Key Words: Warehousing, Handling systems, workforce.
Project Area: Financial Management
Abstract: Literature study on management warehouses is done. Discussion of different types of warehouses, handling systems, selecting location to launch, eligible workforce to be hired, and volume of warehouse is done. Study on a company names PVR car decors is made and collect data like its financial status, product etc. Methods to evaluate are introduced in this report that helps in evaluating private warehousing. Evaluating private warehouse from the data which is been collected. Evaluating the contract warehouse, which the company rented. Comparing the evaluation made on private and public warehouses and suggesting that company a best suitable warehouse.
I owe a special thanks to Dr. Ramachandran, Director (BPD), for giving me the opportunity to expose myself to such an environment and enhancing my knowledge
I am very thankful to Ms. Aqila Rafiyuddin, faculty of Management, for proving all necessary information, support and immense encouragement.
The Customer satisfaction is the important need that needs to be satisfied in the growing business environment in order to stand out among other organizations. Nowadays customers do not buy products that just fulfills his/her basic needs rather they look and give importance for products that give more than just satisfying their requirements. Basically all organizations rely on customer requirements and their satisfaction.
Satisfied customers are regular customers. They support the organization financially by buying their products. Now all companies are customer oriented, customer focused because customers rule entire business world. Any unsatisfied customer can have alternate ways to satisfy their needs with the help of other companies. But if a company loses a customer, he/she never comes back which in turn affects the company status as well as profits. There is a proverb; a right product should be delivered to a right customer at the right time, right place, in the right amounts to maintain customers.
Among all customer focused companies, warehousing is one of them. This gives ultimate customer service to attract more customers. In the coming sections we discuss, how warehousing is important for a customer , how is it producing service, where it should be located in order to give customer service, what are the alternative's present, what type of warehouse is good.
The main part of project is based on case study done in a company named PVR car decors. Study includes collecting financial status of the company of the years 2008, 2009. Comparing both public and contract warehouses and suggest the company to take up a suitable warehouse.
This project is divided into two parts. First part consists of theory for better understanding of warehouses and gives procedural steps for constructing a warehouse. It also explains how to select a contract warehousing. Second part consists of practical part that has methods to be followed while evaluating private warehouse. Comparing both the warehouses is done.
CHAPTER 2: WAREHOUSE PLANING
It is the place or godown where organizations finished, unfinished goods, raw materials, products that are still in process. Warehouses give an opportunity to organizations to store their products safely without any damage. Warehouses are used by manufacturers, retailers, wholesalers, importers, exporters. Manufacturers store their raw materials, finished goods that are to be dispatched to retailers or whole sales or directly to customers. Retailers and Wholesalers use warehouses to store the products and resell to customers. Importers and exporters store goods that are imported or to be exported to different places on customers demand.
DIFFERENTIATE DISTRIBUTION CENTER FROM WAREHOUSE
Distribution center is a place where we store finished goods, and transport them to retailers or wholesalers or directly to the customers. It is not for long term storage of products. When a finished product comes in, they are dispatched to the customers without storing for long time. It is relatively very fast process, requires less cost which leads to more profits. That is why this is known as order fulfillment process. This is a demand driven process because, according to the demands of customers, distribution centers allows the products in and transports. It maintains JIT (just in time).
- They are not only useful for manufacturing companies to store them but also for only transportation to the customers.
- The Online companies may also need warehouses. Whenever any user logs in and orders for a product, according to the order, the warehouse stores the product and transports to that user.
- It will make manufacturing efficient by storing all raw materials, unfinished products, waste materials like broken etc. for future purpose.
- They keep track of all materials that come in. there is no chance of manipulation or cheating.
- This is very effective and fast in transportation.
- It adapts to the changes made by the customer's example like change in lead time to the favor of them.
- It tolerates to the changes in price or supply.
- It divides all shipment of good to sub shipments which are feasible.
- It combines all different products of different manufacturers for shipment to a customer.
- It combines all small shipments to a single large shipment to reduce cost of transportation.
- It follows just in time processing.
Any company according to its production, need, it must select a type. There are three types of warehouses. They are 1) Private warehousing
- Public warehousing
- Contract warehousing
In this section we give a brief idea about each type.
This is owned by a company to store its own goods and maintain them. It doesn't accept other company products. This is advisable when the production rate is very high. This type of warehousing reduces the storage costs and rest.
There is more flexibility. We can change the design according to the customer needs.
Firm will have control over the inventory until it reaches the customer. So there is no possibility of missing.
