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7/9/2020 Ho Chi Minh city University of Transport Faculty of Transport Economics Logistics Division *** Warehousing & Inventory Management Compiled by M.Sc Nguyen Huynh Luu Phuong (Internal Use only) * Agenda: Chapter 1: Inventory management Chapter 2: Warehousing management Chapter 1: Inventory management 1.1 Definition of Inventory: - Inventory is a stock or store of goods It generally refers to material in stock It is also called the idle resource of an enterprise for current and future demand * Quiz: 1/ What types of goods people store? 2/ How many forms of inventory are there? 7/9/2020 1.1 Definition of Inventory: - Do you remember “Dependent and Independent demand” that you studied in the subject “Production management”? Yes, sir No, I’m sorry, sir Oops, Take up studies again to learn more Yeah, Go on the next lesson 1.2 Functions of inventory: To meet anticipated demand To smooth production requirements (seasonal inventory) To decouple components of supply – production – distribution system Inventory To protect against stock-outs (Safety buffer) To take advantage of order cycle To hedge against price increases or to take advantage of quantity discounts To permit production operations 1.3 Objectives of inventory control: What happens if underand overstocking occur? What concerns I need to focus on? Level of customer service Cost of inventory management 7/9/2020 1.4 Requirements for effective inventory management: To be effective, manager must have the following: ➢ A system to keep track of inventory on hand and on order ➢ A reliable forecast of demand ➢ Knowledge of lead time and lead time variability ➢ Resonable estimates of inventory holding cost, ordering cost and shortage cost ➢ A classification system for inventory items 1.4.1 Inventory counting system: → Periodic system: Physical count of items in inventory made at periodic intervals → Perpetual system: System that keeps track of removals from inventory continuously, thus monitoring current levels of each item Trend in usage of computerized check out systems nowadays Some devices facilitate the counting activities * Periodic system: +: decrease order cost by grouping order 933481 001063 -: extra stock for risk of shortage, make decision how much to order * Perpetual system: +: Continuous tracking inventory, fixed order quantity -: added cost of tracking, physical count still needed to ensure the correct information 1.4.2 Demand forcast and lead time information: Forecasting Inventory Management 1.4.3 Cost information: Four basic costs are associated with inventory: - Holding cost (Carrying cost) - Purchasing cost - Ordering cost - Shortage cost 7/9/2020 1.4.4 Classification system: A-B-C Approach: Classifying inventory according to some measure of importance, and then allocating control efforts accordingly 60% High A item B item Annual dollar – volume of items C item Low 10-15% Few 10-20% Number of items Many 50-60% 10 1.4 Economic Order Quantity model (EOQ): * EOQ: Identifying the order size that minimizes total cost 1.4.1 Basic EOQ model: * Assumptions of basic EOQ: ▪ Only one product is involved ▪ Annual demand requirements are known ▪ Demand is spread throughout the year so that the demand rate is reasonbly constant ▪ Lead time doesn’t vary ▪ Each order is received in a single delivery ▪ There are no quantity discounts 11 1.4.1 Basic EOQ model: The inventory cycle: Profile of inventory level over time 12 7/9/2020 1.4.1 Basic EOQ model: The relation between average inventory and number of orders per year 13 1.4.1 Basic EOQ model: Total annual cost = Annual carrying cost + Annual ordering cost TC = Q D H+ S Q Where: - D: Demand, usually in units per year - Q: Order quantity, in units - S: Ordering cost, in dollars USD (or other currency code) - H: Carrying cost, usually in dollars per unit per year 14 1.4.1 Basic EOQ model: 15 7/9/2020 1.4.1 Basic EOQ model: By the profile above or by the calculus, we can obtain the optimal (economic) order quantity The result is the fomula: DS H Q0 = The length of order cycle: Cycle time = Q0 D 16 1.4.2 Economic Production Quantity (EPQ): * The assumptions of the EPQ model are similar to those of the EOQ model, except that instead of orders received in a single delivery, units are received incrementally during production t1 t2 17 1.4.2 Economic Production Quantity (EPQ): Total annual cost = Carrying cost + Setup cost (Ordering cost) TC = I max D H+ S Q Where: Imax: Maximum Inventory I max = Q ( p − u) p p: Production or Delivery rate u: Usage rate 18 7/9/2020 1.4.2 Economic Production Quantity (EPQ): The economic run quantity is: Q0 = DS H The length of order cycle is: Cycle time = The run time is: Run time = p p −u Q0 u Q0 p 19 1.4.3 EOQ with Quantity Discounts: Quantity discounts are price reductions for large orders offered to customers to induce them to buy in larger quantity