Improving Inventory Control by Re-engineering of

Warehouse.

LITERATURE REVIEW
Introduction of Ware House:

Abstract:
Developing an input-output model of a warehouse system to assess operational
efficiency. Model simultaneously accounts for all of the critical resources (labor,
space, and storage and handling equipment) and the different workload
requirements (Picking, storage and order accumulation) of a warehouse. Warehouse
and distribution facilities from a variety of industries, including auto parts, dental
and office supplies, electronics, fine papers, hardware, health care, industrial
packaging, mail order apparel, office machines, photographic supplies, and
wholesale drugs, and used the model to assess and compare their efficiencies.
Warehouses using lower levels of automation tend to be more efficient. This
association is more pronounced in small firms. Unionization is not negatively
associated with efficiency and in fact may actually contribute to higher efficiency.

Order picking has long been identified as the most labour-intensive and costly
activity for almost every warehouse; the cost of order picking is estimated to be as
much as 55% of the total warehouse operating expense. Any underperformance in
order picking can lead to unsatisfactory service and high operational cost for its
warehouse, and consequently for the whole supply chain. In order to operate
efficiently, the order picking process needs to be robustly designed and optimally
controlled. This paper gives a literature overview on typical decision problems in
design and control of manual order-picking processes. We focus on optimal
(internal) layout design, storage assignment methods, routing methods, order
batching and zoning. The research in this area has grown rapidly recently. Still,
combinations of the above areas have hardly been explored. Order-picking system
developments in practice lead to promising new research directions.

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore

 Improving Inventory Control by Re-engineering of
Warehouse.

Introduction:
Warehousing and transportation forms the backbone supply chain of all industries.
Adequate storage capacity and strategic location of the warehouse enables efficient
functioning of supply and distribution network and also provides strategic
competitive advantage to the business. Proper material handling, storage conditions
and timely movement of goods are necessary as improper handling and prolonged
storage can deteriorate the quality of the stored product.

Warehouse can play a key role in the integrated logistics strategy and its building
and maintaining good relationships between supply chain partners. Warehousing
affects customer service stock-out rates and firm’s sales and marketing success. A
warehouse smoothens out market supply and demand fluctuations. When supply
exceeds demand, demand warehouse stores products in anticipation of customers
requirements when Demand exceeds supply the warehouse can speed product
movement to the customer by performing additional services like marking prices,
packaging products or final assembling etc.

Storage Warehouse:

A storage warehouse is a commercial building which is generally located in the

industrial areas and is used for the storage of goods. Storage warehouses are
generally used by manufacturers, wholesalers, exporters, transport business and
customs to store goods.
.
A storage warehouse is an important part in the distribution chain of products. They
are the hubs where goods are stored to be distributed further. To help the movement
of goods and the process storage warehouses are equipped with cranes and forklifts.

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore

 Improving Inventory Control by Re-engineering of
Warehouse.

With time the need of a typical warehouse has be declining due to the Just in Time
policy followed by the business to improve the returns of a business by reducing in
process inventory. The JiT system promotes the delivery of products or parts
directly from the manufacturer to the merchant eliminating the need of a storage
warehouse. But still storage warehouses are commonly used due to the convenience
they offer in the distribution chain. The latest development is the retail store type
warehouses where decorative shelving is replaced by tall heavy duty industrial
racks.

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore

 Improving Inventory Control by Re-engineering of
Warehouse.

Understanding Inventory:

Despite its importance to the supply chain, inventory is not universally well
understood. It is variously characterized, both positively and negatively, as an
economic asset to a non-income-producing use of capital funds.

Only when considered in light of all quality, client service and economic factors—
from the viewpoints of purchasing, manufacturing, sales and finance—does the
whole picture of inventory become clear. No matter the viewpoint, effective
inventory management is essential to supply chain competitiveness.

Inventory control is concerned with minimizing the total cost of inventory. In the
U.K. the term often used is stock control. The three main factors in inventory
control decision making process are:

• The cost of holding the stock

• The cost of placing an order
• The cost of shortage

The third element is the most difficult to measure and is often handled by
establishing a "service level" policy, e. g, certain percentage of demand will be met
from stock without delay.

Types of Inventory:

Company using the different types of inventory,

• Cyclic Inventory
• Safety Inventory
• Seasonal Inventory

Cyclic Inventory:

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore

 Improving Inventory Control by Re-engineering of
Warehouse.

Cyclic inventory is the average amount of inventory used to satisfy demand

between receipts of supplier shipments. The size of the cyclic inventory is a result
of production, transportation, or purchased of material in large lots.

Safety Inventory:

Safety inventory is the inventory held in case demand exceeds expectation; it is

held to counter uncertainty. If the world were perfectly predictable, only cyclic
inventory would be needed, because demand is uncertain and may exceed
expectations, however, companies hold safety inventory to satisfy an unexpectedly
high demand.