It is best used when production is really high. It is less costly.
No need of extra workers to handle and maintain inventory, as they already have workers and specialists working. They can make use of existing workers. That is why there is greater care in handling.
Since private warehousing is the part of firms building, it doesn't need to pay any separate tax.
We cannot expand or reduce the size of warehouse due to its fixed size, when the customers demand increases or decreases. When demand decreases, the company will have same costs due to unused space. When demand rises, since there is no possibility to increase the space to store, it either can't produce on time and go loses or choose lease some warehouse to store temporarily.
If a firm wants to build a warehouse separately by not including in its building, then it takes high start up costs, more workforce, building cost, taxes etc.
These types of warehouses are designed especially for firms that would like store for fewer periods. It is independent type of business. It stores products of different firms irrespective of their type. It is advisable when there is a less production.
It doesn't need any start up costs like building cost or labor cost or material cost or lease cost etc.
It is flexible. At times when is need to expand or contract, this type of warehouses are very much favorable.
No taxes, since it not self owned building.
It provides special free services to all customers like shipping, broken case handling, packaging etc.
It does not support special services desired by the customers. The public warehouse gives only constant services to all customers.
Lack of space during peak seasons and in particular areas where there is plenty competition.
It is a long term contract between vendor and customer unlike public warehousing. The services desired by the customers are supported in contract warehouse and is mentioned in the contract that any benefits or risks that evolves from this are shared by both owner and the customer.
This type provides special services to customers evenly like shipping, packaging, machine handling, inventory control, customer service etc.
It does not allow short duration contracts unlike private and public warehouses.
While starting up any warehouse, it is important that where it is been located. There are two options in placing warehouse. They are onsite, offsite warehousing. Onsite location describes about the placement of warehouse within the firm's site. Offsite placement describes in placing a warehouse in a selected location. The most important approaches that help in deciding the offsite locations are
- General approach
- Specific approach
It is an approach to select a location. There are 3 strategies which you can follow regarding the type of your business.
MARKET POSITIONED STRTEGY: This strategy is to locate warehouse that is near to the customers that is where ever many customers are located. This strategy concentrates more on maximizing services for customers and reduces more transportation costs.
PRODUCTION POSITIONED STRATEGY: This strategy is to locate warehouse near to the raw material suppliers or manufacturers to get more customers. This doesn't concentrate much on customer service.
MID POSITIONED STRATEGY: This strategy is to locate warehouse between manufacturers and customers so that to provide at least more than expected services to customer and to manufacturers. Transport costs are less.
If the business is retailing business, it's better to go for market positioned strategy. Because they have to concentrate more on attracting customers and provide better services in order to maintain them.
Private warehousing is advisable to follow production positioned strategy since the firm owns its own warehousing; all its goods can be transferred with low costs to the warehouse. This takes transport cost only from warehouse to the customers. If they follow mid positioned strategy, they will experience transport costs from manufacturing point to warehouse and from warehouse to customers. So to reduce these extra costs, private warehouse owners should follow production positioned strategy.
This approach identifies specific factors that are necessary to be there when you're selecting a location.
The factors for private warehousing are:
- Look for availability of skilled labor.
- Quality of industrial land.
- Cost of land, labor, construction, maintenance, machines etc.
- Look for the taxes of that particular area.
- Rules and regulations are to be followed.
- Investment cost.
- Transport allowance. See whether high loaded trucks are allowed or not.
The factors for public warehousing are:
- Look for the availability of plenty transport terminals.
- Check whether movements of trucks are allowed.
- Facilities available in that area.
- Warehouse services.
- Availability of computer service, this is useful when there is automated warehouse exists.
- These are the main factors to look for.
PRODUCT MIX CONSIDERATIONS
This section tells us how much space is needed to construct a warehouse.
Here are few steps:
- Note each products annual sale, its demand, weight and cube.
- Determine total size, weight, cube of an average order to be passed through warehouse.
- Similarly do for other products also.
- Estimate the quantity of load, space occupies of each and every product approximately.
- Add up every products space. That gives the volume needed for the warehouse.
MATERIAL HANDLING SYSTEMS
Handling materials is a crucial step for any warehouse. For private warehousing, investment in selecting a material handling system is carefully made. This helps in increasing efficiency of product flow and made a warehouse effective.
Material handling systems are more concerned about movement, control, storage.
It is mainly used for space and time utility, increased flexibility, integration.
There are 3 different types of material handling systems are there.
