Inventory & Warehouse Management

Inventory &
Warehouse Management
Trainer:
Dr. Hakeem-Ur-Rehman
Trainer Introduction
Education
PhD Management Science & Engineering
(Operations & Supply Chain Management)
MS Total Quality Management
Master in Information & Operational Management
Certification / Trainings
Supply Chain Analytics Specialization, Rutgers the State University of New Jersey. USA
Lean Six Sigma Master Black Belt (Exemplar Global-USA) & Six Sigma Black Belt (SQII-
Singapore)
Achieving Excellence through Value Stream Mapping (NPO-Pakistan & APO-Japan)
Industrial Manufacturing Innovation: Production Excellence through Japanese Way
(NPO-Pakistan & APO-Japan)
Experience (15 Years+)
Dr. Hakeem–Ur–Rehman
Asian Institute of Industrial Air Assistant Professor, IQTM–PU
(AIIA) (Trainer) Quality & Productivity Expert: GIZ
National Productivity Organization(NPO) (Trainer & Consultant)
BGMC (Trainer)
Training Outline
Module–1: Inventory & Inventory Management

▪ Inventory in Supply Chain
▪ Inventory & Warehouse Management: KPIs
▪ What is Inventory Management?
▪ Inventory Control Systems
▪ Inventory Models
Module–2: Warehouse Management

▪ What is Warehouse
▪ Distribution of SKUs (ABC Classification, VED & XYZ)
▪ What is Warehouse Management?
▪ Order Picking
▪ Warehouse Material Handling
Module–3: Lean Warehouse Management

▪ 5S & Visual Management
3
Module–1: Inventory & Inventory Management
▪ Inventory in Supply Chain
o What is Inventory?
▪ Inventory & Warehouse Management: KPIs
▪ What is Inventory Management?
▪ Inventory costs (i.e., holding, ordering etc.) and their tradeoffs
▪ Inventory Control Systems

o (s, Q), (s, S), (R, S) & (R, s, S) System
▪ Inventory Models for deterministic demand

o Economic Order Quantity (EOQ) Model & Sensitivity Analysis
o EOQ Model with Quantity Discounts
▪ Inventory Models for probabilistic demand

o Safety stocks
4
Inventory in Supply Chain
▪ Inventory – A physical resource that is stored by a firm with the intent of selling or transforming into
a more valuable resource
Why hold Inventory in Supply Chain?
▪ safety stock
o Due to Bullwhip effect
o To protect against uncertainties
• Demand
• Supply
• lead times
• schedule changes
▪ To allow economic production and purchase (discounts for purchase in bulk)
▪ To cover anticipated changes in demand or supply (Seasonal (Anticipation)

Inventory)
▪ To provide for transit (between levels of a multi-echelon distribution system)

(pipeline inventories) → (Average Demand per day X Lead Time (days))
o In Traditional supply chain, each location is planned independently of the
other locations.
• Lead time and Service levels considered separately
• In Multi-echelon planning is more complex, and co-plans the locations as
an inventory “pool”.
• Lead time and Service levels considered together
Inventory Covers Problems
“Every management mistake ends up in inventory”

Michael C. Bergerac
Former Chief Executive
Revlon, Inc.
Inventory & Warehouse Management: KPIs
Average aggregate inventory value – determines how much of the company’s total assets are invested
in inventory
▪ Example: A distribution center experiences an average weekly demand of 50 units for one of its
items. The product is valued at $650 per unit. Inbound shipments from the factory warehouse average
350 units. Average lead time (including ordering delays and transit time) is 2 weeks. The distribution
centre operates 52 weeks per year; it carries a 1–week supply of inventory as safety stock. What is the
value of average aggregate inventory being held by the distribution centre?
𝑄 350
o Cycle Inventory = = = 175 units
2 2
o Safety stock (1-week supply) = 50 units
ҧ
o Pipe line inventory = 𝑑𝐿=(50 units per week)×(2 weeks)=100 units
o Average Aggregate Inventory = 175 + 50 + 100 = 325 Units
o Value of Average Aggregate Inventory = 325 × $625 = $211, 250

Inventory & Warehouse Management: KPIs…
Inventory turnover - measures the number of times a company has sold and replaced inventory during a given
period.
o used to analyze the efficiency of the firm’s operations in the area of inventory management
𝐶𝑜𝑠𝑡𝑠 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 (𝐶𝑂𝐺𝑆)
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 = 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
▪ Example: Calculate Inventory Turnover Ratio from the following:

Opening Inventory Rs. 29,000
Closing Inventory Rs. 31,000
Revenue from Operations, i.e., Sales Rs. 3,20,000
Gross Profit Ratio 25%
▪ Sales = 3,20,000
▪ Gross Profit = 25% on Sales → 320000 *0.25 = 80,000
▪ Cost of Goods Sold = Total Sales − Gross Profit = 3,20,000 – 80,000 = 2,40,000
▪ Average Inventory = (Opening Inventory + Closing Inventory)/2 = (29000+31000)/2 = 30,000
▪ Inventory Turnover = 240000 / 30000 = 8 times
o COGS = (Beginning Inventory + Purchases During the Period)−Ending Inventory

▪ Days Sales of Inventory (DSI) (Days/Weeks/months of supply): determines how long the current inventory
will last in the warehouse
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 1
𝑫𝑺𝑰 = × 365 = × 365
𝐶𝑜𝑠𝑡𝑠 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑 (𝐶𝑂𝐺𝑆) 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝟑𝟎𝟎𝟎𝟎
o DSI= 𝟐𝟒𝟎𝟎𝟎𝟎 × 𝟑𝟔𝟓 = 𝟒𝟓. 𝟔𝟑 days
Number of On−Time Deliveries

▪ On-Time Delivery (OTD) = × 100
Total Number of Deliveries
Number of Stockouts
▪ Stockout Rate = × 100
Total Number of Orders
▪ Order Cycle time = Delivery Date – Order Date
▪ Order Lead Time = Order Processing Time + Order Delivery Time

Utilized Warehouse Space
▪ Warehouse Capacity Utilization= × 100
Total Warehouse Space
Warehouse Capacity
SKU Utilized Warehouse Space (sq ft) Total Warehouse Space (sq ft)
Utilization
SKU001 1,000 10,000 10%
SKU002 1,200 10,000 12%
SKU003 1,400 10,000 14%
SKU004 1,600 10,000 16%
SKU005 1,800 10,000 18%
What is Inventory Management?
▪ An Inventory Management System is the set of policies and controls that monitor
levels of inventory and determines:
o what levels should be maintained,
o when stock should be replenished, and
o how large orders should be.
Inventory Cost Structures
Item cost
o Expressed as cost per unit or SKU.
o Problem can be compounded by quantity discounts.
o Generally ignored
Ordering (or setup) cost
o Typically expressed as a fixed cost per order or setup.
o Vary with the number of orders made
o As the order size increases, ordering costs decrease and carrying costs increase
o Ordering costs include: Purchase orders, Transportation and shipping, Receiving, Inspection, Handling and storage
Inventory Cost Structures…
Carrying Costs (Holding Costs) – Cost of holding an item in inventory
o Vary with the level of inventory and the length of time an item is held
o Typically expressed as a percentage of SKU (item) cost.
o Carrying costs include: Rent, Heating, cooling, lighting Security, Record keeping
Stock out cost (back order or lost sales)

o Record maintenance
o Lost income, and customer dissatisfaction
o Typically expressed as a fixed cost per backorder or as a function of aging of backorders.
o Shortage costs have an inverse relationship to carrying costs
Inventory Control Policies
▪ Inventory control policy is a managerial procedure; helps to define how much and when to order (or
Produced).
Inventory Control o The orders can only be made at

