Value Adding Roles- Smoothing

How Warehousing add value through operation smoothing?

For educational purpose, we assume that demand is seasonal. From figure 6.1, firm is continually producing an amount equal to the average demand over a time span. That means that materials are fed at a constant rate from the warehouse to the plant. This will usually results in a smooth level of operation that avoids the costs of changing production levels. Example: Set-up cost, hiring and training cost, overtime etc.

Elaborated explaination:

From figure 6.1,when demand is lower than production level, inventory builds up. When demand is higher than production level, inventory depletes. Warehousing of stocks allow the firm to buffer against variability in demand while not incurring additional capacity costs. Lesser changes to production also means production is able to gain economies of scales. Warehousing also ensure a constant supply of raw materials leading to lower stock out situation.

Comparing to figure 6.2, production level varies with demand. This means that when demand is low, capacity like machineries will be left idling, incurring capacity idle costs. When demand is low, firms may fire off production staff and when demand is high, firms will hire more production staff. This hiring and firing approach can be very costly.

In conclusion, warehousing is able to add value to a firm through smoothing operations leading to lower costs of production. The utilisation of warehousing depends on management objectives set, such as low inventories, efficient plant operation, good customer service, and good labor relations.

Example: Christmas tree manufacturer normally utilise production leveling as demand matching is costly to adopt.

2 – 3 usefulness of this topic in the distribution centre

• A constant rate of production means order to suppliers is also constant leading to lower variability in orders. (<--result of inventory)
• Production costs can be lowered with the use of inventory. (<-- uses of inventory)

2 – 3 Constraints of this topic in the distribution centre

• Level of activities at DC can be constrainted by management objective. E.g. Low inventories level.
• Savings in operations should offset increasing warehousing costs which can sometimes be hard to quantify.