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1
The Study of Li & Fung Limited
Name: Kan Shing Fung
Class: BA(Hons) Logistics and Supply Chain Management
Word Counted: 3286
2
Content
Introduction 3
Question 1 warehouse space and layout planning 4
Question 2 Appropriateness of mechanization and full
automation
8
Question 3 Information technology application of Li & Fung 12
Question 4 Modern methods of inventory management &
Compare with re-order point and EOQ.
15
Conclusion 17
Reference 18
Introduction
This report is majorly about the study of the warehouse management operation of
Li & Fung Limited, a well-known specialist in supply chain management and
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introduces one-stop-shop solutions to customers with their international scope and
network. The aspects focus are warehouse space and layout planning, the
appropriateness of mechanization and full automation application, the benefits of
information technology and modern methods of inventory management.
Question 1 warehouse space and layout planning
In the realm of warehouse layout planning, warehouse space should be at one of
the top of the priority of any company. The scarce space is a common problem of the
warehouse at worldwide. A proper planning of the warehouse space and layout can
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help to address this predicament (Greenberg, 2000). In the process of planning, the
objectives should be specified in order to have a clear path towards it. Some specific
ways would be provided in the process. The specific steps and system on which the
warehouse would apply should be resolved in order to complement the desired plan
with the set of circumstances in the warehouse emerged. In the technical side of the
process, the allowances and intervals required to satisfy the space requirements should
also be declared at first. (Kopcke & Brauman, 2001) This is imperative to establish
the foundation in calculating the overall space requirement of the warehouse.
1.1 Warehouse Processes
Refer to the study of Rouwenhorst (2000), the keys flow of items through the
warehouse can be divided in four processes:
First step - The receiving process, it is the first process encountered by the
entering items. The products would be checked or transformed into different storage
modules and stand by for transportation to the next process.
Second step – The storage process, the items are placed in storage locations in
order to provide easy retrieval by an orderpicker.
Third step – The orderpicking process, it refers to the retrieval of items and
transportation to the sorting and consolidation process.
Fourth step – the shipping process, this step is for the order packed, checked and
loaded to any carrier.
1.2 Considerations of warehouse planning
The purpose of the planning is the warehouse space and layout to optimizing the
efficiency of the mentioned warehouse activities, especially the orderpicking process,
and to satisfy the customers’ requirements. Gu (2010) indicated that the conceptual
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planning of a warehouse determines the functional departments. For example the
number of storage departments, types of technologies employing and the amounts of
orders will be assembled. At this stage, the goals of the planning are to meet storage
and throughput requirements, and to reduce the value of investment and future
operating costs. Tompkins (2003) indicates the key factors of warehouse planning are
to maximize the space utilization, equipment utilization, labout utilization,
accessibility of all materials and protection of the materials. Besides, order picking
systems, stock location management and shipping systems are needed to be clarified.
1.2.1 Cost accounting
Many studies express that the proportion of the warehousing cost is about 20%
of the total logistics cost (ELA/AT Kearney, 2004 and Establish/Davis, 2005). It
means that warehousing costs is a serious barrier to supply chain management whilst
the cost of the labour, service, software, hardware, equipment and service from the
vendors is necessary. Park and Webster (1989) point the selection of storage rules,
equipment types, and order picking policies is crucial to reduce the total costs. The
cost (initial investment and annual operational cost) for each alternative (receiving,
storage, picking, sorting, and shipping) is accounted in simple analytic equations. This
analysis is to meet the cost reduction goal of the warehouse planning as more
companies look to cut costs within their warehouses and distribution centres.
1.2.2 Space utilization
Gray et al. (1992) express a similar problem with Park and Webster (1989), and
propose a multi-stage hierarchical approach that uses simple analytic calculations to
evaluate the tradeoffs and prune the design space to a few superior alternatives.
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According to the study of Kind in 1965 (Ashayeri, 1985) introduce both the peak
season and the entire inventory circle of the product for the consideration of space
utilization.
1.2.3 Equipment Utilization
The appropriate application of material handling equipment can easier increase
the efficiency of the entire operation within warehouse. The considerations of this part
are applying the right amount of equipment in the right place, right position, condition
right method as well as right cost (Tompkins et al, 2003).
