Warehousing and Distribution

Lecture Series

Warehousing
WAREHOUSING provides a very strategic chain service that enables firms to store their purchases, work-in-progress and finished goods, as well as perform breakbulk and assembly activities, while allowing faster and more frequent deliveries of finished products to customers, which turns results in better customer service when the system is designed and managed correctly.

Warehousing
Distribution Center
Warehouses arent used to store things, but rather to receive bulk shipments, break them down, repackage various items into outgoing orders and then distribute these orders to a manufacturing location or retail center. These activities are collectively referred to as crossdocking.

Importance of Warehousing
Used to support purchasing, production, and distribution activities.

In retail setting, the warehouse might be regionally located, with the retailer receiving bulk orders from many suppliers, breaking these down and reassembling outgoing orders for delivery to each retail location, and then using private fleet of trucks or for-hire transportation providers to move orders to the retail locations.

Importance of Warehousing
Consolidation Warehouses
Firms may operate to collect large numbers of LTL shipments from nearby regional sources supply where these are then consolidated and transported in TL quantities to a manufacturing or user facility located at some distance from the consolidation center.

Types of Warehouses
Private Warehouses
Refer to warehouses that are owned by the firm storing the goods.

Benefits
1. Reduce the costs in the long-term.

2. Level of control.
3. Better utilize its workforce and expertise in terms of transportation, warehousing and distribution center activities. 4. Can generate income and tax advantages through leasing of excess capacity and/or asset depreciation.

Types of Warehouses
Disadvantages of Private Warehouses
1. Represent a significant financial risk and loss of flexibility to the firm. 2. Bind firms to locations that may not prove optimal as time passes. 3. Warehouse size or capacity is also somewhat inflexible, at least in the short time. 4. Insurance.

Types of Warehouses
Public Warehouses
For-profit organizations that contract or lease a wide range of light manufacturing, warehousing and distribution services to other companies.
Provide a number of specialized services that firms can use to create customized services for various shipments and goods.

Types of Warehouses
Types of Services for Public Warehouses
1. Breakbulk large-quantity shipments are broken down so that items can be combined into specific customer orders and then shipped out. 2. Repacking after breakbulk, items are repackaged for specific customer orders. 3. Assembly some public warehouses provide final assembly operations to satisfy customer requests and to create customized final products. 4. Quality inspections warehouse personnel can perform incoming and outgoing inspections. 5. Material handling, equipment maintenance and documentation services. 6. Short- and long-term storage.

Types of Warehouses
Benefits of Public Warehouses
1. Provide the short-term flexibility and investment cost savings. 2. Allows firms to test market areas and withdraw quickly if demand does not materialize as expected.

3. Cost for firms can be very small if the capacity requirements are minimal.

Types of Warehouses
Disadvantages of Public Warehouses
1. Lack of control provided to the goods owners. 2. Communication problems with warehouse personnel. 3. Lack of specialized services or capacity at the desired locations.

4. Lack of care and security that might be given to products.

Types of Warehouses
Value-added Specialied Services of Public Warehouses
1. Refrigerated warehouses 2. Customs clearance 3. Reverse logistics

4. Freight consolidation
5. Claims processing 6. Real-time information control 7. Direct-store deliveries

Risk Pooling and Warehouse Location

Warehouse Location Decision Affects the following:
1. Number of warehouse needed 2. Required capacities 3. System inventory levels

4. Customer service levels

5. Warehousing system costs

Risk Pooling and Warehouse Location

Risk Pooling
Describes the relationship between the number of warehouses, system inventories and customer service.
When market demand is random, risk pooling assumes that demand at the markets served by a warehouse system is negatively correlated (higher-than-average demand in one market area tends to be offset by lower-than-average demand in another market area). In smaller market areas, warehouses would then require higher levels of safety stocks. This is why smaller number of centralized warehouses serving larger market areas require lower overall system inventories, compared to a larger number of decentralized warehouses serving the same markets.

Differences Between Centralized and Decentralized Warehousing Systems

Safety Stock and Average System Inventory As the firm moves toward fewer warehouses and a more centralized warehousing system, safety stocks and thus average inventory levels across the system are decreased. The magnitude of the reduction depends on the demand correlations in the various market areas.

Differences Between Centralized and Decentralized Warehousing Systems

Responsiveness As warehouse centralization increases, delivery lead times increase, increasing the risk of late deliveries to customers and reducing the ability of the organization to respond quickly to changes in demand. Customer service levels may thus decrease, because of issues such as traffic problems and weather delays.

