WAREHOUSING AND INVENTORY MANAGEMENT

WAREHOUSING

• That segment of an enterprise’s logistics function responsible for the storage and handling of inventories beginning with supplier receipt and ending at the point of consumption. The management of this process includes the maintenance of accurate and timely information relating to inventory status, location, condition and disbursement.

OBJECTIVES OF WAREHOUSING

• To provide an application to automatically receive inventory, • To process orders, and • To handle returns.

Warehouse Management

• Choice of Unit Load

• Use of Building Space

• Utilization of Resources

• Minimum Movement

• Product Integrity

• Safety

• Control & Information Systems

• Environmental Issues

WAREHOUSING & MARKETING STARTEGY

OBJECTIVES OF A SUCCESSFUL WAREHOUSE STRATEGY

• Maximizing the effective use of space• Maximizing the efficient use of warehouse

equipment• Maximizing the efficient use of labour• Maximizing the accessibility of all stock inventories• Maximizing the protection of all items from damage,

spoilage and obsolescence.

METHODOLOGY FOR DEVELOPING WAREHOUSING STRATEGY

• Document existing warehouse operations• Determine and document the warehouse storage

and throughput requirements over the specified planning horizon.

• Identify and document deficiencies in existing warehouse operations.

• Identify and document alternative warehouse plans.

• Evaluate alternative warehouse plans.• Select the recommended solution.• Update the warehouse strategic plan.

ELEMENTS OF A WAREHOUSE STRATEGY

• Clear statement of organizational and reporting structures• Performance metrics detailing targeted operating

objectives.• Authority to acquire capital equipment• Ability of management to hire, fire and develop staff.• Valid operating standards for all warehouse activities.• Valid space utilization standards and performance

measurements for products and storage facilities.• Clear service standards and performance measurements

for all warehouse functions.

FUNCTIONS OF WAREHOUSING

1. Material Handling

• Receiving : Inbound carrier scheduling, order acceptance, material unloading, order audit, inspection and staging.

• Sorting : Grading, testing and grouping.• Value-added Processing : Component picking and

staging, labour and machine allocation, processing, labelling and packaging.

2. Storage

• Storing/ Put-Away : housing received inventory in proper storage locations.

• Stockpiling : Providing access to, protection, accuracy and orderly stocking pf products and materials.

• Product rotation : First-in-first-out rotation of products to avoid spoilage and obsolescence.

• Consolidation : A method of economically converting many small shipments into full carloads and shipping them to a local or regional consolidation center.

2. Storage

• Bulk breaking : Receiving the shipments and repackaging into smaller quantities necessary to meet customer requirements.

• Product mixing : Producing or acquiring a wide variety of products and converting them into stocked assortments.

• Cross docking : A mixing warehouse is used to consolidate deliveries from multiple sources into salable or useable assortments.

2. Storage

• Spot stock : Spot acquisition and storage of products to fulfill customer requirements during a particular marketing season or promotional period. Once the season is over, inventories are pulled back to the regional warehouse.

• Production support : Maintenance of production warehouses due to long lead times and product lot sizes.

3. Order Management

• Order picking : Physical selection of products from storage to meet an order request through a pick list containing the order number, the required date, the items and quantities to be picked, and the picking location.

• Production order picking : Picking the raw materials and components and delivering them to production for fabrication or manufacture.

3. Order Management

• Traffic management : Selecting the carriers to be used for product shipment, or working closely with the traffic management department.

• Shipping : • Shipment preparation : the performance of any necessary value-

added processing and product staging at the outbound dock.• Shipping : carrier scheduling, rate determination, loading

transportation vehicles, and completing documentation such as bill of lading, packing lists, and record maintenance.

4. Information transfer

• Providing detailed information relating to inventory status, throughput levels, space utilization, equipment and manpower availability, and transportation capacities.

WAREHOUSING EVALUATIONAND REQUIREMENTS

PRIVATE WAREHOUSING

• The property, facility, and accompanying storage and material handling equipment are owned and operated by the firm.

BENEFITS OF PRIVATE WAREHOUSING

• High level of direct control over warehouse operations.

• Less expensive when volumes are large and continuous.

• Communication is directly available to firm’s management.

• Unutilized space may be used for other uses.

PUBLIC WAREHOUSING

• The facility, labour, and material handling equipment are owned by the warehouse company, which in turn, contracts warehousing services for a month-to-month fee.

