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Inventory Optimization for

Capital Intensive Industry

Aditi Wahi
Chhabra (15P104)

This study proposes a decision-making framework for the
management of spare parts inventory in capital-intensive
industries. This chapter aims to introduce the study by providing
context to the research problem and an overview of the research
process. It includes background to the research problem, an
introduction to fundamental topics and the objectives of the
research study. Finally, the chapter concludes with the research
design, methodology and thesis outline.

Index :
1. Introduction:
2. Background:
3. Problem
4. Approach:
5. Just
6. Emerging






Inventory optimization is the process of scientifically determining the right
inventory levels across the supply chain. It drives greater profitability
through lower inventories, better fill rates, and ultimately a more satisfied
The following 4 factors have contributed to the growth of inventory
optimization in the past decade:


success of operations-focused improvement initiatives

brute-force reconciliation of supply and demand
focus on metrics for supply chain performance
existence of commercial IO software

In order to optimize inventory levels, it is necessary to recognize that

inventory is not one monolithic quantity. It can be broken into components
that exist for assignable reasons. Some of the most important categories
of inventory include anticipatory stock, cycle stock, early arrival stock,
marketing stock, obsolete stock, pipeline stock, prebuilt stock, and safety
stock.Not all inventory is of equal importance to the business. If inventory
is not broken into its components, it cannot be tracked or improved. The
business drivers of the different categories of inventory differ so they
cannot all be improved the same way or with the same speed.

2. Background
Spare parts play a significant role in organizations. The need for spare
parts arises whenever components fail, require replacement or repair. This
study is concerned with spare parts in capital-intensive industries. In this
regard, a spare part is considered to be a duplicate component used for
maintenance purposes or to replace a damaged part of a machine.
Effective management of spare parts inventory is essential in an
increasingly competitive business environment. In todays society,
operational effectiveness is of high importance and consequently there is
an emphasis on reduced operating costs and higher asset utilization.
Spare Parts Management (SPM) affects the operating cost of a company,
because higher stock levels lead to higher inventory costs. The availability
of parts has an effect on asset utilization as it influences the idle time of a
machine. Spare parts constitute a large portion of total inventory in
manufacturing companies.
The typical inventory system consists of different types of inventory to
fulfil various needs. Inventory is often categorized into finished goods,

Work In Progress (WIP), raw materials and operating supplies or

replacement parts. Spare parts form part of the last-mentioned category
and differ from other inventory items mainly in terms of their required
function and the inventory policies that govern them. In contrast to other
inventory items, the purpose of spare parts inventory is to assist
maintenance staff to restore systems to continue to perform their
intended function. Furthermore, the inventorycontrol principles that
govern spare parts differ from those that govern other inventory items.
This is because, unlike other items, spare parts demand is a function of
equipment utilization and maintenance.
The key challenge in inventory management is to decide which items to
buy, when to buy them and how many items to buy. These decisions are
influenced by two contrasting cost objectives. On the one hand, large
capital investments are required to keep items in stock. On the other
hand, unavailable stock items lead to costly stock-out events influencing
the companys service level.
Therefore, at the centre of the inventory management challenge there is a
trade-off decision between risk and cost. A well-balanced spare parts
inventory system means having in stock exactly what you need when you
need it - not too much, nor too little. The principle objective of inventory
control is to achieve a sufficient service level with minimum inventory
investment and administration costs.
The management of spare parts is further complicated by a number of
factors.Firstly, the spare parts portfolio contains a large number of items
with diversecharacteristics that leads to a complex inventory system.
Secondly, the demandfor spare parts is typically slow and intermittent.
Intermittent demand patterns are characterized bysequences of zero
demand observations, interspersed by occasional non-zerodemand
occurrences, and are therefore very difficult to forecast. Finally,
SPMrequires multidisciplinary decision-making. Spare parts demand is
influencedby maintenance tactics and stock levels are influenced by
Supply Chain (SC)related decisions.
SPM is an interdisciplinary study field. Theexpertise required for the
management of spare parts inventory differ to thoserequired for
conventional inventory items. The management of spare parts
requiresconventional inventory management skills as well as a sound
backgroundon maintenance and repair functions. The field consequently
includes researchin multiple areas such as production, inventory control,
logistics, maintenance,reliability and strategic management. The
dominant research areas can beconsolidated into two major fields of study
contributing to the issue of SPM:Supply Chain Management (SCM) and
Physical Asset Management (PAM).
The first study field, SCM, is important because the existence of
inventorystems from uncertainty in SCs. Inventory can be seen as a buffer
against uncertaintyand is one of the ways to manage uncertainty in SCs. It
is thereforeworth investigating the role that SCM plays in the context of
SPM and viceversa. The term SC refers to the flow of products or services
from source to finalcustomer. SCM includes the management of all
activities and componentsthat exist within a SC. It is possible to view the