Order Based on
System specific times.
the reorder point o The period between two orders is
always the same.
Continuous review Periodic review
System System
Order-Point, Order- Order-Point, Order-Up- Periodic-Review, Order-

Quantity System to-Level Up-to-Level (R, s, S) System
(s, Q) System (s, S) System (R,S) System
Inventory Control Policies…
(s, Q) System
▪ Order-Point, Order-Quantity System
▪ Continuous review System
▪ Net stock (Inventory) = (On hand) − (Backorders)

▪ Inventory position (Available Stock) = (On hand) + (On order) − (Backorders)
▪ (s, Q) System, also known as Two-Bin System
(s, S) System
▪ Order-Point, Order-Up-to-Level
▪ Continuous review System
(R,S) System
▪ Periodic-Review, Order-Up-to-Level
▪ Periodic review System
Inventory models
Objective: Find an optimal policy for managing inventory
Policy consists of:
▪ How much to order (Q)
▪ When to order:
o Time based
• every T time units
o Quantity based
• when inventory is a certain level
1. Basic Economic Order Quantity (EOQ) Model

o EOQ Sensitivity to Changes
2. Quantity Discount Models
3. Periodic Review Model: Deterministic Demand
4. Safety Stock
5. Multi–item Inventory Models Subject to Constraints Using Excel Solver

Basic Economic Order Quantity (EOQ) Model
▪ Developed in 1915 by F.W. Harris
▪ Describes the important trade-off between fixed order costs and holding costs
▪ Answers the question ‘How much do I order?’

1) How much should be ordered?
2) When should an order be placed?
▪ Objective is to minimize the long-run average ordering and holding costs.
▪ Must be calculated separately for each SKU.
▪ Widely used and very robust (works well in a variety of situations, even when its
assumptions don’t hold exactly).
Assumptions of Basic EOQ
1. Demand rate is constant, recurring, and known.
2. Lead time is constant and known.
3. No stockouts allowed.
4. Material is ordered or produced in a lot or batch and the lot is received all at once.
5. Costs are constant:
o Unit cost is constant (no quantity discounts)
o Carrying cost is constant per unit (SKU)
o Ordering (setup) cost per order is fixed
6. Item is a single product or SKU; demand not influenced by other items.
7. Planning horizon is infinite
▪ Every order is received exactly when the inventory level reduces to zero → Zero-Inventory Ordering
Property (ZIOP)
▪ Each order is of the same size

Basic Economic Order Quantity (EOQ) Model
The function of EOQ models is to determine the optimal order quantity that will minimize total
inventory costs ▪ D : Demand Rate
▪ Q : Order quantity
(D) ▪ L : Lead time
▪ R : Reorder Point
ത =𝑸
Average Inventory Level (𝑄) 𝟐
Reorder Point = 𝐷𝐿
𝑄
Order Cycle time → T = 𝐷 𝐷
▪ Orders Frequency (Number of Orders per cycle time) → N = 𝑄
Total Average Inventory Cost
CoD
Annual ordering cost =
Annual Q
cost ($)
Total Cost CcQ
Annual carrying cost =
Slope = 0 2
CcQ CoD CcQ

Minimum Carrying Cost = Total cost = Q +
2 2
total cost
CoD
Ordering Cost =
Q
Optimal order Order Quantity, 𝑄

𝑄∗
3
The optimal order quantity represents a compromise between the two inversely related
costs; carrying costs and ordering costs.
Finding 𝑸∗ − Optimal Order Quantity
𝐶0 𝐷 𝐶𝑐 𝑄
𝑇𝑜𝑡𝑎𝑙 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡 = +
𝑄 2
∗
𝟐𝑪𝟎 𝑫
𝑸 =
𝑪𝒄
Finding TC* - Optimal Total Costs

2𝐶0 𝐷
𝐶𝑐
𝐶0 𝐷 𝐶𝑐
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = +
2𝐶0 𝐷 2
𝐶𝑐
𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕(𝑸∗ ) = 𝟐𝑪𝒄 𝑪𝟎 𝑫
4
EOQ: Example
The I-75 Carpet Store in North Georgia stocks carpet in its warehouse and sells it through an adjoining
showroom. The store keeps several brands and styles of carpet in stock; however, its biggest seller is Super Shag
carpet. The store wants to determine the optimal order size and total inventory cost for this brand of carpet given an
estimated annual demand of 10,000 yards of carpet, an annual carrying cost of $0.75 per yard, and an ordering cost
of $150. The store would also like to know the number of orders that will be made annually and the time between
orders (i.e., the order cycle) given that the store is open everyday except Sunday, Thanksgiving day, and
Christmas Day (which is not on Sunday).
Cc = $0.75 per yard Co = $150 D = 10,000 yards
2𝐶0 𝐷 𝐶0 𝐷 𝐶𝑐 𝑄
𝑄∗ = 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄 ∗ ) = +
𝐶𝑐 𝑄 2
(150)(10,000) (0.75)(2000)
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄∗ ) = +
∗
(2) 150 (10,000) 2000 2
𝑄 =
0.75 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑄∗ = $750 + $750 = $1,500
𝑄 ∗ = 2,000 𝑌𝑎𝑟𝑑𝑠 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑄∗ = 2𝐶𝑐 𝐶0 𝐷 = 2(0.75)(150)(10,000) = $1,500
Orders per year = D/ 𝑄 ∗ Order cycle time = 311 days/(D/ 𝑄5∗ )

= 10,000 / 2,000 = 311/5
= 5 orders/year = 62.2 store days
EOQ Sensitivity to Changes
Finding Sensitivity of EOQ
Suppose I use a “wrong” order quantity, Q. How much worse will my total cost be using this “wrong” Q
versus Q*?
𝐶0 𝐷 𝐶𝑐 𝑄
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄) +
𝑄 2
=
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄 ∗ ) 2𝐶𝑐 𝐶0 𝐷
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄) 1 2𝐶0 𝐷 𝐶𝑐 𝑄

= +
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄 ∗ ) 2 𝑄 𝐶𝑐 2𝐶0 𝐷
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄) 1 𝑄∗ 𝑄
= + ∗
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄∗ ) 2 𝑄 𝑄
EOQ Sensitivity: Order Size (Order Quantity)
𝐷 = 2000, 𝑐0 = $500, 𝑐𝑐 = $12.5
∗
2𝐶0 𝐷 2(500)(2000)
𝑄 = = = 400
𝐶𝑐 12.5
Q Ordering Costs Holding Costs Total Costs Q/Q* TC/TC*

(c0D/Q) (ccQ/2)
800 $1,250 $5,000 $6,250 200% 125%

600 $1,667 $3,750 $5,417 150% 108.3%
Q*=400 $2,500 $2,500 $5,000 100% 100%
200 $5,000 $1,250 $6,250 50% 125%
20 $50,000 $125 $50,125 5% 1002.5%
5
Would you rather order Q > Q* or Q < Q *?
Q Q/Q* TC/TC*
600 150% 108.3%

