Warehouse Operations and

Inventory Management:
A Supply Management Interface
© 2005 CATTAN Services Group, Inc.

A Joint NAPM/APICS Presentation

12 January 2005
to
NAPM- Tulsa
by
Thomas L. Tanel, President and CEO
CATTAN Services Group, Inc.
College Station, TX
cattan@cattan.com
979 260-7200
 Process Owner Considerations

• Receiving and Dock Operations

• Order Picking and Travel Time
• Cycle Counting
• Productivity and Warehousing
• Keys to Process System Reengineering
 Inside Dock Space Requirements

DOCK DOCK DOCK DOCK

LEVELER LEVELER LEVELER LEVELER

DOCK MANEUVERING AREA--15-FT

CLEAR AISLE to UNLOAD/LOAD

Buffer & Staging Area Buffer & Staging Area

What Consumes A Picker’s Time
 Cycle Count Reports

QUANTITY DOLLARS
ITEM
LOCATION CLASS
NUMBER CYCLE
ON HAND VARIANCE UNIT COST ON HAND VARIANCE
COUNT

1905 C-6 50 40 -10 50 2,500 -500 B

9232 M-10 100 110 +10 100 10,000 +1,000 A

488 A-4 500 450 -50 10 5,000 -500 B

4029 F-9 200 195 -5 2 400 -10 C

What should be done as a result of this cycle count?

 Rate Yourself on Productivity
1. Do I understand the primary warehouse cost centers and
their relationship to throughput, transaction volume, and
order frequency?

2. Do the warehouse employees fully understand the

company’s goals and objectives?

3. Are other allied functional areas coordinated with the

warehouse on a periodic basis, and are warehouse
standards of performance understood?
 Rate Yourself on Productivity
(continued)

4. Can we measure the efficiency and effectiveness of my

warehouse’s work?

5. Are all warehouse employees capable of performing tasks

assigned without constraint or limitation by other
business functions?

6. Does warehouse management make effective use of

warehouse assets (labor, equipment, space, and time) to
get the job done?
 Rate Yourself on Productivity
(continued)

7. Do I encourage innovation and teamwork?

8. Do I have a plan to periodically evaluate my warehouse’s

productivity and continually seek improvement?

9. Are our people well-qualified to do their assigned jobs?

10. Is material handling equipment distributed for maximum

utilization?
 Keys to Process
System Reengineering

• Change is managed like day-to-day operations

• Senior executive champions the program
• Focus on real productivity and total costs
• Use the “Little Plus” Method

What about the adage, “If it ain’t broke, don’t fix it”?
It is not as though you are safe where you are. Even in
biology, species which do not adapt risk extinction. Though
it may not be “broke” now, the last person trying to fix it is
in deep trouble. …But then again, the first person adapting
to change is taking risks, too!
 The Warehouse’s Ultimate
Objective

The ultimate objective of the warehouse is to

hold the minimum operational inventory that
contributes the most profits or satisfies needs
—as long as that level is consistent with your
customer service or internal user
requirements and ordering and planning
philosophy.
Optimize Inventory Performance

• Fine tune forecasting to reflect changes in

information to:
– Alter ordering and delivery frequency
– Smooth out flow of materials and information
• Use an A-B-C Inventory Stratification Analysis
to:
– Look at demand patterns
– Determine stocking policy
– Set customer service levels
Forecasting versus Prediction
• Forecasting estimates future events by casting forward past data:

• Past data is combined in a system to estimate the future

• Prediction estimates future events based on subjective

material

• These criteria need not be combined systematically

• Forecasting is a judicious combination of:

• Statistical analysis of historical data
• Marketing/Service plans and strategies
• Analysis of market competition
• Current market or internal customer needs
• Selected economic and industry trends