spare parts SC from twodifferent perspectives. The first is to acknowledge

the influence of spare partsavailability on a companys core SC: higher
spare parts availability increasesproduction throughput and prevents
unforeseen disruptions in the companyscore SC process. The second is to
view the spare parts SC as a unique secondarySC that feeds into the
companys core SC. In this case, the supplier isthe spare parts
manufacturer and the customer is the equipment or functionin need of a
spare part.
The second study field, PAM, also plays a significant role in SPM becauseit
is related to the demand generation process of spare parts and
influencesservice level requirements. Firstly, the demand for spare parts is
as a resultof part failures and therefore influenced by maintenance tactics.
For this reason,it is clear that maintenance andinventory management are
strongly related to the field of SPM and that thetwo fields should be
viewed simultaneously when optimizing a companys operations.
utilizationbecause the consequence of not having a part in stock when
required is extraidle time. In the context of the spare parts SC, asset
management is the client of SPM and therefore the service level
requirement for spare parts is influencedby PAM-related decisions.
The primary concern of PAM is to ensure the most effective use of assets
acrosstheir life-cycles. It is importantto have interdisciplinarycollaboration
in asset management and organizations have realizedthat a crossfunctional, prioritized approach reaps major benefits. EffectivePAM
therefore crosses traditional organizational silos. This supports the
interdisciplinaryview of SPM and emphasizes the need for collaboration
betweenSCM and PAM for an effective solution to the problem.
Capital-intensive industries, in particular, face major challenges in the
managementof spare parts. Capital-intensive industries require large
investmentsin order to operate. The need to find the balance between
inventory costs andrisk in SPM is therefore accentuated because the
capital cost of equipmentand their accompanying parts is expensive and
the industry relies on extremelevels of production throughput. Different
inventory control policies are usedwithin the industry. In many cases, the
problem is that policies are genericallyapplied and intuitive decisions
regarding stock levels are taken with littlefactual and quantitative support.
Decision-making is central to all types of management and therefore also
toSPM. Consequently, managers devote asubstantial amount of time and
effort on making the right decisions. Similarly,the choice of inventory
control policy is difficult and a time-consuming processas it depends on a
variety of different factors.In summary, the major function of spare parts
is to assist maintenance personnelto perform maintenance functions on
equipment. SPM is importantbecause of the associated impact on
inventory cost and asset utilization. However,it is also a complex issue
that contains many different interrelated components.
The research domain of this study is presented in Figure 1. Thefigure
shows that SPM is an interdisciplinary issue residing in the fields ofSCM
and PAM. More specifically, SPM is an inventory management

probleminfluenced by maintenance activities. The next section discusses

the problemstatement and research questions for this study.





3. Problem statement
Managers of spare parts are faced with a magnitude of decisions on a
dailybasis. The common theme amongst these decisions can be
summarized inthe following questions: which items should be bought, how
many shouldbe bought and when should they be bought? Decision-making
in the context of production planning and inventory management is a
problem of coping with large numbers while taking into considerationa
diversity of factors. In todays harsh business environment, managers and
organizations are looking for structured andlogical decision-making
processes that depend on evidence rather than relyingon mere intuition
and personal experience.
The objective of inventory management is to find the optimal stock level
toachieve a desired service level at a minimum cost. This results in tradeoffdecisions between risk and cost. In practice fewcompanies adopt
structural, factual and quantitative approaches to managespare parts.
Therefore, there is a need for a tool to assist structured
decisionmakingand provide quantitative support for trade-off decisions in
The spare parts portfolio is diverse and vast. Different industries and
companieswithin industries have different types of spare parts with
varying characteristics.Furthermore, even within one company, parts vary
in cost, criticality,purpose and demand. Different spare parts therefore
require different managementapproaches and there is no single solution
to the spare parts issue. In thepursuit of a potential solution to the general
spare parts issue, it is thereforebeneficial to focus on the decision-making
process itself rather than a singlesolution to one problem. In this regard,
there is a need for practical guidelines to supplement theoretical modelsin
order to increase the adoption of SPM theories in practice. Thus, there isa

