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MODULE 3:
Warehouse Management
Warehouses or stores play a vital role in the operations of a company. It is in direct touch with the user
department in its day-to-day activities. The most important purpose served by the stores is to provide
uninterrupted service to a construction site. Further, stores are often equated directly with money as
money is locked up in the stores.
Objectives and Functions of Stores
The simplest (and very outdated) definition of the warehouses or stores is that it is the place where one
keeps (or offloads) material for some time before its use.
According to a more functional definition of stores, it is a place where following activities are carefully
undertaken:
Receipt of goods, timely procurement of materials, accounting the transactions, minimising
obsolescence, surplus & scrap by proper identification and using correct preservation methods, ensuring
good housekeeping by accurately and timely updation, issue of receipts, ensuring issues and other
documentation and handling other issues pertaining to storage and cleanliness.
In some cases, the procurement and optimisation of inventory is also added to the functions of stores.
For example, the store’s manager may be given the additional powers to procure urgently required
items.
In other words, the functions of stores can be classified as follows:
(a) To receive raw materials, components, tools, equipment and other items and account for them,
(b) To provide adequate and proper storage and preservation to the various items,
(c) To meet the demands of the user departments by proper issues and account for the consumption,
[d) To minimise obsolescence, surplus and scrap through proper codification, preservation and
handling,
(e) To highlight stock accumulation, discrepancies and abnormal consumption and evolve effective
control measures,
(f) To ensure good housekeeping so that material handling, material preservation, stocking, receipt and
issue can be done adequately, and
(g) To assist in verification and provide supporting information for effective purchase action.
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The details should be maintained in a chronological order to enable the ease of understanding. The
scope of work involves following functions:
(a) Requirement determination,
(b) Raising purchase requisition,
(c) Chasing purchase orders to expedite supplies,
(d) Scheduling arrival of materials,
(e) Receiving the materials physically and planning for storage,
(f) Quantity & quality inspection,
(g) Checking input documents like invoice, lorry receipt, delivery challans and other challans, invoices
etc.,
(h) Taking stock of material received and also of rejected material,
(i) Endorsing the suppliers bills and quantities and forwarding for payment to accounts, Provisional
goods inwards in case of later inspection,
(k) Final goods inwards in case of final acceptance of goods,
(1) Informing indenting departments of arrival of goods,
(m) Sending paperwork to purchase accounts for payment,
(n) Updating insurance paperwork for latest goods arrival, and
(0) In case of demurrages, arrange for insurance company visit.
All this demands a clearly laid out procedure which all concerned are informed about. In addition to
these functions, other functions are as follows:
(a) Regularise miscellaneous items like samples & cash purchases by raising receipt notes,
(b) Complete record keeping formalities for returnable items and items received from feeder shops for
later internal or external consumption,
(c) Keeping record of scrap received, and
(d) Keeping record of other bulk material supply items which may not be physically received or stored
in the warehouse, like fuel oil etc.
Issue Control
We now come to the stage namely, issues. Issues can be further divided into issues to consuming
departments, and issues to outside suppliers for processing or conversion.
In both cases, there are certain common system requirements. The first aspect is the control of issues.
Issues are based on scheduling of project. The second aspect is delegation of authority.
Here, in this unit, we are concerned only with the first aspect. The scope of this issue control involves
the issue of the right material, in the right quantity, to the right personnel, at the right time and place on
receiving the right authorisation, maintaining the records for the same.
Based on consumption schedules/production programs, listing for each material, quantity to be issued
for each project for that material is made and circulated to all concerned.
This automatically controls consumption as the work order issued details on the quantity of material to
be issued by the stores and the stores personnel are not authorised to issue beyond these quantities.
Thus, for routine work, operations get streamlined and free of bureaucracy.
The stores also keeps check on inventory and raises alarms or raises purchase orders (as the case may
be) from time to time. Care should be exercised that work is not held up for the want of materials.
One time issues like bathtubs, furniture, almirahs etc. are to be accounted for separately.
