Inventory Management and Control PDF

**INVENTORY MANAGEMENT: THE NATURE OF INVENTORY MANAGEMENT** Inventory Management helps the company identify which and how much stock is ordered, and at what time. It is important for the company to have a good number of stocks in its inventory. It tracks inventory from purchase to sale of the goo...

**INVENTORY MANAGEMENT: THE NATURE OF INVENTORY MANAGEMENT** Inventory Management helps the company identify which and how much stock is ordered, and at what time. It is important for the company to have a good number of stocks in its inventory. It tracks inventory from purchase to sale of the goods. \**Inventory is not just about the raw materials but it also involves the finished products. The company has to identify it in terms of inventory.* The practice identifies and responds to trends to ensure there\'s always enough stock for the customer\'s orders. If there is no availability of products, customers will be discontent. *\*It is a poor inventory management* In accounting, inventory is considered as an asset. Therefore, too much stock costs money and reduces cash flow. There should always be an ideal level of inventory because excessive inventory of products or even raw materials will deplete the resources/cash flow of the organization. *\*Natutulog ang pera kapag masyadong maraming inventory.* **GOOD INVENTORY** - - **CHALLENGES/OBSTACLES THAT THE COMPANY FACES IN TERMS OF INVENTORY** - - - - - THERE SHOULD ALWAYS BE PROPER INVENTORY MANAGEMENT TO BE ESTABLISHED IN THE ORGANIZATION - - - - - - - - - - - - - - **WHAT IS INVENTORY?** 1. 2. 3. In the field of accounting, inventory is considered as an asset. Accountants use the information about stock levels to record the correct valuation of the balance sheet. **DIFFERENCE BETWEEN INVENTORY AND STOCK** Inventory is often called stock in retail. Managers frequently use the term, stock on hand to refer to products like apparel, houseware, etc. Across industries, inventory refers more broadly to stored sales goods and raw materials that are used for production. - - **DIFFERENT TYPES OF INVENTORY** **13 Types of Inventory** There are four different top-level inventory types: raw materials, work-in-progress (WIP), merchandise and supplies, and finished goods. These four main categories help businesses classify and track items that are in stock or that they might need in the future. However, the main categories can be broken down even further to help companies manage their inventory more accurately and efficiently. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. **INVENTORY PROCESS** If you produce on demand, the inventory management process starts when a company receives a customer\'s order and continues until the order is shipped. Forecasting - how many products will you produce? You have to identify your demand in order for you to create the supply you are producing. IMPORTANT! - - **CONSIDERATIONS IN INVENTORY MANAGEMENT** - - *\*check the products or raw materials to ensure the quality* **DEMAND PLANNING** *\*supplies are created by demands* Demand planning is an important part of successful inventory management. It is the process in which you determine how much of each item you anticipate in terms of selling. Once the demand is determined, the inventory manager follows the flow of goods from supplier to production and ultimately fulfills the customers\' orders. *\*The longer it stays in the warehouse the more it diminishes.* **CHAPTER 2** **Accounting for Inventory and Cost of Goods Sold** **Inventory & COGS** Some companies do have a greater companies investment in n merchandise inventory than in any other asset. Hence, inventory holds a comparable importance in the financial structure of the company. **Inventory and COGS** Because inventory and cost of goods sold are major factors in the financial operations companies (merchandising), for them accurately is important. is ► Two major issues affect accounting for inventory and cost of goods sold, namely: **Measurement of Inventory and COGS** ► Inventory and COGS may be measured using either of the two systems-the periodic and perpetual systems. ► The perpetual system maintains current and accurate accounts of inventory and COGS. This