Economic Reasons:
- Savings from consolidation and spin-off operations;
- Transport savings;
- Production savings (economic lots);
- Discounts on quantities purchased and transportation fees;
- Savings due to the reduction of risk levels and stocks, due to advance of product finishing operations;
Reasons for Services:
-Keep an offer source;
- Cover time and space differences between producers and consumers;
- Attend to market fluctuations (seasonality, competition,...);
Support service level policies;
Warehouse Activities:
- Receipt of material
- Unloading, inspection and separation;
- Movement;
-Safety;
- Picking;
- Consolidation, breaking, mixing of loads;
- Unitization or palletization;
- Expedition;
- Troubleshooting documentation issues;
- Loading;
In some cases:
- Packing;
- Assembly of kits;
- Industrial assembly operations (completion of products);
- Temperature and humidity control;
Storage Operations Planning Objectives:
- Scale facilities and areas effectively (3 dimensions);
- Minimize storage operating costs while maintaining the desired level of service;
- Specify equipment and systems in the planned context;
- Maximize the effective use of space;
- Optimize physical and information flows;
- Provide flexibility;
Storage Policies
They result from the cost trade-off: Space x Movement
Random: These items are stored in random positions, resulting in lower space costs, compaction, and higher moving costs.
Dedicated: These items are stored in predefined positions, resulting in higher space costs and lower handling costs (higher traffic items are placed near entrances or exits)
Mixed: Dedicated by categories
Storage Structure
The decision on the type of structure will be supported by:
- Type of products
- Unit handled (pallets, boxes, fractions, ...)
- Mix moved
- Operation criteria
- Product rotation
- Vehicles, if existing
- Building, layout, budget.
Automatic Equipment
Benefits:
- Reduction of labor cost;
- Increased productivity;
- Increased control through more and better information;
- Best level of service;
Disadvantages:
- High cost of equipment and its maintenance;
- Time consumed for maintenance and training;
- Low flexibility for uncertainties in demand;
- Incompatibility with existing systems;
Warehouse Management Systems (WMS)
"Software management systems that optimize warehousing operations by efficiently managing information and completing activities with a high level of control and inventory accuracy"
- Based on information from carriers, manufacturers, suppliers and customers;
- Promotes the planning of processes in the warehouse;
- More efficiency in receiving, inspecting, checking stocks, separating, packaging and shipping goods;
- Cost reduction; Efficiency in labor, reduction of overtime and hiring;
- Improved customer service; monitoring, identification and correction of errors during verification;
Some operational features:
- Order processing,
- Inventory and batch control;
- Divergence control and forecasting ability;
- Automatic addressing and stock optimization;
- Analysis of performance and labor productivity;
- Itineraries and sequences of stops in the separation;
- Preparation of shipping documents;
- Database with shipping rates;
- Assistance in layout projects;
- Priority of downloads;
- Yard management;
Types of "WMS"
- Stock locators;
- Warehouse controllers, WCS
- Warehouse Managers, WMS
Strategic Storage
In Scaled Systems:
- Stocks distributed, decentralized;
- Less flexibility;
- High stock costs, greater management complexity;
- Transport savings, large batches;
In Direct Systems:
- Stocks concentrated, centralized;
- Greater flexibility;
- Stock savings, less management complexity;
- High transport costs, small batches;
In Advanced Distribution Centers, CDA
- Large volumes of long-haul, consolidated cargo arrive;
- Smaller volumes of fractional cargo, deliveries;
- Scale economy;
- Fast service;
- Consolidation of product mix from different suppliers
In Transit Point:
- Similar to CDA, but without stocks and a single supplier;
- Products received already have defined destinations or customers;
- Easy management, as it does not have stock activities, picking, ...;
- Simple structures, therefore low investments;
- Depends on large volume demands at regular frequencies;
In Cross-Docking:
- Similar to transit points, but with many providers;
- Cargo movement from the direct receiving area to the dispatch;
- Small stock areas and maximum use of vehicles and docks;
- High coordination between participants, using IT, for example barcodes;
In Merge In Transit:
- Extension of cross-docking combined with JIT;
- Distribution of high value-added, multi-component products produced in different specialized plants
- Coordination of transport flows from the management of production and transport lead times;
- Consolidation close to consumers, only when necessary and without large intermediate stocks;
- More rigorous coordination;
The manager is often faced with offers of discounts on the prices of the goods to be purchased depending on the quantities purchased.
