Literature Review

Improving Inventory Control by Re-engineering of Warehouse.

LITERATURE REVIEW

Introduction of Ware House:

Abstract:

Developing an input-output model of a warehouse system to assess operational efficiency. Model simultaneously accounts for all of the critical resources (labor, space, and storage and handling equipment) and the different workload requirements (Picking, storage and order accumulation) of a warehouse. Warehouse and distribution facilities from a variety of industries, including auto parts, dental and office supplies, electronics, fine papers, hardware, health care, industrial packaging, mail order apparel, office machines, photographic supplies, and wholesale drugs, and used the model to assess and compare their efficiencies. Warehouses using lower levels of automation tend to be more efficient. This association is more pronounced in small firms. Unionization is not negatively associated with efficiency and in fact may actually contribute to higher efficiency.

Order picking has long been identified as the most labour-intensive and costly activity for almost every warehouse; the cost of order picking is estimated to be as much as 55% of the total warehouse operating expense. Any underperformance in order picking can lead to unsatisfactory service and high operational cost for its warehouse, and consequently for the whole supply chain. In order to operate efficiently, the order picking process needs to be robustly designed and optimally controlled. This paper gives a literature overview on typical decision problems in design and control of manual order-picking processes. We focus on optimal (internal) layout design, storage assignment methods, routing methods, order batching and zoning. The research in this area has grown rapidly recently. Still, combinations of the above areas have hardly been explored. Order-picking system developments in practice lead to promising new research directions.

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore


Introduction:

Warehousing and transportation forms the backbone supply chain of all industries. Adequate storage capacity and strategic location of the warehouse enables efficient functioning of supply and distribution network and also provides strategic competitive advantage to the business. Proper material handling, storage conditions and timely movement of goods are necessary as improper handling and prolonged storage can deteriorate the quality of the stored product.

Warehouse can play a key role in the integrated logistics strategy and its building and maintaining good relationships between supply chain partners. Warehousing affects customer service stock-out rates and firm’s sales and marketing success. A warehouse smoothens out market supply and demand fluctuations. When supply exceeds demand, demand warehouse stores products in anticipation of customers requirements when Demand exceeds supply the warehouse can speed product movement to the customer by performing additional services like marking prices, packaging products or final assembling etc.

Storage Warehouse:

A storage warehouse is a commercial building which is generally located in the industrial areas and is used for the storage of goods. Storage warehouses are generally used by manufacturers, wholesalers, exporters, transport business and customs to store goods..A storage warehouse is an important part in the distribution chain of products. They are the hubs where goods are stored to be distributed further. To help the movement of goods and the process storage warehouses are equipped with cranes and forklifts.



With time the need of a typical warehouse has be declining due to the Just in Time policy followed by the business to improve the returns of a business by reducing in process inventory. The JiT system promotes the delivery of products or parts directly from the manufacturer to the merchant eliminating the need of a storage warehouse. But still storage warehouses are commonly used due to the convenience they offer in the distribution chain. The latest development is the retail store type warehouses where decorative shelving is replaced by tall heavy duty industrial racks.


http://www.storagewarehouses.net/




Understanding Inventory:

Despite its importance to the supply chain, inventory is not universally well understood. It is variously characterized, both positively and negatively, as an economic asset to a non-income-producing use of capital funds.

Only when considered in light of all quality, client service and economic factors—from the viewpoints of purchasing, manufacturing, sales and finance—does the whole picture of inventory become clear. No matter the viewpoint, effective inventory management is essential to supply chain competitiveness.

Inventory control is concerned with minimizing the total cost of inventory. In the U.K. the term often used is stock control. The three main factors in inventory control decision making process are:

The cost of holding the stock The cost of placing an order

The cost of shortage

The third element is the most difficult to measure and is often handled by

establishing a "service level" policy, e. g, certain percentage of demand will be met

from stock without delay.

Types of Inventory:

Company using the different types of inventory,

Cyclic Inventory Safety Inventory

Seasonal Inventory

Cyclic Inventory:

Cyclic inventory is the average amount of inventory used to satisfy demand between receipts of supplier shipments. The size of the cyclic inventory is a result of production, transportation, or purchased of material in large lots.



Safety Inventory:

Safety inventory is the inventory held in case demand exceeds expectation; it is held to counter uncertainty. If the world were perfectly predictable, only cyclic inventory would be needed, because demand is uncertain and may exceed expectations, however, companies hold safety inventory to satisfy an unexpectedly high demand.