Q*=400 100% 100%
200 50% 125%
TC/TC*
Q/Q*
EOQ Sensitivity: Demand
2𝐶0 𝐷𝐹
▪ How Sensitive is the Total Cost to changes in actual demand? 𝑄𝐹∗ =
▪ Notations: 𝐶𝑐
o DF = Forecasted Demand
o QF* = EOQ using Forecasted Demand 2𝐶0 𝐷𝐴
o DA = Actual Demand 𝑄𝐴∗ =
𝐶𝑐
o QA* = EOQ using Actual Demand
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄) 1 𝑄∗ 𝑄 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄𝐹∗ ) 1 𝑄𝐴∗ 𝑄𝐹∗
= + = +
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄 ∗ ) 2 𝑄 𝑄∗ 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄𝐴∗ ) 2 𝑄𝐹∗ 𝑄𝐴∗
2𝐶0 𝐷𝐴
𝑄𝐴∗ 𝐶𝑐 𝐷𝐴
= =
𝑄𝐹∗ 2𝐶0 𝐷𝐹 𝐷𝐹
𝐶𝑐
𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕(𝑸∗𝑭 ) 𝟏 𝑫𝑨 𝑫𝑭
2𝐶0 𝐷𝐹 = + 5
𝑄𝐹∗ 𝐶𝑐 𝐷𝐹 𝑻𝒐𝒕𝒂𝒍 𝑪𝒐𝒔𝒕(𝑸∗𝑨 ) 𝟐 𝑫𝑭 𝑫𝑨
= =
𝑄𝐴∗ 2𝐶0 𝐷𝐴 𝐷𝐴
𝐶𝑐
EOQ Sensitivity: Demand
𝐷 = 2000, 𝑐0 = $500, 𝑐𝑐 = $12.5
Actual Demand (DA) DA / DF Q*A/Q*F TC*A /TC*F
200 0.10 0.32 1.74

1,000 0.50 0.71 1.06
1,500 0.75 0.87 1.01
1,800 0.90 0.95 1.00
2,000 1.00 1.00 1.00
3,000 1.50 1.22 1.02
4,000 2.00 1.41 1.06
20,000 10.00 3.16 1.74
How much will Total Cost (TC) change if I change 𝑐𝑐 , 𝑐0 ?

EOQ: Robust Solution
5
EOQ Sensitivity: Order Cycle Time ▪ How sensitive is Total Cost (TC) to T?
o Why do we care and why is “time” different?
o How do I find the “best” T that is also practical?
Example:
𝐷 = 2000, 𝑐0 = $500, 𝑐𝑐 = $12.5
2𝐶0 𝐷 2(500)(2000) 𝐶0 𝐷 𝐶𝑐 𝑄 (500)(2000) (12.5)(400)

∗
𝑄 = = = 400 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑄 = + = + = $5000
𝐶𝑐 12.5 𝑄 2 400 2
𝑄 ∗ 400 𝑄∗
∗
𝑇 = = = 0.2 𝑌𝑒𝑎𝑟𝑠 𝑜𝑟 73 𝑑𝑎𝑦𝑠 𝑜𝑟 10.4 𝑤𝑒𝑒𝑘𝑠 𝑇∗ = → 𝑄∗ = 𝐷𝑇 ∗
𝐷
𝐷 2000
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄) 1 𝑄∗ 𝑄
= +
▪ What if I order weekly? monthly? Other? 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑄 ∗ ) 2 𝑄 𝑄∗
o Why do we care and why is “time” different?
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑇) 1 𝑇∗ 𝑇
o How do I find the “best” T that is also practical? = +
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑇 ∗ ) 2 𝑇 𝑇∗
▪ If I order every week instead of every 10.4 weeks.
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(1) 1 10.4 1
o 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(10.4) = 2 + = 5.24 𝑜𝑟 524% ℎ𝑖𝑔ℎ𝑒𝑟 𝑐𝑜𝑠𝑡𝑠
1 10.4
▪ If I order every 4th week instead of every 10.4 weeks.
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(4) 1 10.4 4
o 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(10.4) = 2 + = 1.49 𝑜𝑟 49% ℎ𝑖𝑔ℎ𝑒𝑟 𝑐𝑜𝑠𝑡𝑠
4 10.4
EOQ Sensitivity: Order Cycle Time
𝜀 𝜀 In Worst
case, If both
Power of 2K Policies
of them are
going to be
equal
To find a practical T:
Power of 2K Policies
i. Calculate 𝑇 ∗
▪ Order in intervals of powers of two (2)
ii. Pick a base time period (day, week, etc.)
▪ Select a realistic base period, Tbase (day, week, month)
iii. Find the Lowest value of ‘𝑘’ that satisfies:
▪ It guarantees that Total cost will be within 6% of the Optimal. 𝑇∗
≤ 2𝑘 ≤ 2𝑇 ∗
2
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑇) 1 𝑇∗ 𝑇 1 𝑇∗ 2𝑇
= + = +
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑇 ∗ ) 2 𝑇 𝑇∗ 2 2𝑇 𝑇∗
𝑻∗ 𝑻 𝟏
→ = 𝟐 → =
𝑻 𝑻∗ 𝟐
A power of Two Time interval is guaranteed to be
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(2𝑘 ) 1 1 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑇)
within 6% of the 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑇 ∗ ) with the optimal time
≤ 2+ ≅ 1.06
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡(𝑇 ∗ ) 2 2 interval.
Quantity Discount Models…
1.All-Units
Discount:
Instantaneous ORDER SIZE PRICE
0 - 99 $10 TC = ($10 )
Supply Model
100 – 199 8 (d1)
200+ 6 (d2) TC (d1 = $8 )
Inventory cost ($) TC (d2 = $6 )
Carrying cost
Ordering cost
Q(d1 ) = 100 Qo Q(d2 ) = 200 11

pt
Quantity Discount: Example
▪ Comptek Computers wants to reduce a large stock of PCs it is discontinuing. It has offered the University
Bookstore at Tech a quality discount pricing schedule, as follows:
QUANTITY PRICE
1-49 $1,400
50-89 1,100
90+ 900
▪ The annual carrying cost for a PC is $190, the ordering cost is $2,500, and annual demand for this particular
model is to be 200 units. The Bookstore wants to determine if it should take advantage of this discount or order
the basic EOQ order size.
Co = $2,500
Qopt = 2CoD 2(2500)(200)
Cc = $190 per computer = = 72.5 PCs
Cc 190
D = 200
For Q = 72.5 CoD CcQopt

TC = + + PD = $233,784
Qopt 2
For Q = 90 CoD CcQ
TC = + + PD = $194,105
Q 2 1
Periodic Review Model: Deterministic Demand
T = optimal time between two orders (inside a year)
𝐷𝑇
▪ The total annual average carrying costs = 2 𝐶𝑐
𝐷
▪ Total annual average ordering costs = 𝐶0
𝐷𝑇
𝐷𝑇 𝐷
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝐶𝑐 + 𝐶0
2 𝐷𝑇
𝑑(𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡) 𝐷 1
= 𝐶𝑐 − 2 𝐶0 = 0
𝑑𝑇 2 𝑇
2𝐶0
𝑇∗ =
𝐷𝐶𝑐
Periodic-Review, Order-Up-to-Level (T,S) System