need for a practical decision-making guideline that takes into

considerationthe unique attributes of spare parts.
SPM is an interdisciplinary field encompassing principles from SCM as well
asPAM. In SPM, the majority of research studies focus on single aspects of
thefield like the classification of parts, demand forecasting and inventory
control policies, In summary, practical applications of SPM lag behind
theoretical solutions.
Managers require a tool to assist them with the decision-making process
inSPM, especially as it relates to trade-off decisions. The tool should act as
aguideline and should be flexible and practical, rather than prescriptive.
Finally,the tool should take into account the interdisciplinary nature of the
issues inSPM and therefore provide a holistic approach.This study aims to
address the above-mentioned needs with the developmentof a decisionmaking framework for the management of spare parts in
capitalintensiveindustries. The framework should act as a decision
guideline to assistthe decision-making process in spare parts inventory
management. Theframework should provide managers with a structured,
factual approach tomake informed trade-off decisions and should enable a
holistic approach tothe problem. The research problems are translated
into the following nullhypothesis which is central to the research study.
It is possible to improve current practices by developing a
decisionmakingframework to assist the management of spare parts
inventoryin capital-intensive industries.
This study aims to address the above-mentioned needs. The following
sectiondiscusses the research objectives of the study.

4. Approach
The focus would be on applying the lean sigma management principles,
Just in Time (JIT) techniques and using various frameworks like value
stream mapping for inventory management and logistics cost reduction.

4.1 Lean Six Sigma to Reduce Excess and

Obsolete Inventory
Excess and obsolete inventory write-offs are chronic supply chain
problems costing businesses billions of dollars each year. Unfortunately,
improvement projects that are deployed to eliminate these problems often
have a short-term focus. In other words, the current levels of excess and
obsolete inventory are usually addressed, but not the root causes of the
problem. Often such inventory is reduced by selling it below standard cost
or donating it to charitable organizations. Competing business priorities
sometimes keeps businesses from developing effective long-term
solutions to eliminate the root causes, sometimes it is the difficulty in
unravelling the complexity of the root causes.
How Does Lean Six Sigma Work?

Lean Six Sigma is simply an effective methodology used to fix a problem.

It is based on common sense practices and is completed in five phases:

Define: Define the problem and what is required to satisfy your

Measure: Map the current process to collect data
Analyze: Investigate and identify what causes the problem
Improve: Implement a fix that will solve the problem
Control: Sustain the improved result

Lean Six Sigma methods have been shown to be very effective in finding
and eliminating root causes, and thus preventing arbitrary year-end
reductions in inventory investment.
An analysis of excess and obsolete inventory often shows that its major
root causes are associated with long lead times, poor forecasting
accuracy, quality problems or design obsolescence. However, these
higher-level causes can be successively broken down into lower-level root
causes as shown in the figure.2 below.
Inventory Optimisation

As the figure suggests, from an inventory investment perspective, a long
lead time may be caused, in part, by large lot sizes. For example, if the
actual lead time or order cycle time is 30 days, but the required lot size
for purchase is 90 days of supply (DOS), then this lot size drives a higher
average inventory level than lead time by itself. In this case, the average
on-hand inventory (neglecting a safety-stock calculation) increases from
15 to 45 DOS assuming a constant usage rate. Of course, the actual
reasons for large lot sizes would have to be investigated by a Lean Six
Sigma improvement team. The root causes of long lead times also could
be due to complicated processes having numerous rework loops and non9

value-adding operations as well as scheduling problems and/or late

The second major cause of excess and obsolete inventory is poor demand
management practices. Some lower-level root causes may include
inaccurate historical demand data, a poor forecasting modelling
methodology or other issues such as overly optimistic sales projections.
Lean Six Sigma projects also can be used to attack lower-level root causes
in this area. Lean Six Sigma is frequently used to improve quality levels to
reduce waste and rework caused by a multitude of diverse factors within a
process workflow. Finally, Design for Six Sigma can be used to improve the
design processes for new products or services.