The typical examples of equipment are mostly the material transport equipment
like conveyors, trans pallets, forklifts trucks and industrial vehicles. The information
technology equipment is very important and crucial to create a high-level operation
and routing & sequencing process. For example: Li & Fung Limites has applying the
automatic storage and retrieval system (AS/RS), Radio Frequency Identifications
(RFID) and bar-code system in its warehouse. It is important for the installation of the
corresponding devices of the IT. Storage racks was separated by aisles in a calculated
lengths. (Li & Fung research centre, 2003)
1.2.4 Accounting inventory levels
This accounting for stock keeping units (SKUs) stored in the warehouse is an
operational decision impacting directly to the estimation of space requirement. For
example, the distribution centre of IDS Logistics (Li & Fung Limited) in Sha Tin is a
small scale. It estimated about the available space utilization and the fluctuation of
product storage needed. It decided to collaborate with only one to two customers
brands and provide the warehouse service in each floor.
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1.2.5 Routing
The use of racks could improve space utilization by the enabling of narrower
aisles. The suitable coordination of narrower aisles the stored goods along any one
aisle should be routed in a path of upward and downward undulation.
1.2.6 Safety and security
It is harmful for warehouse owners to bear the disasters after a fire accident or
thefts in a warehouse. There will be a great amount of cost for equipments repairing
or stock compensation. In the case of Li & Fung, it applied the fire preventing
systems (such as automatics fire sprinklers) and alert systems and installed Closed
Circuit Television (CCTV) in storage areas, lifts and unloading docks to prevent the
fire accidents and theft. Fire sprinklers were install in every rack. The monitoring of
the CCTV systems is operating in 24 hours a day. Besides, all the entrance and exits
of the warehouse were monitoring by security staffs so as to maintain the high level of
safety and security. (Li & Fung research centre, 2003)
Question 2 A ppropriateness of mechanization and full automation
Warehouse automation has been described as “The direct control of handling
equipment producing movement and storage of loads with unmanned operation”
(Rowley, 2000). This term can be known as the human work is replaced by robot and
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operation would be carried out by machinery. Meanwhile, labour cost can minimize.
In this decade, automation is fairly commonplace in large warehouses operation,
particularly with regard to conveyor, and automated storage and retrieval systems
(AS/RS), with each of similar types of equipments being applied in more than a third
of large warehouses (Baker, 2004). Many sources indicate the reason of the trend of
warehouse efficiency development is the advances in warehouse technologies and the
raise of the agility supply chain concept.
2.1 Levels of automation warehouse systems
Warehouse technologies are used for 3 main achievements: enhance space
utilization, improve productivity and reduce errors (Aminoff et al., 2002). With
respect to the level of automation, it is possible to classify warehousing systems into 3
types (van den Berg & Zijm, 1999).
Manual warehousing systems (picker-to-product) – The orderpicker collects the
required material in the warehouse by travelling to the storage area.
Automated warehousing systems (product-to-picker) – The picking process is
performed by an automated warehouse device, delivering the required items to a
stationary orderpicker.
Automatic warehousing systems – This performance is similar to the automated
warehousing system level except that the picker role is assumed to a robot.
The selection of the appropriate level of warehouse automation is a difficult task.
However, the cost of installation and operation of automation and mechanization is
expensive. Capital investments can be considerable but the rewards often include
significant savings in the labor costs and productivity aspects, inventory accuracy, or
order processing times (van den Berg & Zijm, 1999). Cost is still an important factor
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as a market qualifier in a turbulent market (Christopher & Towill, 2000). So the cost
effective is one of a good reason to clarify the development trend of warehouse
automation.
2.2 Coordinating processes of implementation of warehouse automation
Emmett (2005) address that there are numbers of high profile instances faces
great difficulties in the beginning stage of implementation and led to profit warnings.
In this stage, the “burn-in” difficulties or “service level dip” would be experienced in
the short term (Naish & Baker, 2004). Emmett (2005) adds that there is a need for
commissioning, substantial testing and rectification of automated equipment.
2.3 Questionnaire results of warehouse automation projects
Naish (2004) had conducted a survey about the main steps and issues in
warehouse automation projects of companies. The interviewees are the members of
the Warehouse and Materials Handling Forum of The Chartered Institute of Logistics
and Transport in UK.
2.3.1 Concern of warehouse automation implementation
According to the questionnaire result, staffing issues were a very important
consideration as regards the change in culture associated with automation. For
example, one company recognized that there was a need a fully involvement of the
whole workforce in testing procedures so that there would be “ownership”
phenomenon of the automation project. Besides, a further concern related to the fear
of the technology not working in immaturity of automated systems. On the cost
aspect, there was certainly a concern about the high investment cost involved.