▪ also known as (R, S)
Periodic Review Model: Deterministic Demand
Practice QUESTION
An organization has a single item whose annual demand is 15,000 units, the unit cost is $2.5, the
ordering cost is $300, and the inventory holding rate is 25%. Determine
a. The frequency between reviews if the organization follows a periodic review system.
b. The order size if the management does not want the inventory level to exceed 5000 units at any
time and there are 1500 units currently in stock.
c. The replenishment policy.
2𝐶0 2×300
a. 𝑇 ∗ = = = 0.2530 Years = 0.2530 × 365 𝑑𝑎𝑦𝑠 = 92.34 ≅ 92 𝑑𝑎𝑦𝑠
𝐷𝐶𝑐 15000×(2.5×0.25)
b. 𝑄 = 𝑆 − 𝑠 = 5000 − 1500 = 3500 Units
c. Review the inventory status every 92 days. Place one order every 92 days such that the maximum
inventory level does not exceed 5000 units.
Safety Stocks
▪ Safety or Buffer Stock: on-hand inventory during lead time + Buffer
Inventory level
Q
Reorder
point, R Reorder point with
a safety stock
Safety Stock
0
LT LT
Time
▪ Stockout: An inventory shortage
▪ Safety stock helps reduce the probability of stockout.
Service-level measures
Service Level measures used to evaluate the level of customer service and manage inventory.
▪ Service Level: Two service-level measures are commonly used in the inventory management literature
considering random demand
i. Cycle Service Level: A measure based on the proportion of order cycles in which no stockouts
occur.
ii. Fill Rate: A measure based on the proportion of customer demands that are satisfied from the
inventory on hand.
Service-level measures: Example
Calculate the Beta Service level (Cycle Service level) & Alpha Service level
(Fill Rate).
▪ Beta Service level (Cycle service level): → Proportion of order cycles in which no stockouts occur.
▪ No stockout was experienced in 8 of the 12 order cycles.
8
▪ 12 = 67% → 67% chance of not stocking out in a replenishment cycle
▪ Alpha Service level (Fill Rate): → The proportion of demand that is met out of stock on hand.
▪ Total Demand = 300
▪ Stock out = 41
▪ Number of items delivered on time = 300 – 41 = 259 Units
𝑻𝒐𝒕𝒂𝒍 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒊𝒕𝒆𝒎 𝒅𝒆𝒍𝒊𝒗𝒆𝒓𝒆𝒅 𝒐𝒏 𝒕𝒊𝒎𝒆 𝟐𝟓𝟗
▪ Alpha Service Level (Fill Rate) = 𝑻𝒐𝒕𝒂𝒍 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒊𝒕𝒆𝒎𝒔 𝒐𝒓𝒅𝒆𝒓𝒆𝒅
= 𝟑𝟎𝟎
= 𝟖𝟔%
Classification of stochastic inventory control models
Stochastic Inventory Models
Continuous
Periodic Review
Review
Empirical Statistical Variable Demand

Distribution Distribution Constant Lead time
Variable Demand Constant Demand

Constant Lead time Variable Lead time
Constant Demand Variable Demand

Variable Lead time and Lead time
Variable Demand
and Lead time
Determining Safety Stock Level: Empirical Distribution
Example: Variable demand
Historical data presented in the below Table that shows a manufacturer’s weekly demand for an item that has a
constant lead time of 1 week. The item costs $50 per unit. The manufacturer uses an inventory carrying rate of 20%
per year. Determine the safety stock and the carrying costs if the manufacturer desires service levels of (a) 85% and
(b) 95%.
i. Develop a cumulative
probability distribution (CPD)
Determining Safety Stock Level: Empirical Distribution…
Example: Variable demand …
ii. Generate a plot of cumulative probability distribution
From the Graph
▪ Average Demand (𝑑)ҧ (50th percentile) = 250
▪ The Maximum demand for service levels of 85% and 95%

(corresponds to the 85th and 95th percentile)
o 𝑃85 = 390
o 𝑃95 = 450
▪ Safety Stock (SS) is the difference between the maximum

demand on a given service level ( 𝐷𝑠𝑙 ) and the average
ҧ
demand (𝑑).
o 𝑆𝑆𝑠𝑙 = 𝐷𝑠𝑙 − 𝑑ҧ
o 𝑆𝑆85% = 390 − 250 = 140
o 𝑆𝑆95% = 450 − 250 = 200
▪ Cost of the Safety Stock (CSS) = Carrying cost per unit (𝐶𝑐 ) × 𝑆𝑆𝑠𝑙
o For service level of 85%; CSS = (20% × 50) × 140 = $1400
o For service level of 95%; CSS = (20% × 50) × 200 = $2000
Example: Variable Lead time
A manufacturing firm procures raw materials from an international supplier. The procurement lead time varies as
seen from the 40 observations in the below Table. What amount of safety stock (in days) would the manufacturer
need to carry in order to ensure that they have the raw material on hand 85% of the time to meet the production
requirements?
i. Develop a cumulative
probability distribution (CPD)
Example: Variable Lead time …
ii. Generate a plot of cumulative
probability distribution
From the Graph

▪ Average Lead time (𝐿ത ) (50th percentile) = 4.7 days
▪ The Lead time for a specified service levels (𝐿𝑇𝑠𝑙 ) (Lead time corresponds to the 85th percentile)
o 𝑃85 = 7 𝑑𝑎𝑦𝑠
▪ Safety Stock (SS)

o 𝑆𝑆𝑠𝑙 = 𝐿𝑇𝑠𝑙 − 𝐿ത
o 𝑆𝑆85% = 7 − 4.7 = 2.3 𝑑𝑎𝑦𝑠
The safety stock that is needed to maintain a service level of 85% is equal to 2.3 days’ usage.
Reorder Point Decisions:
Normal Distribution of Demand during Lead Time
▪ Variable demand and Constant Lead time 2𝐶0 𝐷
∗
𝑅 = 𝑑ҧ × 𝐿 + 𝑍 × 𝜎𝑑 × 𝐿 𝑄 =
𝐶𝑐
▪ Constant demand and Variable Lead time

𝑅 = 𝑑 × 𝐿ത + 𝑍 × 𝑑 × 𝜎𝐿 Safety
Stock
▪ Variable demand and Variable Lead time

𝑅 = 𝑑ҧ × 𝐿ത + 𝑍 × (𝐿ത × 𝜎𝑑2 + 𝑑ҧ 2 × 𝜎𝐿2 ) ҧ
▪ Expected demand during lead time = 𝑑𝐿
ҧ + Safety Stock
▪ Reorder Point = 𝑑𝐿
Where
ҧ
▪ Safety Stock = Reorder Point −𝑑𝐿
▪ 𝑑ҧ = Average demand
▪ 𝜎𝑑 = Standard deviation of demand
▪ 𝜎𝐿 = Standard deviation of Lead time
Variable demand and Constant Lead time: Example
Daily demand for a certain item is governed by a normal distribution with a mean of 100 units and a standard deviation of 8 units.
The time between placing an order and receipt of supply is fairly constant at 5 days. The ordering cost per order is $25 and the cost
per item is $50. Assume 360 working days in a year and 20% interest rate
per year. Answer the following questions (no backlogging allowed):
a) Compute the optimal order quantity.
b) Compute the reorder level to satisfy an 85% probability of not stocking out during the lead time.
▪ Average daily demand, 𝑑,ҧ is 100 units (Annual demand is 36,000 units per year).
▪ Standard deviation of daily demand, 𝜎𝑑 , is 8 units.
▪ Lead time = 5 days.
▪ 𝐶0 =$25 per order.
▪ Cost of item, C, is $50.
▪ 𝐶𝑐 = 0.20 × 50 = $10
a) Economic Order Quantity
b) Reorder Level: 𝑅 = 𝑑ҧ × 𝐿 + 𝑍 × 𝜎𝑑 × 𝐿 = 100 × 5 + 1.04 × 8 × 5 = 519

