Chapter 1Stores and warehouse design

Stores and warehouses hold:

• Raw materials, components and parts for use in manufacturing and processing
• Finished goods for sale
• Goods returned by customers

Different warehouses handle packages of different sizes, depending on the quantities ordered.

Pallets: a flat wooden structure on which heavy goods are placed. It allows forklift trucks to pick up and move them easily. This is the most effective way to transport and store goods.

• Other items could be held on shelves in tote boxes (these are plastic container boxes of different sizes)
• Small items could be held in carousels

Key principles for warehouse design include: keeping the location optimal to minimise stock movement, ensuring sufficient and optimal space and efficient operations regarding layout, handling etc.

Warehouse design

Warehouse design is intended to create an effective and efficient warehouse. It will support operational efficiency and minimise costs.

Location: choice of location should minimise movement of stock, or minimise costs – ideally both.

• For a manufacturing company, the warehouse should be close to the manufacturing operations, for example in the same building (known as factory warehouses)
• For finished goods, warehouses should be located between the place of manufacturing and the location of the customer
• If warehouses serve a large area, or a number of possible customers, transportation is one of the biggest cost items. It is ideal to locate this as close to the point of demand as possible (known as distribution warehouses)
• If the organisation has a just in time philosophy, you might not need a large warehouse. Alternatively, some goods can be held in the open air, in a stockyard

Centralised vs warehousing network

If you have a centralised warehouse covering the whole organisation, you will have lower warehousing costs but higher transport costs.

• A warehousing network will reduce transport costs but increase warehousing costs
• The ideal number of warehouses will minimise the total cost of warehouse operations + transport

There are two elements of transportation costs:

• Long distance bulk trunking (primary transport): costs of transport from origin to the warehouse (often uses large carrier vehicles)
• Local frequent deliveries (secondary transport): costs of transport from warehouse to customers (often uses smaller vehicles)

A manufacturing organisation will have a local store for materials at factory sites. On top of this, there are three approaches for warehousing of finished goods:

It is worth bearing in mind that warehouse location will affect delivery times: something that customers place value on. So there is a trade-off between costs and value.

Other considerations include: accessibility, availability of labour and government incentives.

What do warehouses contain?

• Equipment for storing items: racking and shelving. There may need to be separate areas for cold storage, hazardous items etc
• Equipment for moving items (materials handling). Aisle space, pallets etc
• Space for deliveries into the warehouse (inwards logistics area)
• Picking and packing area, and equipment
• Outward logistics areas (loading truck space etc)
• Office space

Space required will depend on: throughput (volume flowing through the warehouse), item quantities, item sizes and need for special storage space (there could be a hot pick zone for fast-moving items). The use of automated / mechanised equipment may also affect space considerations.

There may be a decision between single storey or multi-storey warehouses. You might use tall racks in single storey, or construct multiple floors if items are smaller etc.

Docking areas

These are areas for unloading and loading vans / trucks. If small vans are used, there might be space within the warehouse building to enter. If trucks are used, you may need loading and unloading docks.

• Most common type is a 'flush' loading dock. This is a garage-like door in the warehouse wall. Trucks reverse into the dock

Flow is important: efficient flow of stock items depends on 1) the location of stock items and 2) the directions of movement. An ABC analysis is used to analyse the flow of work:

Category A items should be the most easily accessible and located in a way that minimises handling and movement.

Cross docking: this applies to items that are delivered and dispatched quickly, often on the same day. These items could be kept in a cross-docking area near the entry/exit for goods. This minimises the movement of stock.

Warehouse layout systems

Straight line (throughflow) system

This is a one-way flow of store items. Goods come in at one end of the warehouse, get handled and stored. Dispatching takes place at the other end of the warehouse.

• The advantages are: that the inward logistics and outward logistics areas are separate which is useful if vehicles are different between the two, and this separation reduces the scope for error
• The disadvantages are: the separate loading bays take more space and are at opposite ends, and all materials need to be moved from one end to the other end

U-shaped (horseshoe) system

The inwards receiving area is at the same end as dispatching area, and goods flow round in a horseshoe pattern.

Crossflow system

Items are stored according to frequency of usage. There are different racks according to the ABC analysis, with fast-moving items kept closest to the goods inwards/outwards point.

• Advantages are that movement is minimised and one-way flow is clear
• Disadvantages are that bulk and standard items may need to be on the same racks, which may be impossible, and segregated according to ABC may not be possible

Picking journeys: in some warehouses, a container truck is given a picking list and moves along the aisles collecting the items. It then takes them to the packing area.