Differences Between Centralized and Decentralized Warehousing Systems

Customer Service to the Warehouse As centralization increases, customer service levels provided by the warehouses supplier is likely to increase, reducing the likelihood of stockouts for a given level of average system warehouse inventory.

Differences Between Centralized and Decentralized Warehousing Systems

Trasportation Costs As centralization increases, outbound transportation costs increase, as LTL shipments must travel farther to reach customers. Inbound transportation costs decrease, since manufacturers and other suppliers are able to ship larger quantities at TL rates to fewer warehouse locations. Overall impact on transportation costs thus depends on the specific warehouse locations, the goods stored, the locations of suppliers and the modes of transportation used.

Differences Between Centralized and Decentralized Warehousing Systems

Warehouse System Capital and Operating Costs As centralization increases, warehouse capital and operating costs decrease because there are fewer warehouses, fewer employees, less equipment and less maintenance costs.

Three Types of Warehouse Location Strategies

Market Positioned Strategy Locates warehouses close to customers, to maximize customer service levels. Recommended when high levels of distribution flexibility and customer service.

Three Types of Warehouse Location Strategies

Product Positioned Strategy Locates warehouses close to the sources of supply to enable the firm to collect various goods while minimizing inbound transportation costs. Works well when there are large numbers of goods purchased from many sources of supply and assortments of goods ordered by customers.

Three Types of Warehouse Location Strategies

Intermediately Positioned Strategy Places warehouses midway between the sources of supply and the customers. Recommends when distribution service requirements are relatively high and customers order product assortments purchased from many suppliers.

Lean Warehousing
As firms develop their supply chain management capabilities, items will be moving more quickly through inbound and outbound warehouses and distribution centers. These warehouses and distribution centers will thus have to develop leaner capabilities.

Lean Warehousing
Greater emphasis on crossdocking Warehouse employees must receive shipments and mix these quickly into outgoing shipments. Reduced lot sizes and shipping quantities Inbound and/or outbound shipping quantities are likely to be smaller and more frequent, containing mixed quantities of goods, and thus requiring more handling.

Lean Warehousing
A commitment to customers service quality

Warehouse employees must perform warehouse activities so as to meet the requirements of their inbound and outbound supplier and customers.
Increased automation To improve handling speed and reliability, more warehouse activities will become automated, from scanner/barcode computer tracing systems, to warehouse management software applications, to automated storage and retrieval systems.

Lean Warehousing
Increased assembly operations
As more firms implement lean systems and mass customization, warehouses will be called upon to perform final assembly operations to meet specific customer requirements.

Purchasing
Lecture Series

Purchasing
A key business function that is responsible for acquisition of the required materials, services and equipment. The act of obtaining merchandise; capital equipment; raw materials; service; or maintenance, repair and operating (MRO) supplies in exchange for money or its equivalent.

Purchasing
Categories
Merchant buyers - purchase their merchandise in volume to take advantage of quantity discounts and other incentives such as transportation economy and storage efficiently. Includes the wholesalers and retailers, who primarily purchase for resale purposes. Industrial buyers purchase raw materials for conversion purposes. Typically, these are the manufacturers.

Purchasing Process
Manual Purchasing System
Slow and prone to errors due to duplications of data entries during various stages of the purchasing process. Electronic Procurement System (e-Procurement) Electronic Data Interchange (EDI) proprietary nature requires a high start-up cost, making it inaccessible to small firms with limited budgets.

Electronic Purchasing System

Advantages of the e-Procurement System Time savings Cost savings Accuracy Real time Mobility

Trackability
Management Benefits to the suppliers

Sourcing Decision: The Make-or-Buy Decision

Outsourcing referred to buying materials or components that were previously made-in-house which is now commonly used to refer to buying materials or components from suppliers instead of making them in-house. Current sourcing trend is to buy equipment, materials and services unless self-manufacture provides a major benefit such as protecting proprietary technologies, achieving superior characteristics, or ensuring adequate supplies.

Sourcing Decision: The Make-or-Buy Decision

Reasons for Buying or Oursourcing Cost advantage Insufficient capacity Reason for Making Protect proprietary technology No competent supplier

Lack of expertise
Quality

Better quality control

Use existing idle capacity Control of lead-time , transportation, and warehousing cost Lower cost

Make-or-Buy Break-even Analysis

Break-even Analysis

A handy tool for computing the cost-effectiveness of sourcing decisions when cost is the most important criterion. Assumptions
All costs involved can be classified under either fixed or variable cost. Fixed cost remains the same within the range of analysis. Linear variable cost relationship exists Fixed cost of the make option is higher because of initial capital investment in equipment. Variable cost of the buy option is higher because of supplier profits.