Remember to forecast in units, not dollars. We don’t ship or issue

dollars, we ship or issue units (pieces, weight, pallets, gallons etc)
 Demand Chain—Pull Vs Push
PHYSICA
L
TO I
BOOK Actual
N
REPLENISHMENT
Forecasted V Demand
S
U
E
P
P
N PULL
Demand
L
Y
T VS
O DEMAND
PUSH
R
Y
Inventory: The $upply Management Dilemma
CO$T Purchasing Inv Control Traffic &
Tradeoffs & Supply & Operations Distribution
Purchasing Procurement Inventory Inbound Freight
& Supply Versus Versus Versus
Quantity Procurement Procurement

Inv Control Procurement Inventory Storage Space

& Operations Versus Versus Versus
Inventory Operations Inventory
Traffic & Procurement Inventory Shipping
Distribution Versus Versus Versus
Inbound Frt. Storage Space Customer Svc
 Flow
Supplier

Purchased
Parts &
Material

Work in
Process

Factory
Finished
Goods

Warehouse Warehouse Warehouse

Customer Customer Customer

Demand Demand Demand
ABC Classification and Pareto’s Law--
Volume versus Number of Items
100

80
A
Volume
(Percent)
B

15
C
5

0 20 50 100

Number of Items (Percent)

Applied Pareto’s Law--ABCD
% of
% of
% of Items Inventory
Activity
Volume

Class Cum Cum

A 20 20 80 50 50

B 50 30 15 83 33

C 80 30 4 95 12

D 100 30 1 100 5
 Microsoft Business Solutions—
ABC Layout by Location

Source: Microsoft Business Solutions—Winning Strategies for Distribution

Warehouse Layout and Inventory Profile
 Satisfaction Guaranteed
— What Is the Cost?
• It is 5 times more expensive to gain a new customer than it
is to satisfy an existing one.
• 7 out of 10 customers who switch from one supplier to a
competitor cite poor service as the reason.
• A 1% increase in customer service can increase sales by
the same amount.
• Dissatisfied customers tell twice as many people about
poor service than satisfied customers do about good
service.
Source: Customer Care Institute
Inventory Stocking Types

CYCLE RISK/INSURANCE
STOCK STOCK

SAFETY IMPAIRED
STOCK STOCK

ALLOCATED “CLOAKED”
STOCK STOCK
Inventory Cycle Time
 Cost of Carrying Inventory—
Order Quantity Least Cost Example
Average Average Number of
Order Carrying Order Total
Lot Size of Inventory $ Orders per
Quantity Costs in $ Cost in $ $ Cost
Inventory Investment Year

1000 500 80 20 10 180 200

2000 1000 160 40 5 90 130

3000 1500 240 60 3.3 60 120

5000 2500 400 100 2 36 136

Let us assume an annual demand of 10,000 units with four order quantity options.
Each unit costs $.16/unit with an order placement processing cost of $18 per order
and an inventory carrying cost of 25%. What Order Quantity is Least Cost?
Service Level-Safety Stock Cost Index
Cost of
Safety
Stock

400

300

200

100

Customer
Service
85 90 95 Level
100

Relationship between Service Level

and Cost of Safety Stock
 Service Level and MAD
Service Level % “K” Factor Needed

50 —

84 1

93 1.5

97 2

98 2.5

99.9 3

99.999 4
Service Level and Costs-a 24%
Inv Carrying Cost Assumption
Service Stock out Extra Inventory
Level Frequency % Investment %

50 50 —

84 16 14

93 7 21

97 3 28

99.9 0.1 43

99.999 0.001 57
 Service Level Impact on Safety
Stock and Inventory Carrying Costs

This assumes a value of $1.00/unit and a 24% Inventory Carrying Cost

Optimize Inventory Performance

• Establish inventory target performance levels

• Delay inventory commitments as long as possible
to:
– Commit in stages (Available-to-Promise postponement)
– Result in more accurate forecasting
– Lower levels of safety stock
• Optimize inventory performance rather than
minimize inventory
Optiant’s Supply Chain Design—
View of Inventory Impact
 Inventory Bottom Line—Improvement of ROA
Potential Reduction in Inventory Levels
Inventory as a % of
Total Investment 10% 20% 30% 40% 50%