4.2 Root Cause Analysis for Inventory Build-up

Lean Sigma principles can be applied for removing all the wastes
contributing to inventory pile up. Many factors effect Inventory build-up in
warehouses. Hence it is of utmost importance to properly identify all the
causes contributing to improper inventory.
A fishbone diagram, also called a cause and effect diagram or Ishikawa
diagram, is a visualization tool for categorizing the potential causes of a
problem in order to identify its root causes.
Ishikawa analysis is applied for identifying the causes in the Figure 3



Lack of



Incorrect Asset










4.2.1 Obsolete: When the Equipment or Manufacturer becomes obsolete

the spares kept in the Warehouse add up as dead inventory. To reduce and
properly manage excess and obsolete inventory, it is possible to use some
indicators of warehouse management. The first of them, the indicator of
non-moving stock, specifies the level of slow-moving stock in a
warehouse, which may be treated as excess and obsolete inventory,
including the inventory of both obsolete and excessively gathered spare
parts. Their analysis allows us to indicate the reasons of their occurrence
and also the possibilities of utilizing them.
The indicator can be expressed as the difference between the current
inventory and the amount of resources coming from the last deliveries
until the zero value is obtained and multiplying it by the number of days
that have passed since the last delivery. The application of the FIFO
method allows to identify the actually slow-moving stock in a warehouse.
This indicator is calculated as:
ZM =d x I
d Number of days of slow-moving resource by FIFO
I value or amount of slow-moving resources in a warehouse.
Obsolete Inventory can be effectively identified and managed by
categorizing all the materials into fast moving, slow moving and nonmoving Items. Over a period of time Very Slow moving items and Non
Moving stock can be analysed to find the actual root causes and eliminate
the inventory based on the actual causes. Such inventory is reduced by
selling it below standard cost or by scrapping it.
4.2.2 Unreliable Equipment: Equipments where prediction of
breakdowns or maintenance becomes difficult because of highly unreliable
nature may add up to the Inventory because of the tendency of keeping
higher level of stocks.
4.2.3 Incorrect Asset Registry:One of the most important factors which
determine the overall inventory to be maintained is the Asset Register. All
the equipment in the facility should be registered in the
CMMS(Computerised Maintenance Management Systems) build and also
the equipment which are removed or isolated should be marked as
deleted so that their inventory is not replenished. Equipment Master Data
like manufacturer name, model no and manufacturing serial numbers are
to be populated with complete Bill of Materials. Materials should be
identified with unique part numbers followed with manufacturer and
model numbers in their classification. Identification of materials with
unique part codes allows in avoiding duplication of material codes and
also in procurement of the right parts. Equipment BOM's should be
complete and accurate to avoid excess procurement of spares.


4.2.4 Incorrect Material Classification:When analysing the Inventory

situation it is very important that it should be driven through a proper
material classification. Materials can be classified into A, B, C and also as
stocked and non-stocked. Some of the symptoms of poor classification are
Items that should not be ordered are triggering orders
The quantities being recommended are often completely

It takes far too long to get through the whole inventory

management process
It is simply impossible to review all the recommended order

quantities prior to placing the orders and often items that should
not be ordered are being ordered. This leads to excess stock
Applying the same Target Fulfillment Rate and Safety Stock to all

items does not use vital working capital effectively

Applying the required Policy parameters, Target Fulfillment Rate
and Safety Stock to items individually is far too much work to do
and impossible to keep up to date and a more effective
mechanism is required

Reviewing the above, the benefits of classification may seem obvious but
what is the real purpose of Classification?