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2.3.2 Concern of ongoing operation
There is some concern in the literature concerning the impact of project’s
ongoing operation. There are only 5 out of 24 projects experienced no disruption to
operations, whilst 8 undergone “moderate or extensive” disruption. The results
indicated the technology would not work well for at least a short-term. In fact, most
automated equipment systems have been practiced for many years and are therefore
fairly mature, many testing and commissioning involved in the complexity of the
projects. Although those problems are normally resolved, there can be a risky period
when service levels suffer before the predicted benefits are emerged.
2.4 Warehouse automation project in Li & Fung
In the Li & Fung logistics centre in Hong Kong, there are two pallet hoists
operating for vertical delivery of goods. This facilities help company to handle the
high goods throughputs accounted in 140 pallets per hour. On the other hand, the
centre in Singapore adopted the automatic storage and retrieval system (AS/RS) and
set up 36 full automatic loading and unloading regions. The system performs full
automatic storage, retrieval and sorting processes (Li & Fung research centre, 2003)
Christopher (2000) claim that a successful AS/RS can save the operations cost about
20%.
Li & Fung satisfy the high storage requirement with its automatic systems. At the
beginning, it had undergone the high cost investment in the substantial testing and
rectification of the systems for years. The 36 full automatic loading and unloading
regions are the typical example of the successful development and improvement of
the ongoing operation problems.
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Question 3 Information technology application in Li & Fung
A robust common regional IT system is one of the key factors for the scalability
and reliability maintenance of Li & Fung logistics service. Its systems enable the
interaction of each supply chain partners and ensuring smooth flow of information
across all business units. These are many outstanding IT applications and systems in
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Li & Fung and it subsidiary IDS Group. The typical examples are SSA WMS EXceed
(Warehouse Management System, WMS), electronic data interchange system (EDI)
and radio frequency identification (RFID) application of IDS Logistics. All of these
systems are standardized across the region and are fully integrated of operations with
fully transparency on a regional basis. IDS also build up its in-house regional
technology center and support teams to respond both Malaysia and Hong Kong
service region (Lee & Lee, 2007). The successful IT application helps the company
accommodate the vary requirements from customers and its warehouse objectives.
3.1 Case 1– Warehouse Management System of Circle K (Li & Fung’s
subsidiary)
For warehouse management, problems like shortage of goods is often occurred in
many retailer, as well as large scale firms. It indicates the insufficient of warehousing
efficiency like the collaborative planning, forecasting & replenishment and time
compression.
In order to meet the customers’ and warehouse manager’s needs, Circle K
introduced new warehouse management system (WMS) called Exceed™
Technologies in 1999. It enabled Circle K to schedule the receiving, forwarding
process, manage storage and forecasting activity with the warehouse unit. With the
enhancement of management in storage level, real-time respond and reliable of
replenishment and the movement of the goods, the shortage of goods can be resolved.
Moreover, the stock accuracy and visibility can be enhanced and some of the
paperwork can be eliminated via WMS application.
3.2 Case 2 – IT application in IDS warehouse centre
There are many types of information stored in logistics warehouse. For example:
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quality, name of goods, details of manufacturers, packaging methods and others. It is
necessary for the high level IT application take place. IDS Logistics introduced the
traditional bar-code systems, RFID to capture all the required information. RFID is
one of the famous high performances IT in the Supply Chain Management and it has
been a hot topic for different academic report. Their outstanding performances in
warehouse are the fleet management, long-range of data capture without a flat surface
of a parcel or goods and transferable of the data to other warehouse IT systems.
Once readers are installed in the parcel and vehicles, IDS warehouseman can capture
the data of the goods inside the parcel. By the data captured, the parcel could be
checked the right packaging method applied and allocate to the vehicles that go to the
right destination. As the vehicles passes with the range of the transponder in the
warehouse docks, the time and location would be recorded in the database of the
vehicle’s reader. It allows the warehouse manager to modify the delivery models and
routing process (Shepard, 2005). In the outbound picking stage, RFID responds to the
stage from sorting to parking stages. Systems are used to check the appropriate
storage rack location and loading dock by the code number so as to guarantee the
100% accuracy of the whole operation.