10% 3% 5% 8% 11% 14%

20% 5% 11% 17% 23% 29%

30% 8% 17% 26% 36% 47%

40% 11% 23% 36% 51% 67%

50% 14% 29% 47% 67% 89%

60% 17% 36% 59% 84% 114%

 Warehouse Mechanization
and Automation

• Tendency to automate whatever used to be

manual or simple
• Involve your people in redesign of:
– Storage equipment layouts
– Material flow paths
• Demands fundamental changes in behavior
• People make them succeed or fail
 Warehouse Layout Design Data
Product data: • Definition of major functional
•activity level areas / departments
•requested quantities • Definition of departmental sub-
•product properties systems
• Storage and material handling
•supplier types
modes
• Operational policies
Order data: • storage policies
•number of line items • replenishment policies
•number of items • order picking policies
•cubic volume • batching
•shipping priorities • sorting
•product correlation • zoning
• routing
• receiving & shipping
Managerial requirements /
policies
company strategy
Work Simplification—6 Basic Questions
Block Layout and Conceptual
Flow
 Block Layout—
U-Shape Material Flow
Replenishment Replenishment

Broken
Case
Reserve Storage Case
Picking
and Picking
Pallet Picking

Accumulation, Sortation & Packing

Direct Direct
putaway putaway
to reserve to primary
Receiving Shipping
Cross-docking
Block Layout--Straight Line Material Flow

SHIPPING

SHIPMENT STAGING

SORTING AND TEMPORARY

ASSEMBLY HOLDING
AREA AREA

RECEIVING CHECK-IN

RECEIVING
Warehouse Layout—L-Shape Flow Configuration

RECEIVING & SORTATION CASE

Packing
CONVEYOR S
Hanging C H
O
Merchandise N
V
E
BOXED I
Active Storage Y
MERCHANDISE
O
R
P

FLAT MERCHANDISE P
ACTIVE I
ACTIVE
STORAGE N
STORAGE
G
RECEIVING & STAGING
 Space and Storage Schemes

Space requirements are directly related to:

• Volume of material to be stored
• Use of space characteristics
– Honeycombing allowance
– Aisle allowance
• Cube and thinking “vertical”
 Bulk Storage from
Floor

Steel Structural Shapes—Floor Storage

Steel Wire—Floor Storage

 Warehousing Equipment Diversity

Standard Racking Double Deep Narrow Aisle

Mobile Racking Drive in Rack Live / Flow

Source: ATLET
AS/RS Cutout View
 Storage and Equipment Correlation
Picking Material Material Material
Storage Space
Unit Handling Handling Handling
Equipment/Methodology Type
Size Option 1 Option 2 Option 3
Standard Fork
Bulk Storage Low Bay Pallet Clamp Truck Pallet Jack
Trucks

Selective Pallet Rack Low Bay Pallet All Fork Trucks Walkie-Stacker AGV
Most Fork Pick to
Bulk Storage from Floor Low Bay Case Pallet Jack
Trucks Conveyor
Selective Pallet Rack- Order Picker Mezzanine
High Bay Case All Fork Trucks
System Trucks Pick-to-Belt
Pushback
Double Deep Rack High Bay Pallet Reach Truck N/A
Rack
Standard Fork,
Narrow Pallet
Drive-in/Drive Thru Rack High Bay Pallet Wide Slave N/A
Truck
Pallets
Floor Level
Pick Module to Most Standard
Pallet Flow Rack High Bay Case Picks to Pallet
Conveyor Fork Trucks
Only
Manual to Robotic Auto Release
Case Flow Rack Low Bay Case
Conveyor Extractor to Conveyor

AS/RS High Bay Pallet AS/RS Shuttle N/A N/A

Warehouse Layout-Combo Storage Methods
Honeycombing Allowance and
Warehouse Location
 Stock Location Methodology
Comparison