is accomplished by constantly (or perpetually) updating the balances in these accounts. **The Perpetual System** The perpetual system also requires that separate inventory accounts be kept for each stock keeping unit (SKU). An SKU is a unique size, strength and type of item e.g. in a pharmaceutical company, Lozartan brand is available in 2, 5, and 10 mg strengths and in 100 and 500 tablet package sizes with six different SKUs. **The Perpetual System** \> for each SKU, the account shows the beginning inventory, all purchases and all sales of the item. \> Each time a purchase or sale has been made, the inventory account must be updated. Thus, the perpetual system provides a complete sales history of each SKU. \> requires a great deal of record keeping. \>with computerization many businesses can now adopt the perpetual system. **The Periodic System** ► The periodic system has historically been used by businesses-such as pharmacies, hardware stores, and supermarkets-that sell many different items, each of which has relatively low unit cost. It is a simpler system to use than the perpetual perp system. ► The periodic system requires accounts for sales, purchases and inventory. There are no accounts for cost of goods sold or for individual SKUs. Merchandise purchases are recorded in the purchase account. \**merchandise = items being offered or sold* **The Periodic System** ► No adjustment is made to the inventory account for either sales or purchases. ► Consequently, the inventory account usually does not reflect the actual amount of inventory the firm holds. **The Periodic System** ► In the periodic system, cost of goods sold is determined using the formula: COGS = BI + P-EI ► The beginning inventory (BI) and the total purchases (P) of the pharmacy is the total value of merchandise that the pharmacy had available for sale for the year. ► The amount of unsold inventory at the end of the year (El) is subtracted from the cost of goods available for sale to determine the value of goods actually sold. **The Periodic System** ► The ending inventory for the present year is recorded in the inventory account. It will be the beginning inventory for the next year. ► When the periodic system is used, cost of goods sold may only be accurately determined after physical inventory has been taken which in some firms is done only once a year. Thus, firms that use the periodic system usually generate accurate financial statements only once a year. *\*every month they conduct inventory to make sure that the items or products are correct or correctly placed.* **Comparison of the Two Systems** The perpetual system is more useful for managers. It offers the following advantages: 1. 2. 3. \**If you\'re a manager, you have the power to decide what item should be displayed, what item should have a discount, etc.* **Comparison of the Two Systems** The major disadvantage of the perpetual system is that it requires much record keeping. Because of this non-computerized pharmacies continue to use the periodic system, **Methods of Costing Inventory** 1. 2. 3. **First in, First out** An alternate method is called FIFO, or first in, first out. The FIFO method is based on the assumption that the first units bought are the first sold **Last in, first out** ►LIFO or last in first out method is based on the assumption that the last unit bought are the first one sold and the first bought are the last sold. ► The LIFO method of assigning cost to inventory can be artificially changed by buying extra units of goods at the end of the accounting period. If prices are increasing, this will artificially inflate the cost of goods sold for the period. **Comparison of Method** ► If prices are increasing over time, the FIFO will give the lowest cost of goods sold and LIFO will give the highest. If prices are decreasing over time, the FIFO will give the highest cost of goods sold and LIFO will give the lowest. ►If prices do not change, all methods will give the same cost of goods sold. **FIFO vs. LIFO** A company must choose one of the methods and use it consistently. It cannot change methods from year to year. *\* choose and use one continuously* *\* If there\'s something wrong with the inventory, which financial statement will be