Where 𝑍 = 𝑁𝑂𝑅𝑀𝑆. 𝑆. 𝐼𝑁𝑉 0.85 = 1.04 (Using Excel)
▪ Ordering policy is Place an order for 424 units when the inventory level reaches 519 units.
Periodic Review-based Models
The inventory system → Single item & reviewed Periodically
𝟐𝐂𝟎
Periodic Review-based Models The optimal review period T → 𝐓 ∗ = 𝐃𝐂𝐜
Variable Demand and Constant Demand and Both Demand and

Constant Lead Time Variable Lead Time Constant Lead Time
The order quantity Q The order quantity Q The order quantity Q

= 𝒅ഥ 𝑻 + 𝑳 + 𝒁𝝈𝒅 (𝑻 + 𝑳) − 𝑰 = 𝒅 𝑻 + 𝑳ത + 𝒁𝒅𝝈𝑳 − 𝑰 ഥ 𝑻 + 𝑳ത + 𝒁 ഥ 𝟐 𝝈𝟐𝑳 − 𝑰
= 𝒅 𝑻 + 𝑳ത 𝝈𝟐𝒅 + 𝒅
Safety Stock (SS) Safety Stock (SS)
= 𝒁𝝈𝒅 (𝑻 + 𝑳) = 𝒁𝒅𝝈𝑳 Safety Stock (SS)
=𝒁 ഥ 𝟐 𝝈𝟐𝑳
𝑻 + 𝑳ത 𝝈𝟐𝒅 + 𝒅
Maximum inventory level (S) Maximum inventory level (S)
ഥ 𝑻 + 𝑳 + 𝒁𝝈𝒅 (𝑻 + 𝑳)
=𝒅 = 𝒅 𝑻 + 𝑳ത + 𝒁𝒅𝝈𝑳
Maximum inventory level (S)
where ഥ 𝑻 + 𝑳ത + 𝒁
=𝒅 ഥ 𝟐 𝝈𝟐𝑳
𝑻 + 𝑳ത 𝝈𝟐𝒅 + 𝒅
o 𝒁 is the standard normal variate for a specified probability;
o 𝜎𝑑 is the standard deviation of the demand
o 𝜎𝐿 is the standard deviation of the Lead time
o 𝑰 is the on-hand inventory including inventory on order.
Periodic Review-based Models: Example
Order Quantity – Variable Demand and Constant Lead Time
A retail shop uses a periodic review inventory system. The annual demand for a consumer product sold by the shop is 5500 units,
the ordering cost is $43 per order, and the inventory carrying rate is 35% per year. The product costs $100 per unit. The daily
demand for the product is normally distributed with a mean of 15 units and a standard deviation of 3 units. If the procurement lead
time is a constant 5 days and the retail shop desires a 90% probability of no stockout during lead time,
compute:
a) Optimal review period
b) Safety stock, SS
c) Maximum inventory, S
d) Order quantity, if the on-hand inventory is 24 units.
2C0 2×43
a) Optimal review period 𝑇 = = = 0.0211 Years
DCc 5500×(0.35×100)
o The optimal review period is 0.0211 × 365 days = 7.7 days.
b) Safety Stock (SS) = 𝑍𝜎𝑑 (𝑇 + 𝐿) = 1.28 × 3 × (7.7 + 5) =13.6 Units → where Z= 1.28 for 90%
c) Maximum inventory level (S) = 𝑑ҧ 𝑇 + 𝐿 + 𝑍𝜎𝑑 (𝑇 + 𝐿) = 15 × 7.7 + 5 + 1.28 × 3 × (7.7 + 5) = 204 Units
d) Order Quantity (Q) = 𝑆 − 𝑠 = 204 − 24 = 180 Units

Module–2: Warehouse Management
▪ What is Warehousing?
▪ Warehousing: Storage Systems
▪ Warehouse: Size and Capacity
▪ Distribution of SKUs
o ABC Classification
o VED Classification
o XYZ Classification
▪ Order Picking
▪ Warehouse Material Handling
50
What is Warehousing?
Warehousing involves the activities related to receiving, storing, and shipping materials to and from
production or distribution locations (APICS Dictionary)
Activities Within a Warehouse
▪ Receive goods
▪ Identify and inspect goods
▪ Dispatch goods to storage
▪ Hold goods
▪ Pick goods
▪ Dispatch the shipment
▪ Record the information
▪ Operate an information system

Warehousing: Storage Systems
Storage
System
Large-item or small-item or
Large-volume low-volume
product product
1. Open floor storage 1. Bin shelving
2. Pallet racks 2. Modular storage drawers
3. Drive-in/double-deep pallet racks
4. Cantilever racks
5. Flow racks
Warehousing: Storage Systems…
Large-item or Large-volume product
1. Open floor storage: Examples
2. Pallets, Pallet Racks, and Pallet Positions
▪ 2 Cartons per Pallet

▪ 6 Cartons → 3 Pallets
▪ 6 Cartons per Pallet Rack
▪ Normally, both the pallet and the storage

structure dimensions are standardized.
▪ key factor: determine the height of the full

pallet and number of pallets to be used for an
▪ 3 drums per Pallet
item.
2. Pallets, Pallet Racks, and Pallet Positions:
Examples
3. Drive-in/double-deep pallet racks
▪ Pallet racks can be designed to store two or more pallets deep, as well
as multiple pallets high
▪ Drive-in pallet racks are designed so that forklifts or other equipment

can “drive in” to the racks between structure uprights and pallet
support rails
3. Drive-in/double-deep pallet racks: Examples
4. Cantilever racks.
▪ Cantilever racks normally consist of
o A row of single upright columns, spaced several feet apart, with arms extending from one or both sides of
the upright to form supports for product storage
o Horizontal and diagonal bracing between uprights prevents the structure from collapsing inside or out
4. Cantilever racks : Examples
▪ Because of their long, unobstructed support, the cantilever racks are ideal for storing long metal rods, tubing,
pipe, bar stock, wood poles, and other products of comparable shapes
5. Flow racks.
▪ This storage type is the use of conveyors positioned within a rack.
▪ The advantages of flow racks over pallet and shelf racks are that they permit easy first in, first out (FIFO)
inventory control
▪ They reduce the need for aisles, minimize handling by having one input and discharge point, and reduce
damage and pilferage
Video of pallet flow racking

https://www.youtube.com/watch?v=TixO3Lvp-Tc
Small-Item or Low-Volume Product Storage
1. Bin shelving. Bin shelving is perhaps the most basic type of static storage available.
2. Modular storage drawers.