To improve focus on the items that are most important to

achieving your business objectives

To apply key Policy parameters including Target Fulfillment Rate

and Safety Stock according to the role an item plays in the

To identify those items that have not sold in the short-term and

must be made Non-stocked. These will only be ordered when a

customer places a firm order
To identify those items that have not sold in a long time and are

now Obsolete and must never be ordered again

To improve productivity in the management of inventory so that
we have the time available for the items that will give us the
biggest benefit yet we do not totally ignore those items that need
attention of a different kind


Pareto Principle for ABC analysis: When ABC analysis is applied to an

inventory situation, it determines the importance of items and the level
of controls placed on the item. By dividing a companys inventory into
different classifications A, B, C; managers can focus on the items that
account for the majority of the inventory. The adaptation of Paretos Law
of the vital few and trivial many follows a pattern:

A inventory accounts for about 20% of the items and 80% of the
dollar usage
B inventory accounts for about 30% of the items and 15% of the
dollar usage
C inventory accounts for about 50% of the items and 5% of the
dollar usage

These percentages are approximate and vary from company to company.

Normally the classifications are based upon annual dollar usage, but
other criteria can be used, such as transaction usage, unit cost, lead
time, and others.
The steps in doing the ABC analysis are: determine annual quantity
usage of each item, multiply the annual quantity usage by the cost of the
item to get the total annual dollar usage, add the total dollar usage of all
items to get aggregate annual dollar inventory expenditure, divide the
total dollar usage of each item by the aggregate inventory expenditure
to reach the percentage of total usage for any item, list the in rank order
by percentage of aggregate usage, and review annual usage distribution
and classify items as A, B, or C.
When doing an ABC classification, separate analysis should be performed
for different types of inventory. ABC analysis provides the means for
identifying those items that make the largest impact on a companys
overall inventory cost performance. Different controls are used for each
classification to improve inventory performance. A items have tighter
controls on inventory records and more frequent reviews of forecasting,
demand requirements, order quantities, safety stocks, and cycle counts.
B items have similar controls to A items but reviews are less frequent.
C items have the simplest controls. They are only important if there is a
shortage of one of them. Thus, C items can be ordered in larger
quantities and have higher safety stocks.
ABC analysis puts emphasis on where the value is. By focusing efforts
on higher value inventory, a company can assign proper resources to
attain the optimum inventory levels, reducing inventory costs, and
ensuring customers needs are met.
Critical, Stocked and Non-Stocked Inventory Items:
Inventory items (spares and consumables) are classified according to
various factors into critical, stocked and non stocked items. Various
factors are

a) Lead time i.e. difference between the ordering time and time of
receipt of material
b) Number of equipments installed in various plants/units
c) Failure rate of equipment spare including the process line
d) Criticality of instrument or parent equipment
e) Criticality of process line in terms of process requirements,
downtime, monetary loss incurred due to failure of material
4.2.5 Incorrect Depreciation:
Sometimes the equipments are registered in the system at their book
value, i.e. their value when they were procured. This shows greater
inventory value. Proper valuation of inventory taking into account the
depreciation needs to be done so as to find out the actual inventory value.
Also the value of rotables, i.e. the equipments reused after repair, should
be corrected in the system. Apart from showing the correct value of
inventory, calculating proper depreciated value also provides information
regarding the equipment quality and remaining equipment life.
4.2.6 Improper Material Storage:
Improper material storage leads to deterioration and damage of
equipments/raw materials/consumables. This increases inspection costs
and reordering costs. Also, locating material at the time of emergency
becomes difficult and may lead to downtime and/or monetary losses.
4.2.7Imprecise Documentation:
Documentation is an important part of maintaining right inventory. If some
material quantity/material location is not updated in the system, the
material becomes untraceable and thus unaccounted for. The inventory
which is not present according to the system is not being used by the
plants and hence its usability vanishes but it is using extra storage space.
4.2.8 Damage:
Material may get damaged due to improper loading, unloading and
storage conditions. It is important to inspect material during unloading so
as to reduce the storage costs and storage space. Material damage due to
improper storage conditions makes inventory unusable and also increases
inspection costs.
4.2.9Incorrect Specifications:
When proper specifications of the materials are not updated in the
documents, visibility of the materials is reduced. Especially when many
SKUs have slight differences in specifications (For example Gaskets,
fittings, pipes, screws etc) it may increase confusion. This also increases
binning/inspection/locating costs thus wasting time of plant personnel.
This also leads to a lot of rework on documentation.
4.2.10Lack of Knowledge:

Lack of knowledge of warehouse staff creates several problems like

improper storage, material damage and unaccountable inventory. Staff
should be aware of different storage methods for different kinds of
consumables. For example, thermocouples should be kept in a dry open
area so that its stem is not damaged; diaphragms should be properly oiled
in order to prevent drying and distortion etc.
4.2.11Insufficient Manpower:
Insufficient manpower in the warehouses leads to poor inventory
management, improper documentation, improper storage and late
retrieval of goods at the time of emergency. Sufficient manpower should
be present to update specifications, storage location, quantity, storage
date and storage condition of all equipment spares and materials.

