Post on 13-Jan-2016
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
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