Week 1 - INTRO

ARTICLE: Impact of Technology on Logistics and Supply

Chain Management
1. One of the core principles of any logistics company is corresponding with customers’
expectations by providing seamless services and delivering orders on time. How has
technologies have evolved, as customers demand total traceability throughout the whole
delivery process. Discuss.
2. The absence of adequate SCM software leads to delivery time failures, clients loss, partners’
loyalty decrease. Do you agree or disagree? Discuss your view.
3. Achieving greater efficiency and competitiveness requires adoption of numerous recent
trends in logistics. With the process of businesses using information technology in the
integration of logistics processes, especially technologies such as exchange of electronic data,
bar codes and radio frequency identification, what are the impacts? Explain.

CHAPTER 8:
WAREHOUSE MANAGEMENT
 LEARNING OUTCOMES

After completing this chapter, you should be able to

• define warehousing
• explain the reasons why firms use warehouses and distribution centres
• draw a basic design for a simple warehouse
• explain how physical layout impacts on warehouse productivity and cost
efficiency
• identify and discuss common problems that arise in warehousing

LEARNING OUTCOMES continued

• analyse typical activities involved in warehousing

• evaluate different key metrics for measuring warehouse efficiency
• explain the labour and equipment requirements of the warehouse and
understand the new technologies being used in a modern warehouse
• identify the materials-handling equipment used in a warehouse
• understand the current and future trends in warehouse management and
their implications for supply chain management.
 DEFINING WAREHOUSING

Refer to textbook

DEFINING WAREHOUSING continued

Types of warehouses
Figure 8.1 Various types of warehouse
Source: Adapted from Coyle, Bardi & Langley (1992: 35–51)

The inbound flow in a warehouse begins when items arrive in the warehouse of the company location, either received from external sources or from
another company location. In principle, the process of receiving inbound orders consists of two activities:
•Receive items at the warehouse receiving dock, where you identify the items, match them to a source document, and record the received quantity.
•Put items away in stock, and record the place you put them.
The source documents for inbound warehouse flow are:
•Purchase orders
•Inbound transfer orders
•Sales return orders
 DEFINING WAREHOUSING continued

Figure 8.1 Various types of warehouse continued

Types of warehouses continued

Inbound logistics
Inbound logistics are all about moving raw materials, supplies, or finished goods into a supply chain. Through
inbound logistics, a business secures its supply — that is, it obtains the products (or the materials to make
the products) that it will eventually sell.
The logistics processes that transport raw materials, inventory, or supplies from a supplier and into a
business’s warehouse, distribution center, fulfillment center, or retail store are all considered inbound
logistics.
Outbound logistics
Outbound logistics are all about moving finished inventory out of a supply chain — that is, moving inventory
out of storage, fulfilling orders, and delivering those orders to end customers.
Any logistics process involved in order confirmation, fulfillment (including picking and packing), shipping, last-
mile delivery, customer service, and troubleshooting qualifies as an outbound logistics process.

DEFINING WAREHOUSING continued

Types of warehouses continued

Figure 8.1 Various types of warehouse continued

Other companies, particularly those focused on
ecommerce, deliver only to individual customers. Amazon
is a well-known example. The company has more than 100
active so-called "fulfillment centers" across the U.S. alone.
Sellers ship their items to these fulfillment centers, where
they are stored until workers pick, pack and ship them to
fulfill customer orders. Amazon's distribution centers
generally range in size from 600,000 to 1 million square
feet.
Nike is another example. It has over 50 distribution centers
around the world, enabling the company to sell directly to
consumers, wholesalers and retailers. The company has six
primary distribution centers in the U.S., the largest of which
is awhile
A warehouse is a facility where goods are stored for periods of time, 2.8 million-square-foot facility
a distribution center tends tolocated in Tennessee,
store goods for
with
short periods of time as orders are fulfilled, commonly daily. On the above33 miles
figure,of conveyor
if only belts, 73
a distribution outbound
center is useddoors
in a and 96
receiving spurs.
supply chain, the production units (e.g. manufacturing plants) would need to constantly produce consignments to
replenish a distribution center servicing retail stores. Longer and globally oriented supply chains have often required the
usage of warehouses where the output of production units can be stored for a period of time and consignments
assembled in larger loads, such as container loads. Such warehouses can then be used to replenish distribution centers
that can be quite distant, commonly through long-distance container shipping. This also conveys the advantage of
shorter deliveries since orders from a retail store are provided from a nearby distribution center. There is also the
possibility of benefiting from economies of scale through bigger vehicles and higher load factors.
 REASONS FOR USING WAREHOUSES
•
AND DISTRIBUTION CENTRES
To achieve economies of scale
More you store, cheaper it becomes per individual item stored- becomes more cost efficient

• To achieve production economics

Companies can produce more if they have suitable place to store products in their warehouse/distribution centre

• To take advantage of quantity purchasing discounts and forward buys

Buy goods in bulk knowing that we can sell them but must store some of the stock until its sold

• To support the firm’s customer service policies

Items stored to keep the customers satisfied do not like out of stock situations

• To meet changing market conditions

Stock is kept to handle seasonal situations as demand rises / drops

• To help overcome the time and space (distance) gap that exists between producer and the end consumer

Customers do not want to drive for products

• To accomplish least total cost logistics corresponding with a desired level of customer service

Warehouses can save extra on transport/ distribution costs reach many customers if it is located closer to customers

REASONS FOR USING WAREHOUSES AND DISTRIBUTION CENTRES continued

• To service the needs of a firm more effectively

Many warehouses are kept from internal production process

• To support the just-in-time programmes of suppliers

Keep adequate levels of stock for daily production. Suppliers responsibility to ensure that stock of supplied items is always available in
volumes needed that stock can be stored quickly

• To keep a steady flow of supply of the product through the supply chain towards the end customer

Distribution centres are used to post production to keep stock, used constantly and continually to resupply retail store as stock runs out.

