Physical inventory and warehouse management

Arnold, Chapman, & Clive: Intro Materials
Management, 6th
ed.
© 2008 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Physical Inventory and
Warehouse Management
Chapter 12

Management, 6th
ed.
Warehouses
• Store inventory for a period of time
– storage
– protection
• Inventory may be turned over rapidly
– distribution center
– customer service

Management, 6th
ed.
Stores
• Perform the same function as a
warehouse for a factory
– raw materials
– finished goods
– supplies
– repair parts

Management, 6th
ed.
Warehouse Activities
• Receive goods
• Identify goods
• Dispatch goods to storage
• Hold goods
• Pick goods
• Marshal the shipment
• Dispatch the shipment
• Operate an information system

Management, 6th
ed.
Receive Goods
• Acceptance of goods from outside
transportation or an attached factory
a. Check the goods against an order or bill of
lading
b. Check the quantities
c. Check for any transit damage
d. Inspect goods if required

Management, 6th
ed.
Identify the goods
• With appropriate stock keeping unit
(SKU) number
• With part number
• Indicate the quantity

Management, 6th
ed.
Dispatch Goods to Storage
• Goods are sorted
• Put away goods
– record the location

Management, 6th
ed.
Hold Goods
• Storage is meant to protect the goods
– cold
– heated
– explosive

Management, 6th
ed.
Pick Goods
• Goods are picked from storage
– must be accessible
– location records
• Brought to marshalling area

Management, 6th
ed.
Marshal the Shipment
• All goods for an order are brought
together
– check for missing items
– check for correct items
– change order information if required

Management, 6th
ed.
Dispatch the Shipment
• The order is prepared for shipment and
loaded on the right vehicle
– protective packaging for shipment
– documents prepared
– loaded and secured

Management, 6th
ed.
Operate an Information System
• Need to know what is in the warehouse
– quantity on hand
– quantity received
– quantity issued
– location of goods
• Computer based or manual system

Management, 6th
ed.
Warehouse Management
• Make maximum use of space
– capital cost of space is very high
• Make effective us of labor and
equipment
– material handling equipment is the second
largest capital cost
– need best mix of equipment and labor
– all SKU’s should be easy to find
– move goods efficiently

Management, 6th
ed.
Warehouse Effectiveness
• Cube utilization and accessibility
• Stock location
• Order picking and assembly
• Packaging (discussed in Chapter 13)

Management, 6th
ed.
Cube Utilization and Accessibility
• Goods are stored on the floor and in the
space above
• Space also required for:
aisles offices
receiving order picking
shipping docks order assembly
• Need to know the maximum space
required

Management, 6th
ed.
Pallet Positions
• Floor storage
• Pallets are stacked on each other
• Maximum stacking height
– due to ceiling height
– due to weight restrictions
• Need to allow for side clearance

Management, 6th
ed.
2 inches
clearance
40 inches 40 inches
Total width required = 42 inches per pallet space
Pallet Spacing

Management, 6th
ed.
Pallet Spacing
6 x 42” / 12 = 21 feet required to store 16 pallets
stacked 3 high

Management, 6th
ed.
Pallet Positions - Example Problem
A company wants to store an SKU consisting of 13,000
cartons on pallets each containing 30 cartons. How
many pallet positions are needed if the pallets are
stored three high?
Number of pallets required = 13,000 / 30 = 434 pallets
Number of pallet positions = 434 / 3 = 144.67 or 145
Note one pallet position will contain only 2 pallets

Management, 6th
ed.
Accessibility
• The ability to get goods with a minimum
of effort
– without moving other goods
– can be a problem with multiple SKU’s in
one area

Management, 6th
ed.
Cube Utilization
• A measure of how well space is utilized
• Should also consider accessibility
– see product D in next slide
• Racking allows accessibility to all goods
while improving utilization

Management, 6th
ed.
Cube Utilization - Example
Product
A
Product
A
Product
A
Product
A
Product
A
Product
B
Product
B
Product
C
Product
C
Product
C
Product
D
Product
E
Utilization = 12 pallets / (5 x 3) spaces = 80%

Management, 6th
ed.
Pallet Positions - Example Problem
Pallets
SKU A 4 pallets
SKU B 6 pallets
SKU C 14 pallets
SKU D 8 pallets
SKU E 5 pallets
37 pallets
pallets are stored 3 high
Pallet Positions
2
2
5
3
2
14
Utilization
= 37 / (14 x 3) x 100%
= 88%

Management, 6th
ed.
Stock Location
• Location will depend on:
– type of goods stored
– storage facilities needed (i.e. refrigeration)
– throughput (volume of items picked)
– size of the orders
• Management considerations
– customer service
– keeping track of the items
– total effort required

Management, 6th
ed.
Locating Stock - Basic Systems
• Group functionally related items
together
• Group fast moving items together
• Group physically similar items together
• Locate working stock and reserve stock
separately

Management, 6th
ed.
Locating Stock -
Functionally Related Items
• Items that are similar in their use or
characteristics
– warehouse staff become familiar with the
items
– similar order processing needs
– often ordered together
• hardware items
• bulk items
• security?

