In: Operations Management
A company currently has a warehouse capacity of storing 5,000 pallets. Finished Goods occupy 1,700 of those pallet positions and the rest are occupied by work-in-process or component items. Only a maximum of 80% or 4,000 of those pallet positions (storage locations) can be used at any given time due to safety reasons. Due to a high volume of items requiring storage, there is a need for this business to rent additional off-site warehouse space and use it to store 700 pallets. This amount is always fluctuating. The cost is $13/pallet monthly and the company therefore spends approximately $109,200 annually on this additional storage. This business ships 2,300 pallets / month so there is a high turnover of the pallet positions. There is approximately a two week advance notice of what is being shipped at any given time. Objective: Eliminate the need for the use of any and all off-site additional warehouse space with the current business conditions and therefore save the company $109,200 annually. Potential Tools at your disposal: • Kan Bans • Safety stock levels negotiated by customers • Lead times for products promised to customers • Re-usable packaging – cartons vs. totes • Adjustable racking for additional storage • Use of large cartons (gaylords) as opposed to cartons (24 or 30 per pallet) • Adjustment in the amount and frequency of overseas shipments from Europe Assignment: Please develop a rational or algorithm to solve this problem. There are obviously many solutions but how can this be done in a one-year time interval? What tools would you use to solve this costly issue? Please consider what is being done and describe the potential to other areas of the business, for example Sales or Customer Service. Whenever possible please apply any quantitative analysis and if data is needed but not presented then please describe how you would acquire this data and how would it be used to solve this problem.
Maximum Number of pallet positions available for use = 4000
Finished Goods Inventory in warehouse = 1700
Raw Material & Work In Progress in Inventory = 2300
Additional Storage Space = 700
Thus total storage space currently in use = 4700
The Business Ships 2300 pallets per month. Thus the demand is
constant. However, in the problem it is mentioned that the
additional storage space of 700 required is always fluctuating.
Thus there is a possible solution.
The current level of inventory is being maintained with a view
of monthly demand of 2300 pallets. However, it is given that a two
week advance notice is available. Thus the company can work with
inventory for 2 weeks of demand.
In the current Scenario, for Monthly demand of 2300
FG: 1700 + 700 (additional) = 2400 (Please note that company keeps
a FG inventory of 2300 + 100 that is a buffer of 100 units over
monthly demand)
WIP = 2300
If inventory Levels are changed for 2 week demand, the Finished
Good (FG) and Work in Progress (WIP) inventory at anytime can be
changed to
Bi-Weekly Demand = 2300/2 = 1150
FG = 1150 + 100 = 1250 (We keep a buffer of 100 just as the company
has been keeping as seen in the equations above)
WIP = 1150
Total = 2400
Even with this the company will have space to have 1600 additional
units of Finished Goods as safety Stock.
Thus final breakdown of Inventory at any time would be - Finised
Goods : 1250 + 1600 = 2850 and Work in Progress = 1150. Total =
4000
Thus the new inventory storage method reduces the WIP inventory
while the finished Goods inventory remains unchanged. This can be
achieved by having an agile production system. It is given that a
two week advance notice is available before shipment. Thus a 2 week
WIP should be sufficient. The company can put into use the 2 BIN
Kan Ban. Thus inventory should not be built up all the time. Only
when there is an intimation about a shipment, the production should
start for the same amount of Finished Goods. Current Demand will
always be satisfied from Finished Goods Inventory. Thus orders will
never be missed.