TRANSPORTATION, WAREHOUSING

& INVENTORY DECISIONS

Presented by:
Kashish Kapoor
Manik Batra
Mayank Bhadola
Naveen Kumar
Somendra Singh

An Overview
Transportation, Warehousing

and Inventory: all are parts of

Supply Chain
Supply Chain : sequence of

processes involved in the

production and distribution of
a commodity.
Warehousing :activities

related to the storage of raw

materials or finished goods in
an orderly manner in large
number prior to the sales
Inventory : raw materials,

work-in-process goods and

completely finished goods
considered to be the portion
of a business's assets that are
ready or will be ready for sale.
All three of these activities are needed to be managed for a firm
Transportation : movement
to operate optimally.

Inventory Decisions
The decisions regarding the shape and
percentage of stocked goods are called
Inventory decisions

In simple words, the decisions related to:

How much to order?
When to re-order?
How many times to order?
How to handle sudden demand change?

Inventory?
What is it? a stored quantity of goods that

exceeds what is needed for the firm to function

at the current time
Why is it needed?
Meeting Demands
Keeping operations running
Lead time
Hedge
Quantity Discount
Smoothing requirements

Inventory Management
A crucial practice done in firms in order
to effectively manage its inventory.
What if I dont manage it effectively?
Loss of sales because of stock outs
Inadequate production for a period of time
Increases in operating expenses due to
unnecessary carrying costs
Increased per unit cost of finished goods
Decisions taken while managing inventory are
Inventory decisions

Factors Affecting Inventory

Decisions
Warehousing:

Adequate physical space for raw material.

Cost:
carrying, ordering or warehousing costs
Lead time:
time between order by customer and
delivery
Turnaround:
how long a finished good sits before sale

Inventory Decisions
Inventory decisions can be categorized as:
Decisions that affect the quantity of inventory
Order size
Number of orders
Safety stocks
Lead time
Planned production

Decisions that affect the per unit cost of

inventory
Suppliers of raw material
Order size
Freight

Producti
on
Budget

Purchas
e
Reorder
Point
Invent
ory
Decisi
ons

Production Budget Decisions

Decisions pertaining to the quantity of goods to be produced
Utmost important; as Insufficient budget Stock outs, too

large budget unnecessary carrying cost

Accurate Sales forecast is required
Current sales demand and safety stocks are kept in
consideration
Determines the need for plant capacity
If current production budget exceeds the plant capacity then
ways to increase the plant capacity must be considered
Increase in plant capacity means scheduling overtime,
purchasing and installing more equipments and hiring labor
Just In Time(JIT) production: a practice where right items of
the right quantity and quality in the right place and right time
are held. Proper use of this results in better productivity and
decreased costs.

Purchase Decisions
Purchase decisions have two parts Order

Size & Order Frequency decisions

The main management accounting tool
that may be used to make Order Size and
Order Frequency decisions is the EOQ
Model.
The EOQ model answers the questions:
How many units should be purchased each

time a purchase is made (order size)?

How many purchases should be made (order
frequency)?

The EOQ Model

Economic Order Quantityis the order quantity that

minimizes the total inventory holding costs and ordering

costs.
Determined by the cost incurred in ordering and carrying
Illustration:
No. of raw materials required in one year = 52 units@1unit/day
You can order the raw material in two ways:
1. Ordering one unit 52 times: Maximum Ordering cost,
Minimum Inventory cost
2. Ordering 52 units one time: Minimum Ordering cost,
Minimum Inventory cost
. An EOQ is decided such that total purchasing cost becomes
minimum

The EOQ Model

The EOQ Model

Example:

If Annual demand for materials (units) =

(A) 100
Cost of placing an order (P) $10.00
Cost per unit of carrying inventory (S) $5.00, then

ly, Order size of 20 is the EOQ as the total cost at this order size is minim

Reorder Point Decision

Decision pertaining to time to reorder materials or

parts
Too late reordering undesirable consequences
like stock outs, delays in production
Too early reordering unnecessary carrying cost
No. of factors needed to be consideredLead Time: time between placing order and

delivery; can vary between a few hours to several

months
Average usage per day : calculated as Annual
requirement of material divided by no. of work days
Safety stock : the stock which is maintained in
order to mitigate the risk of stock outs

Reorder point = Lead Time X Average Usage Per Day

+ Safety Stock

ABC Analysis
An inventory categorization technique
Inventory is divided into:
A items: very tight control and accurate

records; high value, JIT is used to avoid

excess
B items: less tightly controlled and good
record, intergroup items
C items: simplest controls possible and
minimal records, marginally important
Provides a mechanism to identify items

that have significant impact on overall

inventory cost

Transportation Decisions
Transportation activity moves products to

markets that are geographically disparate.

