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The Basics of Warehouse and Inventory Management

Tenaka Budiman, Executive Board of ALI and Supply Chain Director

It is a fact that many companies still believe that a warehouse cannot add values and that a warehouse is only a necessary burden and expense for their business. Many believe the warehouse is only a place to store goods and that it can be maintained by people who have no special skills in warehouse management. They often forgot that their products, whether in the form of raw materials or finished goods, need to be handled professionally, utilizing the next process. Raw materials that will processes into finished goods need to be of the highest standard, so the storage and management of these materials in the warehouse requires the appropriate temperature and humidity and also adequate racking of the best quality possible. Usually, finished goods also have to be stored in the warehouse after the production process in complete, unless they are directly sent to be distributor, wholesaler, retailer or end user. There are many negative outcomes that are possible if a company makes the mistake of storage raw materials or finished goods in a low quality warehouse which is poorly managed

1.    Stock records will not be accurate

2.    Stick will be damaged as a result of bad storage or bad handling habits

3.    Stocks that should be assets will become liabilities

4.    Stock will become obsolete, lose value or become unsellable

5.    Excessive inventory will translate into higher holding costs

6.    FIFO not run efficiently

7.    Late deliveries will occur because warehouse staff will have difficulty in picking goods from storage in a messy stock location

8.    Wrong picking will lead to incorrect order fulfillment

9.    Accidents will become more common as stacking practices are neglected by under qualified staff. If the racking system is also substandard, then goods will more easily fall and be damaged and people will be more easily injured

10. Fraud will become easier and more common as audits, cycle counts and stock takinh becomes less accurate

The main job of warehouse management is to accurately manage inventory but many warehouses are also shifting more towards customer service as they are viewed less as simply a goods storage location and more as a link in the supply chain network responsible for service fulfillment to the customer.

Warehouse management involves with visual management not only keeping the warehouse clean and orderly, but also managing information so that the warehouse team can do their jobs efficiently. It should be emphasized that the warehouse is not only just a place for the storage of goods, but also an important component in the fulfillment of satisfactory customer service. For companies that entrust their goods to third party logistics, the mismanagement of 3PL could be a disaster.

The first basic step to warehouse management in maintaining a clean warehouse that is sensibly mapped out for efficient storage and retrieval based on the types of products, the style of handling or based on which channels the goods will flow through. Goods should be arranged so that the FIFO method can be effectively applied. Sometimes, mapping may include a separation of retail products from bulk products. The concept of 5S or 5R has many advantages when it comes to managing a simple warehouse or even a modern warehouse because the fourth and fifth 'R' stands for "care" and "neat", which equally apply to all types of warehouses. It also refers to the discipline necessary for human resources to keep a warehouse properly maintained.

Let's look at an example. Imagine a food distribution company with a simple warehouse which mainly stores finished food items. The warehouse tends to be messy most of the time, is not properly mapped and there is no visual management. The head of the warehouse often complains that he finds it very difficult to do cycle counts and cannot achieve much accuracy. He cannot manage the warehouse's inventory with many SKU. What should he do? The first step is to educate him about 5R and explain how it should be of implemented. Then, the head of the warehouse can revamp the entire facility using the 5R system with an emphasis on the first 3R, which are concise, neat and rehearse. After that, standards for matching finished goods to the appropriate pallets can be put in place, goods can be fitted with identifying marks and border lines can be drawn on the floor of the warehouse to facilitate the placing of goods for optimum order and efficiency. After all this is done, cycle counts and stock taking can begin. After about a month, once the warehouse team has become acquainted with the new systems, the results will be truly remarkable and the head of the warehouse can take immense pleasure in executing accurate stocktaking and inventory counts. Once these positive results are communicated by word of mount to other warehouse teams, even the most skeptical warehouse managers may be convinced of its value and try to implement 5R in their warehouses. There have even been competitions between 5R and other systems for warehouse stock accuracy and the champion is always 5R. all that is required to train the warehouse team is simple, clear directions, clears examples of implementation and lots of discipline. Many warehouse teams maintain an attitude of "I know what to do but I don't do what I know", so order and discipline must be instilled in them, operational imperatives and working instruction must be made clear and the technical procedures to guide them must be in place. Lastly, any and all forms of fraud must be eliminated from the warehouse environment.

