warehousing inventory and transportation with case study
DESCRIPTION
presentation on warehousing, inventory and transportation decision making followed by a case studyTRANSCRIPT
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.