▪ Modular storage drawers become more cost effective
▪ By dividing the drawer space into small compartments, item

storage requirements can be matched to the proper
compartment, thereby increasing space utilization
Warehouse: Size and Capacity
Warehouse: Size and Capacity…
Question 1: A company has an area for storing pallets as shown in the following diagram. How many
pallets measuring 48 ″ × 40 ″ can be stored three high if there is a 2 ″ space between the pallets?
𝐴𝑟𝑒𝑎 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 (200×12)×(4×12)

Number of Pallets per bay = = = 57Pallets
𝐴𝑟𝑒𝑎 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑓𝑜𝑟 𝑜𝑛𝑒 𝑝𝑎𝑙𝑙𝑒𝑡 (48× 40+2 )
Total Number of Pallets = 57 Pallets × 3 high × 2 bays = 342

Question 2: A company has a warehouse with the dimensions shown in the following diagram.
How many pallets measuring 48 ″ × 40 ″ can be stored four high if there is to be a 2 ″ space between the pallets?
𝐴𝑟𝑒𝑎 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 (60×12)×(4×12)

Number of Pallets per bay = = = 17Pallets
𝐴𝑟𝑒𝑎 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑓𝑜𝑟 𝑜𝑛𝑒 𝑝𝑎𝑙𝑙𝑒𝑡 (48× 40+2 )
Total Number of Pallets = 17 Pallets × 4 high × 4 bays = 342

Question 3: The dimensions of the storage space in the following figure are 150' x 4'
(total twenty rows). How many pallets measuring 48″ × 40″ can be stored four high if
there is to be a 2″ space between the pallets?
Ans: 3360 pallets

Cube Utilization: Stock should fill space to the maximum cube capacity while remaining accessible for
picking
▪ Two most important use-of-space factors are 1) aisle allowances and 2) honeycombing
o Aisle allowance is the percentage of warehouse space occupied by aisles within a storage area
o Honeycombing is the percentage of storage space lost because of ineffective use of the
cube capacity of a storage area
• Honeycombing occurs whenever a storage location is only partially filled with material
Pallet Honeycombing
Question: A small warehouse stores five different SKUs in pallet loads. If pallets are
stacked three high and there is to be 100% accessibility, how many pallet positions are
needed? What is the cube utilization?
Cube Utilization
A company wishes to store the following SKUs
so there is 100% accessibility. The items are
stored on pallets that can be stacked three high.
i. How many pallet positions are needed?
ii. What is the cube utilization?
iii. If the company bought racking for storing
the pallets, how many pallet positions are
needed to give 100% accessibility?
Ans: 21, 86%, 18

Designing Individual Item Decision Models
What is Stock Keeping Unit (SKU)?
▪ SKUs are retailer codes that track product, manufacturer, and price information.
o SKUs are used for inventory and sales tracking
UPC: Universal Product Code

Distribution of SKUs: A–B–C Classification
▪ An inventory classification system in which a small percentage of (A) items account for most of the inventory value
▪ InA–B–C analysis each class of inventory requires different levels of inventory control
▪ The higher the value of inventory, the tighter the control
▪ Class A Items (The important few & Accurate Control required)

o Very few high impact items are included
o 20 % of units
o 70% to 80 % of value
▪ Class B Items (The middle share & Moderate Control required)
o Many moderate impact items (sometimes most)
o 30 % of units
o 15 % to 25% of value
▪ Class C Items (The trivial many, Low cost Inventory &
Minimum Control required)
o Many if not most of the items that make up minor impact
o 50 % of units
o 5 % to 15% of value
This technique is based on Pareto’s theory

▪ 20% of the items in an inventory system account for 80% of dollar-volume sales, the next 30% account for 15% of dollar-
volume sales, while the last 50% of the items account for 5% of dollar-volume sales.
Distribution of SKUs: A–B–C Classification
Example: Sample of 16 items at a Store
Distribution of SKUs: A–B–C Classification…
▪ Step – 1: Computing annual usage value
▪ Step – 2: Rank-ordering by annual usage value & Compute the percentage & Cumulative percentage based on
usage value
Practice Question:
Below Table, lists 10 items sold at a retail shop. Classify each of these items into A, B, or C categories.
Sales data of the retail shop

Solution:
Distribution of SKUs: X–Y–Z Classification
The XYZ classification focuses on the variability of product demand. Here, the products are divided into three categories:
▪ Category X (Stable): Products with steady and predictable demand.
▪ Category Y (Intermittent): Products with intermittent and less predictable demand.
▪ Category Z (Erratic): Products with a highly volatile and difficult to predict demand.
ABC-XYZ
Classification
Distribution of SKUs: V–E–D Classification
▪ VED classification method categorizes items → Vital, Essential, & Desirable – on the basis of criticality of an
item
▪ Criticality of an item can be assessed on basis of different factors. inventory managers may use a set of risk
factors
o Procurement lead time: Items with shorter lead times would be less critical while those with longer lead
times would be more critical.
o Supplier: Items that are supplied locally would be less critical while those supplied by international sources
would be more critical.
o Amount of customization: An item that is highly customized would be considered more critical than one
that is highly standardized.
o Unavailability: An item that may not be available when needed may result in loss of production, and hence
loss of revenue.
▪ Risk factors for VED analysis ▪ VED categorization criteria
Distribution of SKUs: V–E–D Classification
Example:
Sample of items for VED categorization
VED Analysis for a set of items

Distribution of SKUs: Combination of ABC and VED
▪ A combination of ABC and VED to have tighter control.
▪ Using these two techniques together, inventory managers would be able to create nine groups of items including:
o A–V class of items (items that have high usage value and are also vital for production) and the
o C–D class of items (items that have low usage value and are of type-desirable).
ABC × VED technique

Warehouse: Stock Location
Warehouse storage layout: (zoned storage)
Warehouse: Stock Location…
▪ An important principle of good warehouse layout is to move goods in a straight line
▪ Moving goods in a straight line increases warehouse movement velocities, reduces travel time and distance,
increases stocking and picking efficiency, and decreases safety issues relating to too many turns and blind corners
Layouts to Improve Item Picking Efficiency

Warehouse Operations: Optimizing the Picking Process
1. Conduct ABC Analysis (or VED or XYZ)
2. Select the Correct Picking Methodology Before ABC Analysis

▪ Picker-to-Order/Piece Picking
o Picker is responsible for collecting all items
related to an order → effective small order
quantity
▪ Cluster Picking
o pickers are allowed to collect After ABC Analysis
multiple orders at the same time.
o Pickers collect individual-item
orders, items are separated into
individual bin partitions to
reduce/eliminate order errors
▪ etc. ▪ highest volume inventory (C - Green) is stored toward the front of the
warehouse, while the lowest volume inventory (A - Red) is moved to the back.
3. Barcode Scanners Technology ▪ less walking time and fewer man-hours required to complete picking operations.
For warehouses and distribution centers that do not process customer orders, an ABC analysis can be done
based on receiving and shipping volumes.
Warehouse Operations: Material Handling
Forklift trucks:
▪ The great advantage of forklifts is their mobility to travel anywhere in the warehouse
Conveyors: There are two basic forms of conveyor

▪ Gravity conveyors are inclined, and goods use their own weight to move down through a fixed path on wheels or rollers
▪ Powered conveyors use a motor to move goods up, down, or forward on a fixed path on belts, live rollers, or towlines
▪ Products with irregular surfaces use belt conveyors where as heavy, regular items use roller (automated) conveyors
Gravity roller conveyor Powered conveyor (Belt conveyor) Powered conveyor (Roller conveyor)
Warehouse Operations: Material Handling…
Manual lift trucks: Equipment in this category is characterized as belonging to manually operated equipment that
raises products from several inches to several feet off the ground
Walkie trucks: This type of equipment performs many of the same functions as a manual lift truck with the
exception that the lift and vehicle movement are powered by on-board battery drive motors
Warehouse Operations: Material Handling…
Reach trucks:
▪ This type of vehicle is similar in function to a walkie reach truck with the
exception that the operator rides in the stand-up position and performs all
activities from inside the truck
▪ Normally these vehicles are designed to work in narrow aisles.

