Supply Chain Management

Logistics - Warehousing
(Wisner Ch9)

1-1
 Objectives
LEARNING UNIT 5: LOGISTICS FUNCTION
RESULTADOS DE APRENDIZAJE:
Summarize the logistics function to improve supply
chain performance.
Apply and calculate different demand planning
techniques, manufacturing strategies and inventory
control systems in the context of the supply chain.
Demonstrate a basic level of application of the SAP
ERP software in a range of supply chain contexts.

17-2
 Outline for this session
Introduce the function of logistics
Identify the role of the warehouse
Introduce warehouse functions, layout, design and
operations
Distinguish between centralized and decentralized
warehouse systems
Calculate centralization on system inventories

17-3
 Logistics
When products are completed, they are delivered to
customers through a number of different modes of
transportation.
Delivering products to customers at the right time,
quality and volume requires a high level of planning
and cooperation between:
• the firm,
• its customers and
• the various logistics elements or services employed (such as
transportation, warehousing and break-bulk or repackaging
services)
1-4
 The Warehouse
Warehousing: holding or preserving goods in large
quantities from the time of their purchase or
production until their actual use or sale
Warehousing refers to the activities involving storage
of goods on a large-scale in a systematic and orderly
manner and making them available conveniently
when needed
The warehouse is where the supply chain holds or
stores and prepares goods for delivery

1-5
The warehouse as a production center
A warehouse can be considered as a production place in
which a set of inter-related processes are conducted:
• Receiving goods
• Identifying goods
• Dispatching goods to storage
• Holding goods
• Picking goods
• Marshalling the shipment
• Dispatching the shipment
• Operating an information system
1-3
The warehouse as a production center
The warehouse, like a manufacturing plant, it is also
composed by a set of departments or areas of work, that
can be defined as “specific facilities of production”
For example, picking activities of goods, marshaling and
dispatching orders, etc.
The logistics problem in a warehouse is to manage
resources with the main purpose avoiding delays and
queuing times. In other words, minimizing the total
process time (rapid service) and reducing operating
costs
WATCH: Behind the scenes of an Amazon warehouse https://www.youtube.com/watch?v=Y-lBvI6u_hw
1-7
Warehouse Functions

1-8
Warehouse Layout

1-9
 Warehouse Layout

Successful warehouse layouts must adhere to

the principles, regardless of material being
stored to maximize:
• the use of space
• the use of equipment
• the use of labor
• accessibility to all items, and
• the protection of all items

1-10
 Warehouse Layout Design
The goal of warehouse layout design is to
optimize your warehousing functions and achieve
maximum efficiency and space utilization.
Designing a new facility starts with analyzing
your current and projected data on the activities
in each of these areas, including the receiving,
shipping and inventory levels.
This data should be supported by other
considerations such as process flows, material
handling equipment, type and styles of racking
equipment, special handling requirements, and
personnel.
1-11
 Cross-docking
In many cases today, warehouses aren’t used just 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
In this case, the warehouse is more accurately described as
a distribution center and these activities are collectively
referred to as crossdocking
Cross-docking is a practice in logistics of unloading
materials from an incoming semi-trailer truck or railroad
car and loading these materials directly into outbound
trucks, trailers, or rail cars, with little or no storage in
between.
WATCH: Alcarin CrossDocking: https://www.youtube.com/watch?v=wevJ7GkAHqQ
1-12
 Space Requirement Planning
Consideration Description
Determine space Computed and summarized to estimate the overall building size
requirements requirements
Effective space utilization makes good use of total building volume
and not only the floor area
Determine current Easily adapted to new functions such as office (on ground or upper
and future needs levels), computer centers, or to include light industrial/fabrication
Accommodate need for future loading docks, truck space, and car
parking spaces
Technology and e.g. "just-in-time" storage systems, roof design with structural
business practice capacity to handle addition of future rooftop equipment, and fire
change protection for storage of materials with a greater fire hazard
Optimize space and Adequate pathways for material handling equipment such as forklift
circulation trucks, higher bays to take advantage of height allowances in the
space, including aisle widths, lighting design and need for mezzanine
Carrying flexibility Different methods of storage handling simultaneously for different
products
1-13
 Factors Affecting Warehouse
Layout & Planning
External
Site size & configuration
Access to site
Planning ad industrial regulations
Geography and geology of site
Financial considerations
Building factors (existing structures)
Internal
Flow of goods in the warehouse
Movement of people and equipment
Access to stock and congestion
minimization
Stock location, rotation (FIFO), checking
requirements and replenishment
procedures
Handling of goods in and out of the
warehouse
Supervision, safety and stock security
1-14
 Objectives for Efficient Warehouse
Operations

Provide timely customer service.

Keep track of items so they can be found
readily & correctly
Minimize the total physical effort & thus the
cost of moving goods in and out of storage
Provide communication links with customers

1-15
 Warehouse Operations
Inspection Repackaging Storage &
Receiving Picking Dispatch
and ID Holding
The physical Quality and Into unit loads Goods are Accessible Protective
unloading quantity for storage sorted into location and packaging if
check appropriate lots stock records needed
Recording of Stock keeping Moved to Selected for Documents
receipts unit (SKU) or storage order in arranged and
part number location required collated
quantities
Deciding Record and Maintained in Timed to meet Loaded and
storage enter data designated customer secured on the
location locations orders right vehicle
May include Protect from Order prepared
quarantine for damage and for shipping
live goods hazard risks

1-16
 Warehouse Operating Costs

Capital costs
Costs of space & materials handling
equipment
Operating costs
• Utilities – heat and light
• Cost of labor
Measure of labor productivity is the number of units
that an operator can move in a day

