The Purchasing Handbook defines purchasing as “the body of integrated activities that focuses on the acquisition of materials, supplies and services needed to reach organizational goals. In a narrow sense, purchasing describes the process of buying: in a broader context, purchasing involves determining the need: selecting the supplier: arriving at appropriate price, terms and conditions; issuing the contract or order and following up to ensure delivery. Purchasing can therefore be defined as the process of acquiring goods, services and works in return for a price. All organization invariably need input of goods and services from external suppliers or providers and to this extent therefore, purchasing function plays an integral part in ensuring the goods/services are provided to the company. The role and contribution of purchasing has increased quite steadily over the second half of 20th century. The reasons behind this paradigm shift based on importance and recognition of purchasing entail:
- New management concepts
- Advanced technology
- Government policies
- Fewer but larger suppliers
- Competition hence the need for quality
The Purchasing Organization
The ability to execute the functions of purchasing requires the establishment of an effective purchasing organization. The structure of the purchasing function in any given firm is determined by how it is perceived by the rest of the organization. Companies that consider purchasing of fundamental significance to the success of the business view purchasing as a strategic advantage and invest in it with high level functional area decision making. On the contrary, in those companies that perceive purchasing as purely a tactical activity, it is treated as an administrative function without any strategic impact on the business. The relative position of purchasing in an organization is also revealed by its level of interaction with other business functions. Purchasing management normally has close communication with inventory
management, transportation; sales, product design, Marketing and finance should be an integral part of the strategic planning processes of each these business areas.
Generally, the functions of traditional purchasing department can be categorized into five main groups which are management, buying, status reporting and expediting, research and clerical functions. An effectively structured purchasing organization must be able to execute these activities in as efficient and cost effective manner as possible. The key principle in designing an effective purchasing organization is to focus on those activities that add value to the process and eliminating those that merely increase the cost. For instance activities that fall under management such as sourcing and supplier development are value adding, while expediting and clerical activities are non value adding.
Ideally, the structure of the purchasing function should consist of three levels i.e.
- Purchasing Manager,
- The Buyer and the
- Administrative Support.
The purchasing manager aligns the goal of the purchasing department to the goals, mission and vision of the organization, act as liaison to other business departments in the firm, formulate and review performance measurements, develop the purchasing staff, and perform all required administrative functions. The buyer‟s role consists of a number of tasks centered on the actual work of purchasing which comprises of activities such as supplier development, negotiating, and contracting. The administrative staff at the third level is in charge of record keeping, paperwork, data entry and issuing of purchase orders to suppliers.
The purchasing department can be further structured into three general approaches according to Commodity or function, project or product and matrix.
The commodity approach is the most commonly used by companies. In this approach, the purchasing function is divided into spheres of buying responsibility such as production inventories, maintenance, repair and operating (MRO) inventory and services, and capital and construction equipment. In addition, other non buying areas such as acquisition research, administrative support and technical liaison can be integrated in the model. The buyer within
each commodity group is responsible for all sourcing, negotiating, and purchase order releasing activities for that commodity area. The advantage of this method of organization is that focused members of the purchasing team are able to acquire specialized knowledge about products and suppliers, serve as the communication point for purchase order requisition, and reduced cost of operation due to specialization.
Project or Product Approach
Project or product approach is used in firms whose products and services are focused on long- term projects. In such organization, the goal of the purchasing group is the acquisition of the required materials and services required to meet project requirements. The advantage of this form of organization is that certain buyers can be linked to specific project segments, thereby ensuring that purchasing requirements are kept within budget targets and scheduled time frames are met.
In this structure, buyers are organized into project teams with responsibility of meeting the acquisition needs of the entire project. Essentially, these buyer-teams are part of each project or project segment. This organizational structure streamlines the purchasing process and eliminates possible redundancies.
Functions of Purchasing Department
Sourcing: This is a high value adding activity that is concerned with matching purchasing requirements with sources of supply, ensuring continuity of supply, exploring alternatives sources of supply and validating the supplier compliance necessary to meet or exceed buyer criteria for quality, delivery, quantity, and price. The purpose of sourcing is to find right suppliers that improve the overall supply chain performance.
Value Analysis: This set of functions is concerned with increasing the value added elements of the purchasing process. Value analysis can consist of such components as price for quality received, financing, and delivery. An example would be identifying less expensive goods and services that could be used as substitutes at comparable quality and value.
Contracting: Critical functions in this area are the development and analysis of request for quotation (RFQ); negotiating on pricing, volume, length of contract, specifications, supplier selection and monitoring of performance measurements.
Supplier development: In today’s environment, increasing collaboration with suppliers has become a requirement for doing business. Pursuing capabilities that promote supplier partnering require buyers to be knowledgeable of supplier’s capacities, resources, product lines, and delivery and information system capabilities. A key component in the strengthening of this partnership is the development of pricing, technology, and information-sharing agreements that link supplier and buyer together and provide for a continuous win-win environment.
Internal Integration: Purchasing needs to be closely integrated with other enterprise business areas such as marketing, sales, inventory planning, transportation, and quality management. By providing key information and streamlining the acquisition process, the purchasing function can assist the enterprise to synchronize replenishment requirements with the overall capacities of the supply network.
Research: Purchasing department conduct market research to gather diligence on sources of supply, prevailing market prices. Other research activities include value analysis, economic and market studies, special cost analysis, sourcing and system research.
Supplier scheduling: One of the keys to effective purchasing is a valid schedule of when inventory is required either for customer orders or value added processing. By sharing the time phased schedule of demand, firms can provide detailed visibility of future requirement as to the supplier, who in turn can plan the necessary material and capacity resources to support the schedule.
Purchasing and Receiving: These includes day to day purchasing activities associated with order preparation, order entry, order transmission, status reporting, receiving, quantity checking and stock put away, invoice and discount review and order close out.
Cost management: A critical function of purchasing is the continuous search for ways to reduce administrative costs, purchasing prices, and inventory carrying costs while increasing value. Improvement activities include purchasing costs reduction programs, price change management programs, volume and stockless purchasing contracts, cash-flow forecasting and strategic planning.
Performance measurement: Monitoring the quality and delivery performance of suppliers is an integral part function of purchasing department. This is usually done in supplier evaluation and vendor rating. It is important to measure supplier performance since it is essential when evaluating the capabilities of competing suppliers and ensuring that costs, delivery and collaborative targets are being attained.
Centralized and Decentralized Purchasing Function Centralized purchasing
In this type of purchasing all purchasing activities are done at the head office of the organization and the supply effects through Head office to the branch office. It is very common in government organization. In considering a centralized option, a number of critical questions should be considered:
- How is the buying function to co-ordinate the acquisition of products and services?
- Where in the organization are buying decisions to be made?
- How are purchasing decisions and activities to be split between corporate and local facilities?
- Ability to enjoy economies of scale due to bulk purchases
- Availability of large trade discounts
- Better coordination of purchasing requirements through the creation of a single supplier order
- More efficient utilization of scarce resources among competing facility units
- Development of specialized professional
- Centralized purchasing helps to maintain uniformity in purchasing
- Better layout of stores is possible in centralized stores
- High initial investment has to be made in
- Delay in receiving materials from the centralized store by other
- Centralized purchasing is not suitable, if branches are located at different geographical locations.
- In case of an emergency, materials cannot be purchased from local supplier
- Defective materials cannot be replaced timely
- Fragile items may be destroyed during handling, transportation and
- Defective materials cannot be replaced
Decentralized purchasing is where the power of purchasing is delegated to branch offices and departments to purchase all materials independently to fulfill their needs. Under this method, there is no one purchasing manager who has the right to purchase materials for all departments and divisions. This also happens in multinational companies. The manufacturing company which is running several plants at different locations and manufacture different items may have different type of material requirement, hence necessary to decentralize purchasing power.
- Materials can be purchased by each department locally as and when required
- Purchase orders can be placed quickly
- No heavy investment is required
- The replacement of defective material takes little
- Materials are purchased in right quantity of right quality for each department
- Elimination of transportation
Disadvantages of Decentralized Purchasing
- Organization losses the benefit of a bulk purchase
- There is a chance of over and under-purchasing of
- Specialized knowledge may be lacking in purchasing
- Fewer chances of effective control of
- Lack of proper co-operation and co-ordination among various
The Purchasing Process
1. Need or problem recognition
This is the first stage of purchasing cycle, where the user department identifies/recognizes the need to be fulfilled. User department refers to any department within the organization that is need of goods or services to be purchased.
2. Need description
This is where the specification of the goods and services are drawn up detailing the quality, quantity and the duration of the contract. This stage involves a number of departments such as purchasing, design/ engineering, and finance department.
3. Request for proposal or quotations
After the description of the need, the purchasing department sends out RFQ to various suppliers asking them to quote appropriately. There is usually a period of time given for suppliers to respond.
4. Analysis of the proposal
When the suppliers respond, the quotations are analyzed against the set out criteria by an evaluation committee. The results of analysis are given to appropriate committee for further action.
5. Award of contract
The supplier whose bid is the most responsive the user’s needs is awarded the contract to supply the goods or services in form of a Local Purchase Order (LPO) or Local Service Order (LSO).
Through the purchasing department, the buyer follows up to ensure that supplier performances the contract on time.
7. Receipt of goods
The goods and services requested from the supplier are received together with the invoice for processing the payment.
The purchasing department processes the invoice and submits it to the finance department for payment.
SUPPLIER SOURCING AND SELECTION
Sourcing is the process of identifying, selecting and developing suppliers. Sourcing is the process involved in identifying potential vendors, conducting negotiations with them and then signing purchasing agreements with them to provide goods or services that meet your company needs. Sourcing refers to those decisions determining how components will be supplied for production and which production units will serve which particular markets.
Sources of Supplier Information
Sources of information relating to potential suppliers encompass:
- Catalogue: This is a booklet containing details of items for sale by the supplier. They contain valuable technical information and format of presentation is
- Trade directories: These contain new product requirements, special/occasional requirements and emergency
- Yellow pages: Entail a classified telephone directory, often printed on yellow pages that list subscribers by business or service
- Trade Journals: This is a periodical containing new development, discussions etc concerning a trade
- Business advisors: Local business support organizations such as chambers of commerce or Enterprise Agencies often point out prospective suppliers to deal
- Professional peers: This entail informal exchange of information between
- Informational provided by prospective suppliers
Supplier Sourcing Policies
1) Make or Buy Decisions
Make or buy decisions compare the cost of producing a component or providing a service internally with the cost of purchasing the component or the service from an external supplier. The fast changing competitive environment demands greater flexibility and capability to deal with environmental changes and uncertainty. This involves not only focusing on financial or marketing strategies but it may demand careful analysis of all functional or marketing strategies. Many companies are only focusing on what they are good at and outsource the rest.
2) Single Sourcing
Single sourcing of an item means that the company adopts the practice of purchasing all its requirements for an item or service from one supplier although a number of suppliers may have the capability to supply. In sole sourcing, only one supplier supplies all goods.
3) Multiple sourcing
Multiple sourcing of items means that the company adopts the practice of purchasing all its requirements from various suppliers in the market. The objective of multiple sourcing is to maximize benefits on prices and services. In situations of multiple sourcing both buyers and suppliers feel a high level of uncertainty and therefore there are multiple controls to ensure successful transactions.
- The buyer has a higher bargaining power, due to multiple sources of
- It reduces risk in case of breakdown in production on one supplier, the buyer can rely on other
- Increases supplier responsiveness to variations in
- The buyer benefits from creativity of various
E-sourcing is a suite of collaborative web-based tools that enable procurement professionals and suppliers to conduct the strategic activities within the procurement lifecycle over the internet. These strategic activities including requirements and specification definition, tendering and supplier selection, and contract award and management are designed to deliver value for money procurement solutions the public sector. E-sourcing helps to encourage consistency with policy and best practice and increase sourcing and contract management efficiency and effectiveness.
It is management strategy by which an organization outsources major non-core functions to specialized, efficient service providers. The basic objective is normally cost reduction and concentration on core activities.
EVALUATION OF SUPPLIERS
This is the process of assessing supplier performance over time. Suppliers can be evaluated to determine their ability to meet lead time, product quality, and response to emergency needs among others. There are various reasons for evaluating the performance of suppliers.