affected? = balance sheet will be affected* **Lower of Cost or Market** Items on inventory must be valued at a lower of cost or market value Cost refers to the amount paid for the item when it is bought Market value refers to the replacement value of the item **Lower of Cost or Market** ► Usually, cost is lower than market value but if market value is lower than cost, the value of ending inventory declines ► The difference between the calculated value of ending inventory and the value after the adjustment represents a loss of inventory for the pharmacy ► This amount is recorded and recognized as an expense called \"loss on write down of inventory\" **Lower of Cost or Market** ► For example, the pharmacy had 10 bottles of penicillin on hand at year end at a purchase cost of Php 25.00 ► If at year end price of penicillin had declined to Php 20.00 per bottle, the pharmacy would have to value the penicillin at the lower or market price of Php 20.00 per bottle ► It would have to recognize expense for the year of Php 50.00 (10 bottles x Php 5.00 per bottle) Loss on write down of inventory Php 50.00 Cash Php 50.00 **FEFO** First ended, First out or First to expire, First out Inventory management system that moves older products out first to prevent waste from products expiring before they are used. **Returns and Allowances** ► Occur, for example, when goods are not of the quantity or quality ordered are defective, or have been damaged in transit. ► Purchase returns and allowances- suppliers receiving returned merchandise from pharmacies ► Sales returns and allowances- by pharmacies receiving returned merchandise from patrons. ► The merchandise is accepted for either credit or a refund. **GROUP 1** **FINANCIAL IMPLICATIONS OF INVENTORY** **Understanding ratio analysis** **WHAT RATIO ANALYSIS?** **DEFINITION** A method of quantifying a company\'s liquidity, operational efficiency, and profitability to evaluate its performance over time. **PURPOSE** Ratios can be used in the business world by providing summarization of the well being of a company. **ASSET AND LIABILITY** **IMPORTANCE OF RATIO ANALYSIS** Banks and other third parties often use ratios to determine creditworthiness. **CURRENT RATIO** - - - Example standard: Service industries: 1.0-1.4 that is P1.00-P1.40 peso Manufacturing: 1.5-2.1 that is P1.50-P2.10 peso. BAD VS GOOD RATIO BENCHMARKING \*it gives credential and cash flow to your company **Example**: Karusel\'s Creation Party Decoration and Services: P150,000 in current assets P100,000 in current liabilities. Current ratio = 150,000/100,000 - - Current Ratio: P150,000 / P100,000 = 1.5 **Interpretation** Karusel\'s Creation Party Decoration and Services has P1.50 in assets for every peso of liability. This is generally good/high ratio, indicating a reasonable level of liquidity. Note: Service industries 1.0-1.4 that is P100-P1.40 peso Manufacturing 1.5-2.1 that is P1.50-P2.10 peso **QUICK RATIO (ACID TEST)** - - - **Example standard:** - - **Example**: Rei Channel Department store: - - Quick ratio = (250,000 - 50,000) / 220,000 = 200,000 / 220,000 = 0.9 = bad ratio **Quick Ratio**: (250,000 - 50,000) / 220,000 = 0.9 **Interpretation** Rei Channel Department store has P0.90 in assets for every peso of liability. This is bad quick ratio for a retail industry. Note: Manufacturing: 1.4 that is P1 40 peso Retail: 1.0 that is to P1.0 **INVENTORY TURNOVER RATIO** - - - **Example standard:** Automotive or heavy machinery: 1 to 2 Retail: 6 to 8 **Example**: Drug Race drugstore has the following financial details for the year: Cost of Goods Sold (COGS): P1,000,000 Average Inventory: P200,000 Inventory Turnover Ratio = 1,000,000 / 200,000 = 5 **Interpretation** Drug Race drugstore turns over its inventory 5 times annually. However, this falls. below the retail industry standard for Inventory Turnover Ratio, suggesting that the store is not efficiently moving its products. Note: Example standard: Automotive or heavy machinery: 1 to 2 Retail: 6 to 8 **OBSOLETE STOCK** Obsolete Stock is a term that refers to inventory that is at the end of its product life cycle. This inventory has not been sold or used for a long period of time and is not expected to be sold in the future. This type of inventory has to be written-down or written-off and can cause large losses for a company. **VARIOUS FACTORS:** - - - - **OBSOLETE STOCK: ARGUMENTS AGAINST DISPOSAL OF DEAD STOCK** **ARGUMENTS AGAINST OBSOLETE STOCK** WHY YOU HAVE BEEN TOLD NOT TO DISPOSE OF IT? WHY IS THE DEAD STOCK STILL THERE? THE THREE REASONS MOST OFTEN GIVEN AS TO WHY THE PRODUCT CAN'T BE DISPOSED OF ARE: 1. 