2. 17-2
Warehousing Strategy
Lean Warehousing
• This relates to eliminating non–value-added steps and
waste in product storage processes.
• Typical functions include the following: receiving material;
putting-away or storing; replenishing inventory; picking
inventory; packing for shipment; and shipping.
3. 17-3
Warehousing Strategy
Lean Warehousing
Waste can be found in many warehousing processes
including:
• shipping defects, which creates returns;
• overproduction or over-shipment of products;
• excess inventory, which requires extra space and
reduces warehouse efficiency;
• excess motion and handling;
• waiting for parts; and
• inadequate information systems.
4. 17-4
Packaging and Materials Handling
Strategy
Packaging:
• IKEA is always keen to banish (throw out) as much air as
possible from its packaging.
• Packages should preferably be flat for efficient transport
and storage.
5. 17-5
Packaging and Materials Handling
Strategy
Packaging:
• M&M Mars Incorporated, for example, has highly
automated, high-volume equipment to make M&Ms.
• A single packaging line moves 2.6 million M&Ms each
hour.
• Even though direct labor to operate the equipment is very
low, the labor required to maintain the equipment is high.
6. 17-6
Packaging and Materials Handling
Strategy
Packaging:
• You make those little boxes of pudding mix on packaging
lines in your plant.
• A packaging line has a number of machines that are
linked by conveyors.
• At the start of the line, the pudding is mixed, then it is
then placed in small packets.
7. 17-7
Packaging and Materials Handling
Strategy
• These packets are inserted into the small pudding boxes,
which are collected and placed in cases that hold 48
boxes of pudding.
• Finally, 160 cases are collected and put on a pallet. The
pallets are staged in a shipping area from which they are
sent to four distribution centers.
8. 17-8
Packaging and Materials Handling
Strategy
• Over the years, the technology of the packaging lines has
improved so that all the different flavors can be made in
relatively small batches with no setup time to switch
between flavors.
• The plant has 15 of these lines but currently only 10 are
being used.
• Example: Six employees are required to run each line.
9. 17-9
Packaging and Materials Handling
Strategy
Example: 7-Eleven Incorporated
• A Japanese model involved outsourcing everything
possible without jeopardising the business by giving
competitors critical information.
• Therefore, in the United States, the company eventually
outsourced activities such as human resources, finance,
information technology, logistics, distribution, product
development, and packaging
Summary: packaging could jeopardise business
10. 17-10
Packaging and Materials Handling
Strategy
• In other cases, green sourcing can help establish entirely
new lines of business to serve environmentally conscious
customers.
• In the cleaning products aisle of a supermarket, shoppers
will find numerous options of “green” cleaning products
from a variety of consumer products companies.
• These products typically use natural ingredients in lieu
(instead) of chemicals and many are in concentrated
(intense) amounts to reduce overall packaging costs.
11. 17-11
Packaging and Materials Handling
Strategy
Materials Handling:
• Finding the minimum-cost routings of material-handling
devices (such as forklift trucks) between departments in a
plant
• For example, hauling (transporting) materials from a
supply yard to work sites by trucks. Each truck might
have different capacities and performance capabilities.
12. 17-12
Packaging and Materials Handling
Strategy
Materials Handling:
• Plants also gain efficiencies when they become large
enough to fully utilize dedicated resources (people and
equipment) for information technology, material handling,
and administrative support.
14. 17-14
Learning Objectives
1. Explain the different purposes for keeping inventory.
2. Understand that the type of inventory system logic that
is appropriate for an item depends on the type of
demand for that item.
3. Describe what the economic order quantity is and how
to calculate it.