- When the potential supplier is not ISO
- When procuring items with high profit or risk;
- When non-standard items are purchased;
- When construction or similar civil works contracts are assigned;
- When procuring capital
- When a supplier has to improve, in order to eliminate the gaps between resources and capabilities of the supplier or potential supplier and the standards he must meet;
- In case of concluding arrangements based on the JIT (just-in-time) method;
- When the company is involved in global sourcing activities;
- In case of long-term e-procurement arrangements with strategic suppliers;
- When negotiating the TQM (total quality management) and the quality of the articles with high profit and major risks;
- When negotiating outsourcing contracts;
- In case of an important supplier, before approving subcontracting;
- In negotiating agreements on the level of services (SLA – service level agreements).
Factors considered in supplier evaluation Finance
Financial assessment can reduce, but not eliminate the risk of concluding business with a company with a doubtful financial situation. Yet, this can lead to information that contributes to decision making when choosing sources or when considering bids for tenders. The following issues should be checked:
- The assessed turnover of the enterprise over three years
- The profitability and the relationship between gross and net profits of the enterprise over three
- The value of capital assets, return on capital assets and return on capital
- The scale of borrowing and ratio of debts to assets
- The possibility of takeover or merger affecting ability to
- Whether or not the firm is tied to a small number of major customers, so that if one or more withdrew their businesses it might cause the firm financial
- Whether or not the organization has sufficient capacity to fulfill the
Production capacity represents the “limited capability of a production plant to produce products in a specified period, normally expressed in the number of products per unit of time”. The issues examined include:
- The maximum productive capacity in a normal working
- The extent to which capacity is currently over or under committed-for example, a full order book may raise doubts about the supplier’s capacity to take on more work or else you have to wonder if substantial amount of capacity is
- How existing capacity might be expanded to meet future increased demand
- The percentage of available capacity utilized by existing major customers
- What percentage of capacity would be utilized if the potential suppliers were awarded the business of the purchaser? This can also be assessed in terms of annual turnover, but in any cases, care should be taken to avoid making the supplier overly dependent on one or two
- What systems are used for capacity planning?
When evaluating the production facilities, attention should be on aspects such as:
- Does the supplier have a full range of equipment to accomplish the ordered product?
- How can the shortage of equipment and machinery covered?
- Are the machines modern and well maintained? (Failures may compromise delivery);
- Is the plant configuration appropriate?
- Is there evidence of “good management?
- Does the provider use modern systems, such as CAD (Computer Aided Design – Computer Aided Design), CAM (computer aided manufacture – computer-aided production) and FMS (flexible manufacturing systems – flexible manufacturing systems)?
- Is the safety and labor protection satisfactory?
No organization can be better than its employees. The information that must be looked at include:
- The number of workers in working in production and administration
- Utilization of human resource i.e. whether the available staffs are used economically, or the organization is overstaffed with many employees idling or
- The name, professional qualification and experience of technical and managerial
- Employee empowerment and development
- Worker representation and recognized trade unions
- Days lost due to industrial unrest in the last five years
- The organization culture towards quality, customer and motivation to fulfill customer requirements.
The key aspects examined when evaluating suppliers ability to meet the quality requirements include
- Has the supplier met the quality approval criteria of other organization such as the Ford quality Awards, the Ministry of Defence, British Gas or others?
- To what extent does the supplier know about and implement the concept of total quality management?
- What procedures are in place for the inspection and testing of purchased materials?
- What relevant test and inspection process does the supplier use?
- Does quality control cover an evaluation of quality for subcontractors?
- Can the supplier guarantee that the purchaser can safely eliminate the need for all incoming inspection especially JIT deliveries?
This is especially important in evaluating providers of standardized products, or works such as construction or installation of computer systems. It important to find out;
- The similar projects undertaken by the same
- Projects in progress with the same supplier or contractor.
- The unique features of the projects already done by the
- What innovation that can be introduced by the supplier?
- Customers that the provider can identify as referees
Environmental and ethical factors
Sustainable development, green procurement and climate change are key factors affecting purchasing function. The environmental and ethical factors that should be considered include:
- Has the responsibility for environmental management been allocated to a particular person?
- Are materials obtained, so far as possible from sustainable sources such as timber?
- What is the lifecycle cost of the suppliers‟ products?
- What energy savings if any do the supplier’s products provide?
- Does the supplier have a comprehensive waste management plan to control harmful waste?
- Is the organization guided by procurement code of ethics that regulates receiving of gifts and entertainment hospitality?
- How is the conflict of interest handled?
The emergence of E-procurement, integrated financial management and information system are some of factors that make investment in modern IT infrastructure necessary. The key questions that should be explored include:
- Does your organization have a website?
- What information does the website provide?
- What business activities does your organization process electronically?
- How does your organization:
- Reduce or eliminate paper transactions?
- Reduce inventory?
- Provide real-time information on product availability and stocks?
- Make the collaborative planning?
- The integration and the supply chain?
The Ten Cs of Effective Supplier Evaluation
Many of the aspects of supplier appraisal are neatly summarized by Carter as the ten Cs of supplier evaluation.
- Competency of the supplier to undertake the task
- Capacity of the supplier to meet the purchaser’s total
- Commitment of the supplier to the customer needs regarding quality, cost reduction and improvement of service
- Control system in relation to inventory, cost, budgets, people and
- Cash resources and financial stability ensuring that the selected supplier is financially sound and is able to continue in the business in the foreseeable
- Cost commensurate with quality and
- Consistency the ability of the supplier to deliver consistently and where possible improve levels of quality and
- Culture: culture affects the employees‟ attitude which determines quality of goods and
SUPPLIER ASSEMENT METHODS
There are two main approaches used in selecting suppliers
- Supplier appraisal/- used to select potential /new
- Vendor rating-used to assess already performing
This is the assessment of the potential suppliers so as to be used as one of the company’s suppliers. Thus, the concern is with the selection of the next suppliers. The main techniques used in supplier appraisal are:
A) Desk Research
This is the where an analysis of the supplier’s document is done. The documents include: balance sheet, profit and loss account, organization chart e.t.c. This analysis is done by use of statistical tools and ratio analysis. This enables the buyer to make informed judgement on the potential of the supplier to be.
- Field Research
RECEIPT AND INSPECTION RECEIVING OF INCOMING GOODS
There are various sources where goods may be received from. They may be received from outside suppliers, from production departments or other stores within the organization. It is therefore important that the goods must be properly looked after when they arrive. The recording and checking done will depend on the nature of goods and management techniques of the business. It is also important that physical examination, weighing, counting etc of goods received should be arranged in the most economical way to avoid unnecessary delays.
Receiving from suppliers
When goods are being received from suppliers, there are various activities and decisions which take place and these are:-
In most cases majority of goods will arrive at their final destination by road through they may well have been carried for the major part of the journey by some other method of transport such as rail or air. It is therefore, important for goods to be offloaded as soon as possible from the vehicle but therefore unloading certain issues need to addressed.
(a) Are we the consignees?
This is because materials can be brought to the wrong organization especially if addressing or documentation is unclear or where the driver is not familiar with area.
(b) Are the goods for this delivery point?
This is because in large organization there is usually more than one location where deliveries may take place. Delivering to the wrong location may give rise to substantial delay or additional handling.
(c) Are materials hazardous in any way?
It is important that unloading should take place until the necessary safety and other equipment is in place.
(d) Can we avoid double handling?
This can be done by sending goods direct to the point of use.
(e) Are materials to be given any priority?
If materials bear priority marking or the receiving staffs are aware that goods are urgently required then the news of their arrival should be promptly communicated perhaps before unloading takes place.
(f) What unloading method is appropriate?
It is important that a decision has to be made to determine the way in which the delivery is to be unloaded particularly if the materials are difficult in any way. This is because many organizations have a variety of handling equipment available in the receiving area, but it is seldom available instantly.
It may therefore be tempting to use some manual methods and though not inappropriate the possibility of accidents to personnel or damaged materials is much likely than if appropriate mechanical aids are employed.
(ii). Time of Deliveries
Where warehouses are not open 24 hours a day and seven days a week, it is appropriate to ensure that suppliers are informed of the days and times during which facilities will be available to accept deliveries.
(iii) Copy of Local Purchase Order
It is important to inform the storekeeper when orders are placed, what he is expected to receive and when it is likely to arrive. This is by sending a copy of the order from.
(iii) Suppliers Advice Note
It is also important for the supplier to inform his customers when goods are ready for delivery. The document gives a description of the goods and quantity involved the method of transport and the date of dispatch. The intention is that the document should be in the hands of the receiving storekeeper before the goods are received.
(v) Carriers consignment note
In cases where independent transport organizations are employed to carry goods to the customer, the carrier may send a carrier’s consignment note by post in advance. This is to avoid undue delay which is very expensive.
(vi) Suppliers packing notes
Where materials are supplied, crated or otherwise packaged, it is usual for the supplier to send a packing note which is either included in or secularly fixed to the package.
Checking for Quantity and Receiving of goods
A typical receiving procedure consists of four steps:-
1. Unloading and checking the shipment
The number of containers unloaded from the carriers‟ vehicle is checked against the carrier’s manifest (freight bill) to make certain the full consignment has been delivered. All containers are also inspected by the carrier’s representative and noted on the receipt which the receiving clerk signs failure to follow this procedure before accepting a shipment can relieve the carrier of all liability for concealed damage not evident until the container is unpacked.
2. Unpacking and inspecting the material
A receiving clerk is held responsible for three verifications. First, he or she checks the material received against the sellers packing slip and against a copy of the firm’s purchase order to verify that the correct items have been shipped. Second, the quantity of shipment is verified in the same manner. Finally, the clerk inspects the general condition of the material to determine whether any external damage was incurred during shipment.
3. Completion of the receiving report
The paperwork system used varies significantly from firm to firm. In some companies a receiving report form is produced as by-product when the purchase order is generated. When the receiving clerk has finished the inspection, he or she completes his form by recording the quantities of the items received, indicating those that are still open, and noting any other useful information on the form. In other firms that utilize a computerized purchasing/inventory system, the data is keyed directly into the computer system. The system then updates the order and inventory records and may also generate a receiving report in either hard copy or electronic form. Regardless of the system used, operating groups generally require notification that the material has been received: the requisitioner, the purchasing department and the inspection department if technical inspection is required.
4. Delivery of material
For non-stock materials, the receiving department is usually responsible for delivery- directly or via an internal delivery service. In the case of inventory materials, the practice varies. In some firms the receiving department is responsible for internal deliveries, while in others this function is performed by an internal transportation service. In still others, stores clerks are responsible for picking up their own materials.
Upon, delivery of the materials, the receipt customarily signs the receiving report or a delivery receipt, relieving clerk of further responsibility for material. It should be noted at this point in the discussion that in some firms not all delivered materials go through the receiving operation. Some JIT purchasing shipments, some materials purchased from certified suppliers, and most credit card purchases are delivered directly to the point of use, by passing receiving.
The quality and cost of materials are so interrelated in the modern manufacturing world in that they demand the wholesome inspection of material purchased. The main aim of inspection is to prevent the production of non standard items. No one would like to waste their money for products which are non standard or less in quantity or that are not according to his taste and liking. Getting the product right is paramount concern for any organization operating in a competitive environment. The increased concern for quality is reflected in the widespread use of quality of quality assurance schemes, quality circles being right fast time initiatives etc. Responsibility for quality is a concern for all defective material lying ready for use in the company store is a kind of time bomb which will do its damage at or following the time of issue. An obvious means of ensuring that the quality of incoming goods is up to standard is to inspect every item of incoming delivery.