BENEFITS OF PUBLIC WAREHOUSING

• No fixed capital investment.• Reduction in the risk of plant facility and material

handling technology obsolescence.• Flexibility to respond quickly to short-term

marketplace requirements.• Provision of computerized tools such as EDI,

Internet access, bar coding and business system interface.

• Accommodation of abnormally large product quantities.

BENEFITS OF PUBLIC WAREHOUSING

• Consolidation services including shipping and transportation activities.

• Access to special features:• Bulk breaking• Repackaging of products for shipment• Material handling equipment such as cranes, lift trucks, conveyor

systems etc.• Special storage requirements such as sterilized and ultraclean

rooms, temperature controlled storage.

CONTRACT WAREHOUSING

• It is a form of public warehousing which focuses on the creation of a long term agreement that ties both parties together for a period of time at least as long as is necessary to amortize mutual investment.

• The goal of the contract is to establish a form of guarantee on the part of the enterprise that the level of business will remain constant over the life of the contract, and on the part of the public warehouse that the level of contracted services will be available throughout the contracted period.

IN-TRANSIT WAREHOUSING

• This is a special kind of warehousing in which products are stored in the mode of transportation.

• Example: a company may elect to store product in the truck trailer or railcar in which it was delivered. The firm will rent the storage container from the shipper.

WAREHOUSING LOCATION STRATEGIES

• Objective:– To maximize the perceived benefits arising form

the optimal positioning of each distribution point geographically in the channel.

• The strategy is to balance the fixed and current costs (plant and inventory) with the cost of transportation and overall sales.

INVENTORY MANAGEMENT

INVENTORY MANAGEMENT PRINCIPLES

• Improve customer service• Reduce certain costs such as

– ordering costs– stockout costs– acquisition costs– start-up quality costs

• Contribute to the efficient and effective operation of the production system

INVENTORY MANAGEMENT APPROACHES

• Basic EOQ model• Economic Production quantity model• EOQ with quantity discounts

Assumptions of Basic EOQ Model

Demand is known with certainty and is Demand is known with certainty and is constant over timeconstant over time

No shortages are allowedNo shortages are allowed Lead time for the receipt of orders is constantLead time for the receipt of orders is constant Order quantity is received all at onceOrder quantity is received all at once

Annual carrying costAnnual carrying cost =

(average number of inventory)*(holding cost/unit/year)

Average number of inventory = (Q+0)/2 = Q/2

Annual carrying cost = (Q/2)H, Where

Q = Order quantity in unitsH = Holding cost /unit/year

Annual ordering cost = (average number of orders Annual ordering cost = (average number of orders per year) x (ordering cost) = (D/Q)Sper year) x (ordering cost) = (D/Q)S

Total Cost

Annualcarryingcost

Annualorderingcost

Total cost = +

Q2

H DQ

STC = +

Cost Minimization Goal

(optimal order quantity)Order Quantity (Q)

The Total-Cost Curve is U-Shaped

Ordering Costs

An

nu

al C

os

t TCQH

D

QS

2

QO

Carrying Costs

Deriving the EOQ

Using calculus, we take the derivative of the total cost function and set the derivative (slope) equal to zero and solve for Q.

Q = 2DS

H =

2(Annual Demand)(Order or Setup Cost)

Annual Holding CostOPT

Number of Orders Per Year=D/Q Number of Orders Per Year=D/Q

Time Between Orders= Q/DTime Between Orders= Q/D

EOQ EXAMPLE:

Zartex Co. produces fertilizer to sell to wholesalers. One raw material – calcium nitrate – is purchased from a nearby supplier at $22.50 per ton. Zartex estimates it will need 5,750,000 tons of calcium nitrate next year.

The annual carrying cost for this material is 40% of the acquisition cost, and the ordering cost is $595. a) What is the most economical order quantity?b) How many orders will be placed per year?c) How much time will elapse between orders?