Proper weighing and counting equipment should be used for issuing bulk materials. Thus, these
instruments need to be calibrated frequently.
Provision should be made for emergency issue and procedures should be clearly defined for all
concerned to regularise this.
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Stores Documentation
All the documents received or generated inhouse should be properly categorised and a numbering
system should be developed for proper storage and quick retrieval. Besides the receipt and issue
documents, some other methods of documentation necessary are given below:
(a) Bincard or kardex,
(b) Stores transfer voucher (from one stores to another),
(c) List of slow moving/fast moving/obsolete items,
(d) Scrap disposal,
(e) Rejection notes,
(f) Acceptance notes,
(g) Delivery notes,
(h) Travel requisitions,
(i) Tour and expense reports,
(j) Impress details,
(k) Indents,
(1) Codification methodology, and
(m) Material requirement planning.
Methods of Valuation
The methods of valuation are many. In actual practice, there may be more than one method being
followed; one for taxation purpose and the other for control purpose. The details of some of the
important methods are given in subsequent paragraphs.
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FIFO (First in First out) Method
FIFO method assumes that material purchased are issued in strict chronological sequence, i.e. the
material which comes in first is issued first. This method ensures that the materials are issued at the
actual cost and the valuation is done at the latest price paid. So long as the cost of the material does not
fluctuate much, the assessment works fine.
The disadvantages are that in very highly fluctuating costs periods, every batch will have different costs
and the comparison between batches becomes meaningless. Moreover, in an inflationary scenario, the
time lag from the period the material is inward to that when it is issued results in the material being
issued at a lesser price than its current price which wrongly indicate the higher profits.
An illustrative example of a FIFO method is shown in Table
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As can be seen this method is applicable if a very strong analytical team is available to compute the
standard costs.
Replacement Price
This method is very suitable for a relatively high inflationary economy. In this method while purchases
are valued at the price paid for, the issues are valued at the price required to replace them at the current
prevalent prices. This ensures that the final product is priced at market prevalent rates.
The problem with this method is that the replacement value is not available at all times. Thus, a very
strong system to keep updated prices has to be evolved which in turn costs money. The issue material
follows market price but since the in stock material is evaluated at the actual prices, in an inflationary
economy, the stock in hand is always under evaluated. Conversely, when the prices are falling the stocks
in hand are always over evaluated leading to frequent write-offs.
The rate of depreciation or appreciation of all materials in stock is also not the same. Thus, balancing
stocks can be problematic.
Stock Verification
As mentioned earlier, the stock verification is the determination or quantification of the material in
stock and checking its deviation from the figures shown in the books. The store’s manager holds the
responsibility for all happenings in the store. He must periodically verify all stocks to reconcile the
books with the physical presence of the material. The problems mount as the number of items or the
number of transactions increase. Stock verification also checks for pilferage and shows the qualitative
upkeep of the stores. The causes for discrepancy in stock can be due to the following reasons :
(a) The scales or weighing machines etc. have not been properly calibrated or are not of good quality
or being maintained improperly,
(b) Issues without indents or proper paperwork,
(c) Delays in updating paperwork,
(d) Untrained individuals handling paperwork,
(e) Pilferage,
(f) Obsolescence,
(g) Deterioration and damage due to natural causes like corrosion, insect damage, rodent damage or
seepage of rainwater etc., and
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(h) Deterioration and damage due to unnatural causes like theft, sabotage etc.
The process of verification is the physical counting, weighing or measuring the stock of materials that
is in stock and making a record of these figures.
The persons who normally supervise these operations are responsible people from:
(a) Accounts department,
(b) Internal audit department of large companies,
(c) Sometimes, auditors from the bankers or loan givers, and
(d) .in case of mergers, the representatives of the other company.
The verification process is normally started only after a clear cut guidelines for the process is written
down and approved by the concerned authorities. To prevent overwork or stoppage of normal work for
inconvenient time periods, the verification process must be carried out over a long period switching
from one area to another. Sometimes, this is not possible and all verification has to be done at one go.