Objectives of inspection
- To maintain the standard of the quality of the product by accepting materials only of prescribed specification as per purchase
- To receive only the right quantity of materials
- To make the supplier ever careful in supplying the right quality and quantity of materials
- To utilize the money rightly
- To make the purchase and store staff always watchful against any
Advantages of inspection
- Improvement in quality of material
- Improved customer service
- Reduced rework and defect costs
- Improved profitability
- Improvement of supplier performance
Methods of Inspection
- 100% Inspection
This is inspection of every item supplied by the supplier. This method of inspection is appropriate for high value items which cannot be destroyed during inspection. It is also appropriate when the material have a significant effect on the quality of the final product.
ii. Sampling Inspection
Sampling is a set of procedure or a method of selecting some part of a group to represent the whole or total. The advantages of sampling over 100% inspection have been recognized relatively arbitrary and crude spot checking procedures being employed long before the development of statistically based sampling techniques. To be successful an acceptance sampling plan must be designed to suit each particular case seeking an economic balance between the cost of inspection and the increased cost of processing defective items. If the defective parts are dispatched to customers a balance between the cost of re-handling, replacement and possible loss of goodwill verses the cost of increasing the cost of quality control and inspection effort. In the simplest form acceptance sampling decision are based on the testing of a sample size (n) taken at random from the batch size or population size v(N). If a rejection condition is indicated it is usual to carry 100% inspection of batch. In general acceptance sampling is appropriate where:-
- Inspection involves destructive testing
- The costs of acceptance of defective items are not
- Materials arrives in large batches
- It is possible to take truly random sample
- It is economically feasible to consistently identify material as acceptable or
iii. Inspection by storekeeper
Where there is no separate inspection department or where that department deals only with a limited number of commodities the storekeeper may be required to undertake the examination of goods for quality as well as quantity. He is therefore provided not only with a copy of official order by the supplier but also with relevant specifications or samples and with suitable equipment necessary for the degree of inspection which he is required to perform. In those circumstances the storekeeper signs the goods received note not only for receipt of the goods but also for their inspection.
iv. Inspection by Technical staff
In some organizations, inspection arrangements by storekeepers may also be supplemented for items of a technical nature by some degree of examination carried out by suitable members of the technical staff such as the plant engineers or works manager. Appropriate instructions should be issued making clear to all concerned which items are to be inspected by storekeepers and which require also the signature of a technical officer.
v. Inspection by inspection department
Inspectors have authority to accept or reject materials and endorse goods received note accordingly, unless separate inspection certificates are prepared. Storekeepers are instructed that goods awaiting inspection are to be segregated in separate place in the storehouse and that they are not to be made available for issue until cleared by the inspection department.
vi. Inspection at supplier’s premises
In large organizations particularly government departments arrangements may be made for materials to be inspected at the suppliers premises including in some cases examination during the various stages of manufacture. Where this is done, an inspection certificate is given before the goods are dispatched and no inspection or at least only a limited check is necessary at the point of receipt. In these circumstances a copy of the inspection certificate is sent to the storekeeper as soon as it is available. This avoids the need for the material to be held in the inspection bay and it can be put away in its appropriate place in the storehouse immediately on receipt, thus avoiding double handling.
vii. Spot checks
Spot checking is the practice of making random checks of some stores items at irregular and unspecified intervals. It is often done by senior stores officials in the course of their supervisory duties, but can be operated in parallel with the stocktaking program, irrespective of whether the periodic or continuous method is used.
Where items are rejected , the inspection department representatives either signs the appropriate space on the goods received note as rejected, or alternatively indicates the reason for rejection on the inspection certificate or prepares a separate rejection report document, or causes the computer record of transaction to be amended. The accounts payable section is informed, and
goods are held pending negotiations or ultimate return to supplier, in accordance with the instructions to be issued in due course by the purchasing office.
ISSUES AND DISPATCH
Authorization of issues
Stock in store represents money and should not be misappropriated, wasted or improperly used. For this reason, issues cannot be made indiscriminately and, before goods are withdrawn from the storehouse, there must be some authority before transaction. This may be in the form of a signed document, verbal instruction or routine arrangement. The normal method is to use an issue note signed in the appropriate box by an authorized person. Storekeepers should have full details of the names, designations and specimen signatures of all persons empowered to approve issue notes.
Timing of issues
So as to avoid delay in busy storehouse, there will be a routine to provide for a smooth even flow of work. Arrangements may be made for issues to some departments to made in the morning and some in the afternoon.
Generally, material will be drawn from the stock and exchanged for as duly authorized document which will vary depending on the nature of the organization and the type of issue. Stores requisition, requirement voucher, stores indent, issues ticket/note/voucher, stores order, demand note, Kit Marshal list/note and stores schedule.
Methods of Issuing Stock for internal use Issues on Request
This is the simplest method, and there are three variations
- Immediate issues on presentation of an issue note by hand
- Issues made after presentation of an issue note by
- Immediate issues on verbal request only
(a) Immediate issues on presentation of an issue note by hand
The orthodox form of issue procedure is where the user comes to the storehouse and presents a properly authorized issues note or similar voucher giving details of what is required. The storekeeper then selects the items wanted and hands them over in exchange for the document.
(b) Issues made after presentation of an issue by post
Under this arrangement, the issue note is sent in by hand or post by the demanding department and the physical handing over of stock takes place later, either when the user calls for them at pre-arranged time or when they are loaded by the storekeeper for delivery.
(c) Immediate issues on verbal request only
In the case of issues on verbal demand, a person requiring stores calls at the issue counters and states his requirements. The storekeeper then selects the items wanted and hands them over.
Scheduled issues to production
In mass production concerns, with the cooperation of the production control departments or some other planning office, production materials are issued in quantities and at times to respond with the manufacturing programme. The goods concerned are usually collected into a marshalling area in the first place. Thereafter they may be dealt with in several different ways:
- Collected from the storehouse by the production
- Delivered by the storehouse staff to the point on the production lines at which the process of manufacture is to
- Transferred into „open-access‟ stores within the production
Assemblies and kits
There are instances where composite issues of standard nature are required at frequent intervals. This is mostly encountered in the assembly stores of production factories where balanced sets of parts are for assemblies or subassemblies included in the manufacturing program.
A list of certain types of materials in given quantities is approved to held either in a sub store or on a production line. Then at the end of given period, like a week or a month the user concerned will prepare a list of the materials consumed during that time and presents an appropriate issue document at the main storehouse for replacement to bring the Imprest stock up to the same level as it was at the beginning of the period. Arrangement used for supplying parts and materials to technicians who travel about in vans providing after sales services or repair facilities to customers.
Operators who are the common users would be required to present a used article to the storekeeper before a new one can be issued. It can be done with or without issue notes.
Tools or pieces of equipment which are comparatively expensive and required for short period of use at frequent intervals such as ammeters, surveyors‟ chains instruments, electric headlamps, tap and die sets and special tools, are issued on loan from storehouses. The storekeeper will maintain a loan register for everything issued on loan from storehouses. The storekeeper will maintain a loan register for everything issued for workmen showing all loans made in date and order and signs for them when they return then to the store.
Issues to employees on repayment
Employees are issued with items such as tools, protective clothing, and firewood, e.t.c. Payment to be made either in cash or by deduction from wages. Storekeepers are instructed in writing as to the articles permitted and persons to whom they are sold. Lists of sale (original) showing the date of transaction, the employees name and numbers, vocabulary number, description and quantity of goods sold and signed by the purchaser are sent to the cashier to collect the money. A copy is used for posting the stock records and subsequently passed to the accounts section. A third copy is retained by storekeeper.
Materials received on a programmed delivery basis and kept for use only on production line for which they have been purchased will not be issued for any other work. The storekeeper must be informed of all allocations and enter appropriate particulars on stores records, and issues notes relating to allocated should indicate the purpose for which the items are required.
Special attention is usually given to the control and recording of the issues capital material from storehouses. Instructions are given about the authorization of such issues, and stock records (including bin cards, if any) are marked to show that items concerned are reserved for capital project. The storekeeper checks that, when issue documents are presented to him, the capital- project number quoted for cost allocation purposes corresponds with the project number, which appears in his records. The procedure is the same to that described previously for allocated issues.
Issues made in set agreed quantities to designated departments. Material issued usually of low value high usage category such as industrial fastenings, small electronic components or cleaning materials. Materials normally placed in open access location in the user department so that staff can simply draw their requirements as and when they arise. Sometimes called „free issue.‟ The user is saved from making frequent issues from stores.
Delivery and collection
In respect of all internal stores issues, there should be clear instructions whether goods are to be delivered by storehouse staff, collected by the user, or handled by some third party such as the transport department. Any restrictions about stores opening hours be made known to all concerned.
Dispatch of goods outside the organization Finished products sent to customers
The storekeeper is informed of the issues to be made by means of sales advice note, issue order or similar document from the sales department giving details of the items, the consignee’s name and address and any special requirements about packing, labeling or method of transport.
Thereafter, the storekeeper selects packs and dispatches the goods in accordance with these instructions, and documents the transaction by preparing advice note and a packing note.
Items for repair and sales of scrap
When articles are sent out for repair or reconditioning e.g. electric motor to be rewound, when scrap is dispatched to a customer, or when goods are returned to suppliers because of excess deliveries or rejections, the procedure followed is similar to that for finished products sent to customers.
Free issues to suppliers
In some industries and government departments, materials, parts, tools fixtures, patterns etc are supplied to contractor in connection with products which are being manufactured by them. Issues of this kind are recorded in such a way that the total amount issued to any given supplier may easily be ascertained, and a record kept of the number of free issues which have returned to the supplier incorporated in the finished product or otherwise.
Whenever material is issued, the value has to be charged to the appropriate internal department or activity or to an outside customer. For this reason, all issue documents must show either the cost allocation code number for internal issues, or the customer’s name for external transactions. The appropriate cost or customer’s account can be debited with the value of the goods and the stock control credited at the same time.
Picking is the term used to describe the process of extracting goods from the bins and racks in a storehouse to collect all the items required to satisfy any particular issues note or other demand.
In a large storehouse especially a central storehouse serving a number of operating units, the process of selection is followed by a further process of collecting together all items which are to be sent out at the same time to the same consignee.
In large storehouses there must be a routine for dispatch to the places served, including the following.
- A routine system for the time of receipts of issues notes the selection of what is required and marshalling of the needs of each
- A timed scheduled of loading vehicles
- A detailed transport plan for journey to users, timing and routing each vehicle and providing as far as practical for full loads outwards and return
- A regular system of checking to ensure that all items due for dispatch are loaded and that no unauthorized items are put on the
A typical firm has about 70 percent of its capital invested in inventory. Because inventories may represent a significant portion of total assets, a reduction of inventories can result in significant increase in return on investment. According to stock refers to goods purchased for resale or use in production or maintenance process. Generally, stock also refers to any materials purchased to facilitate organization’s processes.
Types of Stock
Raw materials (Working stock)-These are the parts and components, which enter into the production during the production process.
Cycle Stock-This is the inventory that results from the replenishment process and required in order to meet demand and lead times perfectly e.g. if the rate of sales for product is constant at 200 units per day and lead time is always 5 days. No inventory beyond cycle stock will be required.
In-transit inventories-These are items that are being transported from one place to another. They may be considered part of the cycle stock even though they are not always for sale or shipment until they arrive at the destination.
Safety or Buffer stock- They are held in excess of cycle stock because of uncertainty in demand or lead times. This maintains smooth flow of materials without impairing with production.
Speculative stock-This inventory is held for reasons other than to satisfy current demand e.g. materials may be purchased in volumes larger than necessary in order to receive quantity discount or because of forecasted or anticipated price increase, materials shortage or protect against the possibility of a strike.
Dead Stock-This is a set of items for which no demand has been registered for some specified period.
Seasonal Stock-This are products that are stockpiled to allow for expected large increase in demand.
Maintenance, Repairs and Operating Stocks (MRO)-Refers to supplies consumed during the production process and generally do not form part of the produce itself e.g. oils, lubricant tools and fixtures.
Stock control is the function responsible for planning and maintaining the right quantity of materials for given production programme with minimum investment. It is the operation that ensures that store department invariably has sufficient materials for consumption purposes by the user departments. Stock holding refers to the practice of accepting adequate stocks within the store to ensure the present stock requirement is fulfilled.