2. 3. **PROBLEMS WITH CONVINCING DECISION MAKERS THAT \"ITS GOTTA GO\"** **Impact on Financial Statements** Write-off Expenses - Asset Value Reduction - **ORGANIZATIONAL CAPITAL STRUCTURE** The problem for many organizations is that cash flow doesn\'t always keep up with our needs. their accounts receivable - the book value of the inventory they are carrying - **CREDIT STANDING** ***Credit-worthiness*** frequent or large write-offs can raise concerns among creditors about the company\'s financial management practices **OBSOLETE STOCK: ARGUMENTS IN FAVOR OF DISPOSAL OF DEAD STOCK** **RECAPTURE OF SPACE** In terms of space utilization, there are some simple mathematical facts to keep in mind: 1\. Multiplying an item\'s length times its width tells you the amount of square feet the item is occupying. 2\. Multiplying an item\'s length times its width times its height tells you the amount of cubic space it is occupying. **RECAPTURE OF SPACE** **Example**: There are boxes of expired milk in the shelf that the management is deciding whether to dispose or not, thinking it has been paid already. Help the management decide. Per square foot for rent/month: P0.50 Space used: 4,000 square feet Should the management dispose the boxes of milk or not? **EFFICIENT UTILIZATION OF LABOR AND MACHINE RESOURCES** Not only does obsolete inventory take up a lot of space, it can also get in the way of workers. Repeatedly moving obsolete product out of the way hurts efficient use of both labor and machine time. **REDUCTION OF CARRYING COSTS (THE K FACTOR)** The K Factor represents the number of pennies per inventory dollar per year a company is spending to house its inventory. It is generally expressed as a percent. 1\. Demonstrate the impact of carrying costs on your existing dead stock. This addresses the \"We\'ve already paid for it,\" argument in favor of retaining dead stock. Exhibit 2-5 Demonstrating the Impact of the K factor on Existing Dead Stock Assumptions: - - - - *computation:* - - - - - 2\. Demonstrate that if the product remains long enough, even selling it at a profit will not recapture your original cost. This addresses the \"We might need it someday,\" and, \"We might sell it someday,\" arguments in favor of retaining dead stock. **EXAMPLE** Purchase Cost: P100.00 per unit Selling Price: P120.00 per unit Profit: P20.00 K-Factor: P10.00 per unit per month. If the product remains in inventory for 6 months: - Total Cost: - - Net Loss: - - **METHODS OF DISPOSAL** - - - - - - **COMPUTATION OF THE K-FACTOR OR CARRYING COST** **K-FACTOR** This represents the carrying cost as a percentage of the average inventory value. - - **TRADITIONAL METHOD** 1\. Determine Total Carrying Costs Insurance Costs Obsolescence Costs Capital Costs Handling Costs Storage Costs Total Carrying Costs = Storage Costs + Insurance Costs + Obsolescence Costs + Capital Costs + Handling Costs 2\. Calculate Average Inventory - - Average Inventory = Beginning Inventory + Ending Inventory / 2 Formula: K Factor = total carrying cost / average inventory value x 100 **EXAMPLE**: Diwata Parisian Company is a small business that sells office supplies. The owner, Jericus, wants to understand the carrying costs of her inventory to make informed financial decisions. Jericus has identified the following costs related to carrying her inventory for the year: - - - - - She also keeps track of her Inventory levels: - - **EXAMPLE**: (1) Storage Costs - P50,000 Insurance Costs - P10,000 Obsolescence Costs - P5.000 Capital Costs - P20,000 Handling Costs - P2,000 Total Carrying Cost = P50.000 + 10.000 + 5.000 + 20.000 + 2,000 = P 87,000 2) Beginning Inventory - P200.000 Ending Inventory - P300.000 Average Inventory = 200, 000 + 300,000 / 2 = P 250,000 3) K-Factor = P 87,000/P 250,000 x100 = 34.8% The K-Factor of 34.8% indicates that Diwata Parisian Company incurs carrying