The stores personnel should be actively involved in the verification process to make it stop seem like a
witch hunt. If the discrepancy between actual figures and the book values are substantial enough ahd
not properly explicable, it is necessary to start an immediate investigation as the organisations will gain
if the stores personnel are motivated by proper development of an atmosphere of good values and quick
justice.
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packing material etc.
Control of Obsolescence
Computerised maintenance of records can help largely in identifying potential obsolete items. Market
intelligence should be practiced as a norm. Using the FSN analysis, the non-moving (N) items can be
tracked. Care should be taken that the critical or insurance items are not be included in this list.
This method can also be combined with the XYZ analysis to identify obsolete items.
X -items account for 70% of value but about 10% of stock items,
Y -items account for 20% of value but about 20% of stock items, and
Z - items account for 10% of value but about 70% of stock items.
Here, items coming in Y and Z category need attention whereas X category items are very critical as
they constitute a large value. Other than very necessary or insurance items, the excess items should be
used or disposed quickly.
One way of controlling can be to introduce buyback clause or having centralised purchase which can
better plan to keep a low spares level as it can divert these to other sites.
Control of Scrap
It may seem odd that scrap requires control. But the following aspects need to be addressed effectively:
(a) Proper storage and dumping places of scrap need to be identified. It is usual in India to see that all
construction sites or warehouses are littered nearby with scrap.
(b) Assess the performance of staff by assessing the cleanliness of the place.
(c) Fix tolerance limits itself on the production of scrap. Explaining the efficient use can control the use
of cloth.
(d) Scrap should be segregated and sold as this fetches better value. They can be separated as drums of
cement, gunny bags, tin of paints etc.
(e) Reclamation should be used wherever possible by seeing the economics.
If the procurement department is located nearby or in the same premises, they should be given the
responsibility of disposal. Otherwise, the stores manager is the best person for the job. Since the
procurement or purchase manager has brought the material, it is likely that he keeps track of the
market value of the scrap. The salesmen who interact with him can provide him the feedback for
this purpose. It is needless to add here that the purchase, stores and accounting department have to
function as a team. A typical format of "Form of Request for Write-off &
Disposal" is given in Appendix A.
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Disposal Methods
Depending on the nature of scrap, various methods can bc prescribed. Before disposal action can
be initiated, the "paperwork" for the same has to be initiated as the stock levels as well as its value
change after this. Scrap disposal can be done in the form given below:
(a) By inviting offers from time to time,
(b) By auction, and
(c) By annual contract.
Scrap should be segregated and kept compactly and separately. Some scrap like glass wool is
dangerous and should be collected and covered. To save even the scrap collection costs, the rate
contracts or annual contracts can include even the collection of scrap from the sites. However, care
should be exercised when the collection is going on that no good material leaves the site. In this
way, the scarce manpower and its associated costs can be utilised for other constructive work.
Sometimes, the scrap (like bad earth) is not collected by anyone. In such cases, the disposal is the
responsibility of the organisation and the legal and valid dumping place should be determined
before the material is dumped there.
The process of designing a distribution network has two broad phases. In the first phase,
the broad structure of the supply chain network is visualized. This phase decides the number
of
stages in the supply chain and the role of each stage. The second phase then takes the broad
structure and converts it into specific locations and their capability, capacity, and demand
allocation.
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At the highest level, performance of a distribution network should be evaluated along two
dimensions:
Although customer value is affected by many factors, we focus on measures that are
influenced by the structure of the distribution network: Based on the value provided to the
customers the following factors influences the distribution network design.
• Response time
• Product variety
• Product availability
• Customer experience
• Time to market
• Order visibility
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• Returnability
Response time is the amount of time it takes for a customer to receive an order.
Product variety is the number of different products or configurations that are offered by the
distribution network.
Product availability is the probability of having a product in stock when a customer order
arrives.
Customer experience includes the ease with which customers can place and receive orders and
the extent to which this experience is customized. It also includes purely experiential aspects,
such as the possibility of getting a cup of coffee and the value that the sales staff provides.
Time to market is the time it takes to bring a new product to the market.