4.2.12 Incorrect Inventory Modelling:

Incorrect inventory modelling leads to various problems. If the Reorder
level, Reorder Quantity, Maximum level, Safety stock level etc are not
computed properly, it may lead to over-stocking and under-stocking of
inventory in warehouses. For example, if consumption of a material is
low but its reorder level is set high, after consumption of some units the
system will show that the material is to be procured. This will lead to
over-stocking. Similarly if the materials reorder quantity is high in above
scenario the inventory will be over-stocked. Now lets take a second
example of a fast-moving material with a high consumption. If the ROL
for that material is set lower than its average consumption, it wont be
ordered till it reaches its ROL thus creating shortage of material at
various jobs. Also, if the maximum level of the fast-moving material is
set very low and the material has higher lead time as compared to
consumption period, it cant be procured above maximum level and it
takes a long time to replenish leading to under-stocking and shortage.
Following are the few formulae for calculating various levels:
1. Reorder level = Maximum usage * Maximum lead time(Or) Minimum
level + (Average usage * Average Lead time)
2. Minimum level = Reorder level (Average usage * Average lead
3. Maximum level = Reorder level + Reorder quantity (Minimum
usage *
Minimum lead time)
4. Average level = (Minimum level +Maximum level)/2
5. Danger level (or) safety stock level=Minimum usage * Minimum lead
time (preferred)


6. EOQ (Economic Order Quantity - Wilsons Formula) = 2AO/C

Where A = Annual usage units
O = Ordering cost per unit
C = Annual carrying cost of one unit
i.e. Carrying cast % * Carrying cost of unit

There are various software to calculate various inventory levels. We have

developed an excel model for level calculations which is attached in the
CD. Also we have attached a few snapshots of an MS Access tool ware
developed specifically for level calculations and data maintenance below.
We couldnt access the same due to copyright issues.



5. Just In Time Inventory (JIT)


An inventory strategy companies employ to increase efficiency and

decrease waste by receiving goods only as they are needed in the
production process, thereby reducing inventory costs. This method
requires that producers are able to accurately forecast demand.
A good example would be a car manufacturer that operates with very low
inventory levels, relying on their supply chain to deliver the parts they
need to build cars. The parts needed to manufacture the cars do not
arrive before nor after they are needed, rather they arrive just as they are
Just-In-Time Manufacturing:
JIT is a philosophy of continuous improvement in which non-value-adding
activities (or wastes) are identified and removed for the purposes of:

Reducing Cost

Improving Quality

Improving Performance

Improving Delivery

Adding Flexibility

Increase innovativeness
It is a philosophy of manufacturing based on planned elimination of all
waste and continuous improvement of productivity. It encompasses the
successful execution of all manufacturing activities required to produce a
final product, from design engineering to delivery and including all stages
of conversion from raw material onward. The primary elements include
having only the required inventory when needed; to improve quality to
zero defects; to reduce lead time by reducing setup times, queue lengths
and lot sizes; to incrementally revise the operations themselves; and to
accomplish these things at minimum cost.
When the JIT principles are implemented successfully, significant
competitive advantages are realized. JIT principles can be applied to all
parts of an organization:
order taking, purchasing, operations,
distribution, sales, accounting, design, etc.
Elimination of Waste: JIT usually indentifies seven prominent types of
waste to be eliminated:

