Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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Arnold, Chapman, & Clive: Intro Materials
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
Management, 6th
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
Management, 6th
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
Management, 6th
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
Management, 6th
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
Management, 6th
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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© 2008 Pearson Education, Upper Saddle River, NJ 07458.
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Arnold, Chapman, & Clive: Intro Materials
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Physical inventory and warehouse management

  1. 1. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Physical Inventory and Warehouse Management Chapter 12
  2. 2. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Warehouses • Store inventory for a period of time – storage – protection • Inventory may be turned over rapidly – distribution center – customer service
  3. 3. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Stores • Perform the same function as a warehouse for a factory – raw materials – finished goods – supplies – repair parts
  4. 4. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Warehouse Activities • Receive goods • Identify goods • Dispatch goods to storage • Hold goods • Pick goods • Marshal the shipment • Dispatch the shipment • Operate an information system
  5. 5. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Receive Goods • Acceptance of goods from outside transportation or an attached factory a. Check the goods against an order or bill of lading b. Check the quantities c. Check for any transit damage d. Inspect goods if required
  6. 6. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Identify the goods • With appropriate stock keeping unit (SKU) number • With part number • Indicate the quantity
  7. 7. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Dispatch Goods to Storage • Goods are sorted • Put away goods – record the location
  8. 8. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Hold Goods • Storage is meant to protect the goods – cold – heated – explosive
  9. 9. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Pick Goods • Goods are picked from storage – must be accessible – location records • Brought to marshalling area
  10. 10. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Marshal the Shipment • All goods for an order are brought together – check for missing items – check for correct items – change order information if required
  11. 11. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Dispatch the Shipment • The order is prepared for shipment and loaded on the right vehicle – protective packaging for shipment – documents prepared – loaded and secured
  12. 12. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Operate an Information System • Need to know what is in the warehouse – quantity on hand – quantity received – quantity issued – location of goods • Computer based or manual system
  13. 13. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Warehouse Management • Make maximum use of space – capital cost of space is very high • Make effective us of labor and equipment – material handling equipment is the second largest capital cost – need best mix of equipment and labor – all SKU’s should be easy to find – move goods efficiently
  14. 14. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Warehouse Effectiveness • Cube utilization and accessibility • Stock location • Order picking and assembly • Packaging (discussed in Chapter 13)
  15. 15. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Cube Utilization and Accessibility • Goods are stored on the floor and in the space above • Space also required for: aisles offices receiving order picking shipping docks order assembly • Need to know the maximum space required
  16. 16. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Pallet Positions • Floor storage • Pallets are stacked on each other • Maximum stacking height – due to ceiling height – due to weight restrictions • Need to allow for side clearance
  17. 17. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. 2 inches clearance 40 inches 40 inches Total width required = 42 inches per pallet space Pallet Spacing
  18. 18. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Pallet Spacing 6 x 42” / 12 = 21 feet required to store 16 pallets stacked 3 high
  19. 19. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Pallet Positions - Example Problem A company wants to store an SKU consisting of 13,000 cartons on pallets each containing 30 cartons. How many pallet positions are needed if the pallets are stored three high? Number of pallets required = 13,000 / 30 = 434 pallets Number of pallet positions = 434 / 3 = 144.67 or 145 Note one pallet position will contain only 2 pallets
  20. 20. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Accessibility • The ability to get goods with a minimum of effort – without moving other goods – can be a problem with multiple SKU’s in one area
  21. 21. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Cube Utilization • A measure of how well space is utilized • Should also consider accessibility – see product D in next slide • Racking allows accessibility to all goods while improving utilization
  22. 22. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Cube Utilization - Example Product A Product A Product A Product A Product A Product B Product B Product C Product C Product C Product D Product E Utilization = 12 pallets / (5 x 3) spaces = 80%
  23. 23. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Pallet Positions - Example Problem Pallets SKU A 4 pallets SKU B 6 pallets SKU C 14 pallets SKU D 8 pallets SKU E 5 pallets 37 pallets pallets are stored 3 high Pallet Positions 2 2 5 3 2 14 Utilization = 37 / (14 x 3) x 100% = 88%
  24. 24. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Stock Location • Location will depend on: – type of goods stored – storage facilities needed (i.e. refrigeration) – throughput (volume of items picked) – size of the orders • Management considerations – customer service – keeping track of the items – total effort required
  25. 25. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Locating Stock - Basic Systems • Group functionally related items together • Group fast moving items together • Group physically similar items together • Locate working stock and reserve stock separately
  26. 26. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Locating Stock - Functionally Related Items • Items that are similar in their use or characteristics – warehouse staff become familiar with the items – similar order processing needs – often ordered together • hardware items • bulk items • security?