Seasonal Inventory:

Seasonal Inventory is built up to counter predictable variability in demand,

companies using seasonal inventory buildup inventory in periods of low demand
and store it for periods of low demand and store it for periods of high demand when
they will not have the capacity to produce all that is demanded.

Lowering Inventory Costs:

Recent industry reports show that inventory costs as a percent of total logistics
costs are increasing. Despite this rise, many organizations have not taken full
advantage of ways for lowering inventory costs.

There are a number of proven strategies that will provide payoff in the inventory
area, both in client service and in financial terms.

Some of these strategies for lowering inventory costs involve having fewer
inventories while others involve owning less of the inventory you have.

Regardless of which techniques you employ, proactive inventory management

practices will make a measurable difference in your operations.

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore

 Improving Inventory Control by Re-engineering of
Warehouse.

JUST-IN-TIME INVENTORY CONTROL:

"Just-in-time production is a simple idea that may be difficult to implement " wrote
Gershon and Weiss.

"The basic concept is that finished goods should be produced just in time for
delivery, and raw materials should be delivered just in time for production. When
this occurs, materials or goods never sit idle, which means that a minimum amount
of money is tied up in raw materials, semi finished goods, and finished goods….
The just-in-time approach calls for slashing production and purchase lot sizes and
also buffer stocks—but incrementally, a little at a time, month after month, year
after year. The result is sustained productivity and quality improvement with
greater flexibility and delivery responsiveness." This production concept, which
originated in Japan and became immensely popular in American industries in the
early and mid-1990s, continues to be hailed by proponents as a viable alternative
for businesses looking for a competitive edge.

Setting an Inventory Strategy

No single inventory strategy is equally effective for all businesses. Indeed, there are
many different factors that can impact the usefulness of a given inventory strategy,
including positioning of inventory, rationalization, segmentation, and continuous
improvement efforts. Moreover, small businesses in particular often face financial
and logistical limitations when erecting their inventory systems. And of course,
different industries have different inventory needs. Consumer goods producers, for
instance, need to have well-balanced inventories at the point of sale, while
producers of industrial and commercial products typically do not have clients that
require the same degree of delivery lead time.

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore

 Improving Inventory Control by Re-engineering of
Warehouse.

Inventory Accounting

The way in which a company accounts for its inventory can have a dramatic affect
on its financial statements. Inventory is a current asset on the balance sheet.
Therefore, the valuation of inventory directly affects the inventory, total current
asset, and total asset balances. Companies intend to sell their inventory, and when
they do, it increases the cost of goods sold, which is often a significant expense on
the income statement. Therefore, how a company values its inventory will
determine the cost of goods sold amount, which in turn affects gross profit
(margin), net income before taxes, taxes owed, and ultimately net income. It is
clear, then, that a company's inventory valuation approach can cause a ripple effect
throughout its financial picture.

One may think that inventory valuation is relatively simple. For a retailer,
inventory should be valued for what it cost to acquire that inventory. When an
inventory item is sold, the inventory account should be reduced (credited) and cost
of goods sold should be increased (debited) for the amount paid for each inventory
item. This works if a company is operating under the Specific Identification
Method. That is, a company knows the cost of every individual item that is sold.
This method works well when the amount of inventory a company has is limited
and each inventory item is unique.

The Specific Identification Method, however, is cumbersome in situations where a

company owns a great deal of inventory and each specific inventory item is
relatively indistinguishable from each other. As a result, other inventory valuation
methods have been developed. The best known of these are the FIFO (first-in, first
out) and LIFO (last-in, first-out) methods.

FIFO: First-in, first-out is a method of inventory accounting in which the oldest

stock items in a company's inventory are assumed to have been the first items sold.
Therefore, the inventory that remains is from the most recent purchases. In a period
of rising prices, this accounting method yields a higher ending inventory, a lower
cost of goods sold, a higher gross profit, and a highertaxable income.

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore

 Improving Inventory Control by Re-engineering of
Warehouse.

The FIFO Method may come the closest to matching the actual physical flow of
inventory. Since FIFO assumes that the oldest inventory is always sold first, the
valuation of inventory still on hand is at the most recent price. Assuming inflation,
this will mean that cost of goods sold will be at its lowest possible amount.
Therefore, a major advantage of FIFO is that it has the effect of maximizing net
income within an inflationary environment. The downside of that effect is that
income taxes will be at their greatest.

LIFO: Last-in, first-out, on the other hand, is an accounting approach that assumes
that the most recently acquired items are the first ones sold. Therefore, the
inventory that remains is always the oldest inventory. During economic periods in
which prices are rising, this inventory accounting method yields a lower ending
inventory, a higher cost of goods sold, a lower gross profit, and a
lower taxable income. The LIFO Method is preferred by many companies because
it has the effect of reducing a company's taxes, thus increasing cash flow. However,
these attributes of LIFO are only present in an inflationary environment.