Management, 6th
ed.
Locating Stock -
Fast Moving Items
• Close to receiving or shipping
• Reduces travel time
• Slower moving items can be further
away

Management, 6th
ed.
Locating Stock -
Physically Similar Items
• May have similar storage requirements
– refrigeration
– shelving
• Use similar handling equipment
– drums vs small items
– steel tubing vs cartons

Management, 6th
ed.
Locating Stock -
Working Stock & Reserve Stock
• Pick orders from a single location
– ‘home’ location
• Allows more compact picking area
– closer to marshalling area
– reduces order picking travel time
• Reserve stock is handled in bulk

Management, 6th
ed.
Fixed Location
• “A place for everything and everything
in its place”
• Reduces amount of record keeping
• Usually results in poor cube utilization
– space must be available for the
repenishment order quantity
– average of 50% utilization

Management, 6th
ed.
Floating Location
• Goods are stored wherever appropriate
space is available
• Requires good record keeping
• Improves cube utilization
• Often used for reserve stock

Management, 6th
ed.
Point-of-Use Storage
• JIT and repetitive manufacturing
– materials are readily accesible to users
– material handling is reduced
– central storage costs are reduced
– materials are accessible at all times
• Floor stock
– small ‘C’ items
– inventory is adjusted when stock is
replenished

Management, 6th
ed.
Central Storage
• All items are kept in one location
• The opposite of point-of-use storage
– ease of control
– accurate inventory control is easier
– makes use of specialized storage
– reduces safety stock

Management, 6th
ed.
Order Picking and Assembly
• Once an order is received it must be:
– retrieved
– assembled
– prepared for shipment
• Involves:
– labor
– movement of goods
• To provide the desired level of customer
service

Management, 6th
ed.
Area System
• Used in small warehouses
• The order picker moves through the
warehouse and takes all the goods to
shipping
– self marshalling
– order is complete when the picker is
finished

Management, 6th
ed.
Zone System
• Warehouse is divided into zones
• Order pickers work in their own area
– deliver goods to the marshalling area
• Zones are established by related items
– type of storage
– type of material handling required
• Marshalling area then organizes orders
for shipment

Management, 6th
ed.
Multi-order System
• Similar to zone system
• Multiple orders are picked together
• Marshalling area then sorts orders by
shipment
• Used where there are many items or
many small orders

Management, 6th
ed.
Working Stock and Reserve Stock
• Used in all systems
– area, zone, multi-order
• Working stock located close to shipping
• Replenishment is done by separate
workforce
• Improves order picking efficiency and
customer service

Management, 6th
ed.
Physical Control and Security
• Need a system to make it difficult for
people to make mistakes or forget to
update inventory records
• Need:
– a good part numbering system
– a simple well documented transaction
system

Management, 6th
ed.
Part Numbering
• Each part has a unique number used
only for that part
• Descriptive part numbers
– assist in order picking and service
– difficult to keep current
• Non-descriptive part numbers
– easier to keep up-to-date

Management, 6th
ed.
Transaction System
1. Identfy the item
– quantity, location, part number
2. Verify quantity
– standard size containers if possible
3. Record the transaction
– manual or computerized
4. Physically execute the transaction
– move the goods

Management, 6th
ed.
Phsical Control and Security
• Limited access
– locked
– to ensure transactions are completed
• A well trained workforce
– to ensure transactions are completed
– familiar with handling the goods

Management, 6th
ed.
Inventory Record Accuracy
• Accurate on-hand balances are needed
to:
– avoid shortages
– maintain schedules
– avoid excess inventory
• (of the wrong goods)
– provide good customer service

Management, 6th
ed.
Inventory Record Accuracy
• Operate an effective materials
management system
• Maintain customer service
• Operate effectively and efficiently
• Analyse inventory
• The system is only as good as the data
used

Management, 6th
ed.
Inaccurate Inventories
• Result in:
– Lost sales
– Disrupted schedules
– Excess inventory of the wrong things
– Low porductivity
– Poor delivery performance
– Excess expediting

Management, 6th
ed.
Causes of Inventory Errors
• Unauthorized withdrawal of material
• Unsecure stockroom
• Poorly trained personnel
• Inaccurate transaction recording
• Poor transaction recording system
– system should reduce the likelihood of
human error
• Lack of audit capability

