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Analyzing time and inventory

To help understand the relationship of time and inventory it is useful to be aware of the concept of activities that add value to the supply chain and those that do not add value. An activity that adds value is one that provides a positive benefit to the product or service being offered. This can be assessed in terms of whether the customer is prepared to pay for this activity. An activity that dose not add value is one that can be eliminated from the supply chain process and will not materially affect the finished product as far as the final customer is concerned. The analysis of supply chain activities in terms od the extant to which they add value to a product has thus become an important factor in the assessment of supply chain efficiency. The aim is to identify and eliminate those activities that add cost but do not add value. The holding of inventory within a supply chain is one such activity and many companies are now trying to eliminate unnecessary inventory from their supply chains.

One method of highlighting unnecessary inventory is through the use supply chain mapping. This technique enables a company to map the amount of inventory it is holding in terms of the lengh of time that the stock is held. An example of this technique is provided in Figure 13.3. This is an example from the US clothing industry. It shows:

· Value adding time which is represented along the horizontal axis. This shows the total of the manufacturing and transport time for the whole supply chain process from the initial raw material fiber to the supply of the finished product to the end user. It is value adding because the product is changed either through a production process or through a movement process. It amounts to 60 days.

· Non value adding time which is represented by the vertical lines that rise from the horizontal axis. These show the various occasions when the part prepared or finished product is held as some from of inventory. This is adding no specific value to the product. This amounts to 115 days.

The total time or pipeline time which is the addition of the value adding horizontal time and the non value adding vertical time. This there fore includes all the time that it takes through all the different manufacturing storing and transport processes. This is a total time or volume of 175 days.

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The lead- time gap

One of the major reasons for the build up of finished goods inventory is because of the long time that it takes to manufacture and deliver products. Ideally the customer would be prepared to wait the full amount of time that is required. If this were the case there would be no need to hold any stock at all. This of course happens only rarely for special made to order products. The vast majority of products are required either immediately as for many consumer products at the point of sale in shops or within a short timescale as for industrial product and also for consumer products when the retailer orders them in the first instance from the manufacturer.

The total time it takes to complete the manufacture and supply of a product is often known as the logistics lead time. Customers are generally prepared to wait for a limited period of time before an order is delivered. This is the customer’s order cycle time. The difference between the logistics lead time gap is illustrated in Figure 13.1. It is the existence of this lead time gap that necessitates inventory being held. The extent of the lead time gap measured in length of time determines how much inventory must be held. The greater the lead time gap the greater the amount of inventory that must be held to satisfy customer requirements. Thus the more this gap can be reduced the less inventory will be required. Recently there has been a move towards indemnifying different approaches for reducing this gap. A number of these approaches are described in the next section.

Inventory and time

High levels of inventory are used by many companies to hide a number of problems that occur throughout the supply chain. Companies may have sound and acceptable reasons for holding stock as outlined in the previous chapter but some may also used high levels of inventory to protect themselves from those problems that they are unable or unwilling to solve by more direct means. The implications of this are illustrated in Figure 13.2. This shows that there is significant waste in many logistics systems made up of unnecessary inventory the difference between A and B. This is used to cover up problems such as:

· Unreliable suppliers;

· Inaccurate forecasts;

· Production problems;

· Quality issues;

· Unpredictably high demand.

There is of course a very real cost associated with these high inventory levels.

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Different inventory requirements

There are some important differences in the way inventory requirements are determined that are related to the type of demand for the products in question. The nature of this demand should have an influence on the approach adopted to manage the inventory. One important way of differentiating between demand types is that of dependent or independent demand. The type of demand will have an influence on the nature of the inventory management technique chosen. Independent demand occurs where the demand for one particular product is not related to the demand for any other product.

Consumer demand for a desktop computer is for example independent. Indeed most consumer products are independent of the demand for other finished goods. This is an important distinction because products with an independent demand necessitate the use of forecasting to help determine expected demand levels and associated inventory requirements. The EOQ approach is commonly used for products with independent demand.