Factors determining stock holding
- Risk involved: this refers to the risk of not having material forth coming when
- Operations needs of the outfit: This arises when the operational needs are higher than the need for higher stock holding and vice
- Availability of capital: Goods in stock presents working capital and business will have to provide this capital either from the inside or borrowing from outside. It is desirable to restrict the amount tied up in stock as far as circumstances will
- Time required to obtain delivery of goods: The lead time also determines stock holding levels. The higher the lead time the higher the stock holding and vice
- Cost of storage: The higher the cost the lower the stock holding and vice versa. The storage costs entail:
- Operating expenses e.g. wages, salaries, rent, repairs and maintenance
- Cost of insurance
- Overhead costs
- Handling costs
- Stock taking costs
- Users of stock holding: Stock holding are meant for consumption by the customers that are internal and external
- Internal customers: This refers to the internal user departments that require supplies from the stock held within the stores. Normally the user department prepares a list of items to be issued by the stores department. It is imperative to note that for items under a distinct bill of material (BOM) within the production, the stores personnel is only restricted to issue items under that
- External customers: Refers to outside customer of stock held within the store house. The external customers often pay for the supplies of
It is important to note that both internal and external customers play an important role in the perfection of company’s day to day activities and therefore the following attributes should be addressed:
- Provision of excellent customer service
- Provision of the right
- Provision of the right quantity of goods
- On time deliveries
- Supply market conditions: In deciding on the stock holding arrangement, it is essential to analyze the supply market conditions. This attribute gives the storekeeper substantial ideas on deciding whether to hold stock or not depending on market forces. The supply market encompasses stable and unstable
- Stable market: In this particular market prices are relatively stable. The market is also stable since prices of items under this market are insensitive to forces of demand and supply and therefore their stock level can be kept relatively low since replenishment cost is predictably
- Unstable market: These are markets that exhibit substantial short run prices and supply fluctuations. The supply of items is influenced by many factors which may include: political, weather, speculative factors etc. These short run prices are therefore sensitive to general supply and demand forces. Their stock holding level will therefore depend on the prevailing market
Reasons for holding stock
- To provide a buffer between supply and
- To take advantage of quantity
- To account for seasonal fluctuation in price, supply and
- To help the production and distribution operations run more
- To minimize production delays caused by lack of spare
- To provide a variety of materials from which the customer can
- Some materials appreciate in value with long storage
- To accommodate variation in
Types of Costs of Stock
The economics of stock control are determined by analysis of the costs incurred in obtaining and carrying inventories under the headings of acquisition costs, holding costs and costs of stock outs.
a) Acquisition costs
This is the money spend in acquiring stock or transferring the ownership from the supplier to the organization. It is also referred to as ordering costs. Acquisition costs include:
- Preliminary costs, e.g. preparing the requisition, vendor selection and negotiation
- Placement costs e.g. order preparation, stationary, postage e.t.c.
- Post-placement costs e.g. progressing, receipt of goods, materials, handling, inspection, certification and payment of invoices
In practice, it is difficult to obtain more than proximate idea of ordering costs since these vary with:
- The complexity of the order and seniority of staff involved
- Whether order placement is manual or computerized
- Whether repeat order costs less than initial orders
b) Holding/Carrying costs
There are two types of holding costs
- Cost proportional to the value of the inventory e.g. financial costs, e.g. interest on capital tied up in inventory. This may be bank rate or more realistically the target return on capital required by the enterprise. Insurance costs on losses in value through deterioration, obsolescence, fire and
- Cost proportional to the physical characteristics of inventory e.g. storage cost that includes storage space, stores rates, light, heat, power, labour costs relating to handling and inspection, clerical costs relating to stores records and
c) Cost of Stock outs
The costs of stock outs e.g. the cost of being out of inventory, comprise:
- Loss of production output,
- Costs of idle time and fixed overheads spread over a reduced output
- Costs of action taken to deal with the stock outs e.g. buying from a stockiest increased price, switching production, obtaining substitute materials
- Loss of customer good will because of inability to supply or late delivery
- Loss of future sales
Methods that can be used to reduce costs of stocks
There are various methods that can be used to reduce main types of stock costs. For instance, ordering costs can be reduced by buying optimal quantity required. The cost of carrying stock can also be avoided through reducing the amount of excess stock in the store, while costs of stock out can be reduced by ensuring that stock is available to meet customer needs. Essentially, the following are some methods that can be used to reduce and avoid unnecessary stock costs.
- Just in time (JIT) purchasing also known as stockless buying: This is an inventory control philosophy whose goal is to maintain just enough material in just the right place at just the right time to make just the right amount of
- Keeping minimum or buffer stock (Safety stock): This is stock allowance that covers variation in demand and lead
- Avoid slow moving items: Slow moving items have a slow turnover rate and increases carrying costs which are an expense to the
- Variety reduction: Means reducing the range of items or materials that are used in process, production or operation. Variety reduction can make substantial savings inventory by standardizing consumables kept in
- Economic Order Quantity (EOQ): This is the optimal ordering quantity for an item stock that minimizes costs. It is the optimal order of quantity that minimizes the total variable costs required to order and hold
- Material Requirement Planning (MRP): This is a product-orientated computerized technique aimed at minimizing inventory and maintaining delivery
Stock Control Methods ABC Analysis
This is a method discovered by an Italian Vilfred pareto between (1848-1923), he discovered that in inventory there is a common statistical effects, some of the findings were that 80 percent value of wealth of a nation is controlled by only 20 percent of population. In inventory, he discovered that 20 percent of items in the store account for 80 percent of the whole value of the stocks while
the remaining 80 percent of stock only accounts for 15 and 5 percent of the value of the entire stock. He classified them into the category of ABC in respect of their value and quantity (volumes) as illustrated by the following table:
Descriptio Volume Value
Class A items 20% 80%
Class B items 50% 15%
Class C items 30% 5%
The main purpose of this tool is to enable the inventory personnel to develop strategies and tactics of how to manage the stocks. Some of these strategies include:
Class A Items
These are items which are few in the store (20%) but of high value (80%), the inventory personnel needs to;
- Keep a close day-to-day control
- Keep them at minimal level
- Liaise with purchasing department in order to have a standing order with the
- Introduce the Vendor Managed Technique
- Keep them within visibility but out of bound to non personnel e.g. lock
Class B Items
These are items whose volumes is approximately 30 percent of items and whose value is only 15 percent.
Class C items
These carry the biggest volume and varieties in the store but whose value is only an average of 5 percent. In both class B and C the varieties are many and in big volumes, the inventory personnel needs to ensure that:
- The levels of stock are not very low as both items are very much frequently
- The items are well grouped in their respective purpose of use. This is to reduce time wasted when issuing
- For most fast moving items they need to be placed next to issuing
- Implement standardization of inventory in order to reduce
Nature and Importance of Warehouse
Warehouse is where goods and merchandise are kept. Warehousing refers to the activities involving storage of goods in a large scale, systematic and orderly manner, to make them available when they are needed. It is storage of goods prior to their use. This includes open field storage of heavy materials like iron ore, storage of finished goods in the production facility, the storage of raw materials, industrial goods or finished goods while they are transported and highly specialized storage facilities.
In a microeconomic term, warehousing performs a necessary function of creating time utility for raw materials, industrial and finished products.
The closeness of market oriented warehousing to customers allows customers to be served, near points where desired.
Warehouse increases the utility of goods by extending or broadening availability on a time basis to prospective customers.
By using warehouse, company are able to make goods available when and where they are needed.
Types of Warehouses
Warehouses exist in various forms. Some of the common types of warehouses include:
Public warehouses are used to store the goods of the general public. Anyone can store his goods in this warehouse on payment of rent, an individual, a partnership firm, or a company may own this warehouse. They are used by manufacturers, wholesalers, exporters, importers, government agencies e.t.c.
They are owned and managed by manufacturers to exclusively store their own stock of goods. This warehouse may be constructed by the farmers near their fields, wholesalers and retailers near their business centres and by manufacturers near their factories.
Bonded warehouse are owned and managed by government as well as private agencies. Private bonded warehouses have to obtain a licence from the government. Bonded warehouses are used to store imported goods for which import duty is yet to be paid.
Field warehouse occurs in public warehouse when a receipt is issued for goods stored there in. In such cases, the warehouseman’s receipt is usually used a collateral for loan. The receipt issued is negotiable instrument where title to the goods is transferrable. This type of service is attractive to individuals or companies who may have accumulated inventory and finding themselves in need of working capital.
Raw Material and Component Warehouse
This type of warehouse holds raw materials at or near the point of introduction to manufacturing or assembly process.
Finished goods Warehouse
It holds inventory used to buffer the variations between the production schedules and demand.
For this purpose, warehouse is usually located near the point of manufacturer and is often characterized by the flow of goods.
Distribution Warehouse and Distribution Centres
They accumulate and accommodate products from various points of manufacturer within a single firm or from several firms for combined shipment to common customers. Such a warehouse may be located central to other production locations or the customer base. This can be for physical supply system or for physical distribution system in the logistics system as shown below.
PHYSICAL SUPPLY SYSTEM
Fulfilment Warehouse and Fulfilment Centres
It is a warehouse used for receiving, picking and shipping in small orders for individual customers.
Functions of a Warehouse Receiving
Receiving is that ability concerned with orderly receipt of all materials coming to the warehouse. It is the necessary activity that ensures that the quantity and quality of such materials are as ordered and the organizational functions requiring them.
It is performed in a warehouse when products are received in bulk from supplier and subsequently packaged singly in merchandisable quantities or in combination with other parts to form kits or assemblies. An entire receipts of merchandise may be processed at once or apportion may be held in bulk form for later processing. This may be done when packaging greatly increases the storage cube requirement or when a part is common to several kits or assemblies.
Is an act of placing merchandise in storage. It includes both transportation and placements.
This is the physical component of merchandise while it awaits demand. The form of storage depend on size and the quantity of items in inventory and handling characteristics of the products or its container.
Packaging and pricing
Packaging or pricing may be done as an optional step after the picking process. As in the pre- packaging function individual items are boxed for more convenient use. This function has the advantage of providing more flexibility in the use of inventory items.
Is the process of removing items from the storage to meet specific demand. It represents the basic service that the warehouses provide for the customer and it is the function around which most warehouse design are based.
Sorting and Accumulation
Sortation of batch picks into individual orders and accumulation of distributed picks into orders when an order has more than one item and the accumulation is not done as the picks are made.
Packing and shipping
This may include the following tasks.
- Checking orders for completeness
- Packaging of merchandise in an appropriate shipping
- Preparation of shipping documents including packaging lists and bill of
- Weighing of orders to determine shipping
- Accumulation of orders for outbound
In some cases warehouse provides transportation arrangement to the bulky depositors. It collects goods from place of production and also sends goods to the place of delivery an request of the depositors.
Ideal Characteristics of a Warehouse
Any warehouse is said to be ideal if posses the following characteristics.
- Warehouse should be located at a convenient place near highways, railways stations, airports and seaports where the goods can be loaded and unloaded
- It should have mechanical appliances for loading and unloading goods. This reduces the wastage in handling and also minimizes handling
- Adequate space should be available inside the building to keep the goods in proper
- Warehouse meant for preservation should have cold storage
- Proper arrangement should be there to protect the good from sunlight, rain, moisture and pest.
- Sufficient packing space should be there inside the premises to facilitate easy and quick loading and
- Should have proper security arrangement to avoid theft of
- The building should be fitted with latest firefighting equipment to avoid loss of goods due to
Reasons for Warehousing
To keep down production costs; Often it is costly to set up machines, so production runs need to be as long as possible to achieve low unit costs. It is essential, however, to balance these costs with the costs of holding stock.
To accommodate variations in demand; The demand for a product is never wholly regular so it will vary in the short term, by season etc. To avoid stock-outs, therefore, some level of safety stock must be held.
To take account for variable supply times; Additional safety stock is held to cover any delivery delays from suppliers.
Buying costs; There is an administrative cost associated with raising an order, and to minimize this cost it is necessary to hold additional inventory. It is essential to balance these elements of administration and stockholding and for this the economic order quantity is used.
To take advantage of quantity discount Some products are offered at a cheaper unit cost if they are bought in bulk.
To allow for price fluctuations/speculation The price of primary products can fluctuate for a variety of reasons, so some companies buy in large quantities to cater for this.
To help production and distribution operations run more smoothly. Here, stock is held to decouple the two different activities.
To provide customer with immediate service It is essential in some highly competitive markets for companies to provide goods as soon as they are required.
To minimize production delays caused by lack of spare part This is important not just for regular maintenance, but especially for breakdowns of expensive plant and machinery. Thus, spares are held to minimize plant shutdowns.
Seasonal production; You know that agricultural commodities are harvested during certain seasons but their consumption or use takes place throughout the year. Therefore, there is a need for proper storage or warehousing for these commodities, from where they can be supplied as and when required.
Large scale production; In case of manufactured goods, now-a-days production takes place to meet the existing as well as future demand of the products. Manufacturers also produce goods in huge quantity to enjoy the benefits of large-scale production, which is more economical. So the finished products, which are produced on a large scale, need to be stored properly till they are cleared by sales.
Quick supply; Both industrial as well as agricultural goods are produced at some specific place but consumed throughout the country. Therefore, it is essential to stock these goods near the place of consumption, so that without making any delay these goods are made available to consumers at the time of their need.
Continuous production; Continuous production of goods in factories requires adequate supply of raw materials. So there is a need to keep sufficient quantity of stock of raw material in the warehouse to ensure continuous production.
