Inventory Management

and Warehouse Management

5th & 11th, and 12th & 18th July 2019

 Agenda

• Basic Inventory concepts

• Basic Inventory Modeling

• Warehouse Management System

• Term project presentation

 Inventory Management
• A stock of items held to meet future demand

• Inventory is a list for goods and materials, or those

goods and materials themselves, held available in
stock by a business.

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 Types of Inventory

Work in
process

Vendors Raw Work in Finished Customer

Materials process goods
Work in
process

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 The Material Flow Cycle

Cycle time

95% 5%

Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time

Figure 12.1
 Nature of Inventories
• Raw Materials (RM) – Basic inputs that are converted into
finished product through the manufacturing process.

• Work-in-progress (WIP) – Semi-manufactured products need

some more works before they become finished goods for sale

• Finished Goods (FG) – Completely manufactured products ready

for sale

• Supplies – Office and plant cleaning materials not directly enter

production but are necessary for production process and do not
involve significant investment.
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 Reasons To Hold Inventory
• Meet variations in customer demand:
 Meet unexpected demand
 Smooth seasonal or cyclical demand

• Pricing related:
 Temporary price discounts
 Take advantage of quantity discounts

• Process & supply surprises

 Internal – upsets in parts of or our own processes
 External – delays in incoming goods
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Objective of Inventory Management

• To maintain a optimum size of inventory for efficient and

smooth production and sales operations

• To maintain a minimum investment in inventories to maximize

the profitability

• Effort should be made to place an order at the right time with

right source to acquire the right quantity at the right price and
right quality

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 An effective inventory management
should
• Ensure a continuous supply of raw materials to facilitate
uninterrupted production

• Maintain sufficient stocks of raw materials in periods of short

supply and anticipate price changes

• Maintain sufficient finished goods inventory for smooth sales

operation, and efficient customer service

• Minimize the carrying cost and time

• Control investment in inventories and keep 9it at an optimum

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 Classification of inventory
Classification Criteria
1.ABC Classification Annual usage value of items
2.HML Classification (High, Unit price of the materials (it
Low, Medium) does not depend upon
consumption)
3.XYZ Classification Inventory value of items used
4.VED Classification (Vital, Criticality of the item (material
Essential, Desirable) criticality)
5.FSN Classification(Fast, Issues from stores
Slow, Non-moving)
6.SDE Classification (Scarce, Procurement difficulties
Difficult, Easy)
7GOLF Classification (Govt. Source of material
Ordinary, Local, Foreign)
8.SOS Classification (Seasonal, Seasonality of items
Off Seasonal)
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 XYZ Classification
• On the basis of value of inventory stored
• Whereas ABC was on the basis of value of
consumption to value.
• X – High Value
• Y – Medium value
• Z – Least value
Aimed to identify items which are extensively
stocked.
 HML Classification
• On the basis of unit value of item
• There is 1000 unit of Q @ Rs. 10 and 10,000
units of W @ Rs. 5.
Aimed to control the purchase of raw materials.
H – High, M- Medium, L - Low
 VED Classification
• Mainly for spare parts because their
consumption pattern is different from
raw materials.
• Raw materials on market demand
• Spare parts on performance of plant and
machinery.
• V – Vital, E – Essential, D – Desirable
 FSN Classification

• According to the consumption pattern

• To combat obsolete items
• F – Fast moving
• S – Slow moving
• N – Non Moving
 SDE & GOLF Classification
• Based on source of procurement
• S – Scarce, D- Difficult, E- Easy.

• GOLF
• G – Government, O – Ordinary, L – Local,
F – Foreign.
 SOS Classification
• Raw materials especially for agriculture
units
• S – Seasonal
• OS – Off seasonal
 ABC ANALYSIS
(ABC = Always Better Control)
This is based on cost criteria.
It helps to exercise selective control when confronted with
large number of items it rationalizes the number of orders,
number of items & reduce the inventory.
About 10 % of materials consume 70 % of resources
About 20 % of materials consume 20 % of resources
About 70 % of materials consume 10 % of resources

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 ABC Analysis
 Divides inventory into three classes based on annual
dollar volume
 Class A - high annual dollar volume
 Class B - medium annual dollar volume
 Class C - low annual dollar volume
 ABC Analysis

Percent of Percent of
Item Number of Annual Annual Annual
Stock Items Volume Unit Dollar Dollar
Number Stocked (units) x Cost = Volume Volume Class