• To enable efficient “last mile” logistics

Final leg of supply chain that must be concluded for sale. Competition is highest in last mile. At this point where manufacturer gets shopper
to select their product over rivals

• To help provide a level of customer satisfaction and service at (ideally) the lowest total cost

Storing goods cost efficiently. Increase product availability, indirectly leading to high customer satisfaction

• To help close the “time and space” gap in the supply chain as cost efficiently as possible

• To serve as a link between the supplier and the producer, and a link between the producer and end customer

Perform an intermediary linking function. Warehouses from essential role between farmed supplies and production plant plus outbound
transportation to find end customer

• To serve as an integral part of every logistics system

 REASONS
Three FOR USING
basic purposes WAREHOUSES
in an efficient AND DISTRIBUTION CENTRES continued
supply chain

• Movement
– Four handling activities
» receiving/ transfer/ order selection/ shipping
The receiving activity includes the physical unloading of products from the transportation carrier. Transfer involves the physical movement of
the product into the warehouse for storage. Order selection is the major movement activity and involves regrouping products into the
assortments that customers desire (one may also hear the term picking of items in warehousing). Shipping consists of physically moving
assembled orders into carrier equipment, and checking on orders to be shipped (warehousing also takes place before items are
transported by rail, plane or truck).

• Storage

performed on a temporary or semi-permanent basis (goods are either stored in the short term or the long term, or even permanently). Temporary
storage includes only the storage of products necessary for basic inventory replenishment (Coco-Cola bottles are stored in a distribution centre or
warehouse for delivery the next day, or even the very same day). Semi-permanent storage is the storage of inventory in excess of that required for
normal replenishment (

• Information transfer

Information transfer, the third major purpose of warehousing, occurs simultaneously with movement and storage. Three things move in a supply chain,
namely the product, money (payments made as goods move) and information, which moves hand-in-hand with the goods. One needs to know
exactly where an item is in one’s warehouse or distribution centre. Information and e-commerce is totally changing this information function in
terms of warehousing, which is why many modern warehouses use a warehouse management system (WMS) to manage their information related
to the movement of the product in and out of the warehouse.

WAREHOUSE DESIGN AND LAYOUT

A smart layout increases productivity and lowers cost

Optimising layout and

design by using flexible/
expandable racking
Figure 8.2 The Corporate Express Distribution
Centre in Amsterdam
 WAREHOUSE DESIGN AND LAYOUT continued

Taking the right steps towards effective warehouse

layout and design

WAREHOUSE DESIGN AND LAYOUT continued

Smart warehouse layout planning guidelines

Figure 8.3
Utilising the full cubic capacity

Sources: Adapted from College Industry

Council on Materials Handling Education
(http:/ /www.cicmhe.org); Coyle, Langley,
Novack & Gibson (2013: 465, 500)

Staff members will be able to pick, pack and move goods safely and efficiently (reducing the rate of injuries, the cost of
working hours lost resulting from an inefficient layout and poor picking movements, and the expense of redesigning a
poorly built warehouse). Firm investors will see a greater return on their investment if the warehouse is cost efficient in
terms of adequate natural lighting, controlled access points that reduce theft, and flexible design, which makes allowance
for expansion and growth of the warehouse. The Frito-Lay distribution centre in Isando, Johannesburg, is built in such a
way that it enables physical expansion of the distribution centre at a reduced construction cost. This is wise, far-sighted,
strategic logistics thinking.
 WAREHOUSE DESIGN AND LAYOUT continued

Smart warehouse layout planning guidelines continued

Figure 8.4 An effectively designed

warehouse layout
Source: Adapted from Carter (1985: 173)

THE GROUPING OF PRODUCTS WITHIN

THE WAREHOUSE
Goods can be grouped according to one of the following three methods:

• Compatibility

• Complementary

• Popularity

compatibility means that similar goods are stored in similar areas. For example, bulk goods are usually stored in the bulk
storage area. Bulk storage refers to the storing of materials and packages in larger quantities, generally using the original
packaging or shipping containers, boxes or pallets. In other words, all the goods arriving on pallets will be stored in an area
dedicated to palleted bulk goods. They are thus similar or compatible.

Complementary items are often ordered together by the customer. In the case of the Corporate Express stationery distribution
centre, alphabetical file dividers could be stored alongside the A4 lever arch files. This will save the picker from having to
move from aisle to aisle, getting one product after another for the final customer order.

Popularity refers to the principle of storing the most popular items in the most logical place, namely nearer to the point of
distribution. In the case of the University of Johannesburg’s warehouse, it makes logical sense to store boxed reams of
photocopy paper close to the outbound point in the warehouse, since these items are used regularly and in great quantities
by the university. The picker then does not need to walk regularly to the far reaches of the warehouse to get stock for the
customer (which wastes time and ultimately slows down the delivery of the product to the customer).
 THE CATEGORISATION OF INVENTORY IN THE WAREHOUSE

• Categorising inventory in the warehouse according to demand frequency

Customers, both internal and external, want items from the warehouse at different times of the day, month or year. They demand items at different times, according
to the unique seasonal needs of their business. The most popular items, which are always in demand, should be easily accessible and easy to retrieve and
despatch. For example, cans of Coca-Cola, which are in high demand year round, should be stored in the prime storage location. Items that are infrequently
demanded should be shelved in the less accessible parts of the store, which are more difficult to reach. For example, goods requested generally only in
December (say Christmas trees) could be shelved towards the back of the warehouse.