Price stabilization; To maintain a reasonable level of the price of the goods in the market there is a need to keep sufficient stock in the warehouses. Scarcity in supply of goods may increase their price in the market. Again, excess production and supply may lead to fall in prices of the product. By maintaining a balance of supply of goods, warehousing leads to price stabilization.
Role of Warehousing in Logistics System Transport consolidation
Companies may at times be faced with less than track load or car load shipments of new materials and finished goods. The warehouse can help to consolidate small shipments into a large shipment with significant transportation savings.
Warehousing may also help in product mixing for customer’s orders. Companies frequently produce product line which contains different products for example colour, shape, size e.t.c. Customers when placing orders will always want a mixture of the product line. The items may also be produced at different plants and if these goods were not warehoused the orders will have to be filled from several occasions causing difference in arrival time. A warehouse for multiple product lines lead to efficient order filling. In addition, companies also feel the need to move car loads mixed with items from several sources from a physical supply warehouse to a plant.
This is shown below.
Physical supply mixing
The availability of goods of in a warehouse when an order is received from a customer especially if the warehouse is in a reasonable proximity to customer will usually lead to customer satisfaction and enhance future sales. The service function may also be a factor for physical supply warehouse.
Warehousing offers protection against various contingencies for example, transportation delays, vendor stock out, strikes e.t.c. This is very important for physical supply warehouse. For physical distribution the contingencies that may occur is goods damaged in transit.
It involves preventing operations under overtime conditions or working at a low level of production. This strategy allows a company to reduce investment in manufacturing capacity.
Warehouse Layout and Design
The warehouse may be constructed with different layout and designs. However the most important requirement in a warehouse is the space. The most important step in determining warehouse space requirement is developing a forecast of demand for our products. This means an estimate in units for the next relevant sales period by product category. Some decisions would then need to be made about economic order quantities of each item. This will then be converted into cubic footage requirements. The following are the needs for the space requirements.
1. Link interface
Warehouse space is required for providing adequate interface with the link part of the logistic system. That is receiving and shipping. While doing so, some considerations have to be given as to whether we shall be using the dock area outside the building or unloading will take place inside the warehouse. Allowance has to be made for turn-around space possibly for material handling equipment. They may be a need for space in this area for inspecting. The volume and frequency of the throughput will be a critical factor in determining space needs for receiving and shipping.
2. Order selection space
This is an area for order picking and assembly. The amount of space actually necessary for this function will depend upon the volume of orders and the nature of products along with the material handling equipment. The layout in this area is critical in operation and customer service.
- Storage space; This is the actual storage space. The amount of storage will be derived from the forecasting that were carried
- Space for recoopering; That is an area to salvage undamaged parts of damaged
- Office space; For administrative and clerical
- Miscellaneous space requirements e rest rooms, employee cafeteria, utilities e.t.c.
Principles of Warehouse Layout
The most common accepted principles of a warehouse design and layout include:
- Use of one storey facility since it is cheaper to construct and provides a lot of
- Straight line flow of goods into and out of the warehouse should be used to avoid back tracking and inefficiencies in warehouse
- Use of efficient material handling equipment and operations which help to improve efficiency in
- Use of an effective storage plan in the warehouse. That is the goods have to b e placed in a warehouse in such a way to maximize its
- Make maximum use of the height of the building. That is to utilize the cubic capacity of the building
- Keep aisle space to a minimum within a constraints caused by size, height and turning radius of materials handling equipment. Considerations must also be given to the products themselves and the constraints imposed by the
Layout for Order Picking and Preparation
They are two basic ways to layout the order picking and preparation area.
1. The General Area Approach
This is where the order picking and preparation is generally mixed with storage area with appropriate racks and equipment for order preparation as shown below.
2. The Modified Area Approach
This is a modified area approach which has separate storage and order preparation as shown below.
The order picking bays are usually smaller than storage bays to allow for better access. The order picking bays would be stocked on a regular basis and usually there will be a provision made for partial and full boxes. This separation of order picking and storage offers the advantage of reducing picking time and distance but reduces the flexibility of the facility.
There are three general methods of stock location. These methods are; fixed, random and zoned.
Fixed Location storage
This is a method of storage in which a relatively permanent location is assigned for storage of each item in a storeroom or warehouse. While fixed location ensures that materials are easily identified, it consumes a lot of space compared to other methods of stock location.
Random location storage:
It is a storage technique in which parts are placed in any space that is empty when they arrive at the storeroom. Although this random method requires the use of locator file to identify part location, it often requires less storage space than a fixed storage method.
Zoned location storage
It is a combination of fixed and random storage in which items are assigned to random locations within a predestinated zone.
Factors to consider when choosing stock location method
Availability of space: Fixed location storage requires a lot space than random and mixed space. When this method is used, the storekeeper must be sure that there is enough space to accommodate all materials.
Desired level of productivity: It is easier to identify materials when using fixed location than random location. Zoned location can therefore ensure that less time is spent in identifying materials since fixed random location method is used.
Cost: Under fixed location, an organization might incur high costs for renting large store space, while in random location, the cost of purchasing and maintaining locator file may not be avoided. It is therefore important to consider the total cost of each method.
SECURITY AND SAFETY IN THE STORE
Although the storehouse of an organization is used in storing materials and components, hence need to provide their security, it also has stores personnel who performs various functions there in. It is therefore important not only to protect materials from theft, but also to ensure that the employees are also safe. Security and safety therefore in the storehouse entails;
- Protection of goods from damage (security)
- Protection of stores personnel from harm (health and safety).
These two aspects are covered by ensuring that the store is highly, secured, safe for working and health standards are high.
How to ensure security of materials in the storehouse
Considerable amount of organization’s capital is held in materials stored in the store. The stores‟ manager is therefore responsible in ensuring that materials are secured by through the following ways.
1. Development of a security policy
A uniform security policy should be put in place and should include the following points:
- Appointment of a senior manager with overall responsibility for
- Allocation of reasonable budget to cover the cost of security
- Consistent enforcement of the stated company penalties for theft from the shop floor to the
- Regular discussions at managerial level regarding
2. Custody of Keys
The following rules should be observed
- All keys should be numbered for easy
- All keys should be kept in a central point
- Individual stores staff should be made responsible for certain
- Keys taken from the central point should be signed
- The number of duplicate keys must be kept to a minimum to ensure adequate control
3. Control of entry into stores area
No unauthorized personnel should be allowed to enter the stores area. It should be fenced with electric fences, and monitored by CCTV cameras 24 hours seven days a week. There should be always security personnel inspecting people coming in and going out.
4. Marking of stock
Certain materials can be marked in some way to identify their ownership and origin. This applies mostly to equipment or items of high value. There are two reasons for marking stock;
- It discourages theft
- If the stock is stolen and recovered it will be easy to identify the
Marking of stock can be done in various ways i.e.
- Colour marking by paint or
- Trade marks. Trade mark and company’s name can be embossed on the
- Dye marking. If the item is touched by hand the dye will be transferred on to the hands of the
- Giving of serial numbers to all
4. Fire precautions
The following precautions can be taken to prevent fire;
- Fire fighting equipment must be placed in strategic positions. The following are some of the firefighting equipment;
- Fire extinguishers
- Horse reels. They are linked to a large tank of the main supply of
- Sprinkler systems. They are controlled by smoke or heat. When smoke or heat is high, then they start sprinkling the Fire blankets. Used for small fires. They are made of fireproof
- Fire buckets. They are used for smack fires. Buckets are filled with
- No smoking signs must be placed in all parts of the
- Organizing fire drills so that the staff are trained /given instructions on what to do in case of
- Regular inspection by the local fire brigade’s prevention officer will help to ensure safe and efficient
- Installation of fire doors and emergency
- Use of fireproof building materials
5. Segregation of high risk materials
High risk materials such as petrol, oils chemicals, explosives, spirits etc can be kept in a store usually designed for that purpose.
Advantages of segregation of high risk materials
- Expensive firefighting equipment can be concentrated in those
- In case of fire in the main store it will not be able to reach the high risk store
- Fires in the high risk store can be left to burn themselves out if need
- Concentration of efforts to prevent fires in small high risk store will benefit the whole operation in terms of overall fire
6. Knowledge of materials
The following are reasons why storekeepers must have knowledge of materials.
- Application of materials issued will often be guided by the advice of storekeeper. He should therefore have knowledge on the usage of
- To understand the correct methods and equipment of handling certain items to minimize damage.
- For thorough inspection of
- To minimize explosion or contamination during the process of handling storage of materials.
7. Prevention of deterioration
This occurs when materials loose part of their value or totally become useless. Factors that cause deterioration in the store include:
- Poor storage areas that allow damp to enter through broken windows, leaking roofs and
- Failure to follow supplier storage
- Contamination of materials in the store e.g storage of oil drums alongside
- Failure to follow stock rotation code and therefore allowing old stock to be left unused while newer stock is
Prevention of stock deterioration
- Ensure that all storage facilities are clean and damp
- Follow supplier’s
- Conditions of temperatures and humidity are correct for the goods being
- Proper handling methods and
- Supervision of all storage and handling of materials by trained and experienced staff reduces the risk of bad storage or fault
HEALTH AND SAFETY OF STOREHOUSE STAFF
The operations of the stores may expose store personnel to various risks that endanger their health and safety. The most common cause of injury to stores personnel is accident. Accident in the storehouse can be caused by:
- Incorrect handling of materials thus causing strain, muscles damage and long periods of sickness.
- Faulty equipment that suddenly breaks down at vital
- Misuse or overloading of equipment against manufacturer’s
- Poor storage conditions in the form of bad floors and unstable racks, shelves, bins and general
- Lack of supervision within the stores resulting in bad stores practices, untidiness and carelessness.
To improve the health and safety of employees, stores manager should pay attention to the following areas.
The following should be observed to ensure safety.
- Do not lift a weight that is too heavy for
- Protective gloves and footwear must be worn on rough, sharp or when heavy objects are being
- Floor surface should be free of any
- Correct equipment should used when lifting
- All heavy materials above 25kgs should be lifted
- There should be signs and signals to warn employees on danger spot such as slippery floors, steep
Ensure the following in the storage area:
- Check the floor load capacity to avoid sinking
- Do not stack against the one next to
- Do not stack above seven fits high.
- Ensure that the gangways are adequate and free from obstruction
- Do not overload racks or bins
- Movement of material within the store should be
- Highly flammable items like gas should be stored in a special building or
- Use the right ladder for the right job and examine it first for good condition
- Fire points, electrical points and exists must be clear of
- The storehouse must be fitted with modern well maintained firefighting
- Escape doors must not be locked during working
- Fire points should be clearly identified and easily
- Broken or ineffective electrical equipment should be repaired without delay.
- Electricals repairs should only be done by
- In case of fire sound the alarm and report to your
- Protective clothing should be worn when dust, falling material, handling hazards and corrosive or poisonous substances are likely to be
- The following clothing are available to the stores staff, overalls, gloves, goggles, steel toe-capped boots, helmets, warehouse coats
- Disciplinary action will be taken against employees who fail to use protective
- Storehouses should be inspected from time to time to ensure that it is
- The walls and windows should be kept clean
- Toilets should be cleaned and well
- Stairs should be well
- Lighting and heating in working areas should be adequate.
First aid boxes should be available at every storehouse and inspected regularly by the storekeeper. In the event of accident;
- Call for help and report to your supervisor.
- Do only what is necessary to put the casualty in a comfortable
- Do not move the casualty more than necessary before the arrival of
Methods of providing stores security
Stores security can be provided through the use of internal security management or contracting a security firm.
1. Internal security management
This is where the organization relies on stores management staff to control stores security. Advantages
- It is cheaper
- It builds up good relationship and trust between organization and its
- Stores management will be held responsible for stock loss
- Stores staff will be able to cover the aspect of deterioration damage and special
- Large scale theft involving the stores staff may not be
- Stores management staff would not be fully trained in security
Use of security firm
This means making use of specialized organization that supply trained team security guards.
- Trained staffs are able to cope with difficult
- Twenty four hour cover is available if required
- It reduces the damage effect of conflict between members of the company’s
- Very expensive
- Friction can arise between the organization’s staff and management because of outside intervention in case of
- Critical information about the organization can leak to outside
Store layout refers to the detailed floor plan of the storage area for locating each item to be placed in the store after receipt till it is issued for consumption. It is the internal arrangement of the store where the store is divided into blocks of storage space, bins, racks, shelves and containers. The main objectives of store layout are:
- Minimize material handling efforts and costs within storage
- Maximize space utilization of store
- Ensure adequacy of storage space and accessibility of the
- Minimize retrieval and issue time to the
- Facilitate safety and security of materials and persons within the
- Provide good working ambience i.e ventilation, illumination, housekeeping, and cleanliness.
