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WAREHOUSING AND INVENTORY MANAGEMENT. WAREHOUSING.
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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.
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.
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.
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 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 constant over time • No shortages are allowed • Lead time for the receipt of orders is constant • Order quantity is received all at once
Annual carrying cost Annual 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 units H = Holding cost /unit/year • Annual ordering cost = (average number of orders per year) x (ordering cost) = (D/Q)S
Annual carrying cost Annual ordering cost Total cost = + Q D S H TC = + 2 Q Total Cost
Cost Minimization Goal The Total-Cost Curve is U-Shaped Annual Cost Carrying Costs Ordering Costs Order Quantity (Q) (optimal order quantity) QO
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. • Number of Orders Per Year=D/Q Time 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
p = production rate d = demand rate 2CoD Cc1 - Q p Maximum inventory level = Q - d = Q 1 - Qopt = d p d p d p CoD Q CcQ 2 Q 2 d p Average inventory level = 1 - TC = + 1 - Economic Production Quantity Production run = Q/p No. of Production runs = D/Q
EPQ problem Highland 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 2 2. 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 $21.60 500 – 999 20.95 1,000 + 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
Level of inventory at which a new order is placed R = dL where d = demand rate per period L = lead time Reorder Point
Calculate reorder point: Demand = 10,000 yards/year Store open 311 days/year Lead 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 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.