#10286 20% 1,000 $ 90.00 $ 90,000 38.8% A

72%
#11526 500 154.00 77,000 33.2% A

#12760 1,550 17.00 26,350 11.3% B

23%
#10867 30% 350 42.86 15,001 6.4% B

#10500 1,000 12.50 12,500 5.4% B

 ABC Analysis

Percent of Percent of
Item Number of Annual Annual Annual
Stock Items Volume Unit Dollar Dollar
Number Stocked (units) x Cost = Volume Volume Class

#12572 600 $ 14.17 $ 8,502 3.7% C

#14075 2,000 .60 1,200 .5% C

#01036 50% 100 8.50 850 .4% 5% C

#01307 1,200 .42 504 .2% C

#10572 250 .60 150 .1% C

8,550 $232,057 100.0%

 ABC Analysis

A Items
Percent of annual dollar usage

80 –
70 –
60 –
50 –
40 –
30 –
20 – B Items
10 – C Items
0 – | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100
Percent of inventory items
 A- Item B- Item C-Item
Small in number, but Intermediate Larger in number, but
consume large amount of consume lesser amount of
resources •Moderate control resources
•Purchase based on
•Tight control rigid requirements •Ordinary control measures
•Rigid estimate of •Reasonably strict •Purchase based on usage
requirements watch & control estimates
•Strict & closer watch •Moderate safety •High safety stocks
•Low safety stocks stocks ABC analysis does not
•Managed by top •Managed by middle stress on items those are
management level management less costly but may be vital
Economic Order Quantity (EOQ)

EOQ is essentially an accounting formula that determines the

point at which the combination of order costs and inventory
carrying costs are the least.

The result is the most cost effective quantity to order. In

purchasing, this is known as the order quantity, in
manufacturing, it is known as the production lot size.

While EOQ may not apply to every inventory situation, most

organizations will find it beneficial in at least some aspect of
their operation.

Anytime you have repetitive purchasing or planning of an item,

EOQ should be considered.
 EOQ Assumptions

• Known & constant demand

• Known & constant lead time

• Instantaneous receipt of material

• No quantity discounts

• Only order (setup) cost & holding cost

• No stockouts
 Inventory Holding Costs
Reasonably Typical Profile

% of
Category Inventory Value
Housing (building) cost 6%
Material handling costs 3%
Labor cost 3%
Inventory investment costs 11%
Pilferage, scrap, & obsolescence 3%
Total holding cost 26%
 EOQ Model
Annual Cost

Order Quantity
 EOQ Model
Annual Cost

Holding Cost

Order Quantity
 Why Order Cost Decreases
• Cost is spread over more units
Example: You need 1000 microwave ovens

1 Order (Postage Rs. 0.35) 1000 Orders (Postage Rs. 350)

Purchase Order PurchaseOrder

Purchase Order
PurchaseOrder
Order
Description
Purchase Qty.
Description Qty. Description Qty.
Microwave 1000 Description
Microwave
Description Qty.1
Qty.
Microwave 11
Microwave
Microwave 1
Order
quantity
 EOQ
Objective is to minimize total costs
Curve for total
cost of holding
and setup

Minimum
total cost
Annual cost

Holding cost
curve

Setup (or order)

cost curve
Optimal order Order quantity
quantity (Q*)
 An optimum inventory level involves
three types of costs
Ordering costs:- Carrying costs:-
• Quotation or tendering • Warehousing or storage
• Requisitioning • Handling
• Order placing • Clerical and staff
• Transportation • Insurance
• Receiving, inspecting and • Interest
storing • Deterioration, shrinkage,
• Quality control evaporation and
• Clerical and staff obsolescence
Stock-out cost • Taxes
• Loss of sale • Cost of capital
• Failure to meet delivery
commitments
EOQ Model Equations

D = Demand per year

S = Setup (order) cost per order
H = Holding (carrying) cost
d = Demand per day
L = Lead time in days
 Reorder Points
 EOQ answers the “how much” question
 The reorder point (ROP) tells when to
order
Demand Lead time for a
ROP = per day new order in days
=dxL
D
d= Number of working days in a year
 EOQ Example

You’re a buyer for Supermarket.

SaveMart needs 1000 coffee makers per year.