- Minimize loss, pilferage and damage of materials while in store
- Facilitate ease of physical counting
- Provide flexibility of arrangement for future expansion or
- Minimize costs of store operations e manpower costs, insurances, premium, perishability and controlled conditions for storage space.
Factors considered when designing a store layout
Material handling equipment to be used; Enough space should be provided to ensure that the material handling equipment can easily turn in the store.
Desired Customer service level: Where high level of customer service is desired, separating receiving and issue bays may be important in reducing errors that may be incurred due to confusion that arise when the two areas are combined.
Security of material; Some layout design may increase security requirement of the building while others may not. The layout should therefore be adopted basing on the ability to provide the necessary security for material stored.
Dispatch and delivery vehicle requirements; When goods inward or delivery vehicle and dispatch vehicle requirement are different, for instance in height or unit load, entry and exit point in the warehouse may be located on different side of the building.
The cost of operating the store; Combining receiving and issue areas enables sharing of material equipment hence reducing the investment in material handling equipment.
Future plans for expansion; The layout of the warehouse should allow for future expansion, i.e. locating the receiving and the issue bays on the same side of the warehouse increases the ease and possibility for future expansion.
Location of utilities and facilities; The location of facilities, utilities and other administrative rooms should be considered in adopting a particular layout design.
TYPES OF STORE LAYOUT
- U Flow or Horseshoe layout
A U‟ flow occurs when the goods receipt and dispatch functions are located at the same end of a warehouse building. Products flow in at receiving, move in to storage in the back of the warehouse, and then to shipping area which is located at the adjacent to receiving on the same side of the building. Items with high throughput level are located closer to the loading bays. An example of a „U‟ flow design can be seen in the diagram below:
Advantages of U Flow or Horseshoe layout
- Excellent utilization of material handling equipment and other resources due to combination of location of receiving and issuing on the same side of the
- It facilitates cross-docking because the receiving and shipping docks are adjacent to one another and may be co-mingled.
- Yields excellent security because there is a single side of the building used for entry and exit.
2. Inverted T warehouse layout
Goods in and goods out activities are on the same side of the building. The shape allows the use of high, medium and low usage areas to minimize materials handling by locating high and low usage items respectively nearest to and furthest from the goods received and goods outwards areas, thus minimizing material handling for high usage items.
Advantages of Inverted T warehouse layout
- Better utilization of the receiving and issue area and the associated mechanical handling equipment.
- The total area required is less than where there is separate loading and unloading
- Unified bay operations provide for better security control and surveillance
- Possibility to expand on three sides of the
Figure 2: Inverted T Layout System
Disadvantages of Inverted T warehouse layout
- Possibility of error due to unified bay operations
- Central aisle becomes prone to congestion
- Expansion requires some modification of flow
- Moving items from bulk storage to stock or to dispatch requires tight control
3. Cross flow Layout System
The flow in this type of layout is a one way system with an in feed aisle and a separate out-flow from the other end of the racks. Front entry and dispatches uses a common yard area and the layout benefits from the integration of bulk and picking stocks, but if the bulk stocks are a large proportion of the total stock this may not be practical.
Advantages of Cross flow layout system
- Less space occupied than where there is separation of loading and unloading
- Good utilization of loading bays and material handling
- Flexibility for expansion on three sides
- Popularity storage reduces movement
- A combination of bulk and standard stock can be utilized across the width of the warehouse.
- One way flow is clearly defined, hence no congestion on the
Figure 3: Cross flow layout system
Disadvantages of Cross flow layout system
- Unified bay operations may lead to errors
- Segregation into high, medium and low usage may not always be possible
- Combination of bulk and standard items may present
Corner flow Layout system
In the corner flow layout, inward and outward flows are on the adjacent but different sides of the building. This layout helps to reduce
Advantages of Corner flow layout
- It helps to reduce congestion in times of high
- Separation of receiving and issuing bays reduces the possibility of
Disadvantages of Corner flow layout
- The expansion is only possible on two sides without
- As the activities within the store are not visible form one single vantage point, there are potential problems in security and
- More space occupied with loading and unloading bays than where there was combination of the activities of the same side of the
Through flow layout system
In this layout, receiving and issuing bays are on the opposite side of the building. All items must travel the full length the store. The layout also requires separate goods in and dispatch management with dual yard access and doubles the internal bay areas.
Through flow layout system is used when;
- When there is risk of interface or confusion between goods in and goods out
- When goods inwards vehicle and dispatch vehicles are very different; for example differences in platform height or nature of unit
- When a warehouse is connected to production
Figure five: Through flow layout
Advantages of Through Flow layout
- Useful if goods in and goods out vehicle requirement are different
- Works well if it is in a natural flow with other processes
- Total separation of the in and out sections reduces scope for
- No congestion of aisle
Disadvantages of through flow layout
- Separate loading and unloading equipment required
- Loading bays take up a lot of space
- Internal movement may be greater than with other systems
- Expansion is limited on two sides without
Measures of Efficiency in a Warehouse
- Percentage of orders dispatched on time;
- Percentage of orders fully satisfied (ie all order lines supplied);
- Accuracy of order fill;
- Stock availability in the warehouse;
- Order lead time;
- Returns and customer
- Number of cases picked per person per hour;
- Number of order lines picked per person hour;
- Equipment uptime (e.g percentage hours equipment available, with no breakdowns or routine maintenance).
- Cost per case throughput;
- Cost per pallet stored;
- Conformance to budget (eg for staff costs, rent, equipment maintenance, packing materials).
- Percentage pallet storage capacity used;
- Number of hours per day equipment is used (eg sorters or narrow-aisle trucks) – although note that high utilizations may prevent peak throughputs being achieved, so these measures need to be interpreted with caution;
- Number of standard hours
- Percentage of locations with correct stock (ie in accordance with the computer records, as measured during a physical stock-take);
- Percentage of SKUs with correct stock;
- Stock-turn (i.e annual throughput/average inventory level). This figure is also often represented as the number of weeks of inventory held in the warehouse (i.e a stock turn of 10 equals 52/10 or 5.2 weeks of inventory in the warehouse).
- Average number of hours between arrival of goods on site and put away to storage location (ie available for replenishment or picking);
- Average number of hours between customer order receipt and dispatch of
- Number of days without an accident;
A typical manufacturing organization has various types of materials. These types may range from raw materials, work in progress (WIP), maintenance, repair and overhaul (MRO), finished goods, high usage, medium usage, low usage, spare parts, components etc. The variety of materials in the store therefore necessitates a systematic way of identifying and locating the materials in the store. This is effectively done through classification and coding.
Classification refers to identifying materials into broader groups such as WIP, High usage, low usage among others. Coding is the process of giving each material in the store a name. It is a system of identifying specific materials by use of letters or figures or a combination of both. The longer the code, the longer the information it represents.
Common Codification System
- Alphabetical system: It involves the use of alphabetical letters as the basis of codification e.g. P/Q/R
- Numerical system: the use of numbers or figures e.g 04/07/2009
- Alphanumerical: the combination of alphabets and numbers e.g DBM/346/16
Factors to be considered in classification and coding of materials
Range of items: The larger the range of items held in stock, the more complicated and effective the code needs to be.
Staff competency: Will existing staff be able to cope with the new system or will they need training, which will cost money?
Available resources: What resources are available in terms of computers, time for training, location of training sessions etc.
Needs of other departments: The needs of other departments, particularly production, accounts and purchasing, will have to be taken into account to determine which coding system suits them best.
Preparation of stores code
The following steps are followed in preparing store codes.
Step 1 Identify the item to be coded e.g. raw materials, under a basic heading Raw materials RM
Step 2 Type of raw material, e.g.; Liquids/oil RMLO
Step 3 Identify and code the raw materials e.g: liquids/oil/engine RMLOE Step 4 Identify and code the grade e.g liquids/oil/engine/10/15 RMLOE 10/15
Step 6 Determine location of item in terms of gangways, racks e.t.c. liquids/oil/engine/10/15/5/ gangway 1 rack 4. MLOER 10/15/5.1.4
Characteristics of an efficient coding system
- Uniqueness: Each item should have one code
- Distinctiveness: To avoid errors, codes representing different items should be
- Clarity: Codes should be entirely alphabetical or
- Brevity: Codes should be brief but consistent with the
- Expandable: Codes should be able to accommodate new additional
- Significant: The code should signify something about the coded
Methods of Coding Materials
By nature of item: This is coding of items according to their inherent characteristics. Similar items into a series of main groups then each group is further subdivided into subgroups or sections.
By the end use of the item: This is coding of items according to or to correspond with the purpose for which the items will eventually be used.
By the location of the item:
This is the coding of material on the basis of the location within the store where the materials are to be found e.g. the gangways, shelves, pallets etc.
By source of supply: Here materials are coded according to the supplier or origin. If there are three suppliers the coding would be 1, 2, 3 or A,B,C. Coding of materials may be in accordance to local or international suppliers.
By the customer who will buy the end item: Materials are coded according to the final consumer who will eventually buy the end product e.g. individual consumer, industrial consumer, institutional consumer or resell government bodies.
Advantages of Coding System
- To avoid repetitive use of long description of items
- To ensure accuracy in the description and identification of all items
- Prevent duplication of items
- Provide a foundation for an efficient purchasing organization
- Convenient basis is formed for sorting and recording items
- Simplify manual recording
- Facilitate convenient central analysis of unit store house
- Simplify stock control accounting
- Simplify pricing and costing of materials
- May be used as storehouse location
Disadvantages of stock coding
- The process of preparing stock codes is tedious
- It requires a lot of memorizing
- It complicates the storage function further
- It may lead to a proliferation of jargon making it difficult for outsiders to
This is the use of words to explain or identify stock item. It may be simple or complex depending on the item in question. Some descriptions are long and complicated and may end up confusing stores staff. This reason makes the stores personnel to prefer coding of the stock. Nevertheless, description of stock eases identification of stocks when it comes to the issuance of the goods to the user departments. Also good description of stock enables the stores personnel to send the right information to the purchasing function pertaining goods to be ordered.
When a coding operation is complete, the list of codes numbers, descriptions size etc are published in a document known as stores vocabulary. This is an encyclopedia book containing details of stores items. There are two types of stores vocabularies i.e. hard and soft vocabularies.
Hard vocabulary is recorded in books. It is original and requires manual access of information. Soft vocabulary on the other hand is recorded in computer system and in other integral devices of computers like flash disc, CDR, Diskette etc. The information can only be accessed by checking its content through a computer system. In some organizations the information is available in the company’s intranet
How to organize a stores vocabulary
The following stages can be used to organize stores vocabulary.
- Establish a catalogue library
- Inspect the present systems for stocks identification
- Consult other interested departments like production, sales, purchasing, design etc to get their
- Prepare the originating sheets showing items proposed by each
- Compile the vocabulary after removing the unnecessary items, reducing variety of materials
- Distribute the vocabulary copies to the people (workforce) who need
- Amendments: Amendments are published at least quarterly in accordance with the original distribution
Treatment of Items not in the vocabulary
Sometimes it may not be advisable to include every stock item in the vocabulary. These items are described as NIVs (Not in the vocabulary). The NIVs include:
- Machine spares rarely required: these items should be kept out of the stores vocabulary since they are only purchased when a need arises. They are described as ONIS (only when needed items).
- Items of non-repetitive nature: These are items which are needed at certain prescribed intervals e.g. 1-5 years 2-3 year
Marking of Stores
This is another method of codification. There are two types of marking of stores.
- Colour Marking: This is used to supplement the other codification systems e.g use of paint such as blue, red, aluminum
- Secret Marking: Expensive stores items are highly susceptible to theft and pilferage. These are discretely marked to help detect where they have been sold out. The secret marks are not easily
Transport refers to the movement of goods and people from one place to another.
Modes of Transport Road Transport
It incorporates transport using road bound means like Lorries, trucks, vans, tankers etc. It is suitable for transporting durable, bulk products, door to door deliveries especially where the distances covered are not long. Categories of road transport include:
- Own fleet e.g. company Lorries, Vans etc.
