which has dramatically expanded its warehouse and distribution center network to compete more effectively against brick-and-mortar store chains—and even provide same-day service in some areas.

In the past, however, to paraphrase the late comedian Rodney Dangerfield, “warehouses got no respect.”

This lack of respect was especially evident during my days at AMR Research/Gartner, where I spent the lion’s share of my time focused on the Supply Chain Management (SCM) software market. AMR viewed the market as comprised of two sectors: planning (SCP) and execution (SCE) systems.

AMR had difficulty hiring and keeping SCE analysts, especially for warehouse management systems (WMS). Because the firm was originally founded as Advanced Manufacturing Research, it wasn’t surprising that the majority view there was that the warehouse was a “dark and dank” place where products were stored (potentially to gather dust) until customers ordered them. There was a time when AMR was unable to fill the WMS analyst position, so I agreed to do it.

Warehousing is Customer-facing
I agreed to do the WMS job because warehousing is an important customer-facing supply chain function. I was tempered as an early member of Accenture’s Logistics Strategy Practice, where I was fortunate to work with and learn from some of the thought-leaders in warehousing.

My appreciation for warehousing was initially shaped during my childhood. My dad was a shipping clerk in the warehouse of a hospital furniture manufacturer. Though he had little formal education, he understood the importance of customer-facing activities.

In particular, he stressed the importance of packaging products so that they would not be damaged while in-transit to a customer site. This taught me that the warehouse function profoundly affects customer service. Warehouse workers are the last employees to handle a shipment before it is delivered to a customer.

Over the past several decades, the U.S. and other highly-industrialized countries have outsourced and off-shored much of their “Source” and “Make” functions. Out of necessity, their “Deliver” functions (including customer-facing warehousing) remained domestically centered and their roles expanded.

Warehouses evolved, first into distribution centers (DCs) and then into full-line fulfillment centers (FCs). Exhibit 1 depicts the historical progression of warehousing. 

The Warehouse Evolution
My first WMS-related report that I wrote at AMR was titled: “Mixed-Mode Customer Fulfillment Forces Integration Beyond SCE.” The report discussed the evolution of warehouses into DCs, and described their early progression toward full-line FCs. The report also noted that by leveraging postponement strategies, manufacturers were beginning to perform make-to-order (MTO) and assemble-to-order (ATO) manufacturing steps inside their distribution centers, enabling mixed-mode fulfillment.

Postponement strategies were all the rage in moving to mass-customization manufacturing. Companies were moving away from largely make-to-stock (MTS) operations, thereby changing the role of a warehouse.

The report documented that traditional “stocking” warehouses—already evolving into DCs, with the implementation of cross-docking and value-added service strategies—were beginning to become advanced FCs. Walmart had demonstrated that a competitive edge could be gained by leveraging differentiated product flow through its vast network of warehouses and using cross-docking and node-skipping methods such as direct-store-delivery, or DSD.

HP, an early leader in postponement strategies, had begun shipping language-agnostic printers into its regional warehouses servicing multiple countries (for example, pan-European warehouses). Its strategy delayed, or postponed, the installation of language-based motherboards until an order was placed that moved printers into specific countries.

In essence, HP moved the final finished-goods manufacturing steps from plants to its warehouses. This approach also entailed putting value-added services into warehouses. HP and other companies were reporting success in providing special handling for customers and postponing kitting by moving these operations into the warehouse.

Amazon.com: The Online Fulfillment Champ
Amazon’s strategy had always been to become the “Walmart of online retailing.” By at least one important measure, it has successfully executed that strategy. In contrast to most other definitions of excellent supply chains, the one developed during the MIT Supply Chain 2020 Project was devoid of any financial considerations.

The view was that an excellent supply chain is designed to support, enhance, and be an integral part of competitive strategy. Based on this criterion, Amazon (founded in 1995) became an excellent supply chain well before it showed its first quarterly profit in the fourth quarter of 2001.

Amazon initially lost a lot of money because it was investing in the development of a supply chain to support the “biggest online gorilla.” It could not learn much from others because there were no online operations of the magnitude that Amazon envisioned.

Walmart best practices offered little help because they involved large-scale pallet-based pick, pack, and ship warehousing operations. Goods come into Walmart’s warehouses on pallets, are stored on pallets, and are then picked, packed and shipped (by truck) on pallets.

Amazon had to become the best at unit (or piece) pick, pack, and ship. Products might come into warehouses to be stored on pallets, but they needed to be picked as a single unit, packed as a single unit, and shipped (by parcel) as a single unit.

Over time, Amazon developed much of its own technology as it moved from selling only what was in its own warehouses to merchandizing products that were drop-shipped directly from suppliers to customers. This meant that sophisticated distributed order management systems needed to be developed to source orders from Amazon’s own warehouses, from myriad supplier plants and warehouses, and now from its Kindle contract manufacturers.

Amazon recently made one its boldest strategic moves to date by acquiring Kiva Systems.

This WMS company developed a tech-savvy system that uses robots to bring goods directly from storage areas to a fulfillment area, where workers can pick, pack, and ship orders.

I surmise that Amazon felt the Kiva systems would provide it with such a competitive advantage that it wanted the technology all to itself—out of the hands of online competitors. (Of course, Amazon, states that Kiva will still market to other online retailers. However, would they want to buy a system from and be supported by, their competitor? I doubt it!) 

Future Warehouse Roles
To compete more effectively with Amazon, brick-and-mortar retailers are starting to put multi-channel fulfillment into their warehouses. In addition to replenishing stores, these warehouses are responsible for filling online orders either for customers to pick-up at a store or for direct delivery to them.

While I cannot accurately predict all the roles that warehouses might have in the future, they will indeed be more complex as businesses innovate with competitive fulfillment practices. Literally and figuratively, they will not be my father’s warehouse.