These discounts can basically take two forms:
Case 1
Offer a percentage off the purchase price as long as you purchase more than a certain amount.
In the footwear sector, purchases of products and services represent 50 to 60% of industrial costs or even the invoicing value. In the automotive sector, this figure rises to 80% of the cost of a vehicle in Japan, 75% in the US and 70% in Europe. In light metalworking, these values are between 40 and 50%. Any of these examples shows that the management of stocks and purchases are relevant factors in the current management of companies. But stock management is not an isolated cell in the company. In summary, stock management, in addition to having its own organization that responds to the set of possible savings, is found, within the company, as a body integrated in a global organization which, if not sufficiently developed, blocks the its action and the achievement of its objectives.
Case 2
Variation of purchase prices according to levels of purchased quantities.
E.g.: up to 99 units price = 50/unit
from 100 to 199 units price = 45/unit
200 or more units price = 40/unit
How to decide?
Case1
Assuming that we are offered a quantity Qa at a unit price u
1st - Calculate the Qe (with the base unit price - u)
2nd - Calculate Qe’ (with discounted unit price – u’)’
Example
For a product with the following consumption profile:
u = 900 µm
S = 3500 units
a = 5000 µm
t = 20%
the supplier proposed to us to supply 4500 units at a price (u’) = 765 u.m. (15% discount).
Should we or should we not accept?
1st - Calculate Qe:
2º - Calcular Qe’
Como QE’ < QA nada podemos concluir pelo que é necessário calcular o custo anual global para U e U’.
Since Y(Qa)< Y(Qe) (302563 < 322973) we can conclude that it is advantageous to accept the supplier's proposal.
Caso 2
3rd Step
The quantity to be purchased is 600 units because it has the lowest economic cost (674167 u.m.). All others have higher economic costs.
BASED ON GAUSS LAW OR NORMAL LAW
We saw that the role of the Security stock is to prevent:
- Against an eventual increase in consumption;
- Against an eventual extension of the term.
It is, therefore, a matter of guarding against deviations from the values chosen to determine the Order Point. Then recalculate this Order Point.
Making:
If the standard deviation is chosen as the dispersion measurement parameter, the Order Point expression will be displayed:
TO PREVENT CONSUMPTION VARIATIONS DURING THE RISK PERIOD
In the case of the methods we are studying, the risk period is equal to the 'supply period' (this is actually a period of time in which any replacement, due to excess consumption or due to an extension of the period, brings additional costs) Being s (Q) the standard deviation of consumption during the supply period will come:
On what:
Z - Value provided in Table 1 (Ration Risk Function)
d - provision period
This method consists of ordering variable quantities at fixed intervals.
This method consists of ordering variable quantities at fixed intervals. It is used when we buy different materials from the same supplier and we intend to replenish them simultaneously, to reduce order launch costs, to reduce transport costs, etc.
The first question for us is when to order? In other words, how often do I place the order? – hence this method is also called the Fixed Review Cycle Method.
The second question is, of course, what quantity to order?
When to order?
The quantity that we must order, starting from zero, to protect ourselves during the supply period (p) and during the supply period (d), plus the safety stock (Ss) will be:
When placing the order, the Potential Stock (Sp) must be taken into account.
Security Stock Calculation
The Safety Stock is calculated according to point 9.6.2 (expression [2])
There are, however, authors who consider the safety stock given by the expression:
This expression leads to higher safety stock values.
Alarm Stock Calculation (SA)
It may happen that during the supply period (p) the consumptions are abnormal and before we reach the order launch date we may reach a rupture. To avoid this situation, a stock value (alarm stock) is defined which, once reached, will lead to an order outside the period. This stock must then face consumption during the supply period and consumption fluctuations in the same period. It is given by the expression:
The Point of Order method consists of ordering a fixed quantity, called Economic Quantity, as soon as the stock reaches the level of replenishment called Point of Order.