- Mechanized handling system
- Semi automated handling system
- Automated handling system
MECHANIZED HANDLING SYSTEMS:
This type of handling systems uses only human power to pick up and store the products. This needs to be careful in selecting skilled labors.
This type of handling system needs both human power and machines. This needs input to the machines like storing path for storing or retrieval of a product from a place.
They need only automated machines. It does not need any input. Already algorithms are inbuilt giving the location where it is located.
By calculating the costs and adverse effects that occur from the above three handling types, select one best suitable for the company.
For storing any product, we need storage equipments like racks, drawers etc. Racks are stored parallel and it occupies less space compared to all. The shelf store less no. of product and occupies more space compared to racks.
Warehouse is designed to increase efficiency and productivity. There are factors that affect the warehouse design. They are
- Quantity of products: If the quantity of products increases, there should be increase in space allotted to it.
- Material handling system: Usage of automated material handling system leads to less space storage. Whereas others like semi automated, mechanized need space for racks and the machines used.
- Type of storage equipment used: Racks occupy less space compared to shelves.
- Customer service levels: If a customer desires any special service like extra space like 10% should be maintained unoccupied for inventory, this leads to change in storage which effects in design. When customers decrease the lead time, production increases, the products that are stored are immediately dispatched results in less storage area.
- Office area in warehouse: When there is increase in office area, there should be increase in space provided in order to compensate the product flow in.
- Market up's and down's: When market is down, customers show less interest in buying products that leads to decrease in productivity. Results in less storage area.
- Level of customers demand: Increase in customers demand leads to increase in production leads to increase in urge for more storage area results in affecting warehouse design.
Larger the products, shorter the lead time, usage of mechanized handling system results in occupation more space.
Product mix considerations play an important role in planning a warehouse.
Ø Warehouse =?( estimated sales per month in each sales)
Sales are in terms of units. Later convert them to square meter
The most important step in planning warehouse is to plan for workforce that is skilled labor in handling products. This is an expensive deed in hiring workers. It is most important for private warehouses that are located on site to select workers. The warehouse activities are to be noted first before hiring no. of users. The basic activities can be
- Receiving the stock
- Storage of stock
- Selecting the stock to retrieve on customers demand.
Picking up activity is 10% of all warehouse activities. Storage activity is 40% of all warehouse activities. Selection is 10% of all activities and shipment is 20%. So out of all, storage is more straining and skill required job. It is important to distinguish work into four categories.
- Scientific technological support
- Technical side
Based on the proficiency of individual on each category, staff is given salaries.
By considering all the above stages, planning of warehouse will become successful.
CHAPTER 3: WAREHOUSE EVALUATION
This section differentiates between public and contract warehouses regarding financial point of view, investment cost, operational costs etc.
In case of private warehousing, costs like initial cost (investment cost) or operational cost play major role. Let us go through briefly.
Construction cost: building, safety protection systems, AC's, roads, sewage etc.
Machinery costs: Machines, trucks, spare parts, racks etc.
Instrument costs: computers, scanners, printers, barcode readers, software etc.
Labor cost: Training.
Labor costs: Salary, bonus, insurance, hospitality, overtime cost etc. Overhead costs: Advertising, Insurance of equipment, rest, utility costs, maintenance, other costs. Total cost= start up cost+ investment cost+ Operational cost By comparing all costs above, labor cost is greater, and then comes building, machinery, instrument, overhead costs.
Warehouses are paid by the companies that have contract with them. The warehouse charges based mainly on how much volume is occupied and the time period, services provided.
There are mainly three costs 1) warehouse costs 2) Capital costs 3) other costs
Warehouse costs include storage and handling of equipment etc.
Investment Evaluation Methods:
Net Present Value (NPV):
Net present value is an evaluation method that estimates the profitability of a suggested investment. It mainly focuses on whether the present value of future cash flows overwhelms the initial proposed investment.
Steps to be followed when evaluating NPV,
- Determination of expected future cash flow from initially invested amount.
- Determination of present value.
- Implementation of discount rate (opportunity cost of capital) on future cash flow of an investment. Since, the value of Euro is varying as time passes by.
- After determining PV, NPV can be calculated as the difference between the present value (PV) and the cost of investment (IN).
- If NPV is positive, proposed investment accepted thus gains profit otherwise rejected.
Where, PV = Present value (Euro),
n = Expected life of project,
Ci = Expected future cash flow in the investment from previous years (Euro),
i = Time of the cash flow,
r = Discount rate.
