Storage and Handling

Decisions

“Perfection is not attainable, but if we chase

perfection, we catch excellence.”
Vince
Lombardi

Chapter 12
CR (2004) Prentice Hall, Inc.
12-1
Storage/Handling Decisions
in Inventory Strategy
Inventory Strategy
• Forecasting Transport Strategy
• Inventory decisions • Transport fundamentals
• Purchasing and supply

CONTROLLING
• Transport decisions

ORGANIZING
scheduling decisions Customer

PLANNING
• Storage fundamentals service goals
Storage/handling
• Storage decisions • The product
decisions • Logistics service
• Ord. proc. & info. sys.

Location Strategy
• Location decisions
• The network planning process

CR (2004) Prentice Hall, Inc.

12-2
 Storage Decisions
Site Selection

 Finds a specific real estate site as a storage

location
 Weighted checklist is a good approach. Recall,

Factor Marginal
Factors Weights scores score

1 2 5 10
2 9 1 9
. . . .
. . . .
. . . .
12 4 8 32
Weighted score 286 12-3
 Storage Decisions (Cont’d)
Sizing the Facility
 From inventory policy, determine the amount of
inventory to be stored, that is, space needed

 Determine the facility’s seasonal use

 Balance the use of privately-owned space with

rented space—a mixed strategy

No-trend sizing problem

And
sizing with trend
CR (2004) Prentice Hall, Inc.
12-4
 Mixed Strategy for Warehouse
Space
Need for
some space
is seasonal
Rented
Space requirements, sq. ft.

space

Privately-
operated
space

CR (2004) Prentice Hall, Inc. Time 12-5

 The procedures of determining warehouse size

• Monthly demand information as follows

Month Demand, lb Month Demand, lb
Jan 66,500 Jul 1,303,000
Feb 328,500 Aug 460,900
Mar 1,048,500 Sep 99,900
Apr 2,141,000 Oct 15,300
May 2,820,000 Nov 302,200
Jun 2,395,000 Dec 556,700
• Monthly turnover ratio = 3
• 50% of warehouse size is used for aisles
• Firm can only use the rest 70% of warehouse
• Product size = 0.5 sq.ft. per lb and can be stacked
16 units high 12-6
 The procedures of determining warehouse size

• Warehousing equipment costs $30 per sq.ft. that

ammortized over 20 years and operated at $0.05
per lb. throughput.
• The annual fixed cost would be $3 per sq.ft.
• Warehouse rent costs $0.1 per lb. per month and
there is an handling charge $0.07 per lb.

What is the optimal private

warehouse size to be established?

12-7
The procedures of determining warehouse size

Month Demand, lb Space req., sq.ft. Month Demand, lb Space req., sq.ft.
Jan 66,500 1,979 Jul 1,303,000 38,780
Feb 328,500 9,762 Aug 460,900 13,717
Mar 1,048,500 31,205 Sep 99,900 2,973
Apr 2,141,000 63,720 Oct 15,300 455
May 2,820,000 83,929 Nov 302,200 8,994
Jun 2,395,000 71,280 Dec 556,700 16,558

12-8
 The procedures of determining warehouse size

• Select an initial private warehouse size to be

evaluated
• Calculate the percentage of demand that would be
stored at your warehouse on each month
• Calculate the monthly fixed and variable cost at the
private warehouse
• Calculate the percentage of demand that would be
stored at the rented warehouse on each month
• Calculate the monthlu variable and handling cost at
rented warehouse

12-9
Determination of a Mixed Warehouse Strategy for
a 60,000 sq. ft. Privately-Operated Warehouse