It is characterized by ordering fixed quantities on variable dates.
PROVISIONING TERM
The provisioning period of an article is the actual total period that elapses from the communication of the need to the availability of the article, that is, that, in addition to the deadline set by the supplier, it is necessary to add:
NOTION OF AVERAGE STOCK
Let's consider an item that is consumed at the rate of 800 units/year and suppose that its stock is renewed only once a year. The stock of this item evolves from 800 to 0 units in 12 months and its average level for the year is 400 units.
If the stock were renewed twice/year, it would vary from 400 to 0 units in 6 months and its average level would be set at 200 units.
It is the value of this average level that weighs on the financial burden of stocks and this shows that it is influenced by the quantity ordered and the number of orders placed in the year.
NOÇÃO DO "STOCK DE SEGURANÇA”
Suppose that for a given item the stock level is 80 and the consumption is 10 units/week on average. In this way, stock will be void in the 8th week.
To avoid breakage, it is necessary to place a new order taking into account the delivery time. If this was for 3 weeks, the order would be placed in the 5th week.
If consumption were regular, at the end of the 8th week the stock would drop to 0 at the precise moment when the order would enter the warehouse, returning to the stock level.
But this is all theoretical and there is no security
- nor against an extension of the term
- nor against changing the consumer law during the supply period
Therefore, the order will be launched so that it enters the warehouse, not when the stock is zero, but when it has fallen to a level called "safety stock".
ANNUAL COST OF RELEASING ORDERS
The costs of launching an order must be sought in all services involved in the purchase process: User Services (Production, Maintenance), Purchasing Service, Reception and Warehouse, Accounting. For each service, it is necessary to determine the expenses that are considered proportional to the number of orders. At the level of the Purchasing Service, the passage (launching) of an order entails administrative expenses related to the search for possible suppliers, the negotiation and writing of orders and the glance of late suppliers.
The annual cost of launching orders includes:
- the operating cost of purchasing services (salaries, rentals, office furniture)
- the costs of printed matter, mail and telephone
- buyers' travel costs
- the cost of receptions, tests and analysis
- the cost of procedures performed by the User Services
- the cost of accounting procedures: checking invoices, classification and registration, payment.
Knowing this cost allows you to calculate the average cost of launching an order.
Being:
- transit cost for ordering a particular item
- quantity of each order for this item
- annual consumption of the article
The average annual cost of launching orders, for a given item, is obtained by multiplying the number of annual supplies (S/Q) of that item by the unit ticket cost, ie:
If the annual consumption is constant, the greater the quantity of each order, the lower the number of annual orders and the lower the average launch cost per item.
Example of Order Entry Cost Assessment
- 1 to 2% of the total amount of orders launched (in value over the number of orders launched)
- in relation to an order, this cost can represent values between 15 and 20 euros/item (if we consider an average number of items per order between 2 and 3. we can say that the cost per order can vary between 30 and 60 euros) .
ANNUAL STOCK OWNERSHIP COST
The annual cost of ownership of the stock is expressed as a function of the value of the stock, through the annual rate of ownership of the stock ( t ). It comprises the cost of fixed capital, insurance, the cost of running the warehouse, obsolescence and depreciation and impairment losses.
- Cost of Fixed Capital
It is a dominant element among ownership expenses. It is up to the Financial Department to determine this, as it is linked to the company's investment policy. In fact, capital immobilized in stock is not available for other investments such as increasing or modernizing the means of production, advertising, etc. Only the Board can assess the average return it expects from these investments.
- Insurance Cost
Its amount is directly proportional to the stock value and the risk class of the stored materials.
- Warehouse Operating Cost
In practice, the global amount of depreciation and the annual operating expenses of the warehouse (salaries, rent, electricity, maintenance, etc.) are divided by the value of the stock.