Waste from Overproduction

Transportation of Waste

Proessing Waste

Waste from Product Defects

Waste of Idle time

Inventory Waste

Waste of Motion

6.Emerging Technology: RFID

In order to improve productivity and control, warehouses are seriously
considering the use of radio frequency identification (RFID) tags for day18

to-day operations. This wireless technology increases efficiency of

warehouse management because, unlike bar codes which must be
scanned manually to feed in the information on the computers, RF tags
broadcast a signal with information about the product they are attached to
and about the location of the product in the warehouse. RFID technology
provides an interesting option to complement data collection and product
identification in the supply chain management and warehouse operation.
The main purpose of using RFID is to increase warehouse efficiency by
reducing labor and logistic costs that are otherwise skyrocketing and
provides ever-increasing pressure on profit margins in todays competitive
environment. It is cost-efficient because the warehouses can now
streamline several operational areas inside their premises. For example,
picture a typical warehouse where staff receives boxes of stock
accompanied by paperwork detailing items in the delivery. Staff members
then manually check each boxs contents against the manifest. The
drawback of this method is that store staff can not see what items are in
which box, or whether items were missing until each box had been
individually checked. Many of these operation areas might benefit from
radio frequency (RF) communications technology. This wireless technology
in warehouses can help establish a simple paperless, on-line
communication between operations and the staff's computer.
A wireless warehouse, that uses RFID Technology, works by linking
warehouse workers to the back-end warehouse management application
server where warehouse activities are being recorded via wireless
handheld devices, scanning bar codes or RF tags attached to the pallets.
These devices help employees to identify where to pick, put away, count,
or move products within the plant. This translates to a better control over
the movement and storage of materials within the warehouse by
maximizing the efficiency of the receipt and shipment of goods, optimizing
warehouse space utilization and knowing at all times exactly where goods
are stored, allowing employees to improve and maintain high customer
service levels.
IT managers are seriously exploring how RFID technology can be
integrated into warehouse management systems (WMS) in order to
increase efficiency in warehouse management. The challenges for IT
managers are:

Examine operational flows to find efficient ways for implementing

wireless technology in supply-chain and warehouse management

Prepare the facility in order to make the move to wireless warehouse

technology. For example,


Consider things like racking and aisle placement, bin ranking and
numbering (for primary and secondary storage areas), and labelling
the bins with barcode labels

Ensure that the warehouse is properly equipped with RF access

points, antennas, and

Update the product information in computer software

Align the warehouse software for interfacing with primary business


Procure (after considering different options) equipments such as

RF/barcodes scanners, portable as well as heavy duty printers, and
the appropriate type of labels.

Capabilities of RFID-based warehouse management

RFID-based warehouse management brings several benefits that can
eliminate current drawbacks with the help of advanced scanning that
improves supply-chain visibility and agility for greater operational
efficiency. Capabilities include:

Improved efficiency by using RF tags that facilitate automatic data

entry rather than manually making entries of stock first on paper
and then into computer terminals. This eliminates the time required
for data entry, sending paper order to the warehouse and filling and
maintaining the paperwork.

Wireless warehouse can provide timely information and integration

of warehouse data into the ERP system. Integration of warehouse
information and ERP system

Ensures timely and accurate information for invoicing, purchase

order payments and inventory tracking.

Reduces inventory errors, ensuring that the inventory reported is

indeed available. By tracking pieces more exactly, companies can
more accurately detail what has sold in the last business day, and
improve the accuracy of their forecasts about what inventory is
actually needed.

Strengthen security against product theft, loss and counterfeiting


Specific operational goals for RFID-based warehouse


Expected effects on the IT budget

A significant issue for an IT manager is to implement an effective, reliable

RFID solution with low total cost of ownership (TCO). This is particularly
true since all the benefits of the system will accrue to business operations,
while the IT budget will have to absorb an increase in infrastructure
The TCO includes:

Initial implementation costs including handset and other hardware,

software, installation and training;

IT management (upgrade, maintenances) and end-user support


The major expected business productivity improvements include:

RFID reduces inventory errors, ensuring that the inventory reported

is indeed available. By tracking pieces more exactly, companies can
more accurately detail what has sold in the last business day, and
improve the accuracy of their forecasts about what inventory is
actually needed

Reduced warehouse and distribution labor costs -- Warehouse and

distribution costs typically represent 2% to 4% of operating
expenses. Replacing point-and-read labor-intensive operations with
sensors that track pallets, cases, cartons and individual products
anywhere in the facility can significantly reduce labor costs,
resulting in savings of 30% or more.

It helps in reducing errors in order fulfillment and shipping thereby

not only lowering the monetary cost of errors, but also keeping
customer satisfaction and return business levels high.


Thank You