15. 17-15
Inventory
• You should visualize inventory as stacks of money
sitting on forklifts, on shelves, and in trucks and
planes while in transit
• For many businesses, inventory is the largest asset
on the balance sheet at any given time
• Inventory is often not very liquid
• It is a good idea to try to get your inventory down as
far as possible
– The average cost of inventory in the United States is 30 to
35 percent of its value
LO 1
17. 17-17
Models Discussed
1. The single-period model
• Used when we are making a one-time
purchase of an item
2. Fixed–order quantity model
• Used when we want to maintain an item
“in-stock,” and when we restock, a certain
number of units must be ordered
3. Fixed–time period model
• The item is ordered at certain intervals of
time
LO 2
18. 17-18
Definition of Inventory
• Inventory: the stock of any item or resource
used in an organization and can include: raw
materials, finished products, component parts,
supplies, and work-in-process
– Manufacturing inventory: refers to items that
contribute to or become part of a firm’s product
• Inventory system: the set of policies and
controls that monitor levels of inventory and
determines what levels should be maintained,
when stock should be replenished, and how
large orders should be
LO 2
19. 17-19
Purposes of Inventory
1. To maintain independence of
operations
2. To meet variation in product demand
3. To allow flexibility in production
scheduling
4. To provide a safeguard for variation in
raw material delivery time
5. To take advantage of economic
purchase-order size
LO 2
20. 17-20
Inventory Costs
1. Holding (or carrying) costs
– Costs for storage, handling, insurance,
and so on
2. Setup (or production change) costs
– Costs for arranging specific equipment
setups, and so on
3. Ordering costs
– Costs of placing an order
4. Shortage costs
– Costs of running out
LO 3
21. 17-21
Independent Versus Dependent
Demand
• Independent demand: the demands
for various items are unrelated to each
other
– For example, a workstation may produce
many parts that are unrelated but meet
some external demand requirement
• Dependent demand: the need for any
one item is a direct result of the need
for some other item
– Usually a higher-level item of which it is
part
LO 2
22. 17-22
Inventory Systems
• Single-period inventory model
– One time purchasing decision (Example:
vendor selling t-shirts at a football game)
– Seeks to balance the costs of inventory
overstock and under stock
• Multi-period inventory models
– Fixed-order quantity models
• Event triggered (Example: running out of stock)
– Fixed-time period models
• Time triggered (Example: Monthly sales call by
sales representative)
LO 2
23. 17-23
A Single-Period Inventory Model
• Consider the problem of deciding how
many newspapers to put in a hotel
lobby
• Too few papers and some customers
will not be able to purchase a paper
and they will lose the profit associated
with these sales
• Too many papers and will have paid for
papers that were not sold during the
day, lowering profit
LO 3
24. 17-24
Fixed-Order Quantity Model
Models
• Demand for the product is constant and
uniform throughout the period
• Lead time (time from ordering to
receipt) is constant
• Price per unit of product is constant
• Inventory holding cost is based on
average inventory
• Ordering or setup costs are constant
• All demands for the product will be
satisfied
LO 4
25. 17-25
Establishing Safety Stock Levels
• Safety stock: amount of inventory carried in
addition to expected demand
– Safety stock can be determined based on many
different criteria
• A common approach is to simply keep a
certain number of weeks of supply
• A better approach is to use probability
– Assume demand is normally distributed
• Assume we know mean and standard deviation
• To determine probability, we plot a normal
distribution for expected demand and note where the
amount we have lies on the curve
LO 4
26. 17-26
Price Break Models
• Price varies with the order size
• To find the lowest-cost, need to calculate the
order quantity for each price and see if the
quantity is feasible
1. Sort prices from lowest to highest and calculate
the order quantity for each price until a feasible
order quantity is found
2. If the first feasible order quantity is the lowest
price, this is best, otherwise, calculate the total
cost for the first feasible quantity and calculate
total cost at each price lower than the first feasible
order quantity
LO 4
27. 17-27
Inventory Accuracy and Cycle
Counting
• Inventory accuracy: refers to how well
the inventory records agree with
physical count
• Cycle counting: a physical inventory-
taking technique in which inventory is
counted on a frequent basis rather than
once or twice a year
LO 2