Economic Production Quantity (EPQ)

• Production done in batches or lots• Capacity to produce a part exceeds the part’s usage

or demand rate• Assumptions of EPQ are similar to EOQ except orders

are received incrementally during production

Economic Production Quantity Assumptions

• Only one item is involved• Annual demand is known• Usage rate is constant• Usage occurs continually• Production rate is constant• Lead time does not vary• No quantity discounts

Economic Production Quantity

pp = production rate = production rate dd = demand rate = demand rate

Maximum inventory level =Maximum inventory level = QQ - - dd

== QQ 1 - 1 -

QQpp

ddpp

Average inventory level = Average inventory level = 1 - 1 -QQ22

ddpp

TCTC = + 1 - = + 1 -ddpp

CCooDD

QQ

CCccQQ

22

QQoptopt = =22CCooDD

CCcc 1 - 1 - ddpp

Production run = Q/p

No. of Production runs = D/Q

EPQ problemHighland Electric Co. buys coal from Cedar

Creek Coal Co. to generate electricity. CCCC can supply coal at the rate of 3,500 tons per day for $10.50 per ton. HEC uses the coal at a rate of 800 tons per day and operates 365 days per year.

HEC’s annual carrying cost for coal is 20% of the acquisition cost, and the ordering cost is $5,000.a) What is the economical production lot size?b) What is HEC’s maximum inventory level for coal?

EOQ WITH QUANTITY DISCOUNTS

• Under quantity discounts, a supplier offers a lower unit price if larger quantities are ordered at one time

• This is presented as a price or discount schedule, i.e., a certain unit price over a certain order quantity range

• This means this model differs from Model I because the acquisition cost (ac) may vary with the quantity ordered, i.e., it is not necessarily constant

EOQ WITH QUANTITY DISCOUNTS

• The total annual material costs (TMC) = Total annual stocking costs (TSC) + annual acquisition cost

TSC = (Q/2)C + (D/Q)S + (D)ac

EOQ WITH QUANTITY DISCOUNTS

To find the EOQ, the following procedure is used:

1. Compute the EOQ using the lowest acquisition cost. – If the resulting EOQ is feasible (the quantity can be

purchased at the acquisition cost used), this quantity is optimal and you are finished.

– If the resulting EOQ is not feasible, go to Step 22. Identify the next higher acquisition cost.

EOQ WITH QUANTITY DISCOUNTS

3. Compute the EOQ using the acquisition cost from Step 2.– If the resulting EOQ is feasible, go to Step 4.– Otherwise, go to Step 2.

4. Compute the TMC for the feasible EOQ (just found in Step 3) and its corresponding acquisition cost.

5. Compute the TMC for each of the lower acquisition costs using the minimum allowed order quantity for each cost.

6. The quantity with the lowest TMC is optimal.

EOQ WITH QUANTITY DISCOUNTS:PROBLEM

A-1 Auto Parts has a regional tire warehouse in Atlanta. One popular tire, the XRX75, has estimated demand of 25,000 next year. It costs A-1 $100 to place an order for the tires, and the annual carrying cost is 30% of the acquisition cost. The supplier quotes these prices for the tire:

Q ac

1 – 499 $21.60500 – 999 20.951,000 + 20.90

Ordering Points

• The second decision in managing goods for sale is when to order a given product

• Reorder Point – the quantity level of inventory on hand that triggers a new purchase order

Reorder Point

Level of inventory at which a new order Level of inventory at which a new order is placed is placed

RR = = dLdL

wherewhere

dd = demand rate per period = demand rate per periodLL = lead time = lead time

Calculate reorder point:

Demand = 10,000 yards/yearDemand = 10,000 yards/year

Store open 311 days/yearStore open 311 days/year

Lead time = L = 10 daysLead time = L = 10 days

Single Period Model

• Single period model: model for ordering of perishables (vegetables, milk, …) and other items with limited useful lives

• Shortage cost: generally the unrealized profits per unit

• Excess cost: difference between purchase cost and salvage value of items left over at the end of a period

Single Period Model

• Continuous stocking levels

– Identifies optimal stocking levels

– Optimal stocking level balances unit shortage and excess cost

• Discrete stocking levels

– Service levels are discrete rather than continuous

– Desired service level is equaled or exceeded

MATERIALS MANAGEMENT

Materials Management

• Materials management is the branch of logistics that deals with the tangible components of a supply chain. Specifically, this covers the acquisition of spare parts and replacements, quality control of purchasing and ordering such parts, and the standards involved in ordering, shipping, and warehousing said parts.