Seasonal Inventory:

Seasonal Inventory is built up to counter predictable variability in demand, companies using seasonal inventory buildup inventory in periods of low demand and store it for periods of low demand and store it for periods of high demand when they will not have the capacity to produce all that is demanded.

Lowering Inventory Costs:

Recent industry reports show that inventory costs as a percent of total logistics costs are increasing. Despite this rise, many organizations have not taken full advantage of ways for lowering inventory costs.

There are a number of proven strategies that will provide payoff in the inventory area, both in client service and in financial terms.

Some of these strategies for lowering inventory costs involve having fewer inventories while others involve owning less of the inventory you have.

Regardless of which techniques you employ, proactive inventory management practices will make a measurable difference in your operations.



JUST-IN-TIME INVENTORY CONTROL:

"Just-in-time production is a simple idea that may be difficult to implement " wrote Gershon and Weiss.

"The basic concept is that finished goods should be produced just in time for delivery, and raw materials should be delivered just in time for production. When this occurs, materials or goods never sit idle, which means that a minimum amount of money is tied up in raw materials, semi finished goods, and finished goods…. The just-in-time approach calls for slashing production and purchase lot sizes and also buffer stocks—but incrementally, a little at a time, month after month, year after year. The result is sustained productivity and quality improvement with greater flexibility and delivery responsiveness." This production concept, which originated in Japan and became immensely popular in American industries in the early and mid-1990s, continues to be hailed by proponents as a viable alternative for businesses looking for a competitive edge.

Setting an Inventory Strategy

No single inventory strategy is equally effective for all businesses. Indeed, there are many different factors that can impact the usefulness of a given inventory strategy, including positioning of inventory, rationalization, segmentation, and continuous improvement efforts. Moreover, small businesses in particular often face financial and logistical limitations when erecting their inventory systems. And of course, different industries have different inventory needs. Consumer goods producers, for instance, need to have well-balanced inventories at the point of sale, while producers of industrial and commercial products typically do not have clients that require the same degree of delivery lead time.

Inventory Accounting

The way in which a company accounts for its inventory can have a dramatic affect on its financial statements. Inventory is a current asset on the balance sheet.


http://www.answers.com/topic/idle


Therefore, the valuation of inventory directly affects the inventory, total current asset, and total asset balances. Companies intend to sell their inventory, and when they do, it increases the cost of goods sold, which is often a significant expense on the income statement. Therefore, how a company values its inventory will determine the cost of goods sold amount, which in turn affects gross profit (margin), net income before taxes, taxes owed, and ultimately net income. It is clear, then, that a company's inventory valuation approach can cause a ripple effect throughout its financial picture.

One may think that inventory valuation is relatively simple. For a retailer, inventory should be valued for what it cost to acquire that inventory. When an inventory item is sold, the inventory account should be reduced (credited) and cost of goods sold should be increased (debited) for the amount paid for each inventory item. This works if a company is operating under the Specific Identification Method. That is, a company knows the cost of every individual item that is sold. This method works well when the amount of inventory a company has is limited and each inventory item is unique.

The Specific Identification Method, however, is cumbersome in situations where a company owns a great deal of inventory and each specific inventory item is relatively indistinguishable from each other. As a result, other inventory valuation methods have been developed. The best known of these are the FIFO (first-in, first out) and LIFO (last-in, first-out) methods.

FIFO: First-in, first-out is a method of inventory accounting in which the oldest stock items in a company's inventory are assumed to have been the first items sold. Therefore, the inventory that remains is from the most recent purchases. In a period of rising prices, this accounting method yields a higher ending inventory, a lower cost of goods sold, a higher gross profit, and a highertaxable income.

The FIFO Method may come the closest to matching the actual physical flow of inventory. Since FIFO assumes that the oldest inventory is always sold first, the valuation of inventory still on hand is at the most recent price. Assuming inflation,


http://www.answers.com/topic/taxable-income

http://www.answers.com/topic/indistinguishable

http://www.answers.com/topic/cumbersome

http://www.answers.com/topic/inventory-valuation


this will mean that cost of goods sold will be at its lowest possible amount. Therefore, a major advantage of FIFO is that it has the effect of maximizing net income within an inflationary environment. The downside of that effect is that income taxes will be at their greatest.

LIFO: Last-in, first-out, on the other hand, is an accounting approach that assumes that the most recently acquired items are the first ones sold. Therefore, the inventory that remains is always the oldest inventory. During economic periods in which prices are rising, this inventory accounting method yields a lower ending inventory, a higher cost of goods sold, a lower gross profit, and a lower taxable income. The LIFO Method is preferred by many companies because it has the effect of reducing a company's taxes, thus increasing cash flow. However, these attributes of LIFO are only present in an inflationary environment.

