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



StudsPlanetLeading Education consultant in India www.StudsPlanet.com



Warehouses• Store inventory for a period of time

• storage• protection

• Inventory may be turned over rapidly• distribution center• customer service



Stores• Perform the same function as a warehouse for a factory

• raw materials• finished goods• supplies• repair parts



Warehouse Activities

• Receive goods• Identify goods• Dispatch goods to storage• Hold goods• Pick goods• Marshal the shipment• Dispatch the shipment• Operate an information system



Receive Goods• Acceptance of goods from outside transportation or an

attached factory

a. Check the goods against an order or bill of ladingb. Check the quantitiesc. Check for any transit damaged. Inspect goods if required



Identify the goods• With appropriate stock keeping unit (SKU) number• With part number• Indicate the quantity



Dispatch Goods to Storage• Goods are sorted• Put away goods

• record the location



Hold Goods• Storage is meant to protect the goods

• cold• heated• explosive



Pick Goods• Goods are picked from storage

• must be accessible• location records

• Brought to marshalling area



Marshal the Shipment• All goods for an order are brought together

• check for missing items• check for correct items• change order information if required



Dispatch the Shipment• The order is prepared for shipment and loaded on the right

vehicle• protective packaging for shipment• documents prepared• loaded and secured



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



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



Warehouse Effectiveness• Cube utilization and accessibility• Stock location• Order picking and assembly• Packaging (discussed in Chapter 13)



Cube Utilization and Accessibility

• Goods are stored on the floor and in the space above• Space also required for:

aisles officesreceiving order pickingshipping docks order assembly

• Need to know the maximum space required



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



2 inchesclearance

40 inches 40 inches

Total width required = 42 inches per pallet space

Pallet Spacing



Pallet Spacing

6 x 42” / 12 = 21 feet required to store 16 palletsstacked 3 high



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



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



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



Cube Utilization - Example

ProductA

ProductA

ProductA

ProductA

ProductA

ProductB

ProductB

ProductC

ProductC

ProductC

ProductD

ProductE

Utilization = 12 pallets / (5 x 3) spaces = 80%



Pallet Positions - Example Problem

PalletsSKU A 4 palletsSKU B 6 palletsSKU C 14 palletsSKU D 8 palletsSKU 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%



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



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



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?



Locating Stock - Fast Moving Items• Close to receiving or shipping• Reduces travel time

• Slower moving items can be further away



Locating Stock - Physically Similar Items• May have similar storage requirements

• refrigeration• shelving

• Use similar handling equipment• drums vs small items• steel tubing vs cartons



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



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



Floating Location• Goods are stored wherever appropriate space is available• Requires good record keeping• Improves cube utilization

• Often used for reserve stock



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



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



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



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



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



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



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



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



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



Transaction System1. Identfy the item

• quantity, location, part number2. Verify quantity

• standard size containers if possible3. Record the transaction

• manual or computerized4. Physically execute the transaction

• move the goods



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



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



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



Inaccurate Inventories• Result in:

• Lost sales• Disrupted schedules• Excess inventory of the wrong things• Low porductivity• Poor delivery performance• Excess expediting



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



Measuring Inventory Record Accuracy• Ideal is 100%

• banks• ‘A’ items

• A tolerance may be allowed for some items



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



Tolerance

Figure 12.3 Inventory record accuracy



Tolerance

Figure 12.4 Inventory accuracy with tolerances



Tolerance Example Problem

PartNumber

ShelfCount

InventoryRecord

Tolerance

A 1500 1550 +/- 5%

B 120 125 +/- 2%

C 225 230 +/- 3%

D 155 155 +/- 0%

OutsideTolerance



Auditing Inventory Records• Checking the accuracy of inventory records

• Periodic Inventory• usually an annual count

• Cycle Counting • daily counts of items



Auditing Inventory Records• To correct the on-hand balance

• periodic inventory

• To find the reasons for errors and eliminate them• cycle counting



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



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



Physical Inventory - Process

1. Count the items and record the count on tickets left with the item

2. Verify the count, sampling may be used3. Collect the tickets and list all items4. Reconcile the inventory

update financial recordscorrect inventory balances

Investigate reasons for descrepancies



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



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



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



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



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



Scheduling Cycle Counts

ClassificationNumberof Items

CountFrequencyper Year

Numberof Counts

Number ofCountsper Day

ABC

100015002500

1241

12,000 6000 2500

48*2410

Total Count 20,500Workdays per Year 250Counts per Day 82

* Counts per day = 82 * 12,000 / 20,500

Figure 12.5



Scheduling Cycle Counts - Example Problem

ClassificationNumberof Items

CountFrequencyper Year

Numberof Counts

Number ofCountsper Day

ABC

200030005000

1242

Total CountWorkdays per YearCounts per Day

24,00012,00010,000

46,000250184

964840



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



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



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

Business

Physical inventory and warehouse management