Materials Management

• Integrates all materials functions– purchasing– Inventory management– Production control– Inbound traffic– Warehousing and stores– Incoming quality control

AIM OF MATERIAL MANAGEMENT

To get

1. The Right quality

2. Right quantity of supplies

3. At the Right time

4. At the Right place

5. For the Right cost

PURPOSE OF MATERIAL MANAGEMENT

•To gain economy in purchasing

•To satisfy the demand during period of replenishment

•To carry reserve stock to avoid stock out

•To stabilize fluctuations in consumption

•To provide reasonable level of client services

Economy in material management

•Containing the costs

•Instilling efficiency in all activities

Four basic needs of Material management

1. To have adequate materials on hand when needed

2. To pay the lowest possible prices, consistent with

quality and value requirement for purchases

materials

3. To minimize the inventory investment

4. To operate efficiently

Basic principles of material management1. Effective management & supervisionIt depends on managerial functions of • Planning• Organizing• Staffing• Directing• Controlling • Reporting• Budgeting2. Sound purchasing methods3.Skillful & hard poised negotiations4.Effective purchase system5.Should be simple6.Must not increase other costs7.Simple inventory control programme

Elements of material management

1. Demand estimation

2. Identify the needed items

3. Calculate from the trends in Consumption during last years.

4. Review with resource constraints

-

Traditional organizational structure

-

Potential materials management linkages

Role of organization

Organizational linkages more numerous and complex

More difficult to control costs

Require separate materials management as a function

Equal weight with other departments

Decide between centralized and decentralized organizational structure

Organization structure with materials management as separate function

Strategicmanager/CEO

Productionplanning

and controlPurchasing

Manufacturing Marketing Finance

Distribution

Materialsmanagement

MATERIALS MANAGEMENT SYTEMS AND TECHNIQUES

JIT

• Just-in-Time (JIT) Purchasing is the purchase of materials or goods so they are delivered just as needed for production or sales

• JIT is popular because carrying costs are actually much greater than estimated because warehousing, handing, shrinkage, and investment costs have not been correctly estimated

JIT Purchasing

• JIT reduces the cost of placing a purchase order because:– Long-term purchasing agreements define price

and quality terms. Individual purchase orders covered by those agreements require no additional negotiation regarding price or quality

– Companies are using electronic links to place purchase orders at a small fraction of traditional methods (phone or mail)

– Companies are using purchase-order cards

Relevant Costs in JIT Purchasing

• Purchasing Costs• Stockout Costs• Quality Costs

JIT Production Goals

1. Meet customer demand in a timely basis,2. with high-quality products,3. at the lowest possible cost.

JIT Production Features

• Production is organized in manufacturing cells, a grouping of all the different types of equipment used to make a given product

• Workers are hired and trained to be multi-skilled (cross-trained)

• Defects are aggressively eliminated• Setup time is reduced• Suppliers are selected on the basis of their ability to

deliver quality materials in a timely manner

Other Benefits of JIT Production

• Lower overhead costs• Lower inventory levels• Heightened emphasis on improving quality by

eliminating the specific causes of rework, scrap, and waste

• Shorter manufacturing lead times

Performance Measures and Control in JIT

• Financial performance measures such as inventory turnover ratio

• Nonfinancial performance measures of time, inventory, and quality such as:– Manufacturing lead times– Units produced per hour– Days of inventory on hand– Setup time as a % of total manufacturing time– Number of defective units as a % of total units produced

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JIT PurchasingJIT PurchasingJIT Purchasing

The key elements of JIT purchasing are:The key elements of JIT purchasing are:

Cooperative, not adversarial relationshipsCooperative, not adversarial relationships

LongerLonger--term relationships, fewer suppliersterm relationships, fewer suppliers

Delivery and quality enters into selecting a supplierDelivery and quality enters into selecting a supplier

JIT in supplier’s operationJIT in supplier’s operation

Suppliers nearbySuppliers nearby

Shipments delivered directly to production lineShipments delivered directly to production line

Deliveries in small, standardDeliveries in small, standard--size, returnable containerssize, returnable containers

Minimum of paperworkMinimum of paperwork

CONCLUSION

Material management is an important management tool which will be very useful in getting the right quality & right quantity of supplies at right time, having good inventory control & adopting sound methods of condemnation & disposal will improve the efficiency of the organization & also make the working atmosphere healthy any typeof organization, whether it is Private, Government ,Small organization, Big organization and Household.

Even a common man must know the basics of material management so that he can get the best of the available resources and make it a habit to adopt the principles of material management in all our daily activities