- Cost of Obsolescence and Depreciation
This risk is difficult to calculate. In practice, the best method is not to do so and to limit the number of orders for items susceptible to obsolescence or depreciation.
- Cost of Losses due to Deterioration
Percentage calculated by statistics, after physical inventories. It aims to deal with losses that occur due to deficient handling or packaging and possible theft.
Determination of Annual Cost of Ownership of Stock
- if u is the unit value of an article
- and t the annual stock ownership rate
- u.t represents the annual cost of owning a unit
- then link this notion to the quantity ordered. Let us assume that a stock decreases linearly from Q to 0 and is instantly replenished by a quantity Q. We then know that the average stock will be Q/2 and the annual cost of ownership of the stock will then be.
Sample Annual Stock Ownership Fee Assessment
Interest on money ...........................................................................................6.0%
Difference in investment that could be made with capital held in stock ...4.0%
Reception and handling……………………………………………………………… 1.0%
Insurance ....................................................................................................0.5%
Obsolescence ……………………………………………………………………………… 1.0%
Depreciation – Losses – Deterioration – Theft …………………………………… 1.0%
On average, the annual stock ownership fee can represent 10% to 20% of the amount invested in stocks.
CALCULATION OF THE ECONOMIC ORDER QUANTITY
We therefore arrive at a paradox:
- or if you order large quantities and place few orders, that is to say, low order passing costs, but a high average stock level and, therefore, high holding costs
- or if you order in small quantities, but many orders, that is, we have a high transit cost, but a low average stock level and, therefore, low ownership costs.
As these two results are inverse, it is necessary to look for the solution that optimizes them. The resulting quantity is exactly the Economic Order Quantity.
Calculation of Economic Quantity (Qe):
The global annual cost of an article is the sum:
- the annual value of consumption
- the annual cost of launching orders
- the annual cost of owning the stock
then be:
The minimum of this function is found when the derivative vanishes (the variable is Q, the other values are constant)
CALCULATION OF ORDERING POINT
We designate by
d – Provisioning period expressed in months
Sf – Existing physical stock
Ec – Orders in progress
Only – Annual consumption
Res – Quantity reserved
Rupt – Rupture Amount
Ss – Security Stock
Pe - Point of Order
Sp – Potential Stock
If the consumption of the article is regular, the quantity in storage at the end of the supply period will be:
This quantity must be increased from the Safety Stock (Ss) if we want to prevent counter consumption variations during the supply period or variations in the supply period itself.
We get like this:
The expected consumption during the increased supply period of the Safety Stock is called Purchase Point (PE) and is represented by:
The Potential Available Stock (Sp) is given by:
Sp = Sf -Res +Ec
In practice, a replenishment will be triggered whenever:
The quantity to be purchased will then be equal to:
Qbuy + Qeconomica + PE- SP
Application example
1- Calculate the quantity to buy (stock) of an item with the following profile
How is the condition verified:
The quantity to buy will be
Qc = Qe +PE -Sp = 316 +121-100 = 337 un
Calculation of Economic Cost
If, applying the stock management method, the expected economic cost is greater than the current (actual) cost, it means that either the method was not well applied or there are variables whose values are not exact. In this case, the method is temporarily abandoned until we have more consistent values.
This method is part of the forecasting methods.
The main objective of forecasting methods is to isolate the consumption law that characterizes their use as best as possible. Three ways of approach can be used:
1) Analysis of the past as a basis for projections for the future
2) Analysis of the future based on the research of information outside the company related to the market, economic developments and technological trends
3) A mixture of the two approaches, essentially a correction of forecasts based on expectations of the future based on historical consumption projections.
As historical projection methods, three techniques are essentially used:
- Moving Average Method,
- Trend Line Method
- Exponential Smoothing Method
As part of our study we will look at the trend line method.
