12-1

Storage and Handling

Decisions
Chapter 12
Perfection is not attainable, but if we chase
perfection, we catch excellence.
Vince Lombardi
CR (2004) Prentice Hall, Inc.
12-2
Storage/Handling Decisions
in Inventory Strategy
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Transport Strategy
Transport fundamentals
Transport decisions
Customer
service goals
The product
Logistics service
Ord . proc. & info. sys.
Inventory Strategy
Forecasting
Inventory decisions
Purchasing and supply
scheduling decisions
Storage fundamentals
Storage decisions
Location Strategy
Location decisions
The network planning process
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Transport Strategy
Transport fundamentals
Transport decisions
Customer
service goals
The product
Logistics service
Ord . proc. & info. sys.
Inventory Strategy
Forecasting
Inventory decisions
Purchasing and supply
scheduling decisions
Storage fundamentals
Storage/handling
decisions
Location Strategy
Location decisions
The network planning process
CR (2004) Prentice Hall, Inc.
12-3
Storage Decisions
Site Selection
-
Finds a specific real estate site as a storage
location
-
Weighted checklist is a good approach. Recall,
Factor Marginal
Factors Weights scores score
1 2 5 10
2 9 1 9
. . . .
. . . .
. . . .
12 4 8 32
Weighted score 286
12-4
Storage Decisions (Contd)
Sizing the Facility
- From inventory policy, determine the amount of
inventory to be stored, that is, space needed

- Determine the facilitys seasonal use

- Balance the use of privately-owned space with
rented spacea mixed strategy
CR (2004) Prentice Hall, Inc.
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s
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s
q
.

f
t
.

Rented
space
Privately-
operated
space
Time
Mixed Strategy for Warehouse
Space
Need for
some space
is seasonal
CR (2004) Prentice Hall, Inc.
12-5
12-6
PRIVATELY OPERATED RENTED
Month
Warehouse
Throughput,
lb.
Space
Require-
ments,
sq. ft.
Private
Allo-
cation
Monthly
Fixed
Cost
Monthly
Variable
Cost
Rented
Allo-
cation
Monthly
Storage
Cost
Monthly
Handling
Cost
Monthly
Cost
Jan. 66,500 1,979 100% $ 22,500
a
$ 3,325
b
0% $ 0 $ 0 $ 25,825
Feb. 328,000 9,762 100 22,500 16,400 0 0 0 38,900
Mar. 1,048,500 31,205 100 22,500 52,425 0 0 0 74,925
Apr. 2,141,000 63,720 94
c
22,500 100,627
d
6 4,282
e
8,992
f
136,401
May 2,820,000 83,929 71 22,500 100,110 29 27,260 57,246 207,116
June 2,395,000 71,280 84 22,500 100,590 16 12,773 26,824 162,687
July 1,303,000 38,780 100 22,500 65,150 0 0 0 87,650
Aug. 460,900 13,717 100 22,500 23,045 0 0 0 45,545
Sept. 99,900 2,973 100 22,500 4,995 0 0 0 27,495
Oct. 15,300 455 100 22,500 765 0 0 0 23,265
Nov. 302,200 8,994 100 22,500 15,110 0 0 0 37,610
Dec. 556,700 16,568 100 22,500 27,835 0 0 0 50,335
Totals 11,537,000 $270,000 $510,377 $44,315 $93,062 $917,754
a
[90,000 + (3 60,000)]/12 = $22,500.
b
66,500 0.05 = $3,325.
c
60,000/63,720 = 0.94.
d
2,141,000 0.94 0.05 = $100,627.
e
Given a monthly turnover ratio of 3 and 6% of the demand through the rented warehouse, then [(2,141,000 0.06)/3] 0.1 = $4,282.
f
2,141,000 0.06 0.07 = $8,992.
Determination of a Mixed Warehouse Strategy for
a 60,000 sq. ft. Privately-Operated Warehouse
Private
space
exceeded
CR (2004) Prentice Hall, Inc.
12-7
Storage Decisions (Contd)

Facility Configuration

- Configuration affects handling costs in a high
throughput facility, but less important otherwise

- Square or rectangular shapes are best. L-shaped
designs are poor unless conveyors are used.

- Single-story designs are popular for high throughput
facilities and land costs are not prohibitively high
CR (2004) Prentice Hall, Inc.
12-8
Storage Decisions (Contd)
Space Layout

- Configuration of racks and aisles in the building

- Space layout affects building dimensions and size

Dock Design

- Determined by the number of rail cars along the
side of a building or the number of truck stalls
needed
CR (2004) Prentice Hall, Inc.
12-9
Facility Evaluation
Suppose a pool point at St. Louis is being considered to
lower transportation costs between manufacturer and its
customers. Shipments currently are made directly from the
manufacturers inventory in New York. There is a $10/cwt.
handling charge at the pool point.
Direct shipments



Manufacturer


Customer
Shipping
volume,
lb.
Transport
rate,
$/cwt.