- Contract hire e.g. Swan carriers, Andy forwarders etc
- Public hauliers e.g. Signon
Advantages of Road Transport
- It provides door-to-door service
- It’s relative cheap compared with other modes of transport
- It’s relatively faster
- It’s very flexible
- It is not limited to geographical features like mountains valleys rivers except large water bodies.
- It is easily
Disadvantages of road transport
- It is relatively slower than air and pipeline
- There are more delays due to traffic
- It is unsuitable for long distances
- Not suitable for urgently required goods and perishable unless special facilities are installed.
- Unreliable since road transporters don’t stick to strict time schedules
- They are more prone to accidents, theft and pilferage of
- Great source of
It is one of the oldest modes of transport and its popularity was fueled by the industrial revolution. The first trains were steam powered which were later replaced by diesel powered and more recently electric trains were introduced. Rail transport is suitable for bulky and durable goods to be transported over long distances, heavy /less value consignment like sand, gravel, cement, grains etc.
Advantages of rail transport
- It is one of the cheapest modes of transport
- It is suitable for long distances hauls
- Special wagons can be provided for special cargo e.g. refrigerated wagons for perishables e.t.c.
- It is reliable due to adherence of strict schedules
- It has a large capacity for transporting loads of related
- It is suitable for transporting bulky and irregular goods e.g
- No major limitations on geographical
Disadvantages of rail transport
- It is a slow means of transport
- Rail network is limited to few urban centres
- It involves heavy capital investment to construct and maintain
- It is suitable for perishable and urgently required cargo
- It requires specialized skills to
It encompasses the use of ships, barges, steamers, ocean liners, tankers, cruisers, ferries canoes and boats. Its suitable over long distances, bulky and irregular shaped goods for the transportation of durables and for low but large cargo.
Advantages of water transport
- Reliable due to adherence of strict schedules
- It has the largest capacity to transport any quantities
- It has a global reach since no coastline in all the continents is
- It has relatively low cost of transportation
- Its flexible i.e. the same vessel can carry variety of items
Disadvantages of water transport
- It is the slowest means of transportation
- There are higher labour requirements since its labour
- There are higher risks for total loss for cargo and goods incase of
- It is unsuitable for perishable and urgently required
- It is limited to only navigable area/ water
It comprises air bound means of transportation like aero plane and helicopters means of transport and therefore its suitable for urgently required light, perishable or highly valuable cargo. Air freight is commonly used in exportation business and plays significant part in international commerce.
Advantages of Air Transport
- Reliable due to strict time schedules
- It provides the fastest link possible hence offsetting (cancel) the added
- It has wide reach and global presence/
- Guarantee of safety and security of cargo is generally
- It is suitable for emergency supply like drugs, rescue efforts, humanitarian deliveries, and emergencies.
Disadvantages of air transport
- It is the most expensive mode of transport
- There are higher risk of total loss of cargo incase of accident
- It has limited
- It is unsuitable for flammable, explosive and bulky
It comprises underground transportation of liquid and gaseous cargo in pipes. The revolution of pipeline has made it very convenient and easy to transport oil, water and milk in some countries at minimum costs.
Advantages of Pipeline Transport
- Limited interference from geographical features
- There are no delays in transporting cargo except in cases of breakdowns
- It offers flexibility because it’s possible to switch from one fluid to another
- It is cheaper than air and road transport
- It is suitable for long distances haulage.
- There is more security of cargo
- It is less labour intensive
Disadvantages of pipeline transport
- There is a huge capital outlay required
- It has limited transportation i.e. only liquid and gas
- It is unsuitable for perishable liquids
- It is subject to sabotage hence risk to cargo
A container is any unit used for transporting goods. It involves putting cargo in metal containers which are easily transferred between two transportation modes. They can also be easily lifted since they have hooks. It‟s part of unitization and consolidation since it combines several units which are loaded into a container for transportation. Most containers have standard length and height. Goods transported through one container are referred to as full container load (FCL). Where cargo is combined into several consigners through one container is known as less container load (LCL).
Benefits of containerization
- Offers security of goods on transit and also from natural calamities e.g. rain, sun t.c
- It ensure that irregular goods are smoothed into regular shape for transportation and storage.
- It makes the handling of cargo
- It simplifies the process of customs clearance and documentation
- It saves time in loading and offloading
- It reduces the cost of handling and transportation
- It is easy to locate the movement of containers because of serialization
- The container is very durable hence long protection of the cargo
Shortcomings of containerization
- The initial cost of putting containers is very high
- They require special handling equipment for loading and offloading
- They are not recommended to transport very fragile commodities
- They are only applicable for large scale transportation
- They require big space for packaging and offloading
This is a means of transport which switches goods on transit from one mode of transport to another. The type of inter-modal transportation entail: piggy back, fishy back, train ship, air truck and Ro-Ros.
- Piggy back: This involves the use of rail and trucks road where cargo is transferred from anyone of the two to another.
- Fishy back: This is combination of water ship to truck (road) transportation where goods are shifted from anyone of the two to another.
- Train ship: This is the combination of water and rail transport. This is where goods are shifted from rail to water or from water to another.
- Air truck: It involves the shifting of goods between air and road transportation
- Ro–Ros: Roll on, roll off containership allows truck, trailers and containers to be directly driven on and off to the ship without using cranes
Reasons for inter-modal transportation
- To attain flexibility where the weaknesses of one mode are overcome by strengths of the other.
- To minimize transportation costs especially over long distances
- To overcome geographical and physical barriers
- To break bulk (goods that arrive in containers need to be broken down in small units for easy transportation).
- To maintain the customers like the one who need provision of door-to-door
- To promote economic growth by applying the mode of transport suitable to each section of the journey
- To control environmental pollution by reducing energy consumption
- Reduced congestion and the burden on overstressed infrastructure.
Choice of Mode of Transport
The choice of mode of transport depends on various factors:
- The nature of materials to transport
- The volume and distance
- The value of materials
- Special facilities available
- Schedules and frequency of delivery
- Security loss and damage
- Reputation and stability of carrier
- Cost and flexibility
- Reliability t.c
Choice of Ownership
The choice of ownership depends on the following factors.
· Operating costs
In different circumstances, either own account or third party transport might be cheaper and they should consider other benefits before an organization moves away from the cheaper option.
· Capital costs
This is the initial cost of acquisition. Organization must weigh the initial cost of investing in vehicles and compared to hiring.
· Customer service
Organization must choose the mode of transport that provides acceptable customer service in the best possible way. Sometimes it is impossible to get a third party carrier and therefore own account will be the best option.
The structure and operation of a private fleet are fairly rigid as you cannot make quick adjustments to allow for changing circumstances. If there is a certain peak in the demand, you cannot increase the size of the fleet for a few days and then reduce again when the peak passes. Common carriers therefore can make these adjustments faster.
· Management skills
Managing transport needs specialized skills which are not readily available in most organizations. This therefore makes third party carrier to be ideal, since management team with specialized skills.
An organization clearly has greater control over transport and therefore wider operations if it runs its own transport. However, this control might be costly and contract companies might offer equivalent services but without the overheads and inflexibility of private fleet.
Question: Discuss the advantages of leasing a third party transport provider over having own fleet of vehicles.
Emerging Trends in Transport Alternative powering technologies
Due to increased environmental pollution i.e global warming, there is an initiative towards promoting more environmental friendly sources of energy in transport sector.
Cleaner technologies, such as new successful alternative powering technologies, more efficient engines or improvement in the standards for gaseous emissions and noise, can contribute to a more sustainable transport sector. Several powering technologies can influence the transport sector by substituting part or all of the use of fossil fuels, such as the following innovations.
Bio fuels. Bio fuels are becoming more common on the market and the international community is currently seeking to agree on a common bio fuels policy.
LPG. Liquid propane gas (LPG) and compressed natural gases (CNG) are still limited to niches of the market but contribute to security of supply and job creation.
Hydrogen. The future of hydrogen is as yet uncertain as technical problems remain. If these issues are resolved, this could be a source of renewable energy.
Solar energy. Teams of engineers are competing in solar car races every year. Electricity. The electric car and electric motorcycle are already in production. Emerging transportation technologies
High-speed trains. The most prominent evolution in the new future is the development of high- speed trains running across Europe at speeds reaching 320 km an hour. High-speed railways in Austria, Belgium, France, Germany, the Netherlands and Switzerland have joined to form Rail team. A number of technical issues and language complications still have to be resolved, but the trains have the potential of taking some business from airlines and the road. High-speed trains require that railway staff gain new skills. Developing new and unconventional transport systems can take a long time. New transport modes are emerging in a more distant future and cannot be expected to influence the markets in a five to 10-year perspective.
Smart cars. Proposals for vehicle automation have been around for decades. Automating the guidance of cars is attractive for utilization of highway space and safety. Smart cars of the future will use advanced technology to perform such functions as automatic cruise control, lane departure warnings and correction, hazardous object avoidance, driver awakenings, position and satellite monitoring, self-parking and driverless transportation (www.future-car.net). Emerging transport telematics technologies offer many possibilities for improving vehicle control, comfort and safety. New materials and nanotechnologies will reduce weight and energy use. Promoting the development of cars that are smarter, safer and cleaner, will boosts growth of jobs in the digital economy.
RUF. The Rapid Urban Flexible (RUF) is a system where electric vehicles can drive on normal roads or on top of a monorail for longer distances. A substantial part of the system is automated and the system design promises higher efficiency in transport, low energy use and increased safety.
Superbus. Delft University of Technology in the Netherlands has developed a superbus, which switches seamlessly between ordinary roads and dedicated super tracks. The bus reaches speeds of 250 km an hour. The project plans to unveil a fully functional prototype at the Beijing Olympics in 2008.
Maglev. Magnetically levitating (maglev) trains are already operating in Shanghai, China, at speeds of up to 430 km an hour (http://www.maglev.de). Germany plans to build a 37 kilometre stretch of maglev tracks from Munich Central Station to the airport. The train will travel at up to 450 km an hour
Physical Distribution (PD) refers to the set of activities concerned with efficient movement of finished goods from the end of operation management to the consumer. It takes place between numerous wholesaling and retail channels and includes such important decision areas as customer service, inventory control, material handling, protective packaging, order processing, transportation and warehousing.
Physical Distribution is part of a larger process called distribution which includes wholesale and retail marketing as well as physical movement of products. By storing goods in convenient locations for shipment to wholesalers and retailers and by creating faster and reliable means of moving the goods, business owners can help assure continued success in a rapidly changing competitive global market. The importance of physical distribution is also based on its relevance to customers‟ satisfaction. Physical distribution can be viewed as a system of components linked together for the efficient movement of products. Business can ask the following questions in addressing these components.
1. Customer service
What level of customer service should be provided?
2. Order processing
How should the orders be handled?
3. Inventory control
How much inventory should be maintained at each location?
How will the products be shipped?
Where will be the goods located, how many warehouse should be utilized?
6. Material handling
How can efficient methods be developed for handling goods in factory and transport terminals?
These components are interrelated in way that decisions made in one area affects the relative efficiency of another. Viewing physical distribution from a systems perspective can be the key providing a defined level of customer services at the lowest possible costs.
Elements of Physical Distribution Customer service
Customer service is precisely defined standards of customers‟ satisfaction which business owner intends to provide for its customers. Physical distribution system is normally set up to reach the customer satisfaction at the lowest possible cost. In today’s technologically fast paced world, firm always involve the use of specialized software that allow the owner to track inventory while simultaneously analyzing all the modes and transportation means available to determine fastest and cost effective way to deliver goods in time.
Order processing is another physical distribution function because it directly affects the ability to meet customer service standard defined by the owner. If the order processing system is sufficient the owner can avoid the cost of premium transportation or high inventory levels. Order processing varies by industry but often consist of four major activities;
- Credit check
- Recording of the sales such as crediting a sales representative commission
- Making the appropriate account entries and locating the
- Shipping and adjusting inventory
Technological innovations such increase used of Universal Product Code are contributing greater efficiency in order processing. Backwards system gives business the ability to route customer orders efficiently and reduce the need for manual handling.
It is a major component of physical distribution system. Inventory costs include funds invested in inventory, depreciation, possible obsolescence of the goods. Inventory control analysts have developed a number of ways which can help business control inventory effectively.
It is the movement of goods from one point to another. Transportation costs vary by modes.
A storage warehouse holds products for moderate to long term period in an attempt to balance supply and demand for producers and purchasers. They are most often used by business whose product supply and demand are seasonal. On the other hand, a distribution warehouse assembles and distributes products easily keeping them on move as much as possible.
