PHYSICAL INVENTORY CONTROL AND WAREHOUSE MANAGEMENT

1. MATERIALS MANAGEMENT
Week 10 : Physical Inventory Control
and Warehouse Management

2. OUTLINE
➢ Warehousing Management
➢ Physical Control and Security
➢ Inventory Record Accuracy
➢ TechnologyApplications

3. Ch. 10: Physical Inventory and Warehouse Management
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Warehousing Management
Objectivesof EfficientWarehouse Operations
⚫ Provide timely customerservice
⚫ Keep track of items so they can be found
readilyand correctly
⚫ Minimize the total physical effort and thus
the cost of moving goods into and out of
storage
⚫ Providecommunication links with customers

4. Ch. 10: Physical Inventory and Warehouse Management
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Warehousing Management
⚫ Benefits of Warehouse Management
⚫ Providea place to storeand protect inventory
⚫ Reduce transportationcosts
⚫ Improvecustomerservice levels
⚫ The complexity of a warehouse operation will depend
on the numberof SKUs (stock-keeping units) handled
and the numberof orders received and filled.
⚫ Mostactivity in awarehouse is material handling.

5. Ch. 10: Physical Inventory and Warehouse Management
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Warehousing Management
⚫ Costsof Operating a Warehouse
⚫ Capital costs
⚫ costsof spaceand materials handling equipment
⚫ Operating costs
⚫ costof labor
⚫ the measureof laborproductivity is the numberof units that
an operatorcan move in a day

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Warehousing Management
⚫ Costsof Operating a Warehouse
⚫ The costs of operating a warehouse will depend on:
material handling equipmentused, stock location system
used and thewarehouse layout.

7. Ch. 10: Physical Inventory and Warehouse Management
Warehouse Activities
7
⚫ Receivegoods
⚫ Identifythegoods
⚫ Dispatch goods tostorage
 Hold goods
⚫ Pick goods
⚫ Marshal shipment
⚫ Dispatchshipment
⚫ Operatean informationsystem

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Warehouse Activities
⚫ Receive goods
⚫ accepts goods from outside transportation or
attached factory and accepts responsibility forthem
⚫ check thegoodsagainst an orderand the bill of lading
⚫ check thequantities
⚫ check fordamageand fill out damage reports if
necessary
⚫ inspectgoods if required

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Warehouse Activities
⚫ Identify the goods
items are identified with theappropriate stock-keeping unit
(SKU) number (part number) and the quantity received
recorded
⚫ Dispatch goods to storage
goodsaresorted and putaway
⚫ Hold goods
goodsare kept in storageand underproperprotection until
needed

10. Ch. 10: Physical Inventory and Warehouse Management
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Warehouse Activities
⚫ Pick goods
items required from stock must beselected from storageand
brought toa marshalling area
⚫ Marshal the shipment
goods making upa singleorderare brought togetherand
checked foromissionsorerrors; orderrecords are updated
⚫ Dispatch the shipment
ordersare packaged, shipping documentsare prepared, and
goods loaded on thevehicle

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Warehouse Activities
⚫ Operate an information system
a record must be maintained foreach item in stock
showing thequantityon hand, quantityreceived,
quantity issued, and location in thewarehouse

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Warehouse Activities
To maximize productivityand minimize cost, warehouse
management mustwork with the following:
⚫ Maximizeuseof space
space is the largestcapital cost
⚫ Effectiveuseof laborand equipment
labor is the largestoperating cost
material handling equipment is thesecond largestcapital
cost

13. Ch. 10: Physical Inventory and Warehouse Management
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Warehouse Activities
Factors influencing effectiveuseof warehouses
⚫ cube utilizationand accessibility
⚫ stock location
⚫ order picking and assembly

14. Ch. 10: Physical Inventory and Warehouse Management
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Warehouse Activities
⚫ Cube utilization and accessibility
⚫ Goods are stored not just on the floor, but in the
cubic spaceof thewarehouse; warehouse capacity
dependson how highgoods can be stored
⚫ Accessibility means being able togetat thegoods
wanted with a minimumamount of work