Space utilisation

Warehousing systems are inherently a compromise between efficient use of space and quicker access to goods.

'Using the cube': this refers to the fact that it's more economical to build upwards than outwards. This can be done using high-density racking or using mezzanine floors.

• Mezzanine floors: these are non-structural floors attached to a wall of a building. They effectively add an extra storey to the building for lighter items.
• Alternatively, using taller racks means you can add more shelves, adding storage space. This means that you need to ensure equipment can reach top shelves.

Aisle width: wider aisles make movement easier, but mean space isn't used. As a general rule, narrow aisles are 1.5-2m wide, normal aisles are 2.5m. Small item shelves may only have an aisle width of 1m.

• Aisle width affects the equipment that can be used. Narrow aisles may require reach trucks / forklifts that do side-loading rather than front-loading
• Reach trucks are designed for narrow aisles

High density racking: this is made possible by storage equipment with moving shelving. This means that aisles aren't needed as much. High density storage can offer storage for ½ of the space.

If stock is turned over quickly, high density racking would be preferable, minimising aisle space.

Just in time: this philosophy reduces the need for storage space and means faster turnover of stock. Cross docking might be appropriate if turnover is very quick.

Flexibility

The usage and demand of stock may change over time. This might mean that stock needs to be moved around the warehouse if a crossflow system is being used, for example.

• A fixed location storage plan would be appropriate if demand is stable. But this means there isn't flexibility to move stock around
• Random location storage: empty shelves are used for stock wherever they are, maximising utilisation but can cause inefficiencies in movement. Efficient IT systems would be needed for stock tracking
• Semi-random location storage: similar to random, but there are some rules about location, and random placing occurs within these constraints. E.g. fast-moving items may have a particular section that they must be kept within

If demand is seasonal (e.g. for Christmas), organisations may need to hire additional space for parts of the year. They will need to form a rental agreement. Demand planning is important for this.

Chapter 2Product coding

There are different options for coding systems: it could be the company's own coding system, manufacturers', customers' or industry standards. If an organisation has lots of different stock types, they should develop a common coding system for all items (SKUs).

• If there are a wider range of SKUs, a more complex coding system is needed
• Most product coding systems are numeric, but some could be alphanumeric or alphabetic
• In a sequential coding scheme, SKU codes follow a number sequence. E.g. 01, 02, 03 for each additional product
  • Codes aren't linked to particular products, meaning that items aren't easily recognisable from their code
  • Therefore, sequential coding is not efficient, and only really used by small organisations
• Significant coding: each set of digits represents a characteristic of the stock. These codes are longer than sequential codes, because there needs to be extra space for new items to be added
  • An example could be an 8 digit code, split by: 3 digits for product type, 2 digits for manufacturer, and 3 digits for model number
• Randomly generated codes: a random number generator used to create a code. Humans can't understand these codes
• Letter codes: 24 symbols, excluding I and O for confusion. The letters could form abbreviations, which is helpful for humans to recognise. Alphanumeric codes combine numbers and letters
• Colour-based coding: not really relevant nowadays because stock is on IT systems. Colour marking might be used on the items for staff to see e.g. to represent a particular metal

Check digits: a risk of staff inputting numerical codes into IT systems is that they make a mistake. There is therefore an extra digit sometimes added (a 'check digit') to identify mistakes.

• One system for generating check digits is modulus 10. All digits in the code are given a weighting, and the Code multiplied by the Weighting is added up for all digits. This is then divided by 10 to identify the check digit
• The check digit should always divide by 10 without a decimal. If there's a decimal, there's been a mistake

A successful coding system should be:

Use of product codes

Product codes are used by multiple departments for different purposes:

• Warehouse staff will use them to check locations, stock, movements of stock
• Procurement staff will include codes in purchase orders
• User departments will use codes for requisitions
• Accounting will record costs via codes

Industry standard codes

The Universal Product Code (UPC) and European Article Numbers (EAN/UPC) are widely used.

• UPC is 12 digits and used in North America for consumer products.
• EAN/UPC is 13 digits used across the rest of the world; the 1^st digit is used to identify the country of origin.
• The UPC code is made up of manufacturer identification (6 digits), product item number (5 digits) and a check digit
• UPC is used in barcodes commonly in supermarkets

The ISBN system for books is commonly used. There are 13 digits, made up of a prefix (3 digits), registration group (country of origin, language), registrant element (publisher, edition) and a check digit.