• Categorising inventory in the warehouse according to pick destination

The pick destination of goods will also affect how they are categorised in the warehouse. For example, at the warehouse of SAA Cargo, goods destined for local air
travel are placed in one area (area A) and goods destined for international travel are placed in another (area B). In the international freight storage area, goods
are further categorised according to their destination. For example, items on their way to Bangkok are stored on the racks marked BNN (the international route
name for Bangkok) and freight and parcels en route to Kuala Lumpur in Malaysia are marked KUL and are all categorised as such. These are shelved on the
same shelf. Goods moved from an airline freight warehouse must be ready to move quickly, so the correct categorisation according to the pick destination is
crucial.

• Categorising goods in the warehouse according to special storage requirements and health and safety requirements (Occupational Health and Safety Act)

Warehouses worldwide must heed certain health and safety standards in order to comply with local, regional and national laws as well as to keep their personnel
motivated, productive, efficient, healthy and alive. We will briefly discuss some of these guidelines: 1. The facility must have proper lock-out/tag-out procedures
that also enable staff to evacuate the warehouse quickly in the event of a fire. 2. The warehouse must be well ventilated, preferably with clean air that is not
dusty. 3. All floors, aisles and surfaces must be free of clutter, hoses, spills, electrical cords and other materials or factors that could cause slips, trips or falls.
Stock items must not be temporarily stored in the aisles, rather placed in their correct locations directly. 4. Proper guards must be provided for open loading
dock doors and similar areas to prevent employees from falling from a height of one metre or more. 5. Employers must factor in proper work practices when
determining the time requirements for each employee in accomplishing every task. Workers need to change tasks and time must be allowed for moving from,
say, picking to shrinkwrapping or offloading. 6. Workers who have to perform physical work must have enough periodic rest breaks to avoid fatigue. Fatigue
potentially causes injuries, accidents or even deaths in the warehouse. When staff get tired they make mistakes – and some mistakes can be deadly. 7. All
newly hired employees must receive both general ergonomics training (ergonomics is about the science of work – how to correctly lift and move things, etc.)
and task-specific training so that they do not injure themselves through unnecessary lifting of products when pallet-jacks are available, etc. 8. Every employee
must be trained in how to avoid heat stress in hot and humid warehouse environments, and also be provided the appropriate air-conditioning systems.
–

Storage of hazardous substances

Certain types of goods must be stored in specific ways. Special storage conditions necessitate special storage considerations.
For example, some gases are flammable and others are non-flammable. Flammable gases can cause great harm if they
come into contact with open or naked flames, as they may explode. Most hazardous substances are categorised according
to how dangerous they are and what would happen if they were to come into contact with oxygen (air). Items arriving for
storage in the warehouse normally arrive with materials safety data sheets. This will give a clear indication of (1) the
explosive nature of the item, (2) the toxicity of the item, and (3) the oxidisation and flash boiling point of the item to be
stored. Many items need to be stored at very specific temperatures to prevent explosions or oxidation reactions from
occurring.
– The storage of perishable substances
Perishable substances must be stored at the right temperature, so as to prolong their life-span and stop them from spoiling.
Certain substances are stored at high temperatures, such as bitumen, whilst other substances and goods are stored at low
temperatures, such as milk and vegetables. The storage of such perishable items pertains to all the phases of storage and
the movement of freight and goods. With milk, for example, during the receiving process, storage process, despatch,
distribution and transportation process, the temperature of the stored and distributed milk cartons must stay constant and
stable. This is not an easy task for the warehouse manager and staff, and requires a thorough understanding of the supply
and distribution requirements of milk, as well as the OHSA storage requirements. Certain supplier or manufacturer
specifications can also influence how items are stored. Some items have certain manufacturing specifications and
viscosities and need to be stored in certain predetermined ways. They should also be stored according to the specifications
at the temperatures and humidities required. For example, tobacco leaves must be stored in the British American Tobacco
warehouse at Heidelberg at very specific temperatures so that they retain the humidity and quality that they had when
purchased.
 THE CATEGORISATION OF INVENTORY IN THE WAREHOUSE continued

Figure 8.5
Example of an
employee
hazard
communication
card used in the
US, North
America,
Europe, South
Africa, Africa,
the Middle and
far East, and
worldwide
Source: Reprinted with permission from
NFPA 704-2017, System for the
Identification of the Hazards of
Materials for Emergency Response,
Copyright © 2016, National Fire
Protection Association. This reprinted
material is not the complete and official
position of the NFPA on the referenced
subject, which is represented solely by
the standard in its entirety. The
classification of any particular material
within this system is the sole
responsibility of the user and not the
NFPA. NFPA bears no responsibility
for any determinations of any values
for any particular material classified or
represented using this system.