15. Exercise
1. A company wants to storean SKU consisting of 13,000 cartonson pallets
each containing 30 cartons.
How many pallet positions are needed if the pallets are stored three
high?
2. A small warehouse stores five different SKUs in pallet loads. If pallets
are stacked three high and there is to be 100% accessibility, how many
pallet positions are needed? What is thecube utilization?
SKU A
SKU B
SKU C
SKU D
SKU E
4 pallets
6 pallets
14 pallets
8 pallets
5 pallets
Total
15
37 pallets

16. 1.
16
2.
Exercise

17. Ch. 10: Physical Inventory and Warehouse Management
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Warehouse Activities
Stock Location
⚫ Objectives:
⚫ Toprovide the required customer service
⚫ Tokeep track of where items arestored
⚫ To minimize effort to receive, put away, and retrieve items
⚫ Basic Stock Locating Systems
⚫ Group functionally related items together
⚫ Group fast-moving items together
⚫ Group physically similar items together
⚫ Locateworking stock and reserve stock separately

18. Ch. 10: Physical Inventory and Warehouse Management
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Warehouse Activities (Stock Location)
Fixed Location
⚫ An SKU isassigned a permanent location, and
noother itemsare stored there
⚫ Fixed-location systems usually have poorcube
utilization
⚫ Usuallyused in small warehouses; throughput
is small, and thereare few SKUs

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Warehouse Activities (Stock Location)
Floating (Random) Location
⚫ Goods are stored wherever there isappropriatespace
⚫ Advantageof this system is improved cube utilization
⚫ It requiresaccurate and up-to-date information
⚫ Warehouses using floating-location systems are
usuallycomputer-based

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Warehouse Activities (Stock Location)
Twoothersystems sometimes used are:
⚫ Point-of-use storage
⚫ Inventory is stored close to where itwill be needed
⚫ Mainly used in repetitive manufacturing and JIT systems
⚫ Central storage
⚫ Containsall inventory in onecentral location

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Warehouse Activities (Stock Location)
Advantages of Point-of-use Storage
⚫ Materialsare readilyaccessible to users
⚫ Material handling is reduced oreliminated
⚫ Central storagecosts are reduced
⚫ Material isaccessible all the time

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Warehouse Activities (Stock Location)
Advantages of Central Storage
⚫ Easeof control
⚫ Inventory record accuracy is easier to maintain
⚫ Specialized storage can be used
⚫ Reduced safetystock, since users do not need to carry
theirown safetystock

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Warehouse Activities
Order Picking and Assembly
⚫ When an order is received, items must beobtained
from the warehouse, grouped, and prepared for
shipment, systems used:
⚫ Area system
⚫ Zonesystem
⚫ Multiordersystem

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Warehouse Activities
Order Picking and Assembly
⚫ Area system
The order picker circulates throughout the warehouse
selecting the items on an order. Theorder is completeand
ready to shipwhen theorderpicker is finished
⚫ Zone system
Thewarehouse isdivided into zones, and each pickerworks
only in an assigned zone. Theorder is divided by zone, and
the items from each zonearesent to the marshaling area.

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Warehouse Activities
Order Picking and Assembly (continued)
⚫ Multiorder system
This system is thesame as thezonesystem, exceptthateach
pickercollects items fora numberof ordersat thesame
time.

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Warehousing: Physical Control and Security
Physical Control and Security - Elements
⚫ Good part numbering system
⚫ Simple, well-documented transaction system
⚫ Identify the item
⚫ Verify thequantity
⚫ Record thetransaction
⚫ Physically executethe transaction

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Warehousing: Physical Control and Security
Physical Control and Security - Elements
⚫ Limited access
Inventory must be kept in a safe, secure (locked) place
with limited general access.
⚫ Well-trained workforce

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Warehousing: Inventory Record Accuracy
Accurate inventoryrecords enable firms to:
⚫ Operatean effective materials management system
⚫ Maintainsatisfactorycustomerservice
⚫ Operateeffectivelyand efficiently
⚫ Analyze inventory

