Presented by:•Kashish Kapoor•Manik Batra•Mayank Bhadola•Naveen Kumar•Somendra Singh

TRANSPORTATION, WAREHOUSING & INVENTORY DECISIONS

An Overview… Transportation, Warehousing

and Inventory: all are parts of Supply Chain

Supply Chain : sequence of processes involved in the production and distribution of a commodity.

Warehousing :activities related to the storage of raw materials or finished goods in an orderly manner in large number prior to the sales

Inventory : raw materials, work-in-process goods and completely finished goods considered to be the portion of a business's assets that are ready or will be ready for sale.

Transportation : movement of raw material or finished goods from one place to other in a supply chain

All three of these activities are needed to be managed for a firm to operate optimally.

Inventory Decisions

The decisions regarding the shape and percentage of stocked goods are called

Inventory decisions

In simple words, the decisions related to:How much to order?When to re-order?How many times to order?How to handle sudden demand change?

Inventory?

What is it? a stored quantity of goods that exceeds what is needed for the firm to function at the current time

Why is it needed?Meeting DemandsKeeping operations runningLead time HedgeQuantity DiscountSmoothing requirements

Inventory Management

A crucial practice done in firms in order to effectively manage its inventory.

What if I don’t manage it effectively?Loss of sales because of stock outsInadequate production for a period of timeIncreases in operating expenses due to

unnecessary carrying costsIncreased per unit cost of finished goods Decisions taken while managing inventory are

Inventory decisions

Factors Affecting Inventory Decisions

Warehousing: Adequate physical space for raw material.

Cost: carrying, ordering or warehousing costs

Lead time: time between order by customer and

deliveryTurnaround:

how long a finished good sits before sale

Inventory Decisions

Inventory decisions can be categorized as:Decisions that affect the quantity of inventory

Order sizeNumber of ordersSafety stocksLead timePlanned production

Decisions that affect the per unit cost of inventorySuppliers of raw materialOrder sizeFreight

Inventory Decisions

Production

Budget

Purchase

Reorder Point

Production Budget Decisions

Decisions pertaining to the quantity of goods to be producedUtmost important; as Insufficient budget – Stock outs, too

large budget – unnecessary carrying costAccurate Sales forecast is requiredCurrent sales demand and safety stocks are kept in

considerationDetermines the need for plant capacity If current production budget exceeds the plant capacity then

ways to increase the plant capacity must be considered Increase in plant capacity means scheduling overtime,

purchasing and installing more equipments and hiring labor Just In Time(JIT) production: a practice where right items of

the right quantity and quality in the right place and right time are held. Proper use of this results in better productivity and decreased costs.

Purchase Decisions

Purchase decisions have two parts – Order Size & Order Frequency decisions

The main management accounting tool that may be used to make Order Size and Order Frequency decisions is the EOQ Model.

The EOQ model answers the questions:How many units should be purchased each

time a purchase is made (order size)?How many purchases should be made (order

frequency)?

The EOQ Model

Economic Order Quantity is the order quantity that minimizes the total inventory holding costs and ordering costs.

Determined by the cost incurred in ordering and carryingIllustration:No. of raw materials required in one year = 52 units@1unit/day

You can order the raw material in two ways:1. Ordering one unit 52 times: Maximum Ordering cost,

Minimum Inventory cost2. Ordering 52 units one time: Minimum Ordering cost,

Minimum Inventory cost An EOQ is decided such that total purchasing cost becomes

minimum

The EOQ Model

The EOQ Model

Example: If Annual demand for materials (units) = (A) 100

Cost of placing an order (P) $10.00

Cost per unit of carrying inventory (S) $5.00, then

Clearly, Order size of 20 is the EOQ as the total cost at this order size is minimum.

Reorder Point DecisionDecision pertaining to time to reorder materials

or partsToo late reordering – undesirable consequences

like stock outs, delays in productionToo early reordering – unnecessary carrying costNo. of factors needed to be considered-

Lead Time: time between placing order and delivery; can vary between a few hours to several months

Average usage per day : calculated as Annual requirement of material divided by no. of work days

Safety stock : the stock which is maintained in order to mitigate the risk of stock outsReorder point = Lead Time X Average Usage Per Day

+ Safety Stock

ABC Analysis

An inventory categorization techniqueInventory is divided into:

A items: very tight control and accurate records; high value, JIT is used to avoid excess

B items: less tightly controlled and good record, intergroup items

C items: simplest controls possible and minimal records, marginally important

Provides a mechanism to identify items that have significant impact on overall inventory cost

Transportation Decisions

Transportation activity moves products to markets that are geographically disparate.