Transport
cost, $
New York Boston 10,000 17.42 $1,742
New York Cleveland 12,000 24.12 2,894
New York Dallas 8,000 52.21 4,177
New York Seattle 10,000 57.09 5,709
40,000 Total $14,522

CR (2004) Prentice Hall, Inc.
12-10
Facility Evaluation (Contd)
Shipments through pool point

New
York to
St Louis


Inbound
cost, $
From pool
point to
customers
at

Transport
rate,
$/cwt.


Outbound
cost. $

Total
transport
cost, $
400 cwt.
@ 15.65
cwt.


Boston


41.72


4,172

Cleveland 12.62 1,514
Dallas 10.25 820
Seattle 27.06 2,706
Totals $6,260 $9,212 $15,472

Now, add handling cost of $10/cwt. 400 cwt. = $4,000 for a
total cost of $15,472 + 4,000 = $19,472.

Conclusion No benefit to using the pool point.
CR (2004) Prentice Hall, Inc.
12-11
When is a Pool Point Likely
to be an Advantage?
When shipment sizes are small
When demand is far from source points
When transportation rate economies are
significant
When pool point operating costs are low
relative to transportation costs
When transfer times are insignificant to
service
CR (2004) Prentice Hall, Inc.
12-12
Handling Decisions
Controlling costs
- Handling is typically a labor intensive activity

- Costs are decreased by (principles)
- Reducing distance traveled
- Increasing number of units handled at one time
- Seeking multiple order picking in a single order-picking
round trip
- Increasing storage density

- Cost reduction is also achieved by
- Carefully planning the physical layout of the building
- Carefully locating the items within the order-picking area
- Using automation and mechanical assists as labor
substitutes
- Using computer systems to help plan the flow of work
through the building
CR (2004) Prentice Hall, Inc.
12-13
Handling Decisions (Contd)
System Selection

- Determining factors
- Level of automation
- Pallet size
- Number of stories
- Throughput level
- Product characteristics
- Contingency plans

- Financial analysis of handling system alternatives
CR (2004) Prentice Hall, Inc.
12-14
Product Layout

- Selection methods
- Out-and-back selection
- Picker routing
- Designated picker area

- Layout of picking area
- By complementary
- By compatibility
- By popularity
- By cube
Handling Decisions (Contd)
CR (2004) Prentice Hall, Inc.
12-15
Handling Decisions (Contd)
-
Cube - per - order index
-
Layout example
By popularity

By cube
By CPO
The cube-per-order index is the ratio of a products
average required cubic footage for storage to the
average number of daily orders on which the item is
requested. The products with the lowest index value
are located nearest the outbound dock.
CR (2004) Prentice Hall, Inc.





Product
( 1 )

Item
Size,
cu. ft.
( 2 )

Expected
Number of
Orders/Yr.
( 3 )

Average
Inventory,
Units
( 4 )=( 2 )/250
Average
Number
of Daily
Orders
a

( 5 )=( 1 )

( 3 )
Required
Storage
Space,
cu. ft.
( 6 )=( 5 )/( 4 )

Cube -
Per - Order
Index
A 6.0 6,750 800 27 4,800 177.8
B 4.0 15,750 16,000 63 64,000 1015.9
C 1.0 11,250 25,120 45 25,120 558.2
D 8.0 25,500 18,600 102 148,800 1458.8
E 3.0 17,750 12,533 71 37,599 529.6
F 5.0 3,500 3,936 14 19,680 1405.7
G 15.0 6,250 907 25 13,605 544.2
Totals 86,750 77,896 313,604
a
Based on 250 selling days per year
Product Layout Example
Basic data By cube
By CPO
By popularity
CR (2004) Prentice Hall, Inc.
12-16
12-17
D D
F,D
D
Inbound rail dock
C,B B,F
A,E
E,G,C
Layout by CPO
Lowest index values
Outbound truck dock
Highest index values
12-18
Layout by Activity Profiling
Data mine orders to determine activity distributions.
Layout warehouse space according to activity levels.
Returns
Bulk/high cube items
Promotional
merchandise
Bonded items
Full case
items
Split case items
Shipping
Receiving
Returns
Bulk/high cube items
Promotional
merchandise
Bonded items
Full case
items
Split case items
Shipping
Receiving
A high-
throughput
warehouse
layout for drug
store
replenishment
12-19
Handling Decisions (Contd)
Order handling for increased handling
efficiency
- Product sequencing on picker list
- Picker zoning and the bucket brigade
- Order splitting
- Multiple order picking per picking pass
Stock Arrangement
-On-the-square layout
-Angular pallet placement