Make-or-Buy Break-even Analysis

Example Arriba Company has the option to make or buy a part. Its annual requirement is 15,000 units. A supplier is able to supply the part at Php 7 per unit. The firm estimates that it costs Php500 to prepare the contract with the supplier. To make the part, the firm must invest Php25,000 in equipment and the firm estimates that it costs Php5 per unit to make the part. Will Arriba company Make or Buy the part? Why?

Enterprise Resource Planning

Lecture Series

ERP
Traditional or legacy systems continue to be used and modified to include other functional areas of an organization, the emergence and growth of supply chain management, ecommerce and global operations have created the nee to exchange information directly with supplier, customers, and foreign branches of organization.

ERP is the concept of the manufacturing information system thus evolved to directly connect all functional areas and operations of an organization and, in some cases, its suppliers and customers via a common software infrastructure and database.

ERP
Typical ERP system is an umbrella system that ties together a variety of specialized systems, such production and inventory planning, purchasing, logistics and warehousing, finance and accounting, human resource management, customer relationship management and supplier relationship management using a common, shared, centralized database. ERP is a broadly used industrial term to describe the multimodule application software for managing an enterprises functional activities, suppliers and customers.

ERP
Enterprise Resource Planning
Integrates the internal operations of an enterprise with a common software platform and centralized database system. Ties together supply chain member processes using he same information system.

Provides the mechanism for supply chain members to share information so that scarce resources can be fully utilized to meet demand, while minimizing the bullwhip effect and supply chain inventories.

ERP
ERP Transaction Process

1. Ordering 2. Availability 3. Manufacturing 4. Order Tracking

Implementing ERP Systems

ERP Transaction Process
ERP systems have continued to evolve, and integration of ecommerce, customer relationship management (CRM) and supplier relationship management (SRM) applications are now considered ERP requirements by most organizations. ERP Systems

1. Best-of breed
2. Single integrator

Implementing ERP Systems

Best-of-Breed Solution
Picks the best application or module for each individual function in the supply chain.

The resulting system includes several different applications that must be integrated to work as a single coordinated system to achieve the global scope required of the ERP. Disadvantage: Multiple software infrastructures and data bases may have to be used to link the multiple applications obtained from different vendors. This may severely affect the ability of the system to update the databases rapidly and efficiently.

Implementing ERP Systems

Single Integrator Approach
Picks all the desired applications from a single vendor for the ERP system.

All of the applications should work well together, and getting the system up and running should be easier.
As information technology continues to evolve and as competition increases in the ERP software market, ERP vendors are designing their products to be more compatible with each other.

Implementing ERP Systems

Reasons for ERP System Implementation Failure
1. Lack of top management commitment. 2. Lack of adequate resources. 3. Lack of proper training. 4. Lac of communication.

5. Incompatible system environment.

Implementing ERP Systems

Advantages of ERP System
Uses a single database and a common software infrastructure to provide a broader scope and up-to-date information, enabling management to make better decisions that can benefit the entire supply chain. Designed to take advantage of internet technology, thus, users are able to access the system via a the Internet. Helps organizations reduce supply chain inventories due to the added visibility throughout the entire supply chain.

Implementing ERP Systems

Advantages of ERP System
Helps organizations to standardize manufacturing processes.

Enables an organization, especially a multi-business-unit enterprise, to efficiently track employees time and performance and to communicate with them via a standardized method.
Small to medium enterprises are frequently turning to the use of subscription-based ERP systems owned by a third party and provided over the Internet which are termed cloud computing or software-as-a-service (SaaS models).

Implementing ERP Systems

Disadvantages of ERP System
Costly and very complex and have proven difficult to implement, particularly in large multi-business unit organizations. Designed around a specific business model based on specific business processes.

Adopting firm must restructure its processes to be compatible with the new ERP system.
Firms struggle to justify their investment and find ways to better utilize the ERP systems.

ERP Software Applications

Common Modules of ERP System
Accounting and finance. Customer relationship management Human resource management Manufacturing

Supplier relationship management

Supply chain management

ERP Software Providers

SAP Oracle

Peoplesoft purchased by Oracle in 2005

JD Edwards acquired by Peoplesoft in 2003 Baan sold to Invensys in 2000 and later acquired by SSA Global Technologies in 2003 which was bought by Infor Global Solutions in 2006 Microsoft purchased Great Plains in 2001 and Navision in 2002. Microsoft Corporation is the worlds largest software company, SAP is the largest ERP provider, followed by Oracle in terms of market value.