Dependent demand occurs where the demand for a particular products is directly related to another product. In the case of the desktop computer for example the demand for the power leads or the connecting cables would be directly dependent on the number of computers stocked as finished goods. Dependent demand can be classified in two ways. It may be vertical eg the chip actually required in the production of the computer or it may be horizontal eg the instructional manual that is packed with the computer as a finished product.

Typically most raw materials components and sub assemblies have their demand dependent on the demand for the finished product. Because of this dependence there is a far more limited requirement for the forecasting of the demand for these elements as the actual needs are directly related to the finished product requirements themselves. MRP and MRP|| systems are used for these elements.

One feature that has become particularly relevant in recent years concerns the nature of the demand requirement. It it a push system or a pull system? A push system is the more traditional approach where inventory replenishment is used to anticipate future demand requirements. A pull system is where the actual demand for a product is used to pull the product through the system. A push approach to inventory planning is usually based on a set plan that is predetermined according to certain rules of inventory reordering. This approach is a proactive one in the sense that it is planned on the basis of estimated or forecast demand for products from customers.

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Co-operative warehouses

These warehouses are owned managed and controlled by co-operative societies. They provide their members with warehousing facilities at cheaper rates. Container freight stations CFS/ inland container depots ICDs.

CFSs/ ICD are custom- bonded facility with public authority status for the handling and storage for containers. These depots equipped with warehousing space adequate handling equipment and IT infrastructure. Services of CFS/ICDs include the following:

· Loading/ unloading

· Receipt/ dispatch of goods

· Transit operations by road/ rail to and from the port

· Stuffing/ de- stuffing of containers

· Customs clearance

· Consolidation and desegregation of less than container load LCL cargo

· Temporary storage of cargo and containers

· Repair and maintenance of containers

· Refrigerated warehousing

· Hub- and- spoke services

CFS is an off- dock facility located near the service port. ICD on the other hand is located in the hinterland. CFSs/ ICDs act as consolidation points, transit storage locations and ease the compliance procedure with local customs reduce damage/ pilferage optimize container utilization and reduce transport/ inventory cost.

Cold storage

A cold storage is a temperature- controlled storage space and caters to industries such as agriculture horticulture fisheries and aquaculture, dairy and processed food. The highly fragmented cold storage market has 5,386 cold storage units with he total capacity of nearly 23.7 million M.T More than 56% of the capacity is utilized by potato storage while the rest is used for other commodities. Currently the Indian cold storage market is valued at Rs 117 billion and is expected to reach Rs 558 billion by 2015. Sixty- five per cent of the total installed capacity of cold storage in the country is located in Uttar Pradesh and West Bengal. The key activities involved in cold storages are as follows:

· Aggregation

· Sorting

· Pre- cooling

· Packaging from farms to manufacturers

Integrated cold storage warehousing has huge potential in India. The cold storage system when supplemented with temperature- controlled transportation connecting farm- level storage facilities processing units and distribution outlets will not only improve efficiency but will also solve our problem of wastage of agricultural products. The cold chains market is dominated by private players despite the presence of state- owned players. Though the government has pro incentives in tax and duties to ecourage cold chain players the results are yet to be seen. In addition cold chain and container- handling facilities should also be augmented at major sea and airports to target global markets.

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Types of warehouses

Traditionally warehouses in India were broadly classified in to public private bonded government and co- operative warehouses. Lately the concepts of cold chains container freight stations CFS and inland container depots ICD have been gaining importance. Increasing post harvest losses have propelled the development of cold storages to enable the storage of agricultural produce almost throughout the year. Similarly growing international trade and manufacturing activity has led to growing container trade and a greater emphasis on the concept of CFS and ICDs for easy maintenance and reduced pilferage of cargo.