Adds value to the product
Accounts for 40% of the total cost of
production
Lack of efficiency leads to substantial
transportation costs
Effective transportation management can
save a lot of cost
Important transportation decisions includeLong term decisions, Lane operations,
choice of mode and Dock operations.

Long Term Decisions

Highest strategic decision level
Decisions related to the freight flows and

network design
Decision related to the assignment of
primary transportation modes for each flow
Decisions regarding the level of outsourcing
required for major product flow
Network should not be fixed or constant so
as to improvise necessarily
This level is more like preparing a blue print
for the further activities.

Lane Operation Decisions

Second level of transportation decision

making
Focus on daily operational freight
transactions
Primary opportunities :
inbound/outbound consolidation: combining

freight to build volume shipments

temporal consolidation: adjusting shipments
in same geographic area so as to deliver
them in least no. of times
vehicle consolidation: same day and same
geographical area shipments can be loaded
onto one vehicle

Mode Selection
Third level of

transportatio
n decision
making
Includes Air
Freight, Land
Logistics and
Package
carriers
Depends on
several
factors as to
which mode

Mode Selection: Air Freight

For goods that require speedy delivery

across a large geographical area

Pros: high speed, reduced risk of damage,

security, flexibility
Cons: high courier fees
Different from commercial aircrafts
Not affected by terrains

Mode selection: Land Logistics

Includes Rail, Trucks, Ships, pipelines
Rail: high endurance capacity, less climatic

impact, low power consumption but high

cost of basic facilities, difficulty in cost of
maintenance, lack of flexibility, time
consuming
Road: cheaper investment funds, high
ease of access, mobility and availability but
low capacity, low safety, slow, traffic
congestion, pollution and accidents
Pipeline: high capacity, less climatic
impact, continuous but costly

Mode Selection: Package Carriers

Transportation companies like FedEx, US

Postal Services, DHL etc.

Use small and time sensitive shipments
Increased demand due to JIT deliveries
Quite expensive, cannot compete with
truckload carriers on price for large
shipments

Dock Level Operations

Final set of transportation decisions
Example of dock level operations are load

planning, routing, scheduling

Pertains to the execution part of higher
level planning decisions
Common use of IT and decision support
systems
Identification of most efficient routes and
arrangements of shipments to be delivered
accordingly

Warehousing Decisions
Warehousing refers to the activities
involving storage of goods on a largescale in a systematic and orderly
manner and making them available
conveniently when needed.
Functions of warehousing include:
Transportation consolidation
Product mixing
Cross-docking
Service
Protection against contingencies
Smoothing

Transportation Consolidation

Supply and Product Mixing

Basic Warehousing Decisions

Basic Warehouse Decisions:

A Cost Trade-off Framework
Ownership
Public versus contract versus private

Centralized or Decentralized Warehousing

How many
Location
Size
Layout

The Ownership Decision

Public warehousing

costs mostly all

variable.
Private warehousing
costs have a higher
fixed cost
component.
Thus private
warehousing virtually
requires a high and
constant volume.

The Ownership Decision

Factors to consider
Throughput volume
(because of fixed costs)
Stability of demand
Density of market area to be served
Security and control needs
Customer service needs
Multiple use needs of the firm

Firm Characteristics Affecting the Ownership

Decision

Basic Warehouse Operations

The Number of Warehouses

Factors Affecting the

Number of Warehouses
Inventory costs
Warehousing costs
Transportation costs
Cost of lost sales
Maintenance of
customer service
levels
Service small
quantity buyers

Factors Affecting the

Number of Warehouses
Factor

Centralized

Decentralized

Substitutability

Low

High

Product Value

High

Low

Purchase Size

Large

Small

Special
Warehousing

Yes

No

Product Line

Diverse

Limited

Customer Service

Low

High

Warehouse Space Requirements

Warehouse Layout and

Design
Basic needs:

Receiving
Basic storage area
Order selection and

preparation
Shipping

CASE STUDY

C.K. ROTORS
PVT. LTD.

It is a small scale industry located in Coimbatore, Tamil

Nadu. It manufactures ceiling fans.

It can produce 200 fans to its full capacity but uses 60%
of capacity.
It focuses on Kerala and Tamil Nadu.
Due to lower prices, there is demand for their product.
Order processing is done manually.
Soon sale comes down due to stockouts at retailers end.
Company also bears transportation cost which is 1% of
the value of the goods.
Sometimes retailers are out of stock for about 10 days
because they do not order at reorder level.
As a result customers switch to other brands.

Options available to the company

To produce at full capacity.
Arrange for two warehouses, one at Kerala

and the other at Tamil Nadu.

To automate the order processing system.