Module–3: Lean Warehouse
▪ 5S & Visual Management
87
Lean Warehouse: 5S & Visual Management
The 5S & visual management system is designed to create a visual workplace –
o a work environment that is
• self- explaining,
• self-ordering, &
• self-improving.
88
Visual Management
Visual
Management
Visual Visual Visual

Displays Metrics Controls
▪ Label to make it perfectly clear ▪ To make staff aware of related data ▪ Create an mistake-proofed
o where things belong and and information using Charts & environment to promote easy
o what the procedures are graphs etc. adherence to standards
▪ Quantify the path to targets for success ▪ To guide the action of staff members
using Graphs & charts etc. using Sign boards, dos & don don’ts
signs
89
Visual Displays: Examples
Label to make it perfectly clear where things belong and what the procedures are
Hazardous Areas or Equipment

▪ Use a black and yellow striped marking as a border
around any area or piece of equipment where
employees may be inadvertently exposed to a
special hazard.
▪ The black and yellow border indicates that special

caution should be exercised when entering and
working in the area.
Source: Brady 50 Lean Visuals Pocketbook 90

Visual Displays: Examples…
Frequently re-organized storage areas

▪ If you have storage areas that are regularly re-
arranged, use magnets or labels with
repositionable adhesive.

Front and back of flow racks

▪ Always mark the front of a flow rack,
o as this helps reduce picking errors by
the person using the parts.
▪ Also mark the back of a flow rack
o to ensure that material handlers put
parts in the right place when
replenishing stock.

Inside and outside of drawers, cabinets and toolboxes

▪ All drawers, cabinets, toolboxes, and other organizers
should be marked on the outside to clearly indicate
what is contained within.
▪ Also mark the inside of your storage compartments to

clearly identify where each item is properly stored.
o Use foam cutouts or anti-slip mats to prevent the
items from rolling around and shifting in the
drawers.

Tricolour material pull indicators

Tricolour indicators can be used to indicate when
stock is beginning to get low. They provide advanced
warning to material handlers that restocking will be
needed soon. In this example:
▪ Green signals a healthy stock
▪ Yellow provides a warning that the stock is
getting low
▪ Red indicates that resupply is needed immediately

Visual Metrics
▪ Visual metrics allow everyone to “know the score” and they make out-of-standard situations
immediately obvious
▪ Enables everyone to ‘See’ how we are performing
▪ Helps highlight problems, or variances from standard
▪ Visual metrics facilities communication and identification of areas that need improvement
95
Visual Control
▪ Create an mistake-proofed environment to promote easy adherence to standards
▪ To guide the action of staff members using Sign boards, dos & don don’ts signs
Maximum level indicators

▪ Visuals can reinforce stock limits and highlight
overstock situations. It can help you avoid
unnecessarily high inventory levels, which tie up
capital that could be used more efficiently elsewhere.

5S GAME
The “Numbers Game” is an exercise that

illustrates the power of 5s.
The game consist of 4 quick rounds. You must

not look at the sheets until instructed and must
finish when time is up
97
5S GAME
VISUAL STANDARD
13
end
= Reject
13 = OK
start 13
▪ Cross out numbers in sequence from 1 – 49 with a diagonal line as illustrated –
bottom left to top right
▪ Do not turn over the sheet until instructed
▪ Do not rotate sheet of paper 98
5S GAME: ROUND–1
▪ We will apply 5S to a workplace and measure the improvement in

executing our job.
▪ During each 30 second shift, your job is to strike out the numbers 1 to
49 in order
▪ The first page of numbers represents our current workplace
▪ Ready… Set…
99
5S GAME: ROUND–1
The Current ‘Workplace’
Time to allowed : 30 seconds Goal: Cross out the numbers 1- 49 in order
66 72
6 15 9
45
60
39 85 54
75 21 69 79
29 78 53
38
23
41
11 59 77 17 62 26
64
37
76 49 31 16 80
52
73 4 34
28 67
86
55 58
61
100
5S – A Simple Lean Tool
5S helps to eliminate Waste
5S – A Framework to create and maintain your workplace
Seiri Seiton Seiso

整理整頓清掃
Sort Straighten Shine
Seiketsu Shitsuke
清潔躾)
Standardize Sustain
101
Sort (Seiri)
Dictionary definition: To put things in order (or organize them) according to a specific rule or principle.
Industrial definition: To distinguish between necessary things and unnecessary things, and getting rid of what you do not need.
Keep Only
Separate ▪ What is needed Discard
▪ What is needed from ▪ Only in the quantity needed ▪ Unnecessary Items
▪ What is not needed ▪ When it is needed
▪ Close to the place where it is needed
Benefits
▪ Availability of more space
▪ Low inventory & better accountability
▪ Reduced fatigue
▪ Improved Work efficiency
▪ Improved Safety
Car Parking
Area
Should these barrels
be in car parking area?
102
Sort (Seiri)
Degree of
Frequency of Use Storage Method
Need
• Things you have not used in the • Throw them out
past year
Low • Things you have used once in the • Store at a distance

last 6-12 months
Frequency of Use
• Things you have only used between • Store in a central place A
1-6 months near the workplace
Medium
B
• Things used once a week • Store near the work site C
or carry on the person
• Things used daily Distance
High
• Things used hourly
103
Red Tag Movement
▪ At the beginning of each month, put a red tag on

every item. The first step
▪ During the month, remove the red tag when item is to assist your decision to
used. “throw away or save” is a
Red tag movement.
▪ At the end of the month, decide whether the item
with the tag is necessary or not. at Japanese companies
104
Red Tag Movement…
105
5S GAME: ROUND–2
▪ The first “S” is Sort
▪ We have removed numbers between 50 and 90 which are not needed
▪ Ready… Set…
▪ What sort of improvement does this yield?
106
5S GAME: ROUND–2
ROUND 2 - sort
6 15 9
45
39
21
29
38
23
41
11 17 26
37 49 31 16
4 34
28
107
Seiton = Neatness (Set in Order)
Dictionary definition: Establishing a neat layout so that you can always get just as
much of what you need when you need it.
Industrial definition: It is a way of eliminating search.
30 Second Rule
Examples
108
Seiton = Neatness (Set in Order)…
1. Design an efficient layout. Everything should have a name.
(Functional storage) (A place for everything and everything in its place)
2. Eliminate search Reserved seats

(Less search)
Easy to determine
equipment location
Equipment Storage Area

Tool board Examples 109
Set-in-Order: Floor marking guideline
Use visual Management to help Set-in-order
▪ Signs
▪ Lines
▪ Labels
▪ Color-coding
A place for everything and everything in its place → Reserved seats
110
Set-in-Order: Properly store things
Three F Standard
In order to properly store things it is recommended that the following points be taken
into considerations. Namely:
▪ Fixed location: Items have a dedicated location and don’t “wander”
▪ Fixed item: A place for everything, and everything in its place
▪ Fixed quantity: Only a pre-determined amount of items can be stored (no mound
hills allowed)
111
5S GAME: ROUND–3
▪ The second “S” is Straighten or Set in Order

o We have installed a rack system to help locate the numbers.
o Numbers go from bottom to top, left to right
▪ Ready… Set…
112
5S GAME: ROUND–3
ROUND 3 – set in order