CROSS-DOCKING
Figure 8.6 Cross-docking maximises the use of transport opportunities
and reduces storage space needs
Cross-docking is a logistics process that minimises the need for
storage. It means that finished goods are taken from the manufacturing
plant and delivered directly to the customer with little or no handling in
between. Cross-docking thus reduces handling and eliminates storage
of inventory in the warehouse. This process means that goods are
received at one door and shipped out through the other almost
immediately, without putting them in storage; that is, stock coming into
a cross-docking centre is pre-allocated against a replenishment order
generated by a retailer or customer in the supply chain. Cross-docking
shifts the focus from the supply chain to the demand chain. As an
example, the distribution centre of a major retailer such as Spar, a
retail chain that has a footprint throughout Europe and Africa, will
receive various vehicles, which will arrive from various producers.
They will, for instance, in an average day, receive vehicles with Nestlé
products, Frito-Lay’s crisps, Coca-Cola soft drinks, Kellogg’s corn
flakes, and Crosse & Blackwell mayonnaise. These items will not be
stored in the distribution centre, but will be “crossed over” through the
distribution centre to a vehicle that will then travel to a specific store.
 CROSS-DOCKING continued

Figure 8.7 Automated cross-docking sorter

Source: Photo by Ian Harverson. Used with permission from Kite and Ian Harverson.

CROSS-DOCKING continued

Figure 8.8 An effective cross-docking system enables Kite to quickly direct parcels
Source: Photo by Ian Harverson. Used with permission from Kite and Ian Harverson.
 CROSS-DOCKING continued

Figure 8.9 Accumulation and shoot systems

CROSS-DOCKING continued

Figure 8.10 Outbound goods move on gravity flow conveyor systems to final destination for
shrink-wrapping
 TYPICAL ACTIVITIES PERFORMED IN A
WAREHOUSE
• Receiving • Loading and shipping
• Placing • Clerical/administrative
• Storing • Housekeeping
• Replenishing • Maintenance
• Order picking • Inventory management
• Checking • Value-added services
• Packing and marking • Assembly function
• Staging and consolidation • Create or break bulk

TYPICAL ACTIVITIES PERFORMED IN A WAREHOUSE continued

Figure 8.11 Creating or breaking bulk

Source: Image adapted from Mangan, Lalwani & Butcher (2008: 114)
 THE MOST COMMON WAREHOUSING PROBLEMS

• Storage space utilization

Storage, as one of the three main functions of warehousing, must be efficient. Utilising storage space optimally is one of the most important tasks facing
warehouse managers. Warehouse productivity can be measured in terms of utilisation, which is the ratio of capacity used to available capacity. Storage space
relates not only to the floor space utilised, but the height as well; that is, cubic capacity. (The Trade Centre in Johannesburg, South Africa, utilises all the possible
space in its warehouse from top to bottom, both vertically and horizontally. It has forklifts that can reach the roof of the warehouse.)
• Product handling problems
Because of the large number of movements that a product typically undergoes in the warehousing process, products may be handled many times by warehouse
employees. Products that are not easily handled require extra care, which can be time consuming and increase labour costs.
• Warehousing equipment problems
Warehousing equipment is expensive, resulting in the warehousing process being highly capital intensive. Technological advances may result in equipment
becoming obsolete in a very short time. Equipment must be selected carefully in light of future product demand as well as development. All equipment should be
subject to strict maintenance schedules.
• Labour intensity associated with warehousing
Another common problem in warehousing is that, although expensive equipment results in a capital intensive operation, it is simultaneously highly labour
intensive. The warehouse typically employs a fairly large staff, including managers, administrative personnel and security guards; equipment handlers such as
forklift drivers, order pickers, receiving and despatch personnel, cleaners, checkers, packers and others. While every effort should be made to reduce labour
costs, this must be viewed as a trade-off, taking into consideration other costs that may increase by reducing labour.
• Information gaps between warehousing and manufacturing or retailing
The warehouse typically requires timely and accurate information in order to perform functions effectively. This relates to supplying information to the customer,
performing the other two warehousing functions (storage and movement), and communicating with warehouse employees. In order to maintain the required level
of service to customers, the logistics system may, at any time, need to supply the customer with timely information on order status, order tracking, back-order
status, order confirmation, product substitution, product shortages, and/or product information requests. Product flows are the result of transactions or
communications between a firm and its customers. The process and the satisfaction of customer demand depend on effective information movement to the extent
that this is integral to the entire supply chain.
• Costing and budgeting is often difficult
Successful warehouse management depends on minimising the total cost of the warehouse. Minimising total warehousing cost is, however, only one aspect of
warehouse cost management. Warehousing is a link in the logistics function and warehousing costs must be seen in relation to total logistics costs. As has been
stated previously, all costs in the logistics supply chain are related and the supply chain manager is constantly faced with a number of possible trade-offs in order
to minimise total supply chain costs and maximise customer service levels.

ORGANISING FOR WAREHOUSE

MANAGEMENT
A great deal happens behind the scenes in the warehouse, with many people being involved in running it efficiently. Some
people are involved in the strategic management of the warehouse (warehouse director or manager), some on the operational
level (warehouse supervisor), and some on the tactical level (pickers, packers and clerks).
The warehouse/distribution manager/director is like the conductor of an orchestra. He or she analyses where the bottlenecks are
in the warehouse; where things are not operating effectively for one reason or another. He or she will look at the strategic issues
relating to the warehouse and give careful attention to key performance indicators (KPIs) in the warehouse. He or she is
accountable for the overall cost efficiency, productivity and optimal usage of the warehouse as an asset (reporting to the
shareholders in terms of return on investment).
The warehouse supervisor is usually a middle manager who has to supervise a team within the warehouse and ultimately reports
to the warehouse/distribution director/manager. This manager has to understand the strategy of the warehouse, as well as be
able to make the operational activities happen on a day-to-day basis through the effective motivation of his or her team
The receiving clerks handle inbound goods and check that the goods arrive in the correct quality and quantities. They must
ensure that the right goods arrive (e.g. two-litre Coca-Cola bottles) and in the right quantities (e.g. 400 bottles). They also check
that the goods ordered are not damaged, broken or dirty, which would stop the end customer from buying them. The storage and
picking teams will place the items in their correct places in the warehouse (storage), and retrieve them according to the
customer’s requirements (picking). The picker generally has a picking list, which he or she uses to select the items exactly
according to the customer’s order.
The despatch clerks handle the despatch of items that have been correctly packed. This team is usually the final check in the
quality processes of the picker. Have the right goods been picked according to the customer’s order, and what needs to be done
in terms of packaging or shrink wrapping? Job shadowing may be an effective means of training new warehouse employees –
especially those involved in the receiving, storage/pick & packaging, and despatch functions.
The finance personnel make sure that all suppliers are paid promptly, and that all accounts are correctly filed and stored in the
correct place for accurate payment and, if needed, later retrieval.
 WAREHOUSE PERFORMANCE
MANAGEMENT