  27. 27. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Locating Stock - Fast Moving Items • Close to receiving or shipping • Reduces travel time • Slower moving items can be further away
  28. 28. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Locating Stock - Physically Similar Items • May have similar storage requirements – refrigeration – shelving • Use similar handling equipment – drums vs small items – steel tubing vs cartons
  29. 29. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Locating Stock - Working Stock & Reserve Stock • Pick orders from a single location – ‘home’ location • Allows more compact picking area – closer to marshalling area – reduces order picking travel time • Reserve stock is handled in bulk
  30. 30. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Fixed Location • “A place for everything and everything in its place” • Reduces amount of record keeping • Usually results in poor cube utilization – space must be available for the repenishment order quantity – average of 50% utilization
  31. 31. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Floating Location • Goods are stored wherever appropriate space is available • Requires good record keeping • Improves cube utilization • Often used for reserve stock
  32. 32. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Point-of-Use Storage • JIT and repetitive manufacturing – materials are readily accesible to users – material handling is reduced – central storage costs are reduced – materials are accessible at all times • Floor stock – small ‘C’ items – inventory is adjusted when stock is replenished
  33. 33. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Central Storage • All items are kept in one location • The opposite of point-of-use storage – ease of control – accurate inventory control is easier – makes use of specialized storage – reduces safety stock
  34. 34. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Order Picking and Assembly • Once an order is received it must be: – retrieved – assembled – prepared for shipment • Involves: – labor – movement of goods • To provide the desired level of customer service
  35. 35. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Area System • Used in small warehouses • The order picker moves through the warehouse and takes all the goods to shipping – self marshalling – order is complete when the picker is finished
  36. 36. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Zone System • Warehouse is divided into zones • Order pickers work in their own area – deliver goods to the marshalling area • Zones are established by related items – type of storage – type of material handling required • Marshalling area then organizes orders for shipment
  37. 37. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Multi-order System • Similar to zone system • Multiple orders are picked together • Marshalling area then sorts orders by shipment • Used where there are many items or many small orders
  38. 38. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Working Stock and Reserve Stock • Used in all systems – area, zone, multi-order • Working stock located close to shipping • Replenishment is done by separate workforce • Improves order picking efficiency and customer service
  39. 39. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Physical Control and Security • Need a system to make it difficult for people to make mistakes or forget to update inventory records • Need: – a good part numbering system – a simple well documented transaction system
  40. 40. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Part Numbering • Each part has a unique number used only for that part • Descriptive part numbers – assist in order picking and service – difficult to keep current • Non-descriptive part numbers – easier to keep up-to-date
  41. 41. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Transaction System 1. Identfy the item – quantity, location, part number 2. Verify quantity – standard size containers if possible 3. Record the transaction – manual or computerized 4. Physically execute the transaction – move the goods
  42. 42. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Phsical Control and Security • Limited access – locked – to ensure transactions are completed • A well trained workforce – to ensure transactions are completed – familiar with handling the goods
  43. 43. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Inventory Record Accuracy • Accurate on-hand balances are needed to: – avoid shortages – maintain schedules – avoid excess inventory • (of the wrong goods) – provide good customer service
  44. 44. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Inventory Record Accuracy • Operate an effective materials management system • Maintain customer service • Operate effectively and efficiently • Analyse inventory • The system is only as good as the data used
  45. 45. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Inaccurate Inventories • Result in: – Lost sales – Disrupted schedules – Excess inventory of the wrong things – Low porductivity – Poor delivery performance – Excess expediting
  46. 46. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Causes of Inventory Errors • Unauthorized withdrawal of material • Unsecure stockroom • Poorly trained personnel • Inaccurate transaction recording • Poor transaction recording system – system should reduce the likelihood of human error • Lack of audit capability