Public warehouses

Warehouses licensed by the government to private entities individual or cooperative societies to store goods of the general public are called public warehouses. Usually these warehouses are set up at transportation points of railways highways and waterways, providing the facilities of receipt, dispatch loading and unloading of goods. They are rented out against a certain fee. The government also regulates the functions and operations of these warehouses used mostly by manufacturers, wholesalers, exporters importers government agencies etc. they are economical and easily available storage facilities for small manufacturers and traders too. Some warehouses provide facilities for the inspection of goods and also permit packaging and grading. The public warehousing receipts serve as goods collateral securities for borrowings.

Private warehouses

These warehouses are owned by private entities or individuals and are used exclusively for the goods owned imported by or on behalf of the licensee. The warehouses are usually constructed at strategic locations to cater various manufacturing business and service units. They are flexible enough to be customized in terms of storage and placement, according to the nature of the products.

Bonded warehouses

The concept of bonded warehouses was developed in order to facilitate the deferred payment of customs duty by entrepreneurs exporters and importers to enable them to carry out their operations with least investment. These warehouses are used to store imported goods under an undertaking or bond which does not allow the release of goods until the custom duties are paid. These are generally owned managed and controlled by both government and private parties and are established near ports. Government and private parties together manage bonded warehouses. Currently the central warehousing corporation operates 75 custom bonded warehouses with a total capacity of nearly 0.5 million MTs located at Ahmadabad, Bangalore, Bhopal, Chandigarh, Chennai, Delhi, Hyderabad, Jaipur, J N port, Kolkata, Kochi, Lucknow and Mumbai.

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Overview of warehousing India

The Indian logistics market has evolved from traditional transport companies to a full-fledged logistics service provider which offers various supply chain services such as transportation warehousing and other value additions. Traditionally there existed only pure transport or warehousing service providers of the in house nature. The trend changed towards providing customized services and started being outsourced to specialized players in the industry. Thus emerged the concept of third party logistics 3PL where companies provide outsourced or third party logistics services to companies for part or sometimes all of their supply chain management functions. Third party logistics providers typically specialize in integrated operation warehousing and transportation services that can be scaled and customized based on market conditions and the demands and delivery service requirements for their products and materials.

Has also led development of improved international trade activities. Increasing market sophistication changing customer choices and global competition are pressurizing manufacturers to provide better goods and services to customers at lower costs. In a way this has put the pressure on managing costs more efficiently. Various industries have taken up initiatives to cut down on direct material costs administrative costs and have tried streamlining internal production processes. Yet in has been observed that the maximum cost savings can be achieved by managing the supply chain efficiently.

The supply chain is a vital component efficient planning of which can bring down costs to a great extent. Manufacturers are working towards leaner supply chins with lesser lead times in order to gain competitiveness in the market. Transportation warehousing and distribution are the critical components of the entire supply chain. With manufacturing activity increasing in the last few years logistics has gained equal importance in order to provide better goods at lesser cost.

The logistics market in India was valued at Rs 5.6 trillion in 2010 and is forecast to grow at CAGR of over eight per cent over the next five years. World bank has ranked India 47^th among 150 countries in terms of logistics performance in 2010 its potential in the future. It is forecast to grow annually at a rate of 15 to 20% to reach Rs 17 trillion by 2015. However logistics costs in India constitute around 13 to 14% of its GDP against seven to eight per cent being spent by developed countries such as the US Japan and other European countries. This is due to market constraints such as highly fragmented structures poor infrastructure and complicated tax structure.

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Indian Warehousing Show 2012

The Indian logistics market is poised to gather greater momentum with the emergence of India as a manufacturing hub and improving multimodal transportation infrastructure. India is seeing significant growth in the logistics sector due to rise in manufacturing sector. Inspired by the economic boom and the massive investment on infrastructure the logistics market in the country is set to double by 2012.