Ten key metrics for measuring warehouse

performance
Warehouse space utilisation

Productivity of warehouse staff

WAREHOUSE PERFORMANCE MANAGEMENT continued

Ten key metrics for measuring warehouse performance continued

Stock turnover ratio

Receiving efficiency of inbound stock

Receiving efficiency =Time between receipt of purchase order and items being
ready for sale
Receiving efficiency = Time ready for sale, less time purchase order received at
warehouse
 WAREHOUSE PERFORMANCE MANAGEMENT continued

Ten key metrics for measuring warehouse performance continued

Order picking accuracy

Rate of returns

WAREHOUSE PERFORMANCE MANAGEMENT continued

Ten key metrics for measuring warehouse performance continued

Backorder rate

Order cycle time

Average length of time it takes for customers to receive orders once they
have been placed
 WAREHOUSE PERFORMANCE MANAGEMENT continued

Ten key metrics for measuring warehouse performance continued

Warehouse carrying costs of inventory

Warehouse yard turnaround of inbound/outbound docked

vehicles

Measuring warehouse staff performance

WAREHOUSE PERFORMANCE MANAGEMENT continued

Ten key metrics for measuring warehouse performance continued

Measuring warehouse staff performance continued

Table 8.1 Key performance indicators for warehouse employees and management
 MATERIALS HANDLING EQUIPMENT
CATEGORY 1: FORKLIFTS AND PALLETS
Figure 8.12 An example of a pallet
Source: Photo by C. Voortman

Figure 8.13 An example of a forklift

Source: Shutterstock

MATERIALS HANDLING EQUIPMENT continued

CATEGORY 2: TURRET TRUCKS AND REACH

TRUCKS
Figure 8.14 An example of a turret truck
 MATERIALS HANDLING EQUIPMENT continued

CATEGORY 3: SCANNING EQUIPMENT AND NEW

TECHNOLOGIES
Figure 8.15 RFID tags have much imbedded intelligence
Source: Photo by C. Voortman

CATEGORY 4: PORTABLE STORAGE RACKS

CURRENT AND FUTURE TRENDS IN

WAREHOUSING
• Faster order entry and faster order fulfilment
Figure 8.16 Materials handling equipment
Sources: Carter (1985: 189, 193, 194, 196–199, 202); Frey (1982: 1)
 CURRENT AND FUTURE TRENDS IN WAREHOUSING continued

• Faster processing of order returns

• Improved warehouse management system user interfaces
• The rise of automation and autonomous guided vehicles (AGVs)
• Increased use of wearable technologies
• Millennial mindset management
• Faster big data analysis
• Increased digitisation of the full supply chain and warehousing process
• Increased use of blockchain within the supply chain and warehousing
track-and-trace systems
• Increased IoT connection of everything, everywhere, all the time

CHAPTER 5:
INVENTORY
MANAGEMENT
 LEARNING OUTCOMES

After completing this chapter, you should be able to

• explain why firms need inventory
• describe the common types of inventory
• calculate inventory-related costs
• discuss the different types of demand
• analyse demand
• undertake qualitative and quantitative forecasting in inventory management
• perform an ABC (Pareto) analysis
• discuss different types of ordering systems.

INTRODUCTION
Figure 5.1 Intra-firm links within a supply chain

we see a stock point for raw materials (RM). Raw materials are ordered and stored at this stock point. These
raw materials are used to produce end products, which are stored at another stock point. The raw materials
that are procured are probably end products (EPs) of the previous link in the chain, and the end products
produced at this point could well be the raw materials for the next link in the chain. Of course, in many
production environments we will find internal stock points for sub-assemblies and components. However, we
will not go into these stock points here, because the way to control them is similar to the ones we will describe
at a later stage. Firstly, we will explain why we need inventory, and the different purposes of inventory. We will
discuss how to select a proper inventory strategy for which the ABC analysis (also called a Pareto analysis) is a
powerful instrument. There will be an in-depth discussion on the two important questions regarding inventory
control: when to order and how much to order. Thereafter we will describe the important inventory strategies.
 DEFINING INVENTORY

Typically includes:
• Raw materials
• Work-in-progress items
• Parts/equipment
• Finished items

INVENTORY MGT
FURTHER DEFINED … (Copy slide)
• Refers to stocks of goods and materials that are maintained for many
purposes, the most common being to satisfy normal demand patterns

• Inventory decisions drive other business activities like:

– Warehousing
– Transportation
– Materials handling
• Objectives can differ for different functional areas of an organization