  47. 47. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Measuring Inventory Record Accuracy • Ideal is 100% – banks – ‘A’ items • A tolerance may be allowed for some items
  48. 48. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Tolerance • “Allowable departure from nominal value ….” – APICS 11th Edition Dictionary • Between the inventory record and a physical count • Set on individual items – Value, critical nature of the item, availablity, lead time, safety, ability to measure
  49. 49. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Tolerance Figure 12.3 Inventory record accuracy
  50. 50. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Tolerance Figure 12.4 Inventory accuracy with tolerances
  51. 51. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Tolerance Example Problem Part Number Shelf Count Inventory Record Tolerance A 1500 1550 +/- 5% B 120 125 +/- 2% C 225 230 +/- 3% D 155 155 +/- 0% Outside Tolerance
  52. 52. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Auditing Inventory Records • Checking the accuracy of inventory records • Periodic Inventory – usually an annual count • Cycle Counting – daily counts of items
  53. 53. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Auditing Inventory Records • To correct the on-hand balance – periodic inventory • To find the reasons for errors and eliminate them – cycle counting
  54. 54. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Periodic (Annual) Inventory • To satisfy financial auditors • Determine the value of the inventory • Financial auditors are concerned with the total value • Planners are concerned with the item detail
  55. 55. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Taking the Physical Inventory Taking a physical inventory is like painting; the results depend on good preparation – George Plossl •Housekeeping – sort items, precount and seal •Identification – identify and tag items – use personnel familiar with the items •Training in procedures
  56. 56. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Physical Inventory - Process 1. Count the items and record the count on tickets left with the item 2. Verify the count, sampling may be used 3. Collect the tickets and list all items 4. Reconcile the inventory update financial records correct inventory balances Investigate reasons for descrepancies
  57. 57. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Physical Inventory - Problems • Production may be shut down • Labor and paperwork effort • Pressure to get the inventory completed • People doing the inventory may not be familiar with the items • Errors may be introduced
  58. 58. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Cycle Counting • Count inventory continually throughout the year • Predetermined schedule – some items counted frequently • depending on value • past history of problems • Count some items every day
  59. 59. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Cycle Counting- Advantages • Timely correction of errors • Reduction of lost production • Use of trained personnel – familiar with the items – fewer errors – able to identify problems
  60. 60. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Count Frequency • The number of times each item is counted per year • Increases by: – the value or critical nature of the item – the number of transactions per year • chances of error – a past history of problems with the item
  61. 61. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Count Frequency - Methods • ABC method – management establishes a rule for how many times an item should be counted per year • e.g. ‘A’ items once per month, ‘B’ items quartery, ‘C’ items twice per year – a mix of all items is counted every day • computerized systems can identify daily lists of items to count
  62. 62. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Scheduling Cycle Counts Classification Number of Items Count Frequency per Year Number of Counts Number of Counts per Day A B C 1000 1500 2500 12 4 1 12,000 6000 2500 48* 24 10 Total Count 20,500 Workdays per Year 250 Counts per Day 82 * Counts per day = 82 * 12,000 / 20,500 Figure 12.5
  63. 63. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Scheduling Cycle Counts - Example Problem Classification Number of Items Count Frequency per Year Number of Counts Number of Counts per Day A B C 2000 3000 5000 12 4 2 Total Count Workdays per Year Counts per Day 24,000 12,000 10,000 46,000 250 184 96 48 40
  64. 64. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Count Frequency Methods - Continued • Zone Method – used with: – fixed location system – work-in-process counts – in-transit inventory counts • Location Audit – verifies location of goods
  65. 65. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Cycle Counting - When to Count • Counts items when errors are likely to have occurred – when an order is placed • detects errors when stock is low – when an order is received • stock is at its lowest – when inventory reaches zero – when an error occurs • inventory shows negative or there is no stock when there should be
  66. 66. Arnold, Chapman, & Clive: Intro Materials Management, 6th ed. © 2008 Pearson Education, Upper Saddle River, NJ 07458. All Rights Reserved. Technology Applications • Bar Codes – paper labels which show a product code • RF Tags – Radio Frequency – do not need to ‘see’ the item • Reduce recording errors • Improve transaction speed

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