1. LOG 408: Global Logistics Management
Lecture 9: Inventory and warehouse management

2. Key Points of Last Week
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

3. 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.

4. Supply Chain Pipeline
9-4

5. 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?

6. Reasons for holding inventory
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

7. 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)

8. Inventory centralization

9. Part commonality

10. Inventory flow types
Source: Gattorna and Walters (1996)

11. Stockholding policies for alternative inventory flow types

12. 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

13. 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

14. Warehousing in Global Supply Chains

15. 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

16. Generic Warehouse Functions
All activities within a warehouse are associated with one of the following core functions

17. Warehouse Layout Examples

18. 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)

19. 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

20. 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

21. 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.

22. 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

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

24. Storage and Picking Combinations

25. 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?