Materials Management Systems

Materials Management Systems Physical Inventory & Warehouse Mgt. Chapter 12 MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing Management • Objectives of Efficient Warehouse Operations • Provide timely customer service • Keep track of items so they can be found readily and correctly • Minimize the total physical effort and thus the cost of moving goods into and out of storage • Provide communication links with customers MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing Management • Benefits of Warehouse Management • Provide a place to store and protect inventory • Reduce transportation costs • Improve customer service levels • The complexity of a warehouse operation will depend on the # of SKUs handled and the # of orders received and filled. • Most activity in a warehouse is material handling. MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing Management • Costs of Operating a Warehouse • Capital costs • costs of space and materials handling equipment • Operating costs • cost of labor • the measure of labor productivity is the number of units that an operator can move in a day MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing Management • Costs of Operating a Warehouse • The costs of operating a warehouse will depend on: material handling equipment used, stock location system used and the warehouse layout. MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities • Receive goods • Identify the goods • Dispatch goods to storage • Hold goods MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities • Pick goods • Marshal shipment • Dispatch shipment • Operate an information system MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities • Receive goods • accepts goods from outside transportation or attached factory and accepts responsibility for them • check the goods against an order and the bill of lading • check the quantities • check for damage and fill out damage reports if necessary • inspect goods if required MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities • Identify the goods • items are identified with the appropriate stock-keeping unit (SKU) number (part number) and the quantity received recorded • Dispatch goods to storage • goods are sorted and put away • Hold goods • goods are kept in storage and under proper protection until needed MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities • Pick goods • items required from stock must be selected from storage and brought to a marshalling area • Marshal the shipment • goods making up a single order are brought together and checked for omissions or errors; order records are updated • Dispatch the shipment • orders are packaged, shipping documents are prepared, and goods loaded on the vehicle MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities • Operate an information system • a record must be maintained for each item in stock showing the quantity on hand, quantity received, quantity issued, and location in the warehouse MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities • To maximize productivity and minimize cost, warehouse management must work with the following: • Maximize use of space • space is the largest capital cost • Effective use of labor and equipment • labor is the largest operating cost • material handling equipment is the second largest capital cost MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities • Factors influencing effective use of warehouses • cube utilization and accessibility • stock location • order picking and assembly MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities • Cube utilization and accessibility • Goods are stored not just on the floor, but in the cubic space of the warehouse; warehouse capacity depends on how high goods can be stored • Accessibility means being able to get at the goods wanted with a minimum amount of work MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities • Stock Location • Objectives: • To provide the required customer service • To keep track of where items are stored • To minimize effort to receive, put away, and retrieve items • Basic Stock Locating Systems • Group functionally related items together • Group fast-moving items together • Group physically similar items together • Locate working stock and reserve stock separately MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities (Stock Location) • Fixed Location • An SKU is assigned a permanent location, and no other items are stored there • Fixed-location systems usually have poor cube utilization • Usually used in small warehouses; throughput is small, and there are few SKUs MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities (Stock Location) • Floating (Random) Location • Goods are stored wherever there is appropriate space • Advantage of this system is improved cube utilization • It requires accurate and up-to-date information • Warehouses using floating-location systems are usually computer-based MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities (Stock Location) • Two other systems sometimes used are: • Point-of-use storage • Inventory is stored close to where it will be needed • Mainly used in repetitive manufacturing and JIT systems • Central storage • Contains all inventory in one central location MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities (Stock Location) • Advantages of Point-of-use Storage • Materials are readily accessible to users • Material handling is reduced or eliminated • Central storage costs are reduced • Material is accessible all the time MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities (Stock Location) • Advantages of Central Storage • Ease of control • Inventory record accuracy is easier to maintain • Specialized storage can be used • Reduced safety stock, since users do not need to carry their own safety stock MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities • Order Picking and Assembly • When an order is