The Standard Industrial Classification (SIC) system codes for type of industries.

Shell Oil developed the Pantone colour system for the printing industry, and the Materials Equipment Standards and Code (MESC) system.

Barcoding

Numerical codes are represented by bars and spaces, where 0-9 has unique combination of bars and spaces each.

Chapter 3Warehousing equipment

Pallets: there are two types of pallets. The two-way entry pallets (where they can be picked up from front and back) and four-way entry pallets (picked up from any side).

• Pallets are manufactured in standard sizes. ISO 6780 specifies 6 standard pallet dimensions
• The size of racks is dependent on the pallet sizes. Slip sheets might be used to sit on top of a pallet and separate it from the goods sitting on it. This makes it easier to remove a pallet later
• If the supplier's pallet sizes are compatible with the buyer's, there can be efficiencies
• Pallets are re-usable, but those provided by the supplier would be returned once no longer in use. This means that pallets will be stored in a part of the warehouse for return to suppliers
• Pallets aren't required if other storage types are used e.g. tote boxes, storage bins

Unitisation: the use of unit loads for handling items. Unit loads are a grouping together of similar items for storage on pallets. This allows them to be stacked on uniform shelving.

• Items in a unit load are held together by strapping which allows them to be moved as a single unit.
• Tote boxes could be held together as unit loads.

Storage without racking: some goods could be stored without need for racks:

• Block stacking: stacking items on top of each other without racks / pallets
• Post pallets and cage pallets: where stacking might be unstable, post / cage pallets might be used. These are pallets with upright columns in each corner. The pallets sit on the columns
  • Post pallets are used for regularly shaped goods, cage pallets for irregularly shaped goods

Handling equipment

Manual handling equipment: this could be equipment on wheels (e.g. trolleys) or moving stock by hand.

• Trolleys: can be used as containers. Could be supermarket trolleys
• Dollies: platforms on four wheels, steered using a handle
• Pallet truck: for moving heavier loads. Hydraulic systems are used to raise pallets
• Roll cages: cages on four wheels that can be moved manually
• Order picking trolleys: trolleys used by operators to move items around or pick items for customer orders

Powered materials handling equipment: battery powered pallet trucks could be used for longer distances, larger weights.

Forklift trucks: they have a counterweight at the back of the truck to balance against weight carried at the front.

• The most common type is the driver-operated counterbalanced forklift truck (usually powered by LPG or electric)
• If operated indoors, forklifts should be electric
• Reach trucks: these are designed for narrower aisles with tall racking. The forks can reach higher
• Drum handlers: for moving cylindrical drums

Some of the downsides of forklifts include the cost, need for training, requirement for wide aisles.

Selected other equipment:

• Cranes: for moving heavy loads
• Rollers: a line of rollers connecting one location to another. Items roll along it
• Conveyor systems: moving along a conveyor belt
• Monorails: variant of conveyor system, where there is an overhead rail
• Carousels: series of trays / bins, linked together to create a chain. Carousel revolves to bring the appropriate tray to the operator

A weighbridge might be used to measure the weight of a truckload of items (a large weighing machine). This might be needed when goods arrive into a warehouse, or leave.

Packing, packaging and containers

Packing and packaging:

• Packing means putting items into packages and can also refer to the package itself.
• Packaging can use bubble wrap, polystyrene etc for protection.
• ISO 18602 classifies packaging into 3 categories:
  • Primary packaging: packaging in immediate contact with item e.g. food held in tins
  • Secondary packaging: packaging that holds a number of items together, that are in primary packaging
  • Tertiary packaging: packaging for transporting goods
• ISO 14001 would be relevant for the environmental aspect of packaging

Containers:

• Shipping containers are built for intermodal freight transport i.e. across ship, rail, road
• Most containers are dry freight
• Containerisation: using standardised containers for storing and transporting loose units

Warehouse technology

Warehouse management systems (WMS): IT-based system that integrates stock management activities. E.g. forecasting, stock control, recording receipts etc.

Automated guided vehicles (AGV): driverless vehicles for use in warehouse. Now there are robotic forklift trucks, which are mobile robots (more advanced).