• Must consider inventory costs

– Carrying costs
– Ordering costs
– Stockout costs
 COMMON TYPES OF INVENTORY
• Cycle stock
This describes the portion of inventory that is carried by an organisation specifically for the purpose of satisfying regular orders. For a manufacturing organisation,
such stock comprises all of the items that are consumed in the course of normal operations of the company. For a selling organisation, cycle stock would include
all items that the organisation carries in order to satisfy sales orders. Typically, because this kind of stock is either consumed or sold routinely, these items are
not expected to spend a lot of time in storage, and so their replenishment pattern is cyclical.
• Safety stock
This refers to the portion of inventory items held as a buffer to enable the organisation to cushion the effects of uncertainties in demand and/or supply of said items.
Therefore, this kind of stock describes the extra or additional quantities of an inventory item carried by an organisation, over and above its cycle requirements,
particularly to mitigate the risk of stock-outs.
• Anticipation stock
This is the kind of stock that an organisation carries because of a future event, with a high likelihood of occurrence, which justifies the stocking of quantities of the
item above regular cycle quantities. It is important not to confuse anticipation stock with safety stock. The holding of anticipation stock is tied to a specific future
event, such as imminent scarcity of the item, predicted price increases for the item or expected increase in demand for the item, among others.
• Seasonal stock
Items that are carried in store simply because of the levels of demand that are peculiar to particular periods of the year can be categorised as seasonal stock.
While there may be similarities, this type of stock may be distinguished from anticipation inventory on the basis of the rationale that informs its stocking. The
reason for carrying seasonal stock is temporal; it is tied to a period rather than an event. For example, just before the winter season arrives, many clothing
outlets tend to stock items like coats and sweaters.
• Promotional stock
This kind of stock is carried by organisations to enable them to satisfy high levels of demand that are due to a promotion campaign. In order to encourage sales of
a particular item, organisations may create some kind of incentive that encourages more purchases. Thus, it becomes necessary for the stock of that specific
item to be carried in larger quantities, so as to meet with greater demand.
• Dead stock
This is the type of stock that an organisation may have but cannot utilise as was intended. This may be a consequence of keeping the stock item for too long in
storage, beyond its shelf life. If the stock item is perishable, it could be that the item has expired. In other cases, where the item is not perishable, it may be that
the item has become so outdated that it can no longer be used in the normal operations of the organisation.
• Non-conformance stock
This category of inventory items is similar to the dead stock category. The similarity lies in the fact that the stock items are no longer usable by the organisation that
has kept them in storage. However, the difference is that they could still be utilised by other parties. The reason the organisation may not be able to use such
items anymore may be related to a change in operational requirements or the use of different machines or equipment.

PURPOSE OF HOLDING INVENTORY

• Creating a cushion for uncertainties

– Three major kinds

» Uncertainty in demand
» Uncertainty in supply
» Uncertainty in yield
Uncertainty in demand: we do not know exactly when a customer will order and how he will order.
2. Uncertainty in supply: we do not know exactly when a supplier will deliver or whether he will deliver the
quantity demanded.
3. Uncertainty in yield: we do not know exactly how much we will produce. There will usually be some losses or
scrap owing to irregularities in the process.
 PURPOSE OF HOLDING INVENTORY continued
• Holding batch stock
The second purpose of carrying stock is to hold batch stock. This stock occurs because firms usually cannot buy or produce products in the quantity needed. The
incurred stock is called batch stock or cycle stock, and this has to do with either physical or financial restrictions. This situation also occurs when we do our
weekly shopping. We buy in larger quantities than immediately necessary, in order to avoid the need to go shopping every time we want some sugar, or an
egg. In production environments we see the same principle in practice.
• Providing for seasonal stock or anticipation stock
Another purpose for carrying stock is to provide for seasonal stock or anticipation stock. This is stock that is built up in slow periods, because in peak season there
is not enough capacity to do so. In Holland, producers of ice skates start making them in summer so as to have enough stock for the winter period; but this
technique can also be used to cover holiday periods.
• Providing for strategic stock
A type of stock that resembles safety stock is strategic stock. This is stock used by the tobacco industry or the coffee industry, for example, to compensate for crop
failures. Not having enough raw materials (tobacco, coffee) would immediately lead to huge problems. For these firms, this strategic stock is the main
component of total stock
• Enabling smooth production processes
In production environments, we find stocks on the shop floor, which is needed for the smooth operation of the process. This stock is called work in process/progress
(WIP).
• Compliance with legal/contract requirements
A very special kind of stock is the guarantee stock, which consists of parts and components that suppliers have to keep in stock for a number of years. If a mining
firm orders an expensive excavator, for example, they demand that components and spare parts be available for a number of years. Thus, it can happen that
firms have to carry these stocks even though demand for them may be very low and some of the stock probably will have to be scrapped.
• Overcoming supply disappointments
Sometimes expected deliveries from suppliers do not take place when scheduled. This may be for a medley of reasons on the part of the supplier, such as labour
strikes, transportation challenges, stock-outs and incorrect shipment, among others. Without inventories, such disappointments would have severe knock-on
effects on the organisation that requires the deliveries from the supplier in order to operate.
• Compensating for a shutdown in production
Some organisations, especially in the manufacturing industry, have scheduled shutdowns. At other times, a shutdown could also be unplanned. During such
periods, no production takes place, as the entire plant stops running and extensive maintenance work is undertaken. A shutdown in production is never
complemented by a shutdown in demand.