The markets that have been responsible for the rapid growth of Indian logistics include the growth of organized retail industry. Commodity markets and growth in manufacturing and development of Special Economic Zones (SEZ). Indian logistics industry is expected to grow annually at the rate of 15 to 20 percent reaching revenues of approximately $385 billion by 2015.

There are about 110 logistics parks spread over approximately 3500 acres. The estimated cost of these logistics parks is about $1 billion and an estimate of 45 million sq. ft of warehouse space with an investment of $500 million is expected to be developed by various logistics companies by 2012.

Many SEZs have necessitated the development of logistics for the development of logistics for the domestic market as well as for global trade. Mumbai, Kolkata Chennai and Hyderabad have become preferred location for logistics parks. These locations are characterized by excellent port rail and road connectivity and are witnessing significant investment in infrastructure. Eight logistics parks with an approximate investment of $200 million are 600 acres of land around Mumbai.

Seeing the rate of development there are plans for 4 logistics parks spread across approximately 400 acres. Centers like Haldia, Falta, Pargana, Dankuni, Kharagpur, Bantala and Durgapur are expected to witness substantial logistics activities in the near future. Five logistics parks are being set up in Hyderabad, spread across 220 acres and approximately 10 million sq. ft of warehouse space coming up by 2012.

Dedicated freight corridors by the railways and improvements in coastal shipping facilities along with the construction of massive state-of-the- art logistics parks at key distribution hubs are helping to meet the specialized warehousing needs of freight forwarders and industry players. The non-major ports are driving the traffic growth with the traffic at these ports growing at a very healthy rate.

This strong growth is expected to continue, with the share of the non- major ports increasing further. After analyzing the future prospects of the logistics market in India Minch communications a business to business exhibition and conference organizer based in Delhi/NCR launched India warehousing show in April 2011.

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Tricks to select opportunity in Warehouse and Storage

The show received great response from all attendees having about 6714 visitors and 210 conference delegates who attended the technical session. The conference focused on Developing Effective Strategies to build profitability in warehousing and supply chain logistics operations. Topics like the present scenario of the Indian warehousing industry overview of Asian industry and India’s role and growth inhibitors of the sector how leveraging regulatory framework can help sector maximize growth and how Mobility Accelerates the Adaptive supply chain etc. were discussed.

Encouraged by the success of the show in 2011 Minch decided to make it an annual event based in Delhi/NCR. India warehousing show 2012 will see a larger number of participants with more exhibit area. The show visitors will get a chance to know the latest developments and innovations in the area of warehousing and supply chain sector. The ones seeking some information to improve their knowledge of logistics supply chain material handling cold storage etc. India warehouse show 2012 is the most appropriate platform for them. Further concurrently India warehousing conference 2012 would give an insight in to the various aspects of modern warehousing logistics cold storage and material handling. Like it 2011 edition it will again a two days program.

Opportunities

Although India has a unique geography with over 7,000 kms of coastline a diverse demography and huge domestic market the country still only processed just over 7.7 million containers last year as against Dubai 12 million, Singapore 24 million and China over 186 million. Global companies selling their products in India are using these economies as transshipment hubs and regional distribution centers.

These hubs have excellent road and port infrastructures. It is their logistics parks known as free Trade Zones FTZs which help to attract this container movement. In order to compete India needs free trade and warehousing Zones FTWZ and domestic distribution Centre’s which are supported by a rail infrastructure with rail as the preferred mode of transportation rather than road.

Developments

The government of India introduced the free trade and warehousing zones FTWZ policy as a part of foreign trade policy FTP2004- 2009 governed by the SEZ ACT 2005 and SEZ rules 2006. It is a deemed foreign territory within Indian soil. The FTWZ regulatory framework should provide India with the much needed impetus to drive its economic growth to the next level while truly leveraging the nation’s vast domestic market and purchasing power parity. With FTWZ Indian can emerge as a major economic hub for companies importing exporting and providing value added services for distribution in India or other regional countries.