costs equivalent to approximately 34.8% of its average inventory value. **RULE OF THUMB METHOD** The Rule-of-Thumb Method for calculating the K-Factor is straightforward, combining a fixed percentage with the current prime lending rate. **EXAMPLE:** Formula: K-Factor = 20% + Prime Lending Rate 1.) Determine the Prime Lending Rate - 2.) Apply the Rule-of-Thumb Formula - 3.) Substitute the Values - 4.) Perform the Calculation - **HOW DEAD STOCK IMPACTS INVENTORY CARRYING COSTS** **DEAD STOCK** Dead stock is inventory that is unsellable. Dead stock can also include damaged items, incorrect deliveries, Leftover seasonal products or expired raw materials. **IMPACTS** - - - - **IMPACT OF THE K FACTOR ON ITEMS SOLD AT A PROFIT BUT AFTER REMAINING IN STOCK FOR LONG PERIODS OF TIME** **K FACTOR** represents the number of pennies per inventory dollar per year a company is spending to house its inventory. generally expressed as a percent (%) **The Impact of the K Factor on Items Sold at a Profit but after Remaining in Stock for Long Periods of Time** **SCENARIO** A company sells smartphones. The purchase cost of a smartphone is Php 4,000 and they hope to sell at a 40% gross profit (Php 5,600). However, the company\'s carrying cost (k factor) is 20% of the item\'s value per year. - - - - 1. - - - - 2. - - - - 3. - - - - **CARRYING COSTS AND REPLENISHMENT** **CARRYING COST (K FACTOR)** Carrying costs (holding costs) are the costs incurred from storing inventory over time. These costs include warehousing, insurance, depreciation, and the opportunity cost of capital tied up in unsold inventory. **REPLENISHMENT COSTS (R FACTOR)** Replenishment costs, or the R Factor, are the costs associated with placing orders and restocking inventory. These include administrative costs (processing purchase orders), shipping and handling fees, receiving and inspecting goods, and any setup costs related to preparing the stock for use or sale. **EXAMPLE OF R FACTOR** - - 1. - - 2. - - - 3. - - - **GROUP 2** **COMMON LOCATOR SYSTEMS AND ITS CRITERIA FOR CONSIDERATION** **What are Locator Systems**? a tracking and inventory management system used in the shipping industry to monitor the location and status of cargo. The purpose of a material locator system is to create procedures that allow you to track product movement throughout the facility. Although going by many names, the most common \"pure\" systems are memory, fixed, and random. **COMMON LOCATOR SYSTEMS** 1. the foundations of this locator system are simplicity, relative freedom from paperwork or data entry, and maximum utilization of all available space Conditions Under Which Memory Systems Will Work Storage locations are limited in number. Storage locations are limited in size. The variety of items stored in a location is limited. Only one or a very limited number of individuals work within the storage areas. Pros of Memory Systems Simple to understand Little or no ongoing paper-based or computer-based tracking require Full utilization of space Cons of Memory Systems The organization\'s ability to function must strongly rely on the memory, health, availability, and attitude of a single individual. Significant and immediate decreases in accuracy Once an item is lost to recall, it is lost to the system. 2. In fixed location systems, every item has a home and nothing else can live there. Honeycombing is the warehousing situation where there is storage space available but not being fully utilized due to: Product shape Product put away Location system rules Poor housekeeping **HOW TO COMPUTE HONEYCOMBING RATIO: LOCATION BASIS** Honeycombing Ratio = Empty Storage Locations / Total Storage Locations Empty Spaces = 93 / Total Spaces = 490 Honeycombing ratio on location basis 0.189 OR 19% **HOW TO COMPUTE HONEYCOMBING RATIO: FT BASIS** Empty spaces x ft³ / Total ft³ = (65 x 20 ft) + (50 x 15 ft) + (5 x 100 ft) + (8 x 200 ft) / 16,000 ft = 1,300 + 750 + 500 + 1,600 / 16,000 Empty Spaces x ft Total ft = 4,150 / 16,000 Honeycombing ratio on FT 3 basis 0.259 OR 26% 3. **PROS**: - - - **CONS:** - - - 4. -  - **PROS:** - - - - **CONS:** - - - 5. Pure random location systems allow for the maximization of space since no item has a fixed home and may be placed wherever there is space. The primary characteristic of a random locator system that makes it different from a memory system is that each SKU identifier is tied to whatever location address it is in while it is there.  