1. Storage and Handling Decisions
“Perfection is not attainable, but if we chase perfection, we catch excellence.”
Vince Lombardi
Chapter 12
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2. Storage/Handling Decisions in Inventory Strategy
PLANNING
ORGANIZING
CONTROLLING
Transport Strategy •
Transport fundamentals
Transport decisions
Customer
service goals
The product
Logistics service
Ord
. proc. & info. sys.
Inventory Strategy
Forecasting
Inventory decisions
Purchasing and supply
scheduling decisions
Storage fundamentals
Storage decisions
Location Strategy
Location decisions
The network planning process
Storage/handling decisions
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3. Storage Decisions Site Selection ·
Finds a specific real estate site as a storage
location
Weighted checklist is a good approach. Recall,
Factor
Marginal
Factors
Weights
scores
score 1 2 5 10 9 . 12 4 8 32
Weighted score
286

4. Storage Decisions (Cont’d)
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5. Mixed Strategy for Warehouse Space
Need for
some space
is seasonal
Space requirements, sq. ft.
Rented space
Privately- operated space
Time
12-5
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6. Determination of a Mixed Warehouse Strategy for a 60,000 sq. ft
Determination of a Mixed Warehouse Strategy for a 60,000 sq. ft. Privately-Operated Warehouse
Private
space
exceeded
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7. Storage Decisions (Cont’d)
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8. Storage Decisions (Cont’d)
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9. Facility Evaluation
Suppose a pool point at St. Louis is being considered to lower transportation costs between manufacturer and its customers. Shipments currently are made directly from the manufacturer’s inventory in New York. There is a $10/cwt. handling charge at the pool point.
Direct shipments
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10. Facility Evaluation (Cont’d)
Shipments through pool point
Now, add handling cost of $10/cwt.  400 cwt. = $4,000 for a total cost of $15, ,000 = $19,472.
Conclusion No benefit to using the pool point.
CR (2004) Prentice Hall, Inc.

11. When is a Pool Point Likely to be an Advantage?
When shipment sizes are small
When demand is far from source points
When transportation rate economies are significant
When pool point operating costs are low relative to transportation costs
When transfer times are insignificant to service
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12. Handling Decisions
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13. Handling Decisions (Cont’d)
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14. Handling Decisions (Cont’d)
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15. Handling Decisions (Cont’d)
Cube -
per -
order index
The cube-per-order index is the ratio of a product’s average required cubic footage for storage to the average number of daily orders on which the item is requested. The products with the lowest index value are located nearest the outbound dock.
Layout example
By popularity -
By cube -
By CPO -
CR (2004) Prentice Hall, Inc.

16. Product Layout Example( 1 )
Item
Size,
cu. ft. 2
Expected
Number of
Orders/Yr. 3
Average
Inventory,
Units 4
)=(
)/250
Number
of Daily
Orders a 5
Required
Storage
Space, 6
)/(
Cube -
Per
Order
Index A
6.0
6,750
800 27
4,800
177.8 B
4.0
15,750
16,000 63
64,000
1015.9 C
1.0
11,250
25,120 45
558.2 D
8.0
25,500
18,600
102
148,800
1458.8 E
3.0
17,750
12,533 71
37,599
529.6 F
5.0
3,500
3,936 14
19,680
1405.7 G
15.0
6,250
907 25
13,605
544.2
Totals
86,750
77,896
313,604
Based on 250 selling days per year
By cube
Basic data
By CPO
By popularity
CR (2004) Prentice Hall, Inc.
12-16

17. Layout by CPO Highest index values Lowest index values D F,D
Inbound rail dock
C,B
B,F
A,E
E,G,C
Lowest index values
Outbound truck dock

18. A high-throughput warehouse layout for drug store replenishment
Layout by Activity Profiling
Data mine orders to determine activity distributions. Layout warehouse space according to activity levels.
A high-throughput warehouse layout for drug store replenishment

19. Handling Decisions (Cont’d)
Order handling for increased handling efficiency
Product sequencing on picker list
Picker zoning and the “bucket brigade”
Order splitting
Multiple order picking per picking pass
Stock Arrangement
On-the-square layout
Angular pallet placement
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20. Top-down view of storage bays
Center line of aisle
Pallet Layout in Warehouses
(a) On-the-square pallet placement
(b) Angular pallet placement
Storage bay
Center line of aisle

21. Handling Decisions (Cont’d)
Stock Arrangement
On-the-square pallet layout
Angular pallet layout
Stock locator-identification methods
Fixed locator-identification method
Random locator-identification method
Zone location
Increases cube utilization
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22. Equipment Selection
One-time purchase of equipment of different types can be decided on basis of present value analysis, or by selecting the alternative with the lowest NPV.
where
NPV = net present value of equipment over its useful life ($)
I = initial investment ($)
C = annual operating cost ($)
i = the discount, or hurdle, rate that such investments are expected to return
Sn = salvage value in year n ($)
n = useful life of the equipment (years)
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23. Equipment Selection (Cont’d)
Problem Two type A forklift trucks can do the same work as three type B trucks. Additional data are:
Two Type A Trucks
Three Type B
Trucks
Total initial investment
$20,000
$15,000
Useful life (planned) 7
Salvage value (estimated)
$ 5,000
$ 2,000
Annual operating expenses
$ 4,000
$ 6,000
Hurdle rate
0.20
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24. Equipment Selection (Cont’d)
Solution
Solve the NPV equation for the two alternatives.
For truck type A,
For truck type B,
Choose two type A trucks
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25. Equipment Replacement
A financial problem
Alternatives are compared through present value analysis
Typical design concerns differing degrees of automation, capacity, and equipment life.
Example A forklift truck that costs $3,000 and requires $200 to operate in its first year, but operating costs increase at the rate of $30 per year squared thereafter. Technological improvement reduces operating costs by $20 per year. The normal life of a truck is 10 years and the truck can be sold for its remaining undepreciated value. A discount rate of 20%/yr. is used. When should the truck be replaced?
We calculate the equivalent annual cost according to

26. Replacement Example å Accumulates costs for years 1 and 2 Replace-
Cycle
Time, n
(1)
Initial
Invest-
ment, I
(2)
Total
Operating
Costs, C j
(3)
Discounted i n ( ) 1 + = å
(4)
Salvage
Value, S
(5)
(6)
Discount
Factor, -
(7)=
(1+3-5)(6)
Equivalent
Average
Annual
Cost, AC
$3,000
$200 a
$167
$2,700 b
$2,250
1.20
$1,100 2
3,000
410
312
2,400
1,668
0.65
1,068 3
690
475
2,100
1,215
0.47
1,062 4
1,100
672
1,800
868
0.39
1,094 5
1,700
913
1,500
603
0.33
1,092 6
2,550
1,198
1,200
402
0.30
1,138 7
3,710
1,522
900
251
0.28
1,196 8
5,240
1,878
600
140
0.26
1,232 9
7,200
2,258
300 58
0.25
1,300 10
9,650
2,653
0.24
1,357
aComputed as Cj = (j-1) + 30(j-1)2 and accumulated when there is more than one year in the replacement cycle
bComputed as Sn = I[1-0.1(n)]
Accumulates costs
for years 1 and 2
12-26
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