Inventory Costs
(Slide to Copy)

• Assets cost money, which means that inventory

costs money
• Inventory costs between 2010 and 2014 represent
approximately one-third of total logistics costs
• Inventory cost should factor into an organization’s
inventory management policy
• Logistics manager must understand nature of
each cost as well as trade-offs
 INVENTORY CARRYING COSTS
(Slide to Copy)
–Costs associated with holding inventory
–In general, expressed in percentage terms
and this percentage is multiplied by the
inventory’s value
–Resulting number represents dollar value
associated with holding the particular
inventory

INVENTORY HOLDING COSTS

• Capital cost
If we look at the different components of the holding cost rate, one of the most important is capital costs. We had to pay money to purchase inventory
and this money could have been invested elsewhere. So what are the alternative revenues for this money? Accountants are not very clear about
this matter. Many firms use different values, depending on their financial structure and the required yield. Some firms use market interest plus a
certain percentage; others use a kind of ROI (return on investment); but opportunity costs are mentioned in the literature as well. Personal
research has shown these values to be between 8% and 20%.

• Cost of obsolescence

The second important cost factor is the risk of obsolescence. This component is very much product related. Products with a short life cycle (e.g.
fashion items, computer parts or digital cameras) have a high risk of obsolescence, while for common ferrous and non-ferrous metals the risk is
almost non-existent. As for the cost of capital, it is difficult to give an exact value, but it seems that an overall value of 10% is not unrealistic.
Again we have to bear in mind that this is both product related and branch related.

• Handling and storage costs

The third component relates to handling and storage. This means mortgage on, or rent of, warehouses; people and equipment for handling and
storage; computer hardware and computer software; insurance, theft, and so on. In order to illustrate this, the inventory holding costs of three
wholesalers are shown in Table 5.1.
 INVENTORY HOLDING COSTS continued

Table 5.1 Inventory holding costs for three different wholesalers

INVENTORY MANAGEMENT

𝑂𝑟𝑑𝑒𝑟𝑠 𝑠𝑎𝑡𝑖𝑠𝑓𝑎𝑐𝑡𝑜𝑟𝑖𝑙𝑦 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑑

𝑆𝐿 % = × 100
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑

𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠

𝑆𝑇 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘 𝑜𝑛 ℎ𝑎𝑛𝑑

𝑇𝑃𝐶 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 𝑓𝑜𝑟 𝑎 𝑝𝑒𝑟𝑖𝑜𝑑
 DEMAND AND INVENTORY

Independent demand and dependent demand

Figure 5.2 Independent and dependent demand items

DEMAND AND INVENTORY continued

Independent demand and dependent demand continued

Figure 5.3 Independent demand stock levels

Reorder level = Safety stock + Demand during lead time

 DEMAND AND INVENTORY continued

Independent demand and dependent demand continued

Figure 5.4 Dependent demand stock levels

DEMAND AND INVENTORY continued

Random demand and predictive demand

Figure 5.5 Common demand patterns
Source: Wilcox (2008)
 DEMAND AND INVENTORY continued

Fast demand and Slow demand

(Go through text)

ANALYSIS OF DEMAND

Average demand
𝑆𝑚𝑖𝑛+𝑆𝑚𝑎𝑥
Average demand =
2

where:
Smin = Minimum stock level of the item
Smax = Maximum stock level of the item
 ANALYSIS OF DEMAND continued

Total demand
Total demand = Total quantities of an item in received orders +
Total quantities of an item in lost orders

ANALYSIS OF DEMAND continued

Measurement of demand variability

Figure 5.6 Normal distribution of demands for item Y
Source: Wilcox (2008)
 ANALYSIS OF DEMAND continued

Measurement of demand variability continued

Table 5.2 Demand frequency table for item Y

ANALYSIS OF DEMAND continued

Standard deviation and safety stock

Table 5.3 Deviations for the period January to December
 ANALYSIS OF DEMAND continued

Standard deviation and safety stock continued

FORECASTING

Qualitative forecasting
• Panel consensus method
• Delphi method
 FORECASTING continued

Quantitative forecasting
Table 5.4 Hypothetical forecasted and actual demand figures

FORECASTING continued

Quantitative forecasting continued

Simple average

Year-to-date average
 FORECASTING continued

Quantitative forecasting continued

Moving average

Weighted average

FORECASTING continued

Quantitative forecasting continued

Exponential smoothing
 FORECASTING continued

Quantitative forecasting continued

Seasonal analysis
Table 5.5 Determination of seasonal indices for Horistics

FORECASTING continued

Quantitative forecasting continued

Seasonal analysis continued

Table 5.6 Forecasted demand for Horistics based on seasonal indices

 FORECASTING continued

Quantitative forecasting continued

Evaluation of forecast quality

FORECASTING continued

Quantitative forecasting continued

Evaluation of forecast quality continued

Table 5.7 Absolute deviations for the period January to December

VALUE OF INVENTORY ITEMS

Table 5.8 Generic ABC categorisation

VALUE OF INVENTORY ITEMS continued

Table 5.9 Annual expenditure on items

 VALUE OF INVENTORY ITEMS continued

Table 5.10 ABC categorisation of items

ORDERING SYSTEMS
Ordering dependent demand
items
Figure 5.7 Logic of the MRP
 ORDERING SYSTEMS continued

Ordering independent demand items

Table 5.11 Planned order release

ORDERING SYSTEMS continued

Economic order quantity

Ordering costs (OC) = Costs for placing an order (C) × Number of orders (N)

Number of orders = Annual usage (U)/ Quantity ordered each time (Q) = U/Q

OC = C x (U/Q)