The other major advantage of LIFO is that it can have an income smoothing effect. Again, assuming inflation and a company that is doing well, one would expect inventory levels to expand. Therefore, a company is purchasing inventory, but under LIFO, the majority of the cost of these purchases will be on the income statement as part of cost of goods sold. Thus, the most recent and most expensive purchases will increase cost of goods sold, thus lowering net income before taxes, and hence net income. Net income is still high, but it does not reach the levels that it would if the company used the FIFO method.


http://www.answers.com/topic/taxable


Warehouse Layout & Design:

Warehousing was supposed to disappear with Lean Manufacturing. This has rarely occurred but the nature of warehousing often does change from storage-dominance to transaction dominance.

In addition, the trend to overseas sourcing has increased the need for warehousing and its importance in the supply chain.Warehousing buffers inbound shipments from suppliers and outbound orders to customers. Customers usually order in patterns that are not compatible with the capabilities of the warehouse suppliers. The amount of storage depends on the disparity between incoming and outbound shipment patterns.

Order Picking In the Warehouse:

Order picking can be defined as the activity by which a small number of goods are

extracted from a warehousing system, to satisfy a number of independent customer

orders. Picking processes have become an important part of the supply chain

process. It is seen as the most labor-intensive and costly activity for almost every

warehouse, where the cost of order picking is estimated to be as much as 55% of

the total warehouse operating expense.



As the order picking process involves significant cost and can affect customer

satisfaction levels, there have been increasing numbers of process improvements

proposed to help companies with this supply chain issue.

Design Strategies:

One key to effective design is the relative dominance of picking or storage activity.

These two warehouse functions have opposing requirements.

Techniques that maximize space utilization tend to complicate picking and render it inefficient while large storage areas increase distance and also reduce picking efficiency. Ideal picking requires small stocks in dedicated, close locations. This works against storage efficiency.

The figure below shows how different transaction volumes, storage requirements and technologies lead to different design concepts.



High Pick & High StorageThis indicates a large and active warehouse such as a Distribution Center (DC). In these situations, high technology automated picking combined with mechanized handling and high density storage justifies itself.

Low Pick & High StorageThe requirement is for high density storage with high bays, multi-levels and dense packing. Low turnover means that picking can be manual or semi-manual.

High Pick & Low StorageWith high picking activity but low storage, the picking area should be compact and dense and storage is simple. Some automation of picking may be justified.


LOW PICKING & HIGH STORAGE


Low Pick & Low StorageA simple, small warehouse requires neither automation nor sophisticated storage devices. Stacked pallets, floor storage or simple racks and shelves suffice. Handling is manual.

Current Warehousing Problems

Space Utilization Costs too high

Poor productivity

Poor layout

Processes not working

Measuring Tools for the re-engineering of the ware house

5’S

About 5’S: What is 5S ?

5-S can be defined as

1. Seiri (Proper Arrangement and Clearing Up)

a) Look around work area and ask yourself “is it really necessary for all items to be

there?”

b) Separate O.K., re workable and rejected items

c) Rework the re workable items and dispose of the rejected items.


http://www.logisticsbureau.com/distribution_centre_process_improvement.htm


2. Seiton (Orderliness)

Items must be placed in prefixed locations so that they are easily accessible and

can be easily used. Make sure that items can be clearly identified by labeling them

properly.

3. Seiso (Clean Up)

Seiso means cleaning the work place.

4. Seiketsu (Standardization)

Even a clean work place with proper selection and proper arrangement will soon

become dirty if Seiri, Seiton and Seiso are not continuously repeated. Let us

prevent problems by keeping things standardized and maintaining a good

environment.

5. Shisuke (Discipline)

Everyone should be disciplined to follow strictly the rules and maintain standards

while working. For example let us adhere to the timings and let us follow the

prescribed operation standards.

Benefits of 5’S:

Saving of searching time.

Making availability of extra space in plant.

Safety of workers in warehouse.

Before the re-engineering of warehouse I found that:

Space utilization is not proper. Picking times is more.



They doing outward scanning in two places. No any identification mark for the brands.

Advantages of Re-engineering Warehouse:

Proper Space utilization. Reduces the picking time. Proper identifications of rack number, brands and others. Proper marking, where to store the put way and outward.

References:

Shopper’s Stop Warehouse in Bangalore Supply Chain Management Book- Mr. Sunil Chopra


Literature Review

Documents

Transcript of Literature Review