When there is a regular trend in the law of consumption, a line y = ax + b can be defined, called a trend line" which seeks to minimize the sum of squares of the distances between each consumption value and a line to be determined for the same abscissa .
being:
Q - ordered at each point
t - considered abscissa
n - number of points considered in the series under study
t - average of time values considered on the abscissa
Q- average of consumption values taken in ordinates
a - straight line slope
b - Ordered at origin
It is impossible to predict the consumption or need for a given article with perfect accuracy. This means that variations due to forecast errors or exceptional events introduce additional factors that affect planning. In order to anticipate unpredictable fluctuations, it is usual to introduce stocks in systems that make it possible to compensate for all variations, within the forecasts made.
To plan the stock it is necessary to know when the item should be stored and how many units need to be stored. For this it is necessary to predict the average consumption and the associated variance (standard deviation) in the stock model considered, so that, responding to requests in terms and in volume, the average cost involved is minimized. Stock control, particularly for the short term, is in many cases a more practical and cheaper way of taking into account the problem of order fluctuations than very sophisticated forecasting methods.
In this sense, the manager has to choose between three solutions:
- a crude forecast, which will naturally lead to the constitution of important stocks and with parallel ruptures
- an elaborate forecasting method, which can lead to a low level of stocks;
- a supply system directly related to consumption in the Just-in-Time concept.
The arbitration between these three solutions must be done on the basis:
- the relative value of each item;
- the law governing their behavior in the past;
- the associated cost;
- the accuracy of the method used.
However, it should be emphasized that we are dealing with independent consumption models. In dependent consumption models, in which the consumption of an item is directly related to the needs of the compound to which it is connected, techniques will be used that combine with those we will study, namely MRP – Materials Requirement Planning or Planning of Material Requirements Materials and the aforementioned Just-in-Time. Once the items are inventoried, identified and classified and the value of annual consumptions known, the company has the mechanisms to apply the management methods.
A first step to define the most economical method consists in the distribution of the items according to the ABC method, selecting the stocks according to the importance of the consumption value of each item.
But this distribution is not enough to completely solve the problem posed by the economic management of stocks. and that boils down to knowing:
WHEN AND HOW MUCH TO ORDER
The classic methods of stock management - the Point of Order method and the Supply Plan method (both included in the independent consumption methods), are supported by a database consisting of:
- cost of passing an order;
- cost of ownership of the stock;
- annual consumption;
- Unit price;
- deadline;
- law of monthly consumptions;
- risk of rupture accepted.
However, the theory of stocks is always based on an analysis of past records. Hence, the application of management methods should focus in particular on articles in classes B and C. Articles in class A should be the object of a specific treatment and should not be completely dependent on statistical laws.
The problem of economic management of stocks is not centered on the application of management methods, but on selecting the best method for each item, according to its identity, its consumption, price and term characteristics, and the costs associated with storage , refueling and rupture
The problem of economic management of stocks is not centered on the application of management methods, but on selecting the best method for each item, according to its identity, its consumption, price and term characteristics, and the costs associated with storage , refueling and rupture.
It is about ensuring the supply of users at the lowest total cost through:
a) minimization of ownership and passage costs
b) reduction of obsolete
c) reduction of breakages.
To this end:
it is necessary to know how to accurately calculate the average stock in quantity and value and evaluate the results obtained with the methods applied
To measure the efficiency of using a stock, indicators are used that reflect the relationship between consumption and the average stock held. One such indicator is the stock turnover rate.
Translates the number of times the stock is renewed. The higher this rate, the better the management adopted. This indicator can present values that are in a very wide range that can go from values less than one unit to 100, depending on the type of articles and the reference industry. However, a ratio higher than 5 for a traditional industry is considered positive.
If the annual consumption of an article is €60,000 and if the average stock in the period was €15,000, the rotation rate will be equal to 4, which means that the stock is renewed four times a year or every 3 times. 3 months. The average stock should be calculated by adding the stock at the end of each month throughout the year and at the end dividing by 12.
Another indicator used is the average stock coverage rate.
This indicator reflects the number of months of consumption ensured by the average stock.
There is also a third indicator that is translated by the stock break rate, which can be measured through the following ratio:
It is difficult to define an optimal value for this rate as it is a function of a large number of variables, however we can consider as reasonable values for the stockout rate a range between 2% and 4% for the global stock.