• AGVs needed markers, lasers etc to direct themselves whereas mobile robots don't
• Other robotic equipment includes cranes and packers
• Automated packaging machinery is now used along conveyors. These might be computer-controlled conveyor systems

Chapter 4Inventory

In a manufacturing company, there are 4 categories of inventory:

The first category can be divided into raw materials, components and subassemblies:

• Components are partly manufactured products
• Subassemblies are partly assembled elements (larger than components, manufactured using raw materials and components)

Opening and closing stock:

• Opening stock: total inventory quantity held at the beginning of the financial year (measured by cost)
• Closing stock: inventory quantity held at end of the financial year

The above are used to calculate costs of production and cost of goods sold.

• There are different ways of measuring stock: e.g. recording stock movements in an inventory management system, or physically counting stock.

Safety stock

When demand for stock exceeds quantity held in store, there's a stockout.

• If the stockout relates to an item used for production, production may need to stop
• If stockout relates to finished goods, there might be delayed or lost sales
• Safety / buffer stock is needed: extra quantity held in stock. This is the difference between quantity expected to be sufficient and the actual quantity held
  • This should be based on the need to keep inventory costs relatively low, but cater for the uncertainty of demand

Obsolescence and redundancy of stock

Stock obsolescence: when stock becomes out of date, such that it's no longer of use. Obsolete items should be ultimately written off if demand is no longer there, and disposed of.

Stock redundancy: this is when an item has no use for its owner. It can happen if a company changes its requirements, or is holding too much inventory and therefore doesn't expect to use the item at all.

Obsolete stock might be difficult to sell because it is out of date. It might be possible to recover some of the cost. You might be able to sell redundant stock though, if other businesses still have use for it.

Direct and indirect supplies

Direct supplies: raw materials, components, subassemblies that go into manufacturing end-product.

Indirect supplies: items that don't go directly into manufacturing, but are used for operational purposes. These are also known as MRO supplies (maintenance, repairs and operations).

• Indirect supplies can be used by manufacturing, sales and marketing, general admin activities etc
• In manufacturing, they could be consumables, tools or machine spares

ABC classifications of stock

Pareto analysis has shown that 20% of stock generally accounts for 80% of the value of stock turnover. This has been developed into ABC analysis:

With Category A, one should avoid excess stockholding because there would need to be larger inventory. But stockout can have severe consequences.

With Category C, if an item is used infrequently, no items might be held in stock (may just be ordered as needed). If an item is in high turnover, there may be large quantities held (as items are small).

MRP systems will use a forecast of sales demand for each product item to develop bill of materials.

Dependent and independent demand items

Dependent demand items: this is when demand for an item depends on the quantity of the product manufactured. The bill of materials will contain all dependent demand items.

Independent demand items: this is when demand isn't directly dependent on how much is produced. This would apply to most indirect supplies.

Costs of holding inventory

Measuring inventory value is useful for balance sheet/tax records, measuring profits (as items from inventory used in production need to be recorded as costs) and measuring holding costs.

Inventory holding costs can be classified into direct and indirect (those costs that are directly related to inventory holding, and not).

There are direct and indirect costs of acquisition.

• Direct costs: the purchase and delivery costs paid by the buyer
• Indirect costs: costs of processing the purchase e.g. making a specification, goods unloading costs etc

Indirect costs are rarely measured because the benefit of knowing these costs isn't worth the time.

There are also direct and indirect costs of production. Direct costs relate to the materials and labour used directly for production, whereas indirect costs relate to indirect materials and labour used only for support.

What are the main costs of holding inventory?

Loss in value: this can happen for a variety of reasons including damage, spillage, theft, obsolescence / redundancy.

• Items could deteriorate if they're held in inadequate conditions
• Some damages could be protected through insurance e.g. if caused by fire
• Obsolescence / redundancy can occur when items are held in storage for long periods of time

Financial costs: stock insurance + cost of capital invested in inventory

• Stock insurance: the cost of insuring stock is an inventory holding cost
• Cost of capital invested in inventory: the opportunity cost. Instead of holding inventory, the capital could have been invested.

Warehousing and storage and materials handling costs: the general costs of operating a store / warehouse.

• Security and costs of security: warehouse security will also be a cost to the organisation, particularly if the goods held are valuable and therefore require greater security.

Stockouts and how they affect the organisation

Quantitative estimates of the cost of a stockout will likely be limited to the lost profits from lost sales. However, there are additional costs such as the added cost of a 'rush order' (i.e. getting an order for rapid delivery from a supplier) and loss of customer goodwill etc.

When stockouts occur, service levels reduce. E.g. if there are no stockouts, then service level will be 100%. But realistically, it will be somewhat less.

