LOG 408: Global Logistics Management

Lecture 9: Inventory and warehouse management

• Explain the application of a technique known as the transportation model

• Explain various terms on logistics firms, LSPs, 3PLs, 2PLs, 4PLs, 1PLs

• 3PLs as a type of strategic partnership are becoming more prevalent

• Both advantages and disadvantages to outsourcing the logistics function

• Many important issues to consider once the decision has been made and a 3PL agreement is being implemented

• Examine the range of issues in, and the process employed for, in selecting logistics service providers

Key Points of Last Week

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The importance of inventory management

• Inventory is another name for materials and is any material that a firm holds in order to satisfy customer demand (and these customers may be internal and/ or external to the firm)

• Inventory costs money! It ties up working capital and affects cash flow

• Inventory takes up space• Firms need to hire people to take care of inventory• The goal in inventory management is to minimize inventory

holding while maintaining a desired customer service level.

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Supply Chain Pipeline

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Inventory turnover

• A concept used to measure a firm’s performance in inventory management

• Compares annual sales with the amount of average inventory held throughout the year– The higher the turnover, the lower the firm’s inventory costs– Ex. Company Y builds racing cars. In 2006, total value of car

sold was $3m and the average inventory holding is $250k. At the end of 2006, it implemented a JIT program to improve the inventory management. In 2007, the total sales is $4,5m and average inventory holding is $300k. Has the performance improved?

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Reasons for holding inventory

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• Unexpected changes in customer demand• Shorter product lifecycles• More competing products

• Uncertainty in the quantity and quality of the supply and supplier costs

• Delivery Lead time • Economies of scale by carriers – cost/weight of

transport goes down the larger the load• An implication of EOQ model

Inventory reduction strategies

• Inventory centralization: variation of total demand is reduced• Delayed product differentiation: reducing variation by

combining demand at different points is the case of a manufacturer making multiple products

• Part commonality: attempts simply to reduce the number of different parts in a product range wherever possible

• Transit inventory reduction– Reduce lead times: cheaper transport modes may be

slower– An example: choose the better transportation mode for

lower total cost (transportation plus inventory cost)

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Inventory centralization

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Part commonality

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Inventory flow types

Source: Gattorna and Walters (1996)

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Stockholding policies for alternative inventory flow types

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Inventory reduction principles

• Pool inventory: Wherever demand for inventory can be combined, the safety stock can be lowered, still providing the same service level

• Reduce variation: Wherever variation can be reduced, safety stock can be reduced too

• Reduce lead time: When the lead time is long, we need to forecast more into the future, thus the accuracy of the forecast suffers, increasing the variability of demand and consequently requiring higher safety stock

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Inventory reduction principles (cont.)

• Just-in-time inventory system (JIT): making do with the minimum possible level of inventory holding– Inventory hides problems!

• By purposely removing inventory holdings, the problems the inventory was covering are surfaced, and the problems are then proactively fixed

– Small lot production • Ordering in small quantities keeps the average inventory level

small– Hence reduce order processing costs so that the ideal of small

quantity ordering can be accomplished• The time and effort spent in process setups are the

manufacturing equivalent of order processing costs– Hence, reduce the time and effort in setups

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Warehousing in Global Supply Chains

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Value-Adding Activities

• Warehousing operations can achieve this by:– Creating bulk consignments– Breaking bulk consignments– Combining freight– Smoothing supply to meet demand

Warehousing should aim to provide value-adding services as well as minimizing operating costs

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Generic Warehouse Functions

• All activities within a warehouse are associated with one of the following core functions

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Warehouse Layout Examples

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Warehouse design issues

• The warehouse should suit the freight and material handling• Minimize movement & handling• Use automatic handling systems if possible

– Cranes, conveyors, or AGVs (automatic guided vehicles)

• Case of AG Barr (soft drink producer)– Automatic system for large volume orders from large retailers– Manual system for high variety orders from small retailers– Manual system to handle returned freights (from “hawk” drivers to

small retailers)

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Cross Docking

Popularized by Wal-Mart, bypasses the storage area in warehouses and distribution centers. Goods arriving at warehouses from the manufacturer

– are transferred to vehicles serving the retailers– are delivered to the retailers as rapidly as possible

Goods spend very little time in storage at the warehouse– Often less than 12 hours– Limits inventory costs and decreases lead times– It may improves customer service– Typically employed for fast moving freight with constant demand

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Issues with Cross-Docking

• Require a significant start-up investment and are very difficult to manage; usually requiring lots of warehouse space in terms of the number of doors, e.g., 90, 150

• Supply chain partners must be linked with advanced information systems for coordination

• A fast and responsive transportation system is necessary • Forecasts are critical, necessitating the sharing of information.• Effective only for large distribution systems

– Sufficient volume every day to allow shipments of fully loaded trucks from the suppliers to the warehouses.

– Sufficient demand at retail outlets to receive full truckload quantities

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Warehouse Management Systems

A Warehouse Management System (WMS) manages information processes and material requirements transmitted from the management information system (such as ERP) to:

Trigger the right work …..

….. at the right time across the operation ….

…. to meet demand.

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Material Handling and Storage

• Automated material handling improves and standardises warehouse performance by minimising human intervention

• Storage solutions vary depending on the volume, variety and throughput of freight in a warehouse of distribution system. – Pallet storage– Non-pallet storage

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Order Picking

• Picking solutions vary depending on freight volume, variety and throughput. – Pick-to-order– Batch picking– Pick-to-zero– Zone picking

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Storage and Picking Combinations

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Questions to think

• Explain how a reduction in lead time can help a supply chain reduce its inventory buffer without hurting customer service.

• Why is Amazon.com able to provide a large variety of books and music with less safety inventory than a similar bookstore chain selling through retail stores?

• How does part commonality or delayed product differentiation reduce inventory holding?

• In the context of postponement, how might downstream distribution centres be viewed as value-adding?

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