Adds value to the productAccounts for 40% of the total cost of

productionLack of efficiency leads to substantial

transportation costsEffective transportation management can

save a lot of costImportant transportation decisions include-

Long term decisions, Lane operations, choice of mode and Dock operations.

Long Term Decisions

Highest strategic decision level Decisions related to the freight flows and

network designDecision related to the assignment of

primary transportation modes for each flowDecisions regarding the level of outsourcing

required for major product flowNetwork should not be fixed or constant so

as to improvise necessarilyThis level is more like preparing a blue print

for the further activities.

Lane Operation Decisions

Second level of transportation decision making

Focus on daily operational freight transactions

Primary opportunities : inbound/outbound consolidation: combining

freight to build volume shipmentstemporal consolidation: adjusting shipments

in same geographic area so as to deliver them in least no. of times

vehicle consolidation: same day and same geographical area shipments can be loaded onto one vehicle

carrier consolidation: assigning greater shipping volumes to fewer carriers

Mode Selection

Third level of transportation decision making

Includes Air Freight, Land Logistics and Package carriers

Depends on several factors as to which mode should be selected

Mode Selection: Air Freight

For goods that require speedy delivery

across a large geographical area

Pros: high speed, reduced risk of damage,

security, flexibility

Cons: high courier fees

Different from commercial aircrafts

Not affected by terrains

Mode selection: Land Logistics

Includes Rail, Trucks, Ships, pipelinesRail: high endurance capacity, less climatic

impact, low power consumption but high cost of basic facilities, difficulty in cost of maintenance, lack of flexibility, time consuming

Road: cheaper investment funds, high ease of access, mobility and availability but low capacity, low safety, slow, traffic congestion, pollution and accidents

Pipeline: high capacity, less climatic impact, continuous but costly infrastructure, limited control, regular maintenance.

Mode Selection: Package CarriersTransportation companies like – FedEx, US

Postal Services, DHL etc.Use small and time sensitive shipmentsIncreased demand due to JIT deliveriesQuite expensive, cannot compete with

truckload carriers on price for large shipments

Dock Level Operations

Final set of transportation decisionsExample of dock level operations are load

planning, routing, schedulingPertains to the execution part of higher

level planning decisionsCommon use of IT and decision support

systemsIdentification of most efficient routes and

arrangements of shipments to be delivered accordingly

Warehousing Decisions

Warehousing refers to the activities involving storage of goods on a large-

scale in a systematic and orderly manner and making them available

conveniently when needed.

Functions of warehousing include:Transportation consolidationProduct mixing Cross-dockingServiceProtection against contingenciesSmoothing

Transportation Consolidation

Supply and Product Mixing

Basic Warehousing Decisions

Basic Warehouse Decisions:A Cost Trade-off Framework

OwnershipPublic versus contract versus private

Centralized or Decentralized WarehousingHow manyLocationSizeLayout

The Ownership Decision

Public warehousing costs mostly all variable.

Private warehousing costs have a higher fixed cost component.

Thus private warehousing virtually requires a high and constant volume.

The Ownership Decision

Factors to considerThroughput volume

(because of fixed costs)Stability of demandDensity of market area to be servedSecurity and control needsCustomer service needsMultiple use needs of the firm

Firm Characteristics Affecting the Ownership Decision

Basic Warehouse Operations

The Number of Warehouses

Factors Affecting the Number of WarehousesInventory costsWarehousing costsTransportation costsCost of lost salesMaintenance of

customer service levels

Service small quantity buyers

Factors Affecting the Number of Warehouses

Factor Centralized Decentralized

Substitutability Low High

Product Value High Low

Purchase Size Large Small

Special Warehousing

Yes No

Product Line Diverse Limited

Customer Service Low High

Warehouse Space Requirements

Warehouse Layout and Design

Basic needs:ReceivingBasic storage areaOrder selection and

preparationShipping

CASE STUDY

C.K. ROTORS PVT. LTD.

It is a small scale industry located in Coimbatore, Tamil Nadu. It manufactures ceiling fans.

It can produce 200 fans to its full capacity but uses 60% of capacity.

It focuses on Kerala and Tamil Nadu.Due to lower prices, there is demand for their product.Order processing is done manually.Soon sale comes down due to stockouts at retailers end.Company also bears transportation cost which is 1% of

the value of the goods.Sometimes retailers are out of stock for about 10 days

because they do not order at reorder level.As a result customers switch to other brands.

Options available to the company

To produce at full capacity.Arrange for two warehouses, one at Kerala

and the other at Tamil Nadu.To automate the order processing system.