• If you hold too much inventory in order to achieve a 100% service level, then costs will be too high
• Therefore, one needs to find a balance between holding costs and stockout costs
• Stockouts will depend on: the level of stock remaining when an order for re-supply is made, the supply lead time, and rate of demand for stock during the lead time
• Safety stock should be held to reduce likelihood of stockouts

Vendor managed and vendor owned inventory

Vendor managed inventory (VMI): inventory levels are managed by the supplier, but inventory is physically held by the buyer. So supplier decides when to restock.

Vendor owned inventory (VOI): a type of VMI arrangement where the supplier owns the inventory, even though it's held by the buyer. So the buyer pays for stock as they use it.

• The advantage of VOI is that the buyer doesn't need to put capital in stock
• But standard VMI would minimise stockout risk
• VOI is used for MROs

First in, first out (FIFO): idea that units of stock that are used first should come into the store the earliest. I.e. stock is used in the order that it's received.

Chapter 5Inventory control

Techniques of inventory control

Forecasting is important for inventory control, to track how many items should be ordered and held. There are two types of forecasting techniques:

• Subjective / qualitative forecasting (estimates from sales, market research, experts' opinion, Delphi method)
  • Delphi method: expert opinions are shared anonymously among the group, allowing them to all reconsider. This happens until a consensus is reached. This removes risk of individual bias.
• Objective / quantitative forecasting (time series analysis e.g. moving averages etc)
  • This is basically making forecasts based on results from the past
  • Examples are simple moving averages, weighted moving averages

Bullwhip effect (Forrester effect): a small change in final consumer demand leads to a larger change in the upstream supply chain. This highlights need for sharing forecast sales with other suppliers.

Reorders

Reorder level: the stock level at which a replenishment order is raised.

There are two types of stock replenishment systems: periodic review systems and fixed order point systems.

Periodic review systems: monitoring stock levels and deciding on purchases at each review slot.

• There's a desired stock level set. At each review, a replenishment order may be placed to get the level back to the desired stock level.
• Therefore, the quantity of each order isn't set: the regularity is
• The review frequency would be based on the particular item: how frequently the item is used, value of item etc
• Useful to apply an ABC analysis: A items reviewed more frequently, C items less so
• Review could happen through a physical stocktake, or using live computer systems (perpetual inventory)

Fixed order point systems: stock is replenished when inventory falls to a reorder level (ROL). This could be automated. Therefore, order quantities are fixed, regularity isn't.

• The ROL should cater to the maximum amount used per day and the maximum lead time (for safety)
• This system might use economic order quantities: minimising combined total of acquisition + holding costs (AC + HC = TC: Total Cost)

The above two systems are useful for independent demand stock items (finished goods and indirect supplies). But for direct supplies, demand is dependent on production quantities. MRPII is more useful for this.

Hierarchy of components: each item's demand is dependent on the item above it. E.g. demand for car engine is dependent on the demand for cars.

MRP, MRPII and ERP

MRP is based on a master production schedule (MPS) using forecast sales quantities. This derives a bill of materials, showing order quantities.

• Use the inventory status to deduct the amount of stock from the gross requirement, to arrive at the net requirement (i.e. how much stock do we need to buy, bearing in mind what we already have in stock?)

MRPII: derived from MRP systems but also consider other production resources such as labour, machinery and money.

• It is a modular system, with modules including MPS, BOM, MRP, capacity requirement etc

ERP: Integrates all functions in an organisation e.g. supply chain, sales, finance, HR. It is a modular system, with various modules such as those outlined above.

JIT: for Just in Time to work, there will need to be zero defects. Suppliers must also be willing to work to guaranteed lead times. It requires deep supplier partnerships.

• Investing in JIT may not be worth it for all categories. ABC analysis might be useful in ranking most salient goods for JIT

Inventory optimisation: Lean

Lean is about minimising waste while maximising value. There are seven types of waste:

Kanban: a pull system. Output from an earlier stage in a production cycle should only be produced if there is a signal from the next stage that output is required. There would be a signalling system e.g. electronic message.

Kaizen: continuous improvement. Making small improvements over time.

Useful KPIs for inventory performance

• Lead times
• Stockouts in a given period
• Rate of stockturn
  • Stock turnover (times per year) = cost of stock used / average inventory level
  • Stock turnover (days) = (average inventory level / cost of stock used) x 365 days
• Stock cover
  • Stock cover (days) = (current inventory level / expected average daily usage) x 365 days
  • If stock cover increases, could indicate that the item is over-stocked