PRIVATELY OPERATED RENTED

Space
Warehouse Require- Private Monthly Monthly Rented Monthly Monthly
Throughput, ments, Allo- Fixed Variable Allo- Storage Handling Monthly
Month lb. sq. ft. cation Cost Cost cation Cost Cost Cost
Jan. 66,500 1,979 100% $ 22,500a $ 3,325b 0% $0 $0 $ 25,825
Feb. 328,000 9,762 100 22,500 16,400 0 0 0 38,900
Mar. 1,048,500 31,205 100 22,500 52,425 0 0 0 74,925 Private
94c 100,627d 4,282e 8,992f
Apr.
May
2,141,000
2,820,000
63,720
83,929 71
22,500
22,500 100,110
6
29 27,260 57,246
136,401
207,116 space
June
July
2,395,000
1,303,000
71,280
38,780
84
100
22,500
22,500
100,590
65,150
16
0
12,773
0
26,824
0
162,687
87,650
exceeded
Aug. 460,900 13,717 100 22,500 23,045 0 0 0 45,545
Sept. 99,900 2,973 100 22,500 4,995 0 0 0 27,495
Oct. 15,300 455 100 22,500 765 0 0 0 23,265
Nov. 302,200 8,994 100 22,500 15,110 0 0 0 37,610
Dec. 556,700 16,568 100 22,500 27,835 0 0 0 50,335
Totals 11,537,000 $270,000 $510,377 $44,315 $93,062 $917,754
a
[90,000 + (3  60,000)]/12 = $22,500.
b
66,500  0.05 = $3,325.
c
60,000/63,720 = 0.94.
d
2,141,000  0.94  0.05 = $100,627.
e
Given a monthly turnover ratio of 3 and 6% of the demand through the rented warehouse, then [(2,141,000  0.06)/3]  0.1 = $4,282.
f
2,141,000  0.06  0.07 = $8,992.

CR (2004) Prentice Hall, Inc.

12-10
 Storage Decisions (Cont’d)
Facility Configuration

 Configuration affects handling costs in a high

throughput facility, but less important otherwise

 Square or rectangular shapes are best. L-shaped

designs are poor unless conveyors are used.

 Single-story designs are popular for high throughput

facilities and land costs are not prohibitively high

CR (2004) Prentice Hall, Inc.

12-11
 Storage Decisions (Cont’d)

Space Layout

 Configuration of racks and aisles in the building

 Space layout affects building dimensions and size

Dock Design

 Determined by the number of rail cars along the

side of a building or the number of truck stalls
needed

CR (2004) Prentice Hall, Inc.

12-12
 Facility Evaluation
Suppose a pool point at St. Louis is being considered to
lower transportation costs between manufacturer and its
customers. Shipments currently are made directly from the
manufacturer’s inventory in New York. There is a $10/cwt.
handling charge at the pool point.

Direct shipments

Shipping Transport
volume, rate, Transport
Manufacturer Customer lb. $/cwt. cost, $
New York Boston 10,000 17.42 $1,742
New York Cleveland 12,000 24.12 2,894
New York Dallas 8,000 52.21 4,177
New York Seattle 10,000 57.09 5,709
40,000 Total $14,522

CR (2004) Prentice Hall, Inc.

12-13
 Facility Evaluation (Cont’d)
Shipments through pool point
From pool
New point to Transport Total
York to Inbound customers rate, Outbound transport
St Louis cost, $ at $/cwt. cost. $ cost, $
400 cwt.
@ 15.65
cwt. Boston 41.72 4,172
Cleveland 12.62 1,514
Dallas 10.25 820
Seattle 27.06 2,706
Totals $6,260 $9,212 $15,472

Now, add handling cost of $10/cwt.  400 cwt. = $4,000 for a

total cost of $15,472 + 4,000 = $19,472.
Conclusion No benefit to using the pool point.
CR (2004) Prentice Hall, Inc.
12-14
When is a Pool Point Likely
to be an Advantage?
•When shipment sizes are small
•When demand is far from source points
•When transportation rate economies are
significant
•When pool point operating costs are low
relative to transportation costs
•When transfer times are insignificant to
service
CR (2004) Prentice Hall, Inc.
12-15
 Handling Decisions
Controlling costs
 Handling is typically a labor intensive activity
 Costs are decreased by (principles)
- Reducing distance traveled
- Increasing number of units handled at one time
- Seeking multiple order picking in a single order-picking
round trip
- Increasing storage density

 Cost reduction is also achieved by

- Carefully planning the physical layout of the building
- Carefully locating the items within the order-picking area
- Using automation and mechanical assists as labor
substitutes
- Using computer systems to help plan the flow of work
through the building

CR (2004) Prentice Hall, Inc.