As a component of physical distribution, material handling comprise of all the activities associated with moving products within a production facility, warehouse and transportation terminals.
CONTROL OF TRANSPORT INDUSTRY MOTOR VEHICLE INSPECTION UNIT
The Unit is a technical arm of Police Department mandated with the responsibility to ensure that vehicles operating on our roads comply with specifications outlined in the Traffic Act in relation to body design construction and use regulations.
Functions of Motor Vehicle Inspection Unit The Unit functions are as follows:
- Initial inspection. To determine status of commercial goods and public service vehicles before registration.
- Routine or periodical inspection: Annual/Half yearly inspection to gauge roadworthiness of commercial goods and public service vehicles and ensure compliance with Traffic Act Cap 403 Laws of Kenya and Subsidiary rules there ‐
- Random traffic check inspection :‐ To check compliance of all categories of motor vehicles to the Traffic Act Cap 403 Laws Of
- Special inspection:‐ To determine roadworthiness of modified vehicles, as well as verification of change of class and vehicle details e.g. engine change.
- Re‐inspection:‐ To be done after failed initial /routine/periodical/random inspection.
- Accident inspection:‐In aid of Police Investigation to determine pre‐accident status of vehicles involved in road traffic accident and for motor vehicle inspection report analysis in addition to defending the report in a court of
- The unit also works very closely with other government Ministries, Departments, agencies and other stakeholders namely:‐ NEMA, KEBS, UNEP t.c
NOTE:‐ In order to discharge the above functions, the motor vehicle Inspector must be gazetted on appointment by the Minister of Transport as stipulated under Section 3(3)(b) of the Traffic Act.
VEHICLE INSPECTION GENERAL •
Why Vehicle Inspection?
A motor vehicle like any other mechanical machine consists of numerous moving components which wear out gradually in spite of the quality of lubricant applied. The general performance of the vehicle will then begin to deteriorate if the worn out parts or components are not replaced or attended to as may be necessary e.g. worn out piston rings will cause the engine to lose compression, resulting to emission of excessive smoke due to incomplete burning process of fuel in the engine. The engine will also generate less power than designed to propel the vehicle under all road conditions in addition to the high fuel consumption. It is therefore the responsibility of the vehicle owner or person in‐charge of fleet maintenance to ensure that repairs are done as may be necessary and regular maintenance service program put in place. The repairs should be done by competent technical personnel in a reputable garage with appropriate tools and equipment to prolong the life span of the vehicle. Remember that what is cheap initially may cost you very dearly in the long run.
Requirements for inspection
- Valid booking receipt from K.R.A. to confirm payment of inspection fee (K.shs.1000)
- Original vehicle log book (or certified copy)
- Vehicle to be inspected
Refusal to inspect
The examiner can refuse to test vehicle for any of the four reasons:‐
- If it is dirty
- Has insufficient fuel or lubricants to allow safe driving
- Has insecure load (on roof rack)
- The Log Book is not available or physical details differ substantially with particulars in Log Book
A vehicle is issued with roadworthiness certificate and windscreen sticker if certified to be compliant.
NATIONAL TRANSPORT AND SAFETY AUTHORITY (NTSA)
National Transport and Safety Authority is a state corporation under the Ministry of Transport and Infrastructure. It was established through an Act of Parliament; Act Number 33 of 2012.
Objectives of NTSA
- Harmonize the operations of the key road transport departments which were previously handled by various government
- Effectively manage the road transport
- Minimize loss of lives through road crashes.
Mandate of NTSA
- To advise and make recommendations on matters relating to road transport and
- To implement policies relating to road transport and safety
- To plan, manage and regulate the road transport sector in accordance with the provisions of the Act no. 33, 2012
- To ensure the provision of safe, reliable and efficient road transport
CORE FUNCTIONS OF NTSA:
NTSA is committed to upholding the following core functions as the guide to its Service Delivery:
- Registration and licensing of motor vehicles
- Conducting motor vehicle inspections and certification
- Regulating the public service vehicle(PSVs)
- Advising the Government on national policy with regard to road transport system
- Developing and implementing road safety strategies
- Facilitating the education of the members of the public on road safety
- Conducting research and audits on road safety
- Compiling inspection reports relating to traffic accidents
- Establishing systems and procedures for and oversee the training, testing and licensing of drivers
- Formulating and reviewing the curriculum of driving schools
- Co-coordinating the activities of persons and organizations dealing in matters relating to road safety
INTERNATIONAL CONTROL OF TRANSPORT INDUSTRY
Since so much of transport takes place on an international scale there is a great need for organizations to provide a common framework of conventions that all nations can agree to observe. Such bodies have been established and set rules and regulations that all countries are expected to abide by. These regulations cover matters such as safety standards, compensation levels, crew hours and requirements for the carriage of certain special types of cargo such as dangerous goods and perishable foodstuffs. Generally these are inter-governmental bodies and, as such, do not have legislative, executive or judiciary powers but provide the machinery for governments to cooperate and exchange information.
- The International Maritime Organization (IMO)
The IMO is a specialized agency of the UN and serves as a consultative and advisory
body on maritime matters. Established in 1948 to improve safety at sea its role was later extended to include the prevention of maritime pollution. The main conventions agreed by IMO are:
- Safety of life at sea (SOLAS)
- Load line rules
- Anti-collision regulations
- Standards of training and watch keeping
- Marine pollution from ships (MARPOL)
IMO is empowered to call international diplomatic conferences at which proposals are put before member states for discussion. These proposals usually come into force when they have been signed-up to by a certain minimum number of states with a qualifying minimum registered tonnage.
IMO seeks to establish the highest practicable standards of safety but, recognizes that standards that require the most advanced technology cannot be attained by many of the world’s fleets within a reasonable timescale are useless, the standards tend to be set at a level that can be attained by all fleets. IMO has neither the means nor the power to enforce standards and relies on national governments to adopt the standards into their own legislation
2. The International Civil Aviation Organization
ICAO was established in 1947 to standardize safety and other aspects of quality regulation on a world-wide basis. Its objectives are:
- To ensure the safe and orderly growth of air transport throughout the world
- To encourage the development of airports and navigation facilities
- To reduce wasteful competition
- To ensure that all nations have a fair opportunity to operate international airlines
- To avoid discrimination between contracting nations
ICAO had its roots in a conference at Chicago, USA in 1944 which attempted to achieve a multilateral solution to the questions of who could fly where and at what price. Two landmark agreements were produced:
- The International Air Services Transit Agreement, providing for aircraft to fly over or land for technical (non-trade) reasons in the territory of any other country party to the agreement
- The International Air Transport Agreement, which made more comprehensive provision for the carriage of goods and people between countries.
These two agreements formed the basis of the so-called “five freedoms of the air”.
In the same way as IMO, ICAO establishes standards and specifications, which its member states may sign up to but it has no power to enforce their adoption or observance. As with IMO it is left to individual nations to decide whether to accept these standards into national law.
3. The Economic Commission for Europe
The ECE is a commission of the UN that produces international agreements for the whole of Europe (not just the EU) and there are similar Commissions in other parts of the world. As with IMO and ICAO, these agreements are not binding and have to be incorporated into national law to give them effect in any particular country. Some of the major conventions relating to freight transport are:
- The International Agreement on the Carriage of Dangerous Goods by Road (ADR)
- The International Agreement on the Transport of Perishable Foodstuffs (ATP)
- The International Carriage of Goods by Road (CMR)
- The Customs Convention on the International Transport of Goods by Road (TIR)
- The European Agreement Concerning the Hours of Work by Crews of Vehicles Engaged in International Road Transport (AETR)
The International Carriage of Dangerous Goods by Road-
The International Agreement on the Carriage of Dangerous Goods by Road
(ADR), which came into force in 1968, was established to control the international movement of dangerous goods. It was set up under the auspices of the UN’s ECE to provide a common set of rules for the international carriage of dangerous substances and to ensure safe and adequate packaging. The parties to the agreement undertake to permit the transport by road through their territories without hindrance, of dangerous goods, provided that they are packed, labeled and carried on vehicles complying with ADR. Vehicles and containers used for ADR must be constructed to a particular specification and certified by a national competent body; drivers must receive special training and pass an examination. Consignors must ensure that certain information about the nature of the goods and the emergency action is given to the transport company and this must be passed on to the driver. The vehicles and containers must be specially marked to indicate the type of goods carried
The International Transport of Perishable Foodstuffs
The International Agreement on the Transport of Perishable Foodstuffs (ATP) applies to both own-account and hire-or-reward operators on all surface journeys within Europe by road or rail, and sea journeys not exceeding 150 km which are preceded by road or rail legs. It does not apply to air transport or to domestic transport. The agreement provides a list of the particular foodstuffs to be carried and sets maximum permissible temperatures for the carriage of these goods. It lays down common standards for temperature controlled equipment and specifies in detail the tests that transport vehicles and containers have to undergo.
These tests involve the measurement of the efficiency of the insulating body and the adequacy of the cooling equipment. Vehicles and containers approved under ATP carry a white plate with dark blue letters on it, indicating the ATP classification of the equipment together with the expiry date of the certificate.
The International Carriage of Goods by Rail
The International Convention on the Carriage of Goods by Rail (CIM) has existed in some form since 1893 and permits the carriage of goods by rail under a common code of conditions using one document and is part of the Convention concerning International Carriage by Rail (COTIF).
It also covers the maritime portion of a combined transport journey providing the shipping line is listed in the convention. The convention provides for through rates under a common code of conditions and simplified documentation and payment. Intermediate handling or customs examination are not normally required during the journey.
The International Transport of Goods by Road (TIR)
Most European countries are signatories to the Customs Convention on the International Transport of Goods by Road, 1959 (Transports Internationals Routiers, TIR). Under this agreement, customs-sealed vehicles or containers may travel across international frontiers with the minimum of customs formalities and without the necessity of placing bonds or deposits.
International Transport Conventions The Warsaw Convention
The Warsaw Convention is a 1929 agreement that limits the liability of airlines in the event of accidents on international flights. This Convention applies to all international carriage of persons, luggage or goods performed by aircraft for reward. It applies equally to carriage by aircraft performed by an air transport undertaking when no payment is received. A key element of the Convention is the requirement for a consignment note with certain specified details. Provided the consignor has carried out the duties required of him by the Convention the carrier is liable for damage sustained in the event of the destruction or loss of, or of damage to, any registered luggage or any goods, if the occurrence which caused the damage took place during the carriage by air.
The Montreal Convention
This took effect on 4 November 2003 and is an important development of the Warsaw Convention. A major feature of this law is the concept of unlimited liability. The Montreal Convention introduces a two-tier system of compensation. The first tier includes strict liability up to 100,000 Special Drawing Rights (SDR) (approximately US$135,000), irrespective of a carrier’s fault. The second tier is based on presumption of fault of a carrier and has no limit of liability.
The Hague Rules
This agreement, reached in 1924 and amended by the Brussels Protocol of 1968, relates to the carriage of goods by sea and describes the rights and duties of both consignor and carrier. Provision is made for compensation in the event of loss of or damage to a consignor’s goods.
The Hamburg Rules
This is a UN convention on the carriage of goods by sea dating from 1978 and covers the same areas as the Hague Rules but with certain important differences.
Many of the conventions described above depend on the use of specific documentation, without which the various provisions may not be effective. The most common document is the consignment note and there are several different sorts, according to the mode of transport. These include:
- Air Waybill
- Bill of Lading (for ships)
- CMR consignment note
- CIM consignment note
Each of these has a standard layout and multiple copies. Whilst they are all different in detail, the information to be entered is very similar.
- Place of departure and destination
- Names of consignor, consignee and carrier
- Description of the goods
- Number of packages with identifying marks, weights and dimensions
Arjan Van Weele (2004). Purchasing and Supply Chain Management, PVT publishers, New Delhi
Benton W C (2007). Purchasing and Supply Management, Routledge, London
Michael Quayle (2005). Purchasing and Supply Chain Management: Strategies And Realities,
Richards, G. (2011). Warehouse management: A complete guide to improving efficiency and minimizing costs in the modern warehouse. London: Kogan Page.
Rushton, A., Oxley, J., Croucher, P., & Cranfield School of Management. (2001). The handbook of logistics and distribution management. London: K. Page.
Scott, C., Lundgren, H., & Thompson, P. (2011). Guide to supply chain management. Berlin: Springer.