IF I WERE TO GET READY TO GO OUT AND I HAVE 75 INCHES OF SPACE ON MY VANITY\... HOW WOULD I PREPARE MY BASIC MAKE UP WHICH ONLY CONSIST OF 60% TO MAKE SURE I HAVE ENOUGH TIME BEFORE THE PARTY STARTS. 75\"/60% = 45 INCHES OF SPACE (THE REMAINING 30 INCHES (40%) OF SPACE IS FOR THE ITEMS NOT NEEDED FOR THE PROCESS) **PROS:** - **CONS:** - - 6. Enable you to assign specific locations to those items requiring special consideration, while the bulk of the product mix will be randomly located Conceptually you are trying to enjoy the best features of the fixed and random systems. A common application of the combination system approach is where certain items are an organization\'s primary product or raw materiale line and must be placed as close as possible to a packing/shipping area or to a manufacturing work station **Scenario**: Charmax Manufacturing is a \"Job shop\" electronics manufacturer. It manufactures special order items and often will only produce one, never to be repeated run of an item. Therefore, some specific raw materials inventories required for any given production run may never be needed in the future. However, the company uses many common electronics components such as resisters, transistors, and solder in most of the final assemblies it. produces. Its physical plant is very small. **CRITERIA FOR CONSIDERING LOCATOR SYSTEM FIT** **CRITERIA \#1** - - - - - - - **CRITERIA \#2** - - - - - - - **CRITERIA \#3** - - - - - **CRITERIA \#4** - - **CRITERIA \#5** - - **INDUSTRY EXAMPLES** - - - - **CRITERIA \#6** - - - - - - - - - **CRITERIA \#7** - - - - - Question \#1 What criteria states that a business must protect assets from damage and ensure their continued use and functionality? - Question \#2 What are the tools and machinery used in the warehouse to manage inventories? - Question \#3 Which location system is a mix of 2 location systems fixed and random? - Question \#4 Which location system that has a limited space and requires a good memory? - Question \#5 What criteria enables adjustment for challenges such as interference or physical obstacles? - **GROUP 3** **PHYSICAL LOCATION & CONTROL OF INVENTORY** Common Item Placement Theories, Location Addresses and SKU Identifiers, & Honeycombing **PRESENTATION OVERVIEW** 01 Common Item Placement Theories - - - 02 Location Addresses and SKU Identifiers - - 03 Honeycombing - - **01 COMMON ITEM PLACEMENT THEORIES** Locator systems provide a broad overview of where SKUS will be found within a facility. Physical control of inventory is enhanced by narrowing the focus of how product should be laid out within any particular location system. Item placement theories mean where should a particular item or category of items. be physically positioned. **1.1 INVENTORY STRATIFICATION** INVENTORY STRATIFICATION CONSISTS OF TWO PARTS: - - **A-B-C CATEGORIZATION** - - - **Pareto\'s Law** - - To have an efficient physical inventory control, using popularity or the speed of movement into and through the facility as the criterion, the most productive overall location for an item is a storage position closest to that item\'s point-of-use Exhibit 3-10 A-B-C Placement of SKUs  A - The most popular, fastest moving items (the vital few\") B - The next most active C - The slow-movers Column A - - - Column B - Column C - Column D - Column E - Column F - Column G - Column E - +-----------------+-----------------+-----------------+-----------------+ | METHOD 1 | METHOD 2 | | | +=================+=================+=================+=================+ | D | E | D | E | +-----------------+-----------------+-----------------+-----------------+ | Annual Usage | Cumulative | Annual Usage | Cumulative | | | Usage | | Usage | +-----------------+-----------------+-----------------+-----------------+ | 8,673 | 8,673.00 | 8,673 | 8,673.00 | | | | | | | 6,970 | 15,443.00 | 6,970 | **15,443.00** | | | | | | | 5,788 | **21,431.00** | 5,788 | 21,431.00 | +-----------------+-----------------+-----------------+-----------------+ **UTILIZING AN SKU\'S UNLOADING/LOADING