Management, 6th
ed.
Measuring Inventory Record
Accuracy
• Ideal is 100%
– banks
– ‘A’ items
• A tolerance may be allowed for some
items

Management, 6th
ed.
Tolerance
• “Allowable departure from nominal
value ….”
– APICS 11th Edition Dictionary
• Between the inventory record and a physical
count
• Set on individual items
– Value, critical nature of the item, availablity, lead
time, safety, ability to measure

Management, 6th
ed.
Tolerance
Figure 12.3 Inventory record accuracy

Management, 6th
ed.
Tolerance
Figure 12.4 Inventory accuracy with tolerances

Management, 6th
ed.
Tolerance Example Problem
Part
Number
Shelf
Count
Inventory
Record
Tolerance
A 1500 1550 +/- 5%
B 120 125 +/- 2%
C 225 230 +/- 3%
D 155 155 +/- 0%
Outside
Tolerance

Management, 6th
ed.
Auditing Inventory Records
• Checking the accuracy of inventory
records
• Periodic Inventory
– usually an annual count
• Cycle Counting
– daily counts of items

Management, 6th
ed.
Auditing Inventory Records
• To correct the on-hand balance
– periodic inventory
• To find the reasons for errors and
eliminate them
– cycle counting

Management, 6th
ed.
Periodic (Annual) Inventory
• To satisfy financial auditors
• Determine the value of the inventory
• Financial auditors are concerned with
the total value
• Planners are concerned with the item
detail

Management, 6th
ed.
Taking the Physical Inventory
Taking a physical inventory is like painting; the
results depend on good preparation
– George Plossl
•Housekeeping
– sort items, precount and seal
•Identification
– identify and tag items
– use personnel familiar with the items
•Training in procedures

Management, 6th
ed.
Physical Inventory - Process
1. Count the items and record the count on
tickets left with the item
2. Verify the count, sampling may be used
3. Collect the tickets and list all items
4. Reconcile the inventory
update financial records
correct inventory balances
Investigate reasons for descrepancies

Management, 6th
ed.
Physical Inventory - Problems
• Production may be shut down
• Labor and paperwork effort
• Pressure to get the inventory completed
• People doing the inventory may not be
familiar with the items
• Errors may be introduced

Management, 6th
ed.
Cycle Counting
• Count inventory continually throughout
the year
• Predetermined schedule
– some items counted frequently
• depending on value
• past history of problems
• Count some items every day

Management, 6th
ed.
Cycle Counting- Advantages
• Timely correction of errors
• Reduction of lost production
• Use of trained personnel
– familiar with the items
– fewer errors
– able to identify problems

Management, 6th
ed.
Count Frequency
• The number of times each item is
counted per year
• Increases by:
– the value or critical nature of the item
– the number of transactions per year
• chances of error
– a past history of problems with the item

Management, 6th
ed.
Count Frequency - Methods
• ABC method
– management establishes a rule for how
many times an item should be counted per
year
• e.g. ‘A’ items once per month, ‘B’ items
quartery, ‘C’ items twice per year
– a mix of all items is counted every day
• computerized systems can identify daily lists of
items to count

Management, 6th
ed.
Scheduling Cycle Counts
Classification
Number
of Items
Count
Frequency
per Year
Number
of Counts
Number of
Counts
per Day
A
B
C
1000
1500
2500
12
4
1
12,000
6000
2500
48*
24
10
Total Count 20,500
Workdays per Year 250
Counts per Day 82
* Counts per day = 82 * 12,000 / 20,500
Figure 12.5

Management, 6th
ed.
Scheduling Cycle Counts -
Example Problem
Classification
Number
of Items
Count
Frequency
per Year
Number
of Counts
Number of
Counts
per Day
A
B
C
2000
3000
5000
12
4
2
Total Count
Workdays per Year
Counts per Day
24,000
12,000
10,000
46,000
250
184
96
48
40

Management, 6th
ed.
Count Frequency Methods -
Continued
• Zone Method
– used with:
– fixed location system
– work-in-process counts
– in-transit inventory counts
• Location Audit
– verifies location of goods

Management, 6th
ed.
Cycle Counting - When to Count
• Counts items when errors are likely to have
occurred
– when an order is placed
• detects errors when stock is low
– when an order is received
• stock is at its lowest
– when inventory reaches zero
– when an error occurs
• inventory shows negative or there is no stock
when there should be

Management, 6th
ed.
Technology Applications
• Bar Codes
– paper labels which show a product code
• RF Tags
– Radio Frequency
– do not need to ‘see’ the item
• Reduce recording errors
• Improve transaction speed

Physical inventory and warehouse management

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Physical inventory and warehouse management