29. Ch. 10: Physical Inventory and Warehouse Management
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Warehousing: Inventory Record Accuracy
Three pieces of information must be accurate:
⚫ Partdescription (part number)
⚫ Quantity
⚫ Location

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Warehousing: Inventory Record Accuracy
⚫ Inventory is a tangibleasset that is easy to
lose track of unless properlycontrolled
⚫ Inaccurate inventory records will result in:
- Lost sales
- Shortages and disrupted schedules
- Excess inventory (of thewrong things)
- Ineffective MRP / MRPII / ERP

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Warehousing: Inventory Record Accuracy
Inaccurate inventory records will result in:
⚫ Low productivity
⚫ Poor delivery performance
⚫ Excessive expediting, since people will always be
reacting to a bad situation rather than planning
for the future

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Warehousing: Inventory Record Accuracy
Causesof Inventory Record Errors
⚫ Unauthorized withdrawal of material
⚫ Unsecured stockroom
⚫ Poorly trained personnel
⚫ Inaccurate transaction recording
⚫ Poor transaction recording systems
⚫ Lack of auditcapability

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Warehousing: Inventory Record Accuracy
Measuring Inventory Record Accuracy
⚫ It is not practical toexpect 100% accuracy.
⚫ Tolerance
⚫ Tojudge inventoryaccuracy, a tolerance level foreach part
must be specified
⚫ Tolerance is theamount of permissiblevariation between an
inventoryrecord and a physical count.
⚫ Tolerancesareset on individual items based on value, critical
nature, availability, lead time, ability to stop prod., safety
problems, or the difficultyof measurement.

34. Ch. 10: Physical Inventory and Warehouse Management
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Warehousing: Auditing Inventory Records
⚫ Two basic methodsof auditing inventory:
- Periodic (usuallyannual) counts of all items
- Cyclic (usuallydaily) counts of specified items
⚫ Most important is to audit the system to
find causes of record inaccuracy and
eliminate them. Cyclecounting does this;
periodicaudits tend not to.

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Warehousing: Auditing Inventory Records
⚫ Factors in good preparation fora physical
inventoryare:
- Housekeeping
- Identification
- Training

36. Ch. 10: Physical Inventory and Warehouse Management
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Warehousing: Auditing Inventory Records
A physical inventoryconsistsof foursteps:
⚫ Count itemsand record thecount on a ticket left
on them
⚫ Verify thiscount by recounting or by sampling
⚫ When theverification is finished, collect the
tickets and list the items in each department
⚫ Reconcile the inventory records fordifferences
between the physical countand inventorydollars

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Warehousing: Auditing Inventory Records
Several problemswith annual physical inventory:
⚫ Usually the factory/facility has to be shut down,
thus losing production or business
⚫ Laborand paperwork areexpensive
⚫ The job isoften done hurriedlyand poorly since
there is much pressure toget itdone
⚫ Many times, moreerrors are introduced into the
records than areeliminated

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Warehousing: Auditing Inventory Records
Cycle Counting
⚫ A system of counting inventory continually throughout
the year
⚫ Advantages of cycle counting:
⚫ Timely detection and correction of problems
⚫ Complete or partial reduction of lost production
⚫ Use of personnel trained and dedicated to cycle counting
⚫ Count frequency
⚫ The number of times an item is counted in a year

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Warehousing: Auditing Inventory Records
Count Frequency
⚫ Thecount frequencyshould increase as thevalueof
the item and numberof transactions (chance of
error) increase. Forexample, you can base the
frequencyof count on annual dollarvalue usage
⚫ Methods used:
⚫ ABC Method
⚫ Zone Method
⚫ Location Audit System

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Warehousing: Auditing Inventory Records
⚫ Cyclecountscan be scheduled at regular
intervalsorspecial times
⚫ When to Count
- When an order is placed
- When an order is received
- When the inventory record reaches zero
- When an erroroccurs

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