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Road transportation sub-segment

India has the world’s second-largest network of roads 3.83 million km after US’s 6.43 million km national highways form only 2% of the total by length and carry about 40% of the traffic. About 80% of the roads in India are village roads. The road sector is significant to India’s Transportation segment as it account for nearly 65% of the freight and 85% of the passenger traffic in the country. This sub-segment is highly fragmented with the truck operators owning less than five trucks estimated to account for over 75% of the truck fleet.

It is estimated that 10% of the market belongs to those with 6-10 trucks; 4% to those with 11-15 trucks; 3% belongs to those with 16-20 trucks; and only 4% of fleet belongs to those with more than 20 trucks. This industry is also characterized by intense competition which is the result of relatively lower capital requirement ease of obtaining driving licenses and permits.

The small operators are involved mainly in the physical movement of goods and depend on brokers and other fleet operators who in turn depend on the booking agents for obtaining business. The small operators are not in a position to perform functions of aggregating handling delivering of cargo and marketing. Besides they do not have geographical reach and necessary infrastructure to tap business on a continuous basis and thus rely on brokers.

The large fleet operators are small in number and generally operate throughout the country. These fleet operators primarily work on a hub and spoke model. The hub and spoke distribution system enables optimization of costs and higher revenues for the transport companies and fleet operators. These transport companies generally have formal contracts with the users which is very rare in the case of small operators.

Large operators can also bid for the contracts with customers. They utilize the services of the smaller operators when additional vehicles are required. Over the period FY 2001-07 for which detailed data is available from the Government of India Go I the average annual growth in the road sector was around 14.3% at current prices and 9.6% at constant prices. Which was much higher than the overall GDP growth during the period.

Railway Transportation Sub- Segment

India has the second largest rail network 63,000 km in the world. The Indian Railways have grown in to a vast network of over 7,500 railway stations a fleet of about 8,600 locomotives, 41,000 coaches & over 2,40,000 wagons.

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The goods are then transported by and of the modes of transportation rail road air etc. The transported goods are brought to a warehouse and stored. The goods are then re-packed in the format to be sent to the customer and then finally delivered to the customer. Logistics is a critical component relevant across agriculture manufacturing and service sectors and has to be optimally managed for smooth functioning of production and distribution operations. Additionally logistics cost account for a major component of the input in all sectors more so in the case of sectors such as cement steel automobiles FMCG retail pharmaceuticals etc.

With rising competition in the sectors that use logistics services it has become even more important to enhance the efficiency of the system and use the cost benefit in increasing the company’s competitiveness. Besides with increasing globalization a larger number of multi- national companies MNCs are sourcing manufacturing and distribution goods on a global scale and thus need more complex supply chains to be managed. Given such developments the transportation logistics warehousing and packaging sector is expected to become a more specialized and niche expertise area where high premium will be charged for increased quality and quantity of service delivered by logistics service provider.

Industry size and growth of the transportation logistics warehousing and packaging sector

The annul logistics cost in India is valued at Rs 6,750 billion u$$ 135 billion and it is growing at 10% annually. Logistics cost by value accounts for around 13% of the GDP of India this is much higher than that in the Us 9% Europe 10% and Japan 11% but lower than that in countries such as China 18% and Thailand 16%. In particular the percentage wise share of transport cost an important constituent of total logistics cost incurred by a nation by value of GDP has been steadily increasing.

The high cost of logistics in India when compared to developed nations may be attributed to poor quality of infrastructure and inadequate service quality vis-à-vis counterparts such as US and Europe. The transportation logistics warehousing and packaging sector in India is dominated by the unorganized segment small truck owning companies linked to intermediate brokers or transport companies small warehouse operators custom brokers freight forwarders etc.

The organized segment accounts for less than 10% of the total logistics market in India.

As is the case with other industries the employment is distributes across worker or supervisor or management levels in all segments with some unique feature particular to specific segments such as third party logistic providers etc.