Order visibility is the ability of customers to track their orders from placement to delivery.
Returnability is the ease with which a customer can return unsatisfactory merchandise and the
ability of the network to handle such returns.
Based on the cost of meeting customer needs the following factors influences the distribution
network design.
• Inventories
• Transportation
• Facilities and handling
• Information
Inventories
As the number of facilities in a supply chain increases, the required inventory increases as
shown in Figure 3.2. To decrease inventory costs, firms try to consolidate and limit the number
of facilities in their supply chain network.
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Transportation
Inbound transportation costs are the costs incurred in bringing material into a facility.
Outbound transportation costs are the costs of sending material out of a facility. Outbound
transportation costs per unit tend to be higher than inbound costs because inbound lot sizes are
typically larger. For example, an Amazon warehouse receives full truckload shipments of
books on the inbound side, but ships out small packages with only a few books per customer
on the outbound side. Increasing the number of warehouse locations decreases the average
outbound distance to
the customer and makes outbound transportation distance a smaller fraction of the total distance
traveled by the product. Thus, as long as inbound transportation economies of scale are
maintained, increasing the number of facilities decreases total transportation cost, as shown in
Figure
3.3. If the number of facilities is increased to a point at which inbound lot sizes are also very
small and result in a significant loss of economies of scale in inbound transportation, increasing
the number of facilities increases total transportation cost, as shown in Figure 3.3.
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Facility costs decrease as the number of facilities is reduced, as shown in Figure 3.4, because
a consolidation of facilities allows a firm to exploit economies of scale. Total logistics costs
are the sum of inventory, transportation, and facility costs for a supply chain network. As the
number of facilities increases, total logistics costs first decrease and then \ increase, as shown
in Figure 3.5. Each firm should have at least the number of facilities that minimizes total
logistics costs. Amazon has more than one warehouse primarily to reduce its logistics costs
(and improve response time). If a firm wants to reduce the response time to its customers
further, it may have to increase the number of facilities beyond the point that minimizes
logistics costs. A firm should add facilities beyond the cost-minimizing point only if managers
are confident that the increase in revenues because of better responsiveness will be greater than
the increase in costs because of the additional facilities.
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Figure 3.5 . Variation in Logistics Cost and Response Time with Number of Facilities
In this section, we discuss distribution network choices from the manufacturer to the end
consumer. When considering distribution between any other pair of stages, such as supplier to
manufacturer or even a service company serving its customers through a distribution network,
many of the same options still apply. Managers must make two key decisions when designing
a distribution network:
1. Will product be delivered to the customer location or picked up from a prearranged site?
2. Will product flow through an intermediary (or intermediate location)?
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Based on the firm’s industry and the answers to these two questions, one of six distinct
distribution network designs may be used to move products from factory to customer. These
designs are classified as follows.
In this option, product is shipped directly from the manufacturer to the end customer, bypassing
the retailer (who takes the order and initiates the delivery request). This option is also referred
to as drop-shipping. The retailer carries no inventory. Information flows from the customer,
via the retailer, to the manufacturer, and product is shipped directly from the manufacturer to
customers, as shown in Figure 3.6.
Although inventory costs are typically low with drop-shipping, transportation costs are
high because manufacturers are farther from the end consumer. With drop-shipping, a customer
order including items from several manufacturers will involve multiple shipments to the
customer. This loss in aggregation of outbound transportation also increases cost.
Table 3.1 Performance Characteristics of Manufacturer Storage with Direct Shipping Network
Supply chains save on the fixed cost of facilities when using drop-shipping because all
inventories are centralized at the manufacturer. This eliminates the need for other warehousing
space in the supply chain. There can be some savings of handling costs as well, because the
transfer from manufacturer to retailer no longer occurs. Handling cost savings must be
evaluated
carefully, however, because the manufacturer is now required to transfer items to the factory
warehouse in full cases and then ship out from the warehouse in single units. The inability of
a
manufacturer to develop single-unit delivery capabilities can have a significant negative effect on
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handling cost and response time. Handling costs can be reduced significantly if the facturer
has the capability to ship orders directly from the production line.