NPV = PV-IN = i=1nCi(1+r)i-IN
Where, PV = Present value,
IN = Cost of investment.
Internal Rate of Return (IRR):
NPV is termed as IRR when its value exactly equal to zero. It determines the rate at which a project earns in return. Further, IRR must be greater than the rate of discount otherwise the investment is neither reasonable nor worth considering.
IRR= r1+ NPV+|NPV+|+|NPV-|x(r2-r1)
Where, NPV = Net present value,
r1 = Estimated IRR for positive NPV,
r2 = Estimated IRR for negative NPV.
Another way of calculating IRR by trial and error after setting NPV =0.
Payback Method (PB):
Payback method is considered to be the most useful method to determine the length of the time it takes to recover the initially invested amount. It is based on undiscounted cash flows.
Investment is acceptable if and only if Payback period < Maximum desired Payback period
Where, IN = Cost of investment (Euro)
C = Cash flow.
Pay-Off Method (PO):
The only difference between Payback method and Pay-off method is the application of discounted cash flows in the calculation of payback period. The length of the time is termed as discounted payback period. Investment is acceptable only when the estimated discounted payback period is less than or equal to maximum desired discounter payback period.
Where, IN = Cost of investment (Euro),
DC = Discounted cash flow = C(1+r)i
CHAPTER 4: COMPANY DESCRIPTION
PVR Cars and Decors, an engine manufacturing company, was established in 2008 in Hyderabad, Andhra Pradesh. The main objective of the company is to supply car engines of different types. Car engines are based on fuel type, ignition type, cooling type, total no. of cylinders and assembly of cylinders. PVR Cars and Decors is one of the top most engine providers of India. Growth rate of the company is affected by the number of products manufactured. Productivity is highly reliable on level of demand and sales.
Production of PVR Cars and Decors is drastically increased from 2008 to 2009. In 2008, they manufactured 2160 engines and gained 30% profit where as in 2009, they manufactured 3340 engines and gained 40% profit. Company encountered 50% in increment of productivity from 2008 to 2009.
In the manufacturing of engines, Raw materials play a dominant role. Company purchases raw materials from suppliers all over the world on contract basis. Manufactured engines are stored in company warehouse and distributed as per the customer needs.
The company sales details are given in appendix 1, 2.
CHAPTER 5: WAREHOUSE PLANNING
Since the company PVR car decors wants extend its supply chain in Hyderabad, This chapter gives details on warehouse planning process. It determines warehouse Location, material handling, workers, rationale etc. First let us differentiate public and contract warehouses.
Considerations for private warehousing:
- Product mix considerations
- Handling and storage equipment
Considerations for Contract warehousing:
- Product mix consideration
This car décor company wants to support customers with fast, flexible, efficient services.
It wants to follow just in time policy.
To make transportation charges less.
To go satisfy customers demand.
The general approach is taken into consideration in selecting location. Since the company wants to gives fast services and satisfy them, we make use of market positioned strategy that tells that warehouse should be placed near to the potential customers which increases the fast and efficient services to the customers and decrease in transport cost.
While selecting a location, everyone should look for the following needs and if they are available, that location is said to be valid for the warehouse. The needs are
Availability of skilled labor, quality of land, possibility of expansion, Taxation, Cost of land, labor and utilities, highway access, other rules and regulations.
Now we have selected a location where the warehouse should be present which helps in satisfying demand of end users.
Product Mix Considerations:
Before calculation the space that an engine could occupy, let's look at sales history of the product. Analysis shows that demand for car engines (V6) has been increasing from the time of investment. The sales have gradually increased fro year by year. Last year 2008, sales history records 1500 engines demand from customers. In the year 2009 which recorded to increased demand shows 50% increase in demand i.e. 2250.
Material Handling System:
Material handling and storage systems should be taken into consideration only when company is going own a warehouse. As mentioned earlier handling systems play an important role. Here in this case, we have chosen mechanized handling system by using forklifts, trucks etc. For storing the products, we use racks, pallets for safety purpose. The list of general equipment, instruments, and office equipments is given in the next section in terms of investment costs.
Once we know the volume of the products to be stored in warehouse, storage equipment, we can determine the volume of the warehouse. The warehouse consists of not only storage equipment and products but also office. The table mentioned below gives details about the area occupied by products in terms of square meter excluding office area.
The last step for warehouse planning is to determine personnel. The warehouse's inflow and outflow operations are controlled by two operators in 2008. The gradual increase in sales has increased workforce demand. So in the year 2009, one more employee is been added.