12-16
 Handling Decisions (Cont’d)
Factors to be considered on manual handling system
selection:
Do materials handling of outsiders impose
constraint on the choice
Does the warehouse design impose constraint on
the equipment choice
The level of system load bear heavily to equipment
selection
Product characteristics
Contingency planning
Financial evaluation

CR (2004) Prentice Hall, Inc.

12-17
 Equipment Selection
One-time purchase of equipment of different types
can be decided on basis of present value analysis,
or by selecting the alternative with the lowest NPV.
(1  i )n  1 Sn
NPV  I  C 
i (1  i ) n
(1  i )n
where
NPV = net present value of equipment over its useful life
($)
I = initial investment ($)
C = annual operating cost ($)
i = the discount, or hurdle, rate that such investments
are expected to return
Sn = salvage value in year n ($)
n = useful life of the equipment (years)
CR (2004) Prentice Hall, Inc.
12-18
Equipment Selection (Cont’d)
Problem Two type A forklift trucks can do the same
work as three type B trucks. Additional data are:

Two Type A Three Type B

Trucks Trucks
Total initial investment $20,000 $15,000
Useful life (planned) 7 7
Salvage value $ 5,000 $ 2,000
(estimated)
Annual operating $ 4,000 $ 6,000
expenses
Hurdle rate 0.20 0.20

CR (2004) Prentice Hall, Inc.

12-19
Equipment Selection (Cont’d)
Solution
Solve the NPV equation for the two alternatives.
For truck type A,
(1  0.2)7  1 5,000
NPVA  20,000  4,000   $33,000
0.2(1  0.2) (1  0.2)
7 7

For truck type B,

(1  0.2)7  1 2,000
NPVB  15,000  6,000   $36,040
0.2(1  0.2) (1  0.2)
7 7

Choose two type A trucks

CR (2004) Prentice Hall, Inc.

12-20
 Equipment Replacement
A financial problem
Alternatives are compared through present value
analysis

Typical design concerns differing degrees of

automation, capacity, and equipment life.

Example A forklift truck that costs $3,000 and requires $200

to operate in its first year, but operating costs increase at the
rate of $30 per year squared thereafter. Technological
improvement reduces operating costs by $20 per year. The
normal life of a truck is 10 years and the truck can be sold for
its remaining undepreciated value. A discount rate of
20%/yr. is used. When should the truck be replaced?
We calculate the equivalent annual cost according to
 n Cj Sn   i (1  i )n 
ACn  I    n  
 j  1 (1  i ) j
(1  i )  (1  i ) n
 1 12-21
 Replacement Example
(1) (2) (3) (4) (5) (6) (7)=
(1+3-5)(6)
Discounted Discounted Equivalent
Replace- Operating Salvage Discount Average
ment Initial Total Costs, Salvage Value, Factor, Annual
C i(1  i )
n
Cycle Invest- Operating
n

 j j Value, Sn Cost,
Time, n ment, I Costs, Cj j 1 (1 i ) Sn (1  i )n (1  i )  1 ACn
n