In regards to visual management, the differentiation of goods by labels, which display the type, age and category of every item in the warehouse, is very helpful, not only for the warehouse team but also for anyone trying to locate an item in the warehouse. Even if a business already uses the warehouse management system (WMS), visual management is still vital, especially to help new members of the warehouse team to pick goods more quickly and efficiently. All that is required is data from the WMS to guide them to the desired items. Visual management is an important part of inventory control inside the warehouse because it makes it easy to keep track of the expiration dates of perishable goods by color code. By using a system of colored labels, everyone in the warehouse can practice the FIFO system with ease while practically eliminating incidences of human error.

The visual management of luxury goods is of particularly concern when there is potential for fraud. Perhaps a picture of a Mercedez car placed close to luxury goods would remind the warehouse team to be especially careful when handling these high priced items. Visual control can also be used to differentiate area where products of modern markets and products of traditional markets should be stored. This also applies when differentiating bulk products from retail products.

When we manage inventory, one way to categorize products is by their selling patterns, for example, fast moving items and slow moving items. Also, potentially toxic or dangerous items should have their own categorized as well.

Generally, when managing a variety of inventory types, the ABC inventory system has been shown to be quite dependable. The ABC inventory system is used to categorize items based in importance and on the level of necessary supervision. Under this system, goods are categorized by the calculation of Usage multiplied (x) by Price divided (/) by Unit equation.

Based on the Pareto principle:

Class A-20% of the total item, its value contributed of 80% from usage.

Class B-30% of the total item, its value contributed of 15% from usage.

Class C-50% of the total item, its value contributed of 5% from usage.

ABC Classification (Pareto principle)

Ø  A items: very tight control, complete and accurate records, frequents review.

Ø  B items: less tightly controlled, good records, regular review.

Ø  C items: simplest controls possible, minimal records, large inventories, periodic reordering.

Class A inventory items generally have a strong strategic value to the enterprise. It is important to keep very accurate information about these items:

-    How many do we have?

-    Where are they in the system?

-    Who orders these items and when?

-    What factors affect customer demand?

Class B inventory

Ø  Usually purchased directly from the same companies

Ø  These items are quite important but not as vital as Class A

Ø  Usually stock taking is done only two to four times a year

Class C inventory

Ø  The value is low and/or it is commodity sold in large volumes at minimum profit

Ø  Spend he cost of procurement

Ø  Is basically never out of stock

Ø  Stock is counted only about once a year and not very accurately

Ø  The supplier controls the minimum stock and the vendor managed the inventory (VMI)

Inventory management is an integrated activity which is very closely tied to supply and demand. Inventory could be compared to a blood stream. Because inside the body, when the bloodstream is interrupted, that part of the body becomes sick and activities become disrupted. The same is true of inventory within the supply chain network. Inventory should be viewed as an asset of a company as long as the volume is not excessive enough to raise holding costs and liability. Equally as important, inventory should not be lacking as this would cause lost sales opportunities.

A major function of supply chain management in any company is to strike a balance within inventory management. So, the basic principles of inventory management are:

Ø  Inventory availability is the most important aspect of customer service

Ø  Inventory costs are the most expensive aspect to overall logistics costs as it is the sum of the price of the goods plus the warehouse rental space it requires

Ø  It is fairly difficult to convert physical inventory into liquid assets making inventory a risky investment

We also need to know about the factors that affect inventory, which are:

1.    Sales Levels

-    The higher turnover rate, the greater investment in inventory

2.    Technical and Production Specification and Requirements

-    Production order/batch       diverse and various supplies in hand

-    Production lead time       Supplies can be arranged

3.    Production process

-    Long Productin process       Higher costs

4.    Life time/life cycle of raw materials and final production

-    Durable Products       relatively high inventory

-    Short Life Time Products      relatively low inventory

-    Seasonal Products        high in certain seasons

5.    Lead time in purchase ordering and delivery

 

Inventory is defined as goods which are stored in order to fulfill customer orders. We believe that inventory management is of crucial importance as it is a measurement f how responsive a company is towards it customers. For every business, inventory management plays a determining role in the overall costs accrued by the whole supply chain no matter what kind of inventory it is. By determined its functions and locations in the business, supply chain practitioners cam gain significant ability to determine inventory costs by analyzing activities throughout the supply chain. Sometimes, problems with inventory occur as a result of problems in a completely different link of the supply chain. The objective of inventory management id to balance out the availability of stock so that the profit made through customer orders are more than the costs of inventory. The ultimate goal is to achieve a state of zero inventory, but since this can probably never be achieved, keeping inventory costs as low as possible is good enough.  


source:

Logistics+ Vol. XI Issue No. 61

 

 


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