Unlike pure drop-shipping, under which each product in the order is sent directly from its
manufacturer to the end customer, in-transit merge combines pieces of the order coming from
different locations so the customer gets a single delivery. Information and product flows for
the in-transit merge network are shown in Figure 3.7 . In-transit merge has been used by Dell
and can be used by companies implementing drop-shipping. When a customer ordered a PC
from Dell along with a Sony monitor (during Dell’s direct selling period), the package carrier
picked up the PC from the Dell factory and the monitor from the Sony factory; it then merged
the two at a hub before making a single delivery to the customer.
As with drop-shipping, the ability to aggregate inventories and postpone product customization
is a significant advantage of in-transit merge. In-transit merge allowed Dell and Sony to hold
all their inventories at the factory. This approach has the greatest benefits for products with
high value whose demand is difficult to forecast, particularly if product customization can be
postponed. ned.
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Under this option, inventory is held not by manufacturers at the factories, but by distributors/
retailers in intermediate warehouses, and package carriers are used to transport products from
the intermediate location to the final customer. Information and product flows when using
distributor storage with delivery by a package carrier are shown in Figure 3.8.
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sense for products with somewhat higher demand.
Transportation costs are somewhat lower for distributor storage compared with those for
manufacturer storage because an economic mode of transportation (e.g., truckloads) can be
employed for inbound shipments to the warehouse, which is closer to the customer. Unlike
manufacturer storage, under which multiple shipments may need to go out for a single customer
order with multiple items, distributor storage allows outbound orders to the customer to be
bundled into a single shipment, further reducing transportation cost. Distributor storage
provides
savings on the transportation of faster-moving items relative to manufacturer storage.
Response time under distributor storage is better than under manufacturer storage because
distributor warehouses are, on average, closer to customers, and the entire order is aggregated
at
the warehouse before being shipped.
Last-mile delivery refers to the distributor/retailer delivering the product to the customer’s
home
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Distributor storage with last-mile delivery requires higher levels of inventory than the other
options (except for retail stores) because it has a lower level of aggregation. From an inventory
perspective, warehouse storage with last-mile delivery is suitable for relatively fast-moving
items
that are needed quickly and for which some level of aggregation is beneficial. Auto parts
required
by car dealers fit this description.
Among all the distribution networks, transportation costs are highest for last-mile delivery,
especially when delivering to individuals. This is because package carriers aggregate delivery
across many retailers and are able to obtain better economies of scale than are available to a
distributor/retailer attempting last-mile delivery.
Response times for last-mile delivery are faster than those for package carriers. Product variety
is generally lower than for distributor storage with carrier delivery.
The cost of providing product availability is higher than for every option other than retail stores.
The customer experience can be good using this option, particularly for bulky, hard-to-carry
items. Time to market is even higher than for distributor storage with package carrier delivery
because the new product has to penetrate deeper before it is available to the customer. Order
visibility is less of an issue, given that deliveries are made within 24 hours.
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Inventory costs using this approach can be kept low, with either manufacturer or distributor
storage to exploit aggregation. Transportation cost is lower than for any solution using package
carriers because significant aggregation is possible when delivering orders to a pickup site.
This allows the use of truckload or less-than-truckload carriers to transport orders to the pickup
site.
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A manager must consider many trade-offs during network design. For example, building
many facilities to serve local markets reduces transportation cost and provides a fast response
time, but it increases the facility and inventory costs incurred by the firm.
Managers use network design models in two situations. First, these models are used to
decide on locations where facilities will be established and determine the capacity to be
assigned to each facility. Managers must make this decision considering a time horizon over
which locations and capacities will not be altered (typically in years). Second, these models are
used to assign current demand to the available facilities and identify lanes along which product
will be transported. Managers must consider this decision at least on an annual basis as demand,
prices, exchange rates, and tariffs change. In both cases, the goal is to maximize the profit while
satisfying customer needs. The following information ideally is available in making the design
decision:
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