The Electronic Data Interchange system (EDI) helps IDS to schedule the logistics
activities for customers in real-time and accuracy manner. The essential documents
like invoices and purchase orders transfers to partners in this standardize platform.
A high-performance warehouse management system in IDS logistics centres
achieves the electronic management in entire warehouse operation. The system can
monitor the change of inventory level and orders and integrate/sort the orders
automatically, and provide an auto memo to the staff for replenishment. It can
combine the application with RFID technologies to implement real-time treatment and
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prevent the disaster of sudden situation.
Besides, the IT systems of IDS are based on network. The systems break the
barrier of communication between supply chain units and itself and provide an
efficient path for the units to tracking the inventory storage, goods in forwarding and
the location of sales. The online tracking systems show the visibility of the current
status of the order, the information of product inventory level and freight forwarding.
It provides a platform for forecasting of the potential problem such as late complete of
order or problems occur in forwarding stage. Moreover, there is a special function of
the system, providing an alert column and emergency column for the all supply chain
units to notice the warning messages or problems occurring (Li & Fung research
centre, 2003)
Question 4 M odern methods of inventory management & Compare with
re-order point and EOQ.
4.1 Re-order point
Re-order point (ROP) consists of when products should be order (fixed order
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interval system) or how many products should be ordered at a fixed interval (fixed
order quantity system). The aim of this method is to keep the inventory level in a
relatively low and fixed level (Donald & Murphy, 2004) . The formula of ROP is:
ROP = (Average daily demand) X (Replenishment cycle)
4.2 Economic order quantity
Economic order quantity (EOQ) refers to the numbers of inventory should be
ordered at a particular time. The formula is used to clarify the point where the blend
of inventory carrying costs and order costs are at its lowest level (Bassin 1990, 48).
The order will be set when the EOQ falls lower than re-order level. The major
assumptions of EOQ are a constant and known replenish cycle and rate of demand,
and without inventory in transit(Donald & Murphy, 2004).
4.3 Just-In-Time approach
One of the most popular and contemporary method in inventory management is
the Just-In-Time approach. This approach was come out in the trend of lean business
principle(Donald & Murphy, 2004). It promotes minimize inventory level by greatly
reduce of safety stock and materials and products arrived at the time that they are
needed. The assumptions of JIT are focusing the Real-time communication with their
supply chain partners and customers and no wastage is accepted.
4.4 Comparison between traditional and contemporary approaches
The traditional and contemporary approaches have no conflicts to each other and
both of their assumptions are similar. They both focus on the returns of investment
and reduce the unwanted cost. There might be a confect between the uses of the both
sides. It could be known that they are walking in different path but the final
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destinations are close.
4.5 Case 1- CATSCAN
IDS Marketing invented a calculating systems called CATSCAN. It is a
specialized system for the low inventory application or Just-In-Time retailer to
analysis and forecast the sales margins with different factors. The climate is one of the
factor affect the analysis result. The system would also recommend the best
combination of products that achieve good sales. (Li & Fung research centre, 2003)
4.6 Case 2 – Inventory management system
Warehouse has the responsibility to monitor the appropriate level of the
customers’ inventory. IDS staff uses the warehouse management system to control the
inventory level. Once the inventory level fall below the safety level, staff will sent out
the replenishment memo to the manufacturers immediately. Besides, the system will
sent a auto replenishment memo to inform the staff. Even the inventory level is
keeping in a very low rate, IDS can have the just-in-time information and take the
real-time treatments. It is a common activity for IDS to operate with the small brand
in Sha Tin.
Conclusion
Li & Fung Limited is a world’s leader in providing supply chain solution to its
final clients. This company is never stop to invest vast cost on the develop
information technology application and warehouse equipments. There should be
failures but the company is resolute to achieve improvement and innovation. The
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typical example is the development of the AS/RS system.
Besides, the company has a good understanding and forecasting about the market
trend and the customers requirement. In the turbulent marketplace, development a
customized information system is a crucial point to maintain the long-term business
relationship. The concept of lean and agile is popular. The company can reduce its
wastages and reduce unwanted cost of its clients. Moreover, the well-planned
warehouse management systems can provide just-in-time service and treatments in the
entire supply chain management. Li & Fung has well-planned in the layout design, as
well as in the security aspect. These are the reasons of how it maintain competitive
edge and good operation in the entire supply chain flow.
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