The more you purchase, the lower price you get But, the more I purchase, the more inventory I deal with 20 1.4.3 EOQ with Quantity Discounts: Total cost = Carrying cost + Ordering cost + Purchasing cost TC = Q D H + S + P.D Q Where: P: Unit price 21 7/9/2020 1.4.3 EOQ with Quantity Discounts: 22 Adding PD doesn’t change the EOQ 1.4.3 EOQ with Quantity Discounts: Order quantity Price per unit to 44 $2 45 to 69 $ 1.7 70 or more $ 1.4 The total cost curve with quantity discounts is composed of a portion of the total cost curve for each price 23 1.4.3 EOQ with Quantity Discounts: There are two general cases of the model: ❑ Carrying costs are constant ❑ Carrying costs are stated as a percentage of purchase price When carrying costs are constant, all curves have the same EOQ 24 7/9/2020 1.4.3 EOQ with Quantity Discounts: The procedure for determining the overall EOQ for carrying costs are constant: Compute the common EOQ a If the feasible EOQ is on the lowest price range, that is the optimal order quantity b If the feasible EOQ is in any other range, compute the total cost for the EOQ and for the price breaks of all lower unit costs Compare the total costs, the quantity that yields the lowest total cost is the optimal order quantity 25 1.4.3 EOQ with Quantity Discounts: When carrying costs are given as a percentage of unit price, price decreases reduce carrying costs and that causes an increase in the EOQ 26 1.4.3 EOQ with Quantity Discounts: The procedure for determining the overall EOQ for carrying costs are stated as a percentage of unit price: Beginning with the lowest price, compute the EOQ for each price range until a feasible EOQ is found If the EOQ for the lowest price is feasible, it is optimal order quantity If the EOQ is not the lowest price range, compare the total cost at the price break for all lower prices with total cost of the largest feasible EOQ The quantity that yields the lowest total cost is the optimum 27 7/9/2020 1.4.4 When to reorder with EOQ ordering: → REORDER POINT (ROP): When the quantity on hand of an item drops to this amount, the item is reordered There are four determinants of the reorder point quantity: The rate of demand The length of lead time The extent of demand and/or lead time variability The degree of stock-out risk acceptable to management If demand and lead time are both constant, the reorder point is simply: ROP = d x LT Where: d: Demand per day or week LT: Lead time in days or weeks 28 1.4.4 When to reorder with EOQ ordering: * Example 8: Tingly takes two-a-day vitamins, which are delivered to his home by a routeman seven days after an order is called in At what point should Tingly telephone his order in? (Note: No safety stock involed) → Service level: Probability that demand will not exceed supply during lead time Service level = 100% - Stockout risk → Safety stock: Stock that is held in excess of expected demand due to variable demand rate and/or lead time The ROP then increases by the amount of the safety stock ROP = Expected demand during lead time + safety stock 29 1.4.4 When to reorder with EOQ ordering: 30 10 7/9/2020 2.6 Storage and handling equipment: Vertical Carousel 79 2.6 Storage and handling equipment: Automatic Guided Vehicle Systems (AGVSs) 80 2.6 Storage and handling equipment: * Advantages of Automated Materials Handling systems: - Labor cost reduction - Ability to increase output rate - Improvement in consistency of service - Increased accuracy level - Improvement in speed of service * Disadvantages of Automated Materials Handling systems: - Initial capital cost - Downtime or Maintenance interruptions - Software-related prolem - Lack of flexibility to respond to changing environment - Maintenance cost - User interface and training 81 27 7/9/2020 2.7 Inefficient warehouse management system: - Receiving - Put-away - Storage ▪ Incorrect product, uncompleted information … ▪ Unidentified product, unknown storage location … ▪ Different size of items, inappropriate location of storage, unproductive space utilization … - Order picking - Shipping Prep - Shipping ▪ Costly picking method, uncompleted picking … ▪ Unsuitable packaging, no lebeling … ▪ No scheduling, out of date records, inefficient loading … 82 2.8 Warehouse activity cost: ▪ Receiving cost ▪ Storage cost ▪ Picking cost ▪ Shipping cost * Warehouse affects the following cost: ❑ Warehousing cost ❑ Cost of loss sale ❑ Inventory cost ❑ Transport cost 83 2.9 Plan for warehouse and facility: ❑ Factors of warehouse location selection ❖ Source of raw material or items Where is the best place to locate our warehouse? ❖ Transportation network, facility aroud the site ❖ Source of labor, cost of labor ❖ Community’s attitude, government regulations ❖ Public facility ❖ Environment ❖ Future opportunity ❖ Land cost, construction cost, tax, insurance ❖ Distance between factory, supplier, customer… 84 28 7/9/2020 2.10 Design for