RATIO** Exhibit 3-12 Unloading/Loading Ratio Time Savings Assumptions: - - -  - - - - - **1.2 FAMILY GROUPING** Positions items with similar characteristics together Groupings can be based on: - - - Family Grouping in... - - - **PROS OF FAMILY GROUPING** - - - **CONS OF FAMILY GROUPING** - - - **Using Inventory Stratification and Family Grouping Together** Inventory stratification (ABC analysis) and family grouping are complementary strategies that can significantly enhance overall layout of item placement, ensuring efficiency and productivity. **1.3 SPECIAL CONSIDERATION** A product\'s characteristics may dictate how it should be receive, store, pick, ship in a particular manner Factors could be and are not limited to: - - - - - Even with items requiring special handling or storage, the inventory stratification and family grouping concepts can and should be employed to ensure efficient inventory layout. **02 Location Addresses and SKU Identifiers** **SIGNIFICANCE** YOU CANNOT CONTROL WHAT YOU CANNOT FIND CLEAR SKU MARKINGS - MULTIPLE LOCATIONS FOR ONE SKU - CLEAR LOCATION MARKINGS - VISIBLE SKU CODES ON PACKAGES - TRACKING SKU LOCATIONS - SIMPLE MARKING SYSTEMS - **BENEFITS** IF YOU INCORPORATE THESE ELEMENTS INTO YOUR INVENTORY SYSTEMS, YOU CAN EXPECT: - - - **KEYS TO EFFECTIVELY TYING TOGETHER SKUS AND LOCATION ADDRESSES** SKU contains details of products through letters or numbers (brand, model number, color) LA \"Location Address\" consists of the address where the product is located or kept **KEY \#1** **CLEARLY MARK ITEMS WITH AN SKU IDENTIFIER AND WITH UNIT OF MEASURE** - - **EXAMPLE** COCA-COLA PRODUCTS IN A SUPERMARKET Product: Coca-cola 1.5 liters SKU: 12345678 Unit of Measure: Case (SKU represents a container with multiple units) Each (SKU represents a single product) **KEY \#2** **CLEARLY MARK LOCATION ADDRESSES ON BINS/SLOTS/SHELVES/RACKS/FLOOR LOCATIONS/DRAWERS** - - - 1. - 2. - 0 →9 = 10 00 → 99 = 100 000 → 999 = 1,000 10 x 10 = 100 10 x 10 x 10 = 1000 A → Z = 26 AA → ZZ = 676 AAA → ZZZ = 17,576 26 x 26 = 676 26 x 26 x 26 = 17.576 **EXAMPLES USING SINGLE NUMERIC VARIATIONS** SKU: 1234567890 Whereas: - - - SKU: ABCDEFGHIJ Whereas: - - - 3. - - **EXAMPLES** COMMON LOCATION ADDRESSING SYSTEMS FOR RACKS OR SHELVING. **COMMON LOCATION ADDRESSING SYSTEMS FOR BULK STORAGE** **Bulk Storage Grid Systems** - - Address: A020 A-Aisle 02-Cross Aisle C-Tier  **Bulk Storage Quadrant Addressing System** - - - - - - **KEY \#3** **TIE SKU NUMBERS AND LOCATION ADDRESSES TOGETHER** ADDRESSING LOCATIONS SYSTEM USING ALPHA-NUMERIC **01 Addressing Racks, Drawers, and Shelving** 001203A02802 Whereas: - - - - - - **02 Bulk Storage Grid Addressing System** 0012A02C whereas: - - - - **03 Bulk Storage Quadrant Addressing System** 0012SENW whereas: - - **KEY \#4** **UPDATE PRODUCT MOVEMENT** Monitor the movement of the products (such movements adding, deleting, moving from one place to another) using manual tracking computerized approach, bar coding **01 Best approach: Barcoding or RFID** If unavailable: - - -  **03 Honeycombing** **3.1 THE HONEYCOMBING EFFECT** Honeycombing in the warehouse\... \- an EMPTY space or GAPS in storage area. \- the loss of effective storage capacity. \- often occurs in facilities that use FIXED locations. **THE HONEYCOMBING EFFECT** **CAUSES** Honeycombing can occur due to multiple reasons, a few causes may be: IMPLEMENTED PRODUCT LOCATOR SYSTEM (FIXED SYSTEM) - - POOR WAREHOUSE MANAGEMENT. - - STACKING ERRORS - - **CONSEQUENCES** INCREASED STORAGE COSTS - - - INVENTORY INACCURACY - **3.2 IDENTIFYING HONEYCOMBING** One can visually identify honeycombing by observing empty spaces or gaps in the storage area. a\. Horizontal Honeycombing b\. Vertical Honeycombing For more accurate assessment: - - **3.2.1 MEASURING HONEYCOMBING** EFFECTIVE CAPACITY (%) = USED STORAGE SPACE / TOTAL STORAGE CAPACITY x 100 - - **3.2.2 MEASURING HONEYCOMBING** Honeycombing Ratio = EMPTY STORAGE SPACE / TOTAL STORAGE CAPACITY x 100 \*\*higher honeycombing ratio indicates more wasted space - - **3.2 MINIMIZING HONEYCOMBING** The following strategies can be utilized to minimize honeycombing: a\. Optimized Storage Layout - b\. Regular Inventory Reviews - c\. RFID - d\. Demand Forecasting -