CHAPTER 6: WAREHOUSE EVALUATION
As stated earlier, warehouses are of different kinds. Evaluation of better warehouse is based on analysis of profitability of individual warehouse from cost perspective.
Based on some assumptions like consideration of total private finance in which loans and inflation are not included, warehouse is completely operated and rented by company.
Cost analysis includes the detail calculation of total investment costs and operational costs of company for a period of two-years.
Investment costs depend upon the number of equipments and instruments in the warehouse which will be differentiable as per the customer needs.
Operational costs are classified into labor costs and overhead costs. Labor costs include the salaries of employees, health and social allowances provided by the company and fringe benefits. Overhead costs consist of other operational costs that facilitate warehouse operations. Costs may include depreciation, equipment and stock insurance that being paid to an insurance company on annual agreement. Security and safety is also an important parameter in operating warehouse. Electricity consumption and water utilities are also taken care by company Telecommuntication costs paid according to the agreement with a telecommunication company. Increase in salary and utility costs are also taken into consideration in the analysis.
As discussed earlier, investment evaluation methods are used to evaluate the profitability of an invested amount to operate the private warehouse. Cash flows and discounted cash flows are of major concern. Cash flows can be calculated by adding depreciation to the net profit and excluding capital investment from it.
Further, NPV, IRR, PB and PO methods are used to determine whether the investment is profitable or not. Investment is considered only when NPV >0 and IRR > r (discount rate) and payback period within desired value.
Discount rate set by PVR Car & Decors Company is 10 %. Following table determines the Net present value.
Evaluation of Contract Warehouse:
Contract warehouse is also termed as public warehouse. This includes logistics .Picking and packing will be operated by another provider that already operating a warehouse.
This includes rent depends up on the number of pieces and stock level. Handlings costs are also be taken care. Investment costs are not considered.
Investment evaluation methods do not apply since initial investment is not included in the calculations.
Comparison between private and contract warehousing based on cost analysis:
All companies will look for the profit that they get from all resources. One of the most common areas of getting profit is warehouse. The level of demand from customers increases from time to time. Hence, opting a rightful warehouse which minimizes the company's unnecessary expenditure.
In private warehouse, total cost includes both investment cost and operational cost.
CHAPTER 7: CONCLUSION AND RECOMMENDATIONS:
Conclusions and recommendations are drawn from the analysis made in the previous section. The case study is made from the company PVR car decors which are planning to own a warehouse this year to decrease the transportation cost, rent etc.
Based on procedural steps to be followed, Location is found and it should have an area of more than 135sq m to handle 270 engines per month. Initially in 2008 it required 100sq m to handle 180 engines.
Since the sales are been increased year by year, production rate increases which leads to more demand in storage area. So it is advisable to leave more space for future expansions.
Private and Contract warehouses are evaluated on cost perspective. The amount of products that are stored is important factor. Since production always varies, when production is less we need less storage area, which is satisfied by only contract warehousing. When production is more, we can go for either private or contract warehousing. By the analysis made from case study, it is found that production is less, so contract warehouse is best preferable.
CHAPTER 8: BIBILIOGRAPHY
- KAPOOR, S.K., KANSAL, P. "Basics of Distribution Management: A Logistical Approach" (http://books.google.fi/books?id=5fOPkttS0KcC&printsec=frontcover#v=onepage&q=&f=false)
- TOMPSKIN, J.A., SMITH, J.D. "The Warehouse Management Handbook" (http://books.google.fi/books?id=oHkA15BCY9MC&printsec=frontcover#v=onepage&q=&f=false )
- Logistics Management: Warehouse and DC Management (http://www.logisticsmgmt.com/article/335054Warehouse_and_DC_Management_Part_2_Zooming_in_on_the_perfect_site.php)
- BARTHOLDI, J.J., HACKMAN, S.T. "Warehouse and Distribution Science" (Retrieved from http://www2.isye.gatech.edu/~jjb/wh/book/editions/wh-sci-0.90.pdf)
- Department of Transport Management. Vilnius Gediminas Technical University. Economic evaluation of logistics centers establishment. 2007. (Retrieved from http://www.transport.vgtu.lt/upload/tif_zur/2007-2-meidute.pdf
- BAKER, P., CROUCHER, P., RUSHTON, A.: The handbook of Logistics and Distribution Management. 3rd Edition. United Kingdom. 2006. 611 pages. ISBN 0-7494-4669-2