Holding costs (HC) = Value of items to be held (V) × Holding percentage (H)

Value of items held = Average inventory × Price of item (P)

Since average inventory is Q/2 (where Q is the order quantity), then

HC = (Q/2) x P x H
 ORDERING SYSTEMS continued

Economic order quantity continued

Figure 5.8 Holding costs and ordering costs

Source: Wilcox (2008)

ORDERING SYSTEMS continued

Re-order point system

RP = (D × L) + SS

Where:
D is the forecasted demand per period
L is the replenishment lead time in periods
SS is the desired safety stock level
 ORDERING SYSTEMS continued

Variable order quantities

Lot-for-lot system

Target inventory level system

TIL = D (L + R) + S

ORDERING SYSTEMS continued

Period order quantity system

Table 5.12 The POQ system logic
 ORDERING SYSTEMS continued

Periodic ordering
Table 5.13 The PO system logic

ORDERING SYSTEMS continued

Time-phased order point system

Table 5.14 The time-phased order point system
 ORDERING SYSTEMS continued

Kanban system
Figure 5.9 Kanban squares

ORDERING SYSTEMS continued

Order modifiers
 Contemporary Issues with Managing Inventory [1]
(Slide to Copy)
• Lean manufacturing

–Focuses on the elimination of waste and the

increase of speed and flow
–Identifies seven major sources of waste including
inventory
–Just-in-time (JIT) is one of the best-known lean
inventory practices

Contemporary Issues with Managing Inventory [2]

(Slide to Copy)

• Lean manufacturing

–Just-in-time (JIT)
• Seeks to minimize inventory by reducing (or
eliminating) safety stock while having the
required amount of materials arrive at the
production location at the exact time they are
needed
 Contemporary Issues with Managing Inventory [3]
(Slide To Copy)
• Service parts logistics

–Involves designing a network of facilities to

stock service parts
• Deciding upon inventory ordering policies
• Stocking the required parts
• Transporting parts from stocking facilities
to customers

Contemporary Issues with Managing Inventory [4]

(Slide to Copy)

• Vendor-managed inventory (VMI)

–Size and timing of replenishment orders are the

responsibility of the manufacturer
–Allows manufacturers to have access to a distributor’s
or retailer’s sales and inventory data
–Benefits include reduced inventories, fewer stockouts,
and improved customer retention
 CHAPTER 9:
REVERSE LOGISTICS

LEARNING OUTCOMES

After completing this chapter, you should be able to

• define reverse logistics and understand the importance of reverse logistics
in supply chain management
• discuss the drivers of reverse logistics implementation and identify
benefits of effective reverse logistics management
• discuss the most important barriers to reverse logistics implementation
• explain the types and reasons for product returns in a typical supply chain
• discuss the reverse logistics process and related activities
 LEARNING OUTCOMES continued

• identify key decisions firms have to make during each stage of the reverse
logistics process
• compare the disposition options and explain the importance of accurate
disposition decisions
• illustrate and explain the reverse logistics process
• explain environmental standards applicable to reverse logistics.

Introduction
• Reverse logistics is the set of activities that is conducted after the sale of a
product to recapture value and end the product's lifecycle. It typically
involves returning a product to the manufacturer or distributor or
forwarding it on for servicing, refurbishment or recycling.
• Reverse logistics can have a significant impact on a company's bottom
line, in good and bad ways. For example, generous return policies can
encourage distributors and retailers to order more stock than they expect
to sell, which can increase inventory costs for manufacturers. Proper
disposal of products can minimize penalties from noncompliance with
environmental regulations.
• Like other supply chain management processes, reverse logistics can be
made more efficient and profitable with better planning, management and
execution, and is a key component of service lifecycle management.
 RL as a Critical Area of a Supply
Chain
• PESTLE Framework
• PESTLE stands for Political, Economic, Social,
Technological, Legal and Environmental factors. It
allows a company to form an impression of the
factors that might impact a new business or
industry.

Pestle Framework/Analysis
 DRIVERS OF REVERSE LOGISTICS IN
THE SUPPLY CHAIN

• Economic drivers
• Legislative drivers
• Environmental drivers
• Corporate citizenship and consumer
pressures

BARRIERS TO REVERSE
LOGISTICS IMPLEMENTATION

• Economic barriers
• Internal barriers
• External barriers
• Operational barriers
 PRODUCT RETURNS IN THE
REVERSE LOGISTICS PROCESS

• Manufacturer returns
• Distribution returns
• Consumer returns

PRODUCT RETURNS IN THE REVERSE LOGISTICS PROCESS continued

Figure 9.1 Types of product

returns and related reasons
in a supply chain
 REVERSE LOGISTICS PROCESSES AND
STRATEGIC CONSIDERATIONS
Figure 9.2 Reverse logistics
processes and activities in a
supply chain
Source: Developed by author

REVERSE LOGISTICS PROCESSES AND STRATEGIC CONSIDERATIONS continued

• Returns collection
• Inspection and sorting processes
• Returns processing
• Disposition processes
– Reuse option
– Product recovery options
– Material recovery option
– Waste management options
 ENVIRONMENTAL
MANAGEMENT: ISO 14 000
ISO 14000 is a series of environmental management standards
developed and published by the International Organization for
Standardization (ISO). The ISO 14000 standards provide guidelines
and frameworks for organizations that need to systematize and
improve their environmental management efforts.

It contains requirements for achieving and maintaining

environmentally sound standards of doing business. The entire
business process is considered, from product manufacturing to
product performance and, ultimately, product disposal.