INVENTORY
FIXED COMMODITY RANDOM COMBINATION
ITEM #
LOCATION LOCATION LOCATION LOCATION
LOCATION

SPACE UTILIZATION POOR POOR FAIR EXCELLENT EXCELLENT

TRAINING TIME EXCELLENT GOOD EXCELLENT GOOD FAIR

CUSTOMER SERVICE FAIR FAIR GOOD GOOD GOOD

FLEXIBILITY FAIR POOR FAIR EXCELLENT EXCELLENT

EXPANSION FAIR POOR FAIR EXCELLENT EXCELLENT

 Common Storage Utilization
Allowances

NORMAL STORAGE SLOTS TO BE

TYPE OF STORAGE DEPTH HEIGHT UTILIZATION PROVIDED PE
ALLOWANCE PALLET STORED

FLOOR OR DRIVE-IN RACKS More than 3 More than 3 30—40% 1.3—1.4

FLOOR OR DRIVE-IN RACKS Up to 3 Up to 3 25—30% 1.25—1.3

DOUBLE DEEP RACKS 2 Any 20—25% 1.2—1.25

SELECTIVE RACK 1 Any 10—15% 1.1—1.15

Source: Warehousing Education and Research Council

Warehouse Configuration--Double Deep Rack
Storage Module and Aisle Allowance
Warehouse Layout-3D “Cube”—Thinking Vertical
Multiple Storage Methods
 Real Time Information
• Use automatic data collection (ADC) techniques
• Insure flow of information is both:
– Seamless and at the source
– Parallel to the flow of material
• Seek opportunities to utilize EDI, E-Com, RF,
and ASNs
• Must support warehouse floor process—not
dictate it
• Provide flexibility to meet change in marketplace
and customer requirements
Information and Material Flow
Process Mapping
Process Flowchart– Order Fill Example
 WMS Integration

The WMS must integrate with other

warehousing components, namely:
• Radio Frequency Systems
• Bar Code Scanners and Printers
• ADC, RFID & Voice Recognition Technologies
• Data Exchange with ERP Systems
• Database Supply Chain Event-Driven or Time-Driven
• Synchronization Rules for Application Programs
Cadence Warehouse Centric Fulfillment—
Example from Cadre Technologies
 Available-to-Promise Functionality

• WMS ability to drill down for detailed

information on specific orders
• WMS ability to facilitate an answer to the
question, “Where is the product?”
• WMS ability to do any of the following:
– Determine availability in storage
– Cross-dock to reach a customer quickly
– Place allocation against inbound material
– Determine when goods will arrive at facility
 Crossdocking and Warehousing
No
No stock!
stock!
Storage!
Storage!
Customer
Customer Order
Order

Receipt
Receipt Ship
Ship

Cross-Docking
Cross-Docking

• Cross Docking helps to achieve the key logistics objectives of:

• Stock reduction
• Fixed resource reduction
• More responsive operating systems
Warehouse Layout--Crossdocking
 Total Cost of Ownership
• You need to study, learn, and evaluate known
solutions.
• Then compare and explain the costs and benefits
of each.
• If you reduce your internal cost profile, you can
provide the same or better service at a lower cost
to your internal and/or external customer.
 Building Cube Comparison Money Chart

Rack Cost/Pallet $29.00 $32.00 $40.00

Build @ Cost/SF $14.72 $17.99 $26.11

Clear Height 22 ft 31 ft 51 ft

Tiers 4 6 10

Aisle Width (feet) Cost/Pallet

5.00 $128.25 $113.00 $110.50

8.00 $150.29 $130.95 $126.16

12.00 $179.73 $154.87 $147.05

 Building Cube Comparison Space Chart

Clear Height 22 ft 31 ft 51 ft

Tiers 4 6 10

Aisle Width (feet) Area/Pallet (square feet)*

5.00 6.74 4.50 2.70

8.00 8.24 5.50 3.30

12.00 10.24 6.83 4.10

* NOTE: Area/Pallet = The footprint divided by the number of pallets in a stack.

THANK YOU FOR COMING

CATTAN Services Group, Inc.

© 2005 CATTAN Services Group, Inc.