warehouse and facility: ❑ Factors affect the size of warehouse ❖ Customer service level ❖ Size of market served ❖ Number of products marketed ❖ Size of product ❖ Materials handling system used ❖ Throughput rate ❖ Production leadtime ❖ Stock layout ❖ Necessary space requirements ❖ Types of racks used ❖ Demand fluctuations 85 2.10 Design for warehouse and facility: Type of truck Deep reach Turret Reach lift Counter balance Area required 500 m2 285 m2 600 m2 900 m2 Aisle width 2.5 m 1.6 m 2.4 m 3.6 m Floor space saved 45% 70% 33% 86 2.10 Design for warehouse and facility: 2.10.1 Truck yard traffic flow pattern Warehouse Loading/Unloading area Truck road Maneuvering area Internal bus system/walkway 87 29 7/9/2020 2.10 Design for warehouse and facility: 2.10.2 Temporary holding area: Trucks park along the perimeter Trucks park in the middle Trucks park at 45-degree angle 88 2.10 Design for warehouse and facility: 2.10.3 Truck dock concepts: * Open dock: - Low-cost design - Negative impact of weather 89 2.10 Design for warehouse and facility: 2.10.3 Truck dock concepts: * Flush dock: - Excellent weather protection & security - Dock bumper required to prevent damage - Require good communication between driver & dock employee 90 30 7/9/2020 2.10 Design for warehouse and facility: 2.10.3 Truck dock concepts: * Enclosed dock: - A variant of open or flush design, including: ▪ The straight-in-entrance enclosed dock ▪ The side entrance enclosed dock ▪ The finger dock design ▪ The drive-through dock design Flat-bed or open-sided truck 91 2.10 Design for warehouse and facility: 2.10.3 Truck dock concepts: * Saw-Tooth dock: - Suitable for limited maneuvering area - Require one way truck flow pattern - Require more dock space -> fewer docks, high construction cost 92 2.10 Design for warehouse and facility: 2.10.3 Truck dock concepts: * Pier dock: - Suitable for limited dock area - Require an extension to connect warehouse with docks 93 31 7/9/2020 2.10 Design for warehouse and facility: 2.10.3 Truck dock concepts: ❑ Reduce in-house transport by considering these receiving and shipping docks location 94 2.10 Design for warehouse and facility: 2.10.4 Facility design considerations: ❑ Area required for the projected storage, the number of storage position and other operational space requirements such as aisle space, office and miscellaneous space ❖ Main aisle ❖ Cross aisle ❖ Personal aisle ❖ Service aisle ❖ Fire aisle Minimal requirement 95 2.10 Design for warehouse and facility: 2.10.4 Facility design considerations: ❑ Space for case picking, piece picking, sortation, packing or value-added activities What is valued-added activities? Quiz Assortment work Usually, shipping labels are affixed, indicating delivery addressees and delivery addresses, etc Assembling work Price-tagging Are the item number and quantity correct? Price Tag 96 32 7/9/2020 2.10 Design for warehouse and facility: 2.10.4 Facility design considerations: ❑ Space for equipments and tools to be stored, charging room ❑ Space for UPS, diesel generator 97 2.10 Design for warehouse and facility: 2.10.4 Facility design considerations: ❑ Local building codes, restriction, seismal, wind, rain, humidity… ❑ Average delivery truck requirements ❑ Building shape and expansion capability ❑ Use one story building as possible One-story warehouse Multi-story warehouse Ramp way 98 2.10 Design for warehouse and facility: 2.10.4 Facility design considerations: ❑ Use one story building as possible 99 33 7/9/2020 2.10 Design for warehouse and facility: 2.10.4 Facility design considerations: ❑ Adequate lighting systems and light level Natural light usage is recommended ❑ Ceiling fans or floor level fans to circulate the air Especially for humid area 100 2.10 Design for warehouse and facility: 2.10.4 Facility design considerations: ❑ Fire safety requirements for general warehouse ✓ Signage shall be provided on the walls of the warehouse to control the maximum allowable storage height and to maintain the minimum clearance below the sprinkler heads → A 50mm wide red line shall be drawn around the wall with signage indicated as “No Storage Above This Line” ✓ Fully comply with fire safety standard such as: TCVN 3890 -2009, TCVN 7336 – 2003, TCVN 6379 – 1998 ✓ No obstacle shall exist on fire ailse ✓ Put clear “exit” light indicator ✓ Exit doors are always in “open” satus (no lock, no catch) 101 2.10 Design for warehouse and facility: 2.10.4 Facility design considerations: ❑ Fire extinguishing instructions ✓ Put clear instruction panel at easily recognizable place Read fire fighting and prevention instructions thoroughly 102 34 7/9/2020 2.10 Design for warehouse and facility: 2.10.4 Facility design considerations: ❑ Take engineers’ advice for floor load capacity ❑ Pillar interval in warehouse 90 m 70 m 50 m 80 m 103 2.10 Design for warehouse and facility: 2.10.5 Storage area design: ❑ Use full building height ❑ Utilize warehouse’s cubic capacity 104 2.10 Design for warehouse and facility: 2.10.5 Storage area design: ❑ Move goods in a straight line 105 35 7/9/2020 2.10 Design for warehouse and facility: 2.10.5 Storage area design: ❑ Fixed location: This is a management method to specify storing locations (shelf numbers, etc.) by items, like at bookstores and libraries • Merit: It is easy to find goods as they are always in the same location • Demerit: Other goods cannot be stored even if there is some vacancy A shortage in storing space may occur because of a sudden increase in the quantity of goods to store ❑ Free location: This is a management method which allows any item to be stored at any vacant storing space Names of goods and their location number are connected to be managed • Merit: Storing space efficiency improves • Demerit: It is possible that the same kind of goods are dispersed and stored in different locations It is difficult to find goods, unless managed by computer, etc 106 2.10 Design for warehouse and facility: 2.10.5 Storage area design: ❑ Numbers are assigned to each lane of the shelves and each shelf, and the shelf number and stored goods are connected for management by computer, etc How to identify the pallet position in warehouse? 107 2.10 Design for warehouse and facility: 2.10.5 Storage area design: ❑ Products can be grouped by: ❖ Compatibility ❖ Complementarity ❖ Popularity ❑ Partition warehouse into smaller unit of storage and put clear section indicator ❑ Color sections, racks, shelve for easy recognition 108 36 7/9/2020 2.11 Operation design for warehouse: 2.11.1 Receiving: Check prerequisites No Check items Return to vendor Yes Schedule carrier Move goods to temporary/sortation area Prepare for equipment/labor Go to storing process Unload vehicle 109 2.11 Operation design for warehouse: 2.11.2 Storing: Rearrange goods Move goods to storage area Update records Update records Identify product Identify location Label SKU 110 2.11 Operation design for warehouse: 2.11.3 Picking: Build picking list Select picking method Draw routing pattern Prepare for equipment/labor Move goods to sortation area 111 37 7/9/2020 2.11 Operation design for warehouse: 2.11.3 Picking: * Communication devices widely used are: - Printed paper instruction - Voice-directed instruction - Pick-to-light digital display instruction 112 2.11 Operation design for warehouse: 2.11.3 Picking: * Picking methods: - Discrete picking - Batch picking - Zone picking - Wave picking - Zone-Batch picking - Zone-Wave picking - Zone-Batch-Wave picking 113 2.11 Operation design for warehouse: 2.11.3 Picking: * Picking routing patterns: ❑ The objective in designing a picker routing pattern is to minimize picker walking time and movements between two pick positions To achieve maximum picker productivity, an appropriate picker routing pattern is implemented in conjunction with good warehouse practices such as: Clear and properly lighted ailses, clear instruction, clear pick position etc ✓ S-Shape ✓ Return ✓ Mid-point ✓ Largest gap 114 38 7/9/2020 2.11 Operation design for warehouse: 2.11.4 Shipping preparation: Check picking list Label package Return remains to previous position Break case Form SKU Update records Assort items Label SKU Stage items Package items 115 2.11 Operation design for warehouse: 2.11.5 Shipping: Schedule carrier Prepare for equipment/labor Load vehicle Deliver to customer Update records 116 2.12 Warehousing and Inventory management Efficiency Measurement: * Inventory Turnover: 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = Quiz 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 Which is a high or low inventory turnover better??? 117 39 7/9/2020 2.12 Warehousing and Inventory management Efficiency Measurement: * Warehouse acitivities KPI: Warehouse activities efficiency measured by the following criteria: Cost – Cost of Receiving per receiving line, etc…; Productivity – Volume received per man-hour, etc…; Utilization – Receiving Dock door utilization %, etc…; Quality – Accurate receipts %, etc…; Cycle Time – Time taken to process a receipt, etc… 118 2.12 Warehouse activities and management Efficiency Measurement: Inventory 119 2.13 Tips for warehouse productivity: 120 40 7/9/2020 2.13 Tips for warehouse productivity: 121 41 ... with Quantity Discounts: 22 Adding PD doesn’t change the EOQ 1.4.3 EOQ with Quantity Discounts: Order quantity Price per unit to 44 $2 45 to 69 $ 1.7 70 or more $ 1.4 The total cost curve with quantity... Production Quantity (EPQ): The economic run quantity is: Q0 = DS H The length of order cycle is: Cycle time = The run time is: Run time = p p −u Q0 u Q0 p 19 1.4.3 EOQ with Quantity Discounts: Quantity... production – distribution system Inventory To protect against stock-outs (Safety buffer) To take advantage of order cycle To hedge against price increases or to take advantage of quantity discounts