1-17
 Warehouse Management

Maximize productivity & minimize cost

Warehouse management must work with the
following:
Maximize use of space:
• space is the largest capital cost
Effective use of labor & equipment
• labor is the largest operating cost
• material handling equipment is the second largest capital
cost
1-18
 Warehouse Performance
Order picking is important for achieving high levels of
customer service; it traditionally also takes a high
proportion of the total warehouse staff complement and is
expensive.
The good design and management of picking systems and
operations are consequently vital to effective warehouse
performance.
Warehouse or Inventory Information System: Need to
know what is in the warehouse:
• The quantity on hand
• The quantities received
• The quantity issued
• The location of goods

1-19
 Risk Pooling
Risk pooling describes the relationship between the
number of warehouses, system inventories and customer
service
When market demand is random, it is very likely that
higher-than-average demand from some customers will be
offset by lower-than-average demand from other
customers.
Therefore, as the number of customers served by a single
warehouse increases, these demand variabilities will tend
to offset each other more often, thus reducing overall
demand variance and the likelihood of stockouts

1-20
 Risk Pooling
The differences between centralized (few) and decentralized
(many) warehousing systems are:
Issue Description
Safety stock and The fewer warehouses (centralized) system, safety stocks and
average (cycle) average inventory levels are decreased
inventory
Responsiveness As warehouse centralization increases, delivery lead times
increase, increasing late deliveries to customers and reducing
responsiveness. Customer service levels decrease
Customer service to As centralization increases, customer service
the warehouse levels from suppliers increases, reducing the likelihood of stockouts
Transportation costs As centralization increases, outbound (delivery) costs increase
Inbound transportation costs decrease to fewer warehouse locations.
Capital and operating As centralization increases, these costs decrease
costs
1-21
 Risk Pooling
The effect of risk pooling can be estimated
numerically by the square root rule
Where, the system average inventory (as impacted by
changing the number of warehouses in the system) is
equal to the original system inventory times the ratio
of the square root of the new number of warehouses to
the square root of the original number of warehouses:
Where:
𝑁2 S1 = total system stock for N1 warehouses;
𝑆2 = 𝑆1 S2 = total system stock for for N2 warehouses;
𝑁1 N1 = number of warehouses in the original system; and
N2 = number of warehouses in the proposed (new) system

1-22
 Risk Pooling
Square Root Rule Example
 Perkins Western Boot Emporium currently owns two
warehouses in Houston and Seattle to store its boots before
shipping them out to various retail customers across the
western U.S.
 Their current average inventory level is approximately 6,000
pairs of boots at each warehouse. He has found that this level
of stock will result in warehouse stockouts approximately 1%
of the time. They want to know the impact on average
inventory if they change to one warehouse and keep the low
stockout rate

𝑁2 1
𝑆2 = 𝑆1 = 2 x 6000 = 8, 511 8510.63
𝑁1 2
Av. Stock decreases by 6,189 pairs of boots
Problem Exercises: Complete the Square Root Rule problems in the handout 1-23
 SqRoot Rule Exercises
1. 27, 901 units total for the 2 warehouses (answers
may vary due to rounding)
2 1.41
𝑆2 (3 𝑤𝑎𝑟𝑒ℎ𝑜𝑢𝑠𝑒) = 8 ∗ 7000 = 56000 = 27,901
8 2.83
2. 12710 units total for the 3 warehouses; and 7347
units total for one warehouse (answers may vary due
to rounding)
3 1.73
𝑆2 (3 𝑤𝑎𝑟𝑒ℎ𝑜𝑢𝑠𝑒) = 6 ∗ 3000 = 18000 = 12, 710
6 2.45
1 1
𝑆2 (1 𝑤𝑎𝑟𝑒ℎ𝑜𝑢𝑠𝑒) = 6 ∗ 3000 = 18000 = 7, 347
6 2.45
1-24
 SqRoot Rule Exercises
3. a. 54845 items in 8 warehouses (answers may vary due to rounding)
8 2.83
𝑆2 (8 𝑤𝑎𝑟𝑒ℎ𝑜𝑢𝑠𝑒) = 15 ∗ 5000 = 75000 = 54,845 𝑖𝑡𝑒𝑚𝑠
15 3.87
b. Inventory level at 15 warehouses = 75, 000 items. Holding Costs = volume * (% * Price)
= 75000 * (0.025 * 225) = $421, 875
Inventory level at 8 warehouses = 54845 items. Holding Costs = volume * (k * C) =
54845* (0.025 * 225) = $308, 503
Holding cost target = 20% reduction. (421875-308503) / 421875 is a reduction of 26.9%.
The centralization of the warehouses meets the 25 % target.
4. a. 7, 753 cans of paint in 6 warehouses (answers may vary due to rounding)
6 2.45
𝑆2 (6 𝑤𝑎𝑟𝑒ℎ𝑜𝑢𝑠𝑒) = 10 ∗ 1000 = 10000 = 7,753 𝑐𝑎𝑛𝑠
10 3.16
b. 𝑅𝑂𝑃 = 𝐷 ∗ 𝐿𝑇 + 𝑍𝜎𝑑 𝐿𝑇 = (85 * 6) + 1.9 (4 6 ) = 525 cans of paint (522.26)

1-25
 Bibliography
Wisner/Tan/Leong. Principles of Supply Chain
Management: A Balanced Approach 3rd Ed. Ch 9, Págs.
299 - 339

Additional Material From:

Clips:
8 Best Practices for Inventory Management
https://www.youtube.com/watch?v=3qLV6tfLfk0
Alcarin CrossDocking:
https://www.youtube.com/watch?v=wevJ7GkAHqQ

1-26