6 15 9
45
39
21
29
38
23
41
11 17 26
37 49 31 16
4 34
28
113
Seiso = Cleaning
Definition: Eliminating trash, filth, and foreign matters for a cleaner workplace.
Cleaning as a form of inspection.
Keep things clean

+ Inspection
(Caring attitude)
114
Seiketsu = Standardization
Definition: SEIRI SEITON SEISO
Keeping things organized, neat, and clean, even in
personal and environment aspects.
Key for Standardization
▪ Make the rules, then follow and enforce them
▪ Make the rules simple and easy to follow
▪ Use immediate correction
▪ All employees doing the same job should be able to work in any station with the same tools that are
in the same location in every station.
Standardize: The result of doing the first three steps properly - namely sort,
straighten, and sweep. 115
Seiketsu = Standardization for Sort
Red Tag Rules

o When to Red Tag
o How to Red Tag
o What’s go on the Red Tag
o more…
Rules for the Red Tag Holding Area

o When to clear out
o How to dispose of items
o more…
116
Seiketsu = Standardization for Set-in-order
▪ Which items
▪ Where
▪ How many
▪ Who replenishes
▪ What to do when items are missing
▪ Visual Standards: Signs, lines, Labels
and color coding
▪ more…
117
Seiketsu = Standardization for Cleaning
▪ Clean and Inspect Schedule
▪ Show the task, person responsible,
items needed, frequency, the time
element and the desired state
▪ Where to keep cleaning supplies, ow
to replenish
▪ more…
Standardized Cleaning Lists
118
Standardization: Examples and Techniques
▪ Standards can always be improved, but once a standard is set it’s important to make it visual so that it’s
maintained. A good way to maintain and improve performance is to make the status visible.
▪ There are many examples of visual management and standardization available including:
o Safety Crosses
o Color Coding Standards Color Coding Standards
o Standard Work Documents
o Location Control Marks
o Position Marks / Shadow Boards
o Standardized Filing / Diagonal Tape
How often
accidents occurs?
119
Standardization: Examples and Techniques…
Standard Work Documents Location Control Marks
Standardized Filing / Diagonal Tape

Position Marks / Shadow Boards
▪ Retrieval within 30 seconds
▪ Labelling reserved seats
▪ Color identification
120
5S GAME: ROUND–4
▪ The fourth “S” is Standardize
▪ We’ve created a system of ordering the numbers from lowest to highest from left to
right and top to bottom
▪ We’ve put one number in each box to standardize
▪ Ready… Set…

121
5S GAME: ROUND–4
ROUND 4 – set in order / With Standardization

Numbers from 1 to 49
1 2 3 4 5 6 7 8 9
10 11 12 13 14 15 16 17 18
19 20 21
22 23 24 25 26 27
28 29 30 31 32 33 34 35 36
37 38 39 40 41 42 43 44 45
46 47 48 49
122
5S & Visual Management: impact on Productivity
5S is defined as a methodology that results in a workplace that is clean, uncluttered, safe, and well organized to help
reduce waste and optimize productivity.
123
Shitsuke = Self-discipline
Definition: Doing the right things as a matter of course.
PURPOSE: To maintain what has been accomplished.
How to sustain the 4S (Sort, Set-in-Order, Shine & Standardize):
o Maintain and review standards. Once the previous 4 S's have been established, they
become the new way to operate.
o Maintain focus on this new way and do not allow a gradual decline back to the old ways.
o While thinking about the new way, also think of better ways.
o When an issue arises such as a suggested improvement, a new way of working, a new tool
or a new output requirement, review the first 4 S's and make changes as appropriate.
124
5S Audit Results
5S Workplace Scan Checklist
Department: Place an "x" in the appropriate box based on number of issues observed. Monthly 5S Overview
Date: Scored By: Number of Observations >> 0 1-2 3-4 5-6 >6
Distinguish between what is needed and not needed 1 - Sort
1 Unneeded equipment, tools, furniture, etc. are present X 20
2 Unneeded items are on walls, notice boards, etc X 15
Sort
3 Items are present in walkways, stairways, corners, fire exits etc. X

4 Unneeded inventory, supplies, parts, or materials are present X 10
5 Safety hazards (water, oil, chemical, machines) exist X
2 - Set in
5 - Sustain
Subtotal >> 0 1 4 6 0
5 Order
A place for everything and everything in it's place 0
1 Correct places for items are not obvious X
Set in Order
2 Items are not in their correct places X

3 Walkways, workstations, equipment locations are not indicated X
4 Items are not put away immediately after use X
5 Height and quantity limits are not obvious X 4-
Subtotal >> 0 1 4 6 0 3 - Shine
Standardize
cleaning, and looking for ways to keep it clean and organised
1 Floors,walls stairs, and surfaces are free of dirt, oil, and grease X
2 Equipment is not kept clean and free of dirt, oil, and grease X
Shine
3 cleaning materials are not easily accessible X

4 Lines, labels, signs, etc are not clean and unbroken X
5 Other cleaning problems of any kind are present X Monthly Audit Results
100
Subtotal >> 0 2 4 0 0
Maintain and monitor the first three categories 90
1 Necessary information is not visible X
Standardise
80
2 All standards are not known and visible X
70
3 Checklist don't exist for all cleaning and maintenance jobs X
60 65
4 All quantities and limits are not easily recognizable X
60 60
5 How many items can't be located in 30 seconds X 50 55 54
51
Subtotal >> 0 1 4 6 0 40 45 46 46
Stick to the rules
30
1 How many workers understand the 5s principals X
20
Sustain
2 How many times last week was daily 5s not performed X

3 Number of times that personal belongings are not neatly stored X 10
4 Number of times job aids are not available or up to date X 0
5 Number of times last week daily 5s inspection were not performed X Jan- Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
06
Subtotal >> 0 1 0 6 8
Total >> 0 6 16 24 8 125
Grand Total 5S Score 54
5S & Visual Management Simplified
Type Examples
Identification Markers Signboards, name labels, photos, or shapes of items.
Location Markers Tape strips, color coding, numbering.
Quantity Markers Signs indicating number (min/max), standard containers, number of spaces for items
indicators of normal operating values.
Standard Methods Charts of standard cycle time and work sequence, standard procedures, flowcharts,
photos of operation.
Tags Excess (red tag), broken items, tooling needing sharpening or repair, defectives.
Andon Visual (lights, flags) and hearing (bells, buzzers) signals to draw immediate attention
or help.
Kanban Card, empty container, or space signaling that production or movement is authorized.
Performance Display Production schedule and quantity produced, quality, productivity cost, safety, or
improvement activities.
Defect Display Tables or boards showing defective product, tooling, raw materials, or paperwork.
Personnel Board Availability (in/out), assignment and location of dept. personnel, cross-training
status vs. plan.
126
Questions & Answers
Trainer: Dr. Hakeem–Ur–Rehman 127

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Module–1: Inventory & Inventory Management

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