The cost of each coffee maker is Rs.78.
Ordering cost is Rs.100 per order. Carrying
cost is 40% of per unit cost. Lead time is 5
days. Supermarket is open 365 days/yr.
What is the optimal order quantity & Reorder
Point (ROP)?
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 SaveMart EOQ

2 D S
EOQ 
H
D= 1000
2 1000  Rs100
S= Rs.100 EOQ 
C= Rs. 78 Rs.31.20
I= 40%
H= CxI
H= Rs.31.20 EOQ = 80 coffeemakers
 An EOQ Example
Determine optimal number of needles to order
D = 1,000 units
S = Rs.10 per order
H = Rs.50 per unit per year

2DS
Q* =
H
2(1,000)(10)
Q* = = 40,000 = 200 units
0.50
 An EOQ Example
Determine optimal number of needles to order
D = 1,000 units Q* = 200 units
S = Rs.10 per order
H = Rs.50 per unit per year

Expected Demand D
number of =N= =
orders Order quantity Q*

1,000
N= 200= 5 orders per year
 An EOQ Example
Determine optimal number of needles to order
D = 1,000 units Q* = 200 units
S = Rs.10 per order N = 5 orders per year
H = Rs.50 per unit per year

Number of working
Expected time days per year
between orders =T= N

250
T= 5 = 50 days between orders
 An EOQ Example
Determine optimal number of needles to order
D = 1,000 units Q* = 200 units
S = Rs.10 per order N = 5 orders per year
H = Rs.50 per unit per year T = 50 days

Total annual cost = Setup cost + Holding cost

D Q
TC = Q S + 2 H

TC = 1,000 (Rs.10) + 200 (Rs 0.50)

200 2

TC = (5)(Rs.10) + (100)(Rs 0.50) = 50 + 50 = Rs.100

Thanks
WAREHOUSING MANAGEMENT SYSTEM

Gaurav Narkhede | Josue Servalis | Mike Macas | Praneetha Boda

 THE WAREHOUSE MANAGEMENT
• Part of firms logistics system that stores products at and
between point of origin and point of consumption.

• Term “Warehousing” is referred as transportation at zero

miles per hour

• Warehousing provides time and place utility for raw

materials, industrial goods, and finished products, allowing
firms to use customer service as a dynamic value-adding
competitive tool.
ROLE OF WAREHOUSE IN THE LOGISTICS SYSTEM
• The warehouse is where the supply chain holds or stores
goods.

• Functions of warehousing include

 Transportation consolidation
 Product mixing
 Docking
 Service
 Protection against contingencies
 RECEIVING
INPUT •Schedule Carrier
•Unload Vehicle
•Inspect for damage

WAREHOUSE PROCESS
Storage
Put-away
•Equipment
•Identify Product
•Stock Location
•Identify Product Location
– Popularity
•Move Products
– Unit Size
•Update Records
– Cube

Shipping Preparation Order Picking

•Packing •Information
•Labeling •Walk & Pick
•Stacking •Batch Picking

Shipping
•Schedule Carrier
•Load Vehicle
•Bill of Loading OUTPUT
•Record Update
 WAREHOUSE ACTIVITIES
• Receive goods

• Identify the goods

• Dispatch goods to storage

• Hold goods

• Pick goods

• Marshal shipment

• Dispatch shipment

• Operate an information system

 Benefits from a Good WMS
1.Visibility
Without an advanced WMS, organizations are reduced to doing a
daily warehouse check with pen and paper and spending hours
reconciling what they found with previous checks.
2. Velocity
A WMS provides real-time visibility into asset locations and their
operational status including dwell times in various states. By
monitoring all the delays in the visit lifecycle, it becomes possible
to accelerate operations, such as rapidly identifying available
empty trailers for outbound loads.
3. Safety
A WMS can improve safety by eliminating the need to have
people walking around the warehouse performing manual checks.
Instrumentation on yard trucks monitors speed, safe practices
and hours of service for yard truck drivers.
4. Process Conformity
The WMS will ensure every trailer, tractor and driver entering the
facility is checked-in and out in a consistent way. Seals are
checked, damage is recorded and shipment information is
associated with the trailer number.
5. Operational Efficiency
The imperative for so many facilities is to reduce yard congestion,
queuing at the gate and throughput in general. Turn around time
 Benefits from a Good WMS
6. Spotter Efficiency
A warehouse management system greatly improves spotter move
times and enables shuttle drivers to electronically receive,
accept and confirm completion of move requests, eliminating
radio communication, pen and paper in the cab.
7. Improve Planning Applications
WMS complements and augments the planning functions by
providing execution visibility.
8. The Network Perspective
Organizations typically fail to take a network view of their WMS
deployments. By running facilities in isolation, they fail to
recognize labor savings by consolidating talent into centralized
control towers. The network view allows organizations to pool
assets, including empty trailers, the transportation trucks
and to compare operational effectiveness across locations.
9. Collaboration/Transparency
Progressive shippers and 3PLs think of visiting carriers as their
customers. Some even provide Carriers with access to their WMS,
so they can send real-time shipment notifications, which can
happen before the shipment leaves the source facility.
10. SAVINGS
Automating yard operations with a WMS is often justified through a
combination of reduced demurrage costs, lower driver
detention fees and increased throughput.
KPI’s For Warehouse Operations?

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