The other major advantage of LIFO is that it can have an income smoothing effect.
Again, assuming inflation and a company that is doing well, one would expect
inventory levels to expand. Therefore, a company is purchasing inventory, but
under LIFO, the majority of the cost of these purchases will be on the income
statement as part of cost of goods sold. Thus, the most recent and most expensive
purchases will increase cost of goods sold, thus lowering net income before taxes,
and hence net income. Net income is still high, but it does not reach the levels that
it would if the company used the FIFO method.

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore

 Improving Inventory Control by Re-engineering of
Warehouse.

Warehouse Layout & Design:

Warehousing was supposed to disappear with Lean Manufacturing. This has rarely
occurred but the nature of warehousing often does change from storage-dominance
to transaction dominance.
In addition, the trend to overseas sourcing has increased the need for warehousing
and its importance in the supply chain.
Warehousing buffers inbound shipments from suppliers and outbound orders to
customers. Customers usually order in patterns that are not compatible with the
capabilities of the warehouse suppliers. The amount of storage depends on the
disparity between incoming and outbound shipment patterns.

Order Picking In the Warehouse:

Order picking can be defined as the activity by which a small number of goods are
extracted from a warehousing system, to satisfy a number of independent customer

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore

 Improving Inventory Control by Re-engineering of
Warehouse.

orders. Picking processes have become an important part of the supply chain
process. It is seen as the most labor-intensive and costly activity for almost every
warehouse, where the cost of order picking is estimated to be as much as 55% of
the total warehouse operating expense.

As the order picking process involves significant cost and can affect customer
satisfaction levels, there have been increasing numbers of process improvements
proposed to help companies with this supply chain issue.

Design Strategies:

One key to effective design is the relative dominance of picking or storage

activity.
These two warehouse functions have opposing requirements.
Techniques that maximize space utilization tend to complicate picking and render
it inefficient while large storage areas increase distance and also reduce picking
efficiency. Ideal picking requires small stocks in dedicated, close locations. This
works against storage efficiency.
The figure below shows how different transaction volumes, storage requirements
and technologies lead to different design concepts.

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore

 Improving Inventory Control by Re-engineering of
Warehouse.

LOW PICKING & HIGH

STORAGE

High Pick & High Storage

This indicates a large and active warehouse such as a Distribution Center (DC). In
these situations, high technology automated picking combined with mechanized
handling and high density storage justifies itself.

Low Pick & High Storage

The requirement is for high density storage with high bays, multi-levels and dense
packing. Low turnover means that picking can be manual or semi-manual.

High Pick & Low Storage

With high picking activity but low storage, the picking area should be compact and
dense and storage is simple. Some automation of picking may be justified.

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore

 Improving Inventory Control by Re-engineering of
Warehouse.

Low Pick & Low Storage

A simple, small warehouse requires neither automation nor sophisticated storage
devices. Stacked pallets, floor storage or simple racks and shelves suffice. Handling
is manual.

Current Warehousing Problems

• Space Utilization
• Costs too high
• Poor productivity
• Poor layout
• Processes not working

Measuring Tools for the re-engineering of the ware house

• 5’S

About 5’S: What is 5S ?

5-S can be defined as

1. Seiri (Proper Arrangement and Clearing Up)

a) Look around work area and ask yourself “is it really necessary for all items to be
there?”
b) Separate O.K., re workable and rejected items
c) Rework the re workable items and dispose of the rejected items.

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore

 Improving Inventory Control by Re-engineering of
Warehouse.

2. Seiton (Orderliness)
Items must be placed in prefixed locations so that they are easily accessible and can
be easily used. Make sure that items can be clearly identified by labeling them
properly.

3. Seiso (Clean Up)

Seiso means cleaning the work place.

4. Seiketsu (Standardization)
Even a clean work place with proper selection and proper arrangement will soon
become dirty if Seiri, Seiton and Seiso are not continuously repeated. Let us
prevent problems by keeping things standardized and maintaining a good
environment.

5. Shisuke (Discipline)
Everyone should be disciplined to follow strictly the rules and maintain standards
while working. For example let us adhere to the timings and let us follow the
prescribed operation standards.

Benefits of 5’S:

• Saving of searching time.

• Making availability of extra space in plant.
• Safety of workers in warehouse.

Before the re-engineering of warehouse I found that:

• Space utilization is not proper.

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore

 Improving Inventory Control by Re-engineering of
Warehouse.

• Picking times is more.

• They doing outward scanning in two places.

• No any identification mark for the brands.

Advantages of Re-engineering Warehouse:

• Proper Space utilization.

• Reduces the picking time.

• Proper identifications of rack number, brands and others.

• Proper marking, where to store the put way and outward.

References:

• Shopper’s Stop Warehouse in Bangalore

• Supply Chain Management Book- Mr. Sunil Chopra

Vijay Pratap Gautam, M.F.Tech-Nift-Bangalore