received, items must be obtained from the warehouse, grouped, and prepared for shipment, systems used: • Area system • Zone system • Multiorder system MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities • Order Picking and Assembly • Area system • The order picker circulates throughout the warehouse selecting the items on an order. The order is complete and ready to ship when the order picker is finished • Zone system • The warehouse is divided into zones, and each picker works only in an assigned zone. The order is divided by zone, and the items from each zone are sent to the marshaling area. MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehouse Activities • Order Picking and Assembly (continued) • Multiorder system • This system is the same as the zone system, except that each picker collects items for a number of orders at the same time. MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Physical Control and Security • Physical Control and Security - Elements • Good part numbering system • Simple, well-documented transaction system • Identify the item • Verify the quantity • Record the transaction • Physically execute the transaction MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Physical Control and Security • Physical Control and Security - Elements • Limited access • Inventory must be kept in a safe, secure (locked) place with limited general access. • Well-trained workforce MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Inventory Record Accuracy • Accurate inventory records enable firms to: • Operate an effective materials management system • Maintain satisfactory customer service • Operate effectively and efficiently • Analyze inventory MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Inventory Record Accuracy • Three pieces of information must be accurate: • Part description (part number) • Quantity • Location MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Inventory Record Accuracy • Inventory is a tangible asset that is easy to lose track of unless properly controlled • Inaccurate inventory records will result in: • Lost sales • Shortages and disrupted schedules • Excess inventory (of the wrong things) • Ineffective MRP / MRPII / ERP MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Inventory Record Accuracy • Inaccurate inventory records will result in: • Low productivity • Poor delivery performance • Excessive expediting, since people will always be reacting to a bad situation rather than planning for the future MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Inventory Record Accuracy • Causes of Inventory Record Errors • Unauthorized withdrawal of material • Unsecured stockroom • Poorly trained personnel • Inaccurate transaction recording • Poor transaction recording systems • Lack of audit capability MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Inventory Record Accuracy • Measuring Inventory Record Accuracy • It is not practical to expect 100% accuracy. • Tolerance • To judge inventory accuracy, a tolerance level for each part must be specified • Tolerance is the amount of permissible variation between an inventory record and a physical count. • Tolerances are set on individual items based on value, critical nature, availability, lead time, ability to stop prod., safety problems, or the difficulty of measurement. MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Auditing Inventory Records • Two basic methods of auditing inventory: • Periodic (usually annual) counts of all items • Cyclic (usually daily) counts of specified items • Most important is to audit the system to find causes of record inaccuracy and eliminate them. Cycle counting does this; periodic audits tend not to. MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Auditing Inventory Records • Factors in good preparation for a physical inventory are: • Housekeeping • Identification • Training MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Auditing Inventory Records • A physical inventory consists of four steps: • Count items and record the count on a ticket left on them • Verify this count by recounting or by sampling • When the verification is finished, collect the tickets and list the items in each department • Reconcile the inventory records for differences between the physical count and inventory dollars MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Auditing Inventory Records • Several problems with annual physical inventory: • Usually the factory/facility has to be shut down, thus losing production or business • Labor and paperwork are expensive • The job is often done hurriedly and poorly since there is much pressure to get it done • Many times, more errors are introduced into the records than are eliminated MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Auditing Inventory Records • Cycle Counting • A system of counting inventory continually throughout the year • Advantages of cycle counting: • Timely detection and correction of problems • Complete or partial reduction of lost production • Use of personnel trained and dedicated to cycle counting • Count frequency • The number of times an item is counted in a year MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Auditing Inventory Records • Count Frequency • The count frequency should increase as the value of the item and number of transactions (chance of error) increase. For example, you can base the frequency of count on annual dollar value usage • Methods used: • ABC Method • Zone Method • Location Audit System MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementWarehousing: Auditing Inventory Records • Cycle counts can be scheduled at regular intervals or special times • When to Count • When an order is placed • When an order is received • When the inventory record reaches zero • When an error occurs MGMT 3750

Ch. 12: Physical Inventory and Warehouse ManagementReview Questions • Questions: 1,2, 5, 9-15, 17 MGMT 3750

Materials Management Systems