CR (2004) Prentice Hall, Inc.
12-20
(a) On-the-square pallet placement
Storage bay
Center line of aisle
(b) Angular pallet placement
Storage bay
Center line of aisle
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Top-down
view of
storage bays
12-21
Handling Decisions (Contd)
Increases cube
utilization
Stock Arrangement
- On-the-square pallet layout
-
Angular pallet layout
Stock locator-identification methods
- Fixed locator-identification method
-
Random locator-identification method
-
Zone location
CR (2004) Prentice Hall, Inc.
12-22
Equipment Selection
One-time purchase of equipment of different types
can be decided on basis of present value analysis,
or by selecting the alternative with the lowest NPV.
n
n
n
n
i
S
i i
i
C I NPV
) 1 ( ) 1 (
1 ) 1 (
+

+
+
+ =
where
NPV = net present value of equipment over its useful life
($)
I = initial investment ($)
C = annual operating cost ($)
i = the discount, or hurdle, rate that such investments
are expected to return
S
n
= salvage value in year n ($)
n = useful life of the equipment (years)
CR (2004) Prentice Hall, Inc.
12-23
Equipment Selection (Contd)
Problem Two type A forklift trucks can do the same
work as three type B trucks. Additional data are:
Two Type A
Trucks
Three Type B
Trucks
Total initial investment $20,000 $15,000
Useful life (planned) 7 7
Salvage value
(estimated)
$ 5,000 $ 2,000
Annual operating
expenses
$ 4,000 $ 6,000
Hurdle rate 0.20 0.20
CR (2004) Prentice Hall, Inc.
12-24
Equipment Selection (Contd)
Solution
Solve the NPV equation for the two alternatives.
For truck type A,
000 , 33 $
) 2 . 0 1 (
000 , 5
) 2 . 0 1 ( 2 . 0
1 ) 2 . 0 1 (
000 , 4 000 , 20
7 7
7
=
+

+
+
+ =
A
NPV
For truck type B,
040 , 36 $
) 2 . 0 1 (
000 , 2
) 2 . 0 1 ( 2 . 0
1 ) 2 . 0 1 (
000 , 6 000 , 15
7 7
7
=
+

+
+
+ =
B
NPV
Choose two type A trucks
CR (2004) Prentice Hall, Inc.
12-25
Equipment Replacement
-A financial problem
-Alternatives are compared through present value
analysis
-Typical design concerns differing degrees of
automation, capacity, and equipment life.
Example A forklift truck that costs $3,000 and requires $200
to operate in its first year, but operating costs increase at the
rate of $30 per year squared thereafter. Technological
improvement reduces operating costs by $20 per year. The
normal life of a truck is 10 years and the truck can be sold for
its remaining undepreciated value. A discount rate of 20%/yr.
is used. When should the truck be replaced?

We calculate the equivalent annual cost according to
(

+
+
(

+
+ =

=
1 ) 1 (
) 1 (
) 1 ( ) 1 (
1
n
n n
j
n
n
j
j
n
i
i i
i
S
i
C
I AC
Accumulates costs
for years 1 and 2
Replacement Example
a
Computed as C
j
=200 - 20(j-1) + 30(j-1)
2
and accumulated when there is more
than one year in the replacement cycle
b
Computed as S
n
= I[1-0.1(n)]

Replace-
ment
Cycle
Time, n
(1)
Initial
Invest-
ment, I
(2)
Total
Operating
Costs, C
j
(3)
Discounted
Operating
Costs,
C
i
j
j
j
n
( ) 1
1
+
=

(4)
Salvage
Value,
S
n
(5)
Discounted
Salvage
Value,
S
i
n
n
( ) 1
+
(6)
Discount
Factor,
i i
i
n
n
( )
( )
1
1 1
+
+
(7)=
(1+3-5)(6)
Equivalent
Average
Annual
Cost,
AC
n
1 $3,000 $200
a
$167 $2,700
b
$2,250 1.20 $1,100
2 3,000 410 312 2,400 1,668 0.65 1,068
3 3,000 690 475 2,100 1,215 0.47 1,062
4 3,000 1,100 672 1,800 868 0.39 1,094
5 3,000 1,700 913 1,500 603 0.33 1,092
6 3,000 2,550 1,198 1,200 402 0.30 1,138
7 3,000 3,710 1,522 900 251 0.28 1,196
8 3,000 5,240 1,878 600 140 0.26 1,232
9 3,000 7,200 2,258 300 58 0.25 1,300
10 3,000 9,650 2,653 0 0 0.24 1,357
CR (2004) Prentice Hall, Inc.
12-26