1 $3,000 $200a $167 $2,700b $2,250 1.20 $1,100

2 3,000 410 312 2,400 1,668 0.65 1,068
3 3,000 690 475 2,100 1,215 0.47 1,062
4 3,000 1,100 672 1,800 868 0.39 1,094
5 3,000 1,700 913 1,500 603 0.33 1,092
6 3,000 2,550 1,198 1,200 402 0.30 1,138
7 3,000 3,710 1,522 900 251 0.28 1,196
8 3,000 5,240 1,878 600 140 0.26 1,232
9 3,000 7,200 2,258 300 58 0.25 1,300
10 3,000 9,650 2,653 0 0 0.24 1,357
a
Computed as Cj =200 - 20(j-1) + 30(j-1)2 and accumulated when there is more
than one year in the replacement cycle Accumulates costs
b
Computed as Sn = I[1-0.1(n)] for years 1 and 2
CR (2004) Prentice Hall, Inc. 12-26
 Handling Decisions (Cont’d)
Product Layout

 Selection methods
- Out-and-back selection
- Picker routing
- Designated picker area

 Layout of picking area

- By complementary
- By compatibility
- By popularity
- By cube

CR (2004) Prentice Hall, Inc.

12-23
 Handling Decisions (Cont’d)
 Cube-per-order index

The
Thecube-per-order
cube-per-orderindex
indexisisthe
theratio
ratioof
ofaaproduct’s
product’s
average
averagerequired
requiredcubic
cubicfootage
footage forfor storage
storagetotothe
the
average
averagenumber
number of
ofdaily
daily orders
orderson on which
whichthe
the item
item isis
requested.
requested. The
Theproducts
productswith
withthe
the lowest
lowest index
indexvalue
value
are
arelocated
locatednearest
nearest the
theoutbound
outbounddock.dock.
 Layout example
 By popularity
 By cube
 By CPO

CR (2004) Prentice Hall, Inc.

12-24
 Layout by CPO
Inbound rail dock Highest index values

D D

F,D D

Lowest index values

C,B B,F

A,E E,G,C

12-25
Outbound truck dock
 Product Layout Example
(1 ) (2 ) (4 )=(2 )/250 (5 )=(1 ) (3 )
(3 ) (6 )=(5 )/(4 )
Average Required
Item Expected Average Number Storage Cube-
Size, Number of Inventory, of Daily Space, Per-Order
a
Product cu. ft. Orders/Yr. Units Orders cu. ft. Index
A 6.0 6,750 800 27 4,800 177.8
B 4.0 15,750 16,000 63 64,000 1015.9
C 1.0 11,250 25,120 45 25,120 558.2
D 8.0 25,500 18,600 102 148,800 1458.8
E 3.0 17,750 12,533 71 37,599 529.6
F 5.0 3,500 3,936 14 19,680 1405.7
G 15.0 6,250 907 25 13,605 544.2
Totals 86,750 77,896 313,604
a
Based on 250 selling days per year

By cube Basic data By CPO

By popularity

CR (2004) Prentice Hall, Inc. 12-16

 Handling Decisions (Cont’d)
Stock Arrangement
 On-the-square pallet layout
 Angular pallet layout

Stock locator-identification methods

 Fixed locator-identification method
 Random locator-identification method
 Zone location
Increases cube
utilization

CR (2004) Prentice Hall, Inc.

12-27
 Layout by Activity Profiling
Data mine orders to determine activity distributions.
Layout warehouse space according to activity levels.
Shipping

Returns
Bulk/high cube items
A high-
throughput
warehouse
Promotional
merchandise
layout for drug
store
replenishment
Bonded items
Split case items

Full case
items

Receiving 12-28
 Handling Decisions (Cont’d)
Order handling for increased handling
efficiency

 Product sequencing on picker list

 Picker zoning and the “bucket brigade”
 Order splitting
 Multiple order picking per picking pass
Stock Arrangement

On-the-square layout
Angular pallet placement
CR (2004) Prentice Hall, Inc.
12-29
 Pallet Layout in Warehouses
Storage bay

Top-down
view of
storage bays Center line of aisle
(a) On-the-square pallet placement

Storage bay

Center line of aisle

12-30
(b) Angular pallet placement