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Packaging sector

Logistics is defined as a business planning framework for the management of material service information and capital flows. It includes the increasingly complex information communication and control systems required in today’s business environment. It is also defined as the procurement maintenance distribution and replacement of personnel and material.

A typical logistics framework consists of physical supply internal operations and physical distribution of goods and services. The global annual logistics spend is valued at about USD 3.5 trillion. The annual logistics cost for the USA is about 9% of GPD and internationally it varies between 9% and 20% of the GDP.

The Us logistics market is the largest in the world and account for one third of the world logistics market. The global logistics industry has registered significant growth in the last decade wherein the big driver has been the emergence on Third Party Logistics 3PL and Fourth logistics 4PL players in industry who are expected to play and much more important role in the years to come.

The global logistics industry is characterized by high costs of operations low margins shortage of talent infrastructural bottlenecks alongside increasing demand from clients for providing one stop solutions to all their needs and for investing in progressive technology. All these factors will further decrease the margins involved in this industry and fasten the process of consolidation in industry through acquisitions mergers and alliances.

The entities in a typical supply chain are the supplier the manufacturer the distribution the retailer and the customer. Goods information and finance move unidirectional or bi-directionally between these entities. A typical supply chain is as shown below. The terms logistics and supply chain management SCM are typically used interchangeably in common parlance though there is a subtle difference between the two.

While SCM is more strategic in nature logistics is more operations oriented. Logistics can be considered as a part of SCM which encompasses planning activities implementation control of the efficient forward and reverse flow and storage of goods services and related information between the point of origin and the point of consumption in order to meet customer and legal requirements. The activities involved in a typical supply chain are typically inbound activities or outbound activities inbound logistics refers to activities relating to bringing goods in to the organization while outbound logistics deals with activities relating to taking the goods out of the organization. The value chain for logistics is as shown below goods that are received from the manufacturer are loaded stuffed in to containers of the right size.

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1. Serration- this enable goods coming into a warehouse to be sorted in to specific customer orders immediately on arrival. The goods then go directly to order collation.

2. Packing and shipping- picked goods as per the customer order are consolidated and packed according to customer order requirement. It is shipped according to customer orders and respective destinations.

3. Cross- docking- move products directly from receiving to the shipping dock- these products are not at all stored n the specific locations.

4. Replenishing- this is the movement of goods in larger order quantities for example a whole pallet at a time from reserve storage to order picking to ensure that order picking locations do not become empty. Maintaining stock availability for order picking is important for achieving high levels of order fill.

1.7 Activity profiling

Warehouse activity is primarily divided in to two activities

· Item activity profile

· Order activity profile

Order activity profile includes

Order activity profile includes

· Order mix distribution

· Lines per order distribution.

· Cube per order distribution.

· Lines and cube per order distribution.

Order Mix distribution

Variety of order mix distribution that are helpful plotting warehouse operating strategy. Three are considered the most helpful are the family mix distribution, the handling unit distribution and the order increment distribution.

Family mix Distribution

In many cases operating strategy of the warehouse is dictated by the order mix- the extent to which orders require items from multiple families of items. If the orders are pure means only one of the item then it is early indicator that zoning the warehouse will create a small warehouse within the warehouse will ensure the goods productivity and customer service.

Example of family Mix Distribution

Items A which carry more volume and weight has to be considered as Flat stock item B Which is less volume and weight than the item A named as cut stock item C which is less volume and weight than the item B named as envelope.

Example

· Rice Bags - Flat Stock

· Milk powder Tin- Cut Stock

· Tissues - Envelope.

Assign the materials in warehouse or retail outlet, zone the warehouse by these three item families. If the customer orders are mixed then in pallet building we would start with flat stock the cut stock and put the envelope stock on top of that. If that is this way we will have to travel across those zones or pass a pallet from one zone to the next. Zoning the warehouse by item family yield good productivity customer service and increase storage density performance.