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Sales and Distribution Management

MBAM 562

UNIT SEVEN: WAREHOUSING AND


INVENTORY CONTROL

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7.1. Meaning, objectives and functions-
Warehousing
• Warehousing or storage is an essential function of
marketing process. Storage is the process of
holding and preserving goods.
• Goods must be stored from the time they are
produced till they are needed for consumption or use.
• The storage is done in warehousing specially
constructed for this purpose.
• Thus, warehousing or storage refers to the
arrangement by which goods are stored when they
are not immediately needed and are kept in such a
manner that they are protected form deterioration.
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In other words, warehouse is a place where the
surplus goods can be kept safely for future use.
Suitable places for storage are provided for the
purpose. Several types of warehouses are used for
storage of goods. Different commodities need
different types of storing place and techniques.
Liquids like petrol, Buta gas, Diesel, eatable
oils, need tanks.
Food grains like wheat, teffa, rice, barley need
ventilated halls.
Potatoes, onions, tomato, fruits need cold
storages.
Finally the warehouse means the process of
storing commodities.
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Need for warehousing:-
1.Regular supply:-
Modern production is carried on in anticipation of demand.
All goods produced may not be sold immediately. There will be
usually a time gap between production and demand or
consumption. The manufacturer, therefore, has to make adequate
arrangements for storage of his output. This is essential to make
them available to the customers whenever needed.
2. Seasonal products:- Many products, especially the
farm(Agricultural) products, are produced seasonally, while the
demand for them is there throughout the year. Such products are
in abundance in their season. But such products would become
scarce during unseasonal causing suffering to consumers. To avoid
such suffering or inconvenience to consumers the surplus
products are to be protected. For example in Ethiopia the
agricultural farmers are producing Teffa, Barley in a seasonal
where the consumption or demand will be throughout year. In this
aspect the warehousing is very essential.
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3.Continuous production:- Some products are produced
throughout the year, though demand for them may arise
mainly in a particular season. Ready-made garments,
blankets, woolen goods, electronic fans are examples. Such
products have to be stored till the demand season arrives.
Here, there is no demand, especially air-conditioned
machines/ fans only particular season like in the month of
may or June are using this products.
4.Perishable goods: - Certain commodities are perishable
in nature. They get deteriorated if their consumption is
delayed. Fruits, vegetables, eggs, injeera, meat, chicken,
Flowers, etc. are examples of perishable goods. Cold storage
is needed to preserve them. In Ethiopia need not necessary
preserved in cold storages in some items, why because the
nature/climate is the gift of god.

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5.Quality:-There are some commodities which improve
in quality if they are kept for a long duration. Rice, Teff,
Barley etc needed preservation for a long period to become
better in flavor. Hence, they are to be stored for a long
time.
6.Prompt supply: - For prompt and uninterrupted
supply to consumers, storage is required at different centers.
Concentration of products at the centre of production only
may cause many hindrances of time and place.
7.Price stabilization: - Storage of goods becomes
necessary also when the prices are going down too low in
the market. Storage is necessary to regulate the prices of
the products. This mainly done by the Government to keep
the price within limits.
8.Speculative purpose: - Goods may keep in storage for
speculative purpose also.
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Functions of warehousing:-
A. Storage of goods :- There is always a time gap
between the quantity produced and the quantity
immediately consumed. Surplus of produce or
commodities, if not stored properly may be lost in value
and quality. Storing thus, is the basic function of
warehousing. It removes the hindrance of time and
quality.
B. Stabilization of prices:- Warehousing provides a
much needed cushion to absorb the market fluctuations and
to provide the goods at more or less uniform prices
throughout the year. Warehousing facilitates smooth supply
of goods in the market and removes violent fluctuations
in supply.
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C. Protection of goods: - Warehousing safeguards the
goods from various against of harm. By storing the goods
in suitable racks, drums, bags and by keeping them away
from sun, dust and rain etc.
Warehousing saves the commodities or goods from
deterioration. Pilferage and theft are made difficult by
making proper security arrangements.
Fire-protection devices are also kept ready to meet any
fire accident. This, the risk of loss of goods is minimized
and even avoided.
D. Security for loans:- Warehousing concerns issue
warehouse receipts which can act as good security for
raising bank loans. Thus, it helps in financing the trade.
E. Act as commodity banks: - Warehousing concerns act
as commodity banks by giving loans directly to the owners
of goods against the deposit of goods in their
warehouse.
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F. Specialized marketing services: - Modern warehouse-
keepers offer various specialized marketing services, such as,
grading, packing etc. for the purpose of sale.
G. Ancillary services: - Warehouse provides facilities for
loading and unloading of goods at minimum expense.
Role and importance of Warehousing:-
1. Like transportation, warehousing too vests the product
with time utility and place utility.
2. In the case of some commodities, warehousing vests the
product with form utility as well.
3. It is common knowledge that a certain level of storage is
capable in marketing of most products.
4. For products with high season ability, storage is needed
on a large scale.
5.In some cases, sub-distribution realities necessitate extra
storage.
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6. Storage reduces the need for instant
transportation, which is often difficult and
costly.
7. Storage is also a competitive advantage, as with
better storage, better servicing of the channel and
consumer is possible.
8. Storage also helps in balancing demand and
supply, and in stabilizing prices.
9. In the case of some products, storage by itself
acts as a stimulate of demand.

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7.1.2Classification:-
1. Private ware houses:- The private warehouses are
owned by big business concerns or wholesalers who use
them for the storage of their own stocks. Their
maintenance and insurance are the responsibility of their
owners. Since these warehouse are operated for own
purposes, their services are not available to other
manufacturing or business concerns. These warehouses,
therefore, have a limited value and utility.
2. Public warehouses: - Public warehouses are the most
important type of warehouses. They may be owned by
some individuals or by some agency. They provide
storage facilities to the public for certain fees or charges.
In other words, they provide storage facilities to the
retailers, wholesalers, agriculturists or even general
public.
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They are required to work as per the rules and regulations
framed by the government for them. They are licensed by
the government. They provide facilities to storing to all
without discrimination. They are constructed generally at
strategic places where rail and road transport facilities are
available. They are well designed to give all types of
protection to goods. They may be put to diverse uses.
Government is giving encouragement to start public
warehouses in the co-operative sector in Ethiopia.
3. Bonded warehouses: - A bonded warehouse is one
which is licensed to accept imported goods for storage
before payment of customs duty. It is located near by a
port. It may be either government owned or privately
owned.
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• A bonded warehouse privately owned works under the
strict control and supervision of customs authorities. It
is called a bonded warehouse, because the good
deposited with it are held “in a bond”. If the goods are
dutiable(taxable) goods, the importer has to pay the
import duty to obtain delivery of such goods.
• If the importer is not able to pay the import duty
immediately, he may apply to the customs authorities for
permission to keep the goods in the bonded warehouse.
If the permission is granted, the importer can keep the
goods in the warehouse till the duty is paid. Goods kept
in the bonded warehouse can be withdrawn by the
importer only after payment of customs duty on such
goods.
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He can pay the import duty installments by withdrawing
the goods in parts also. If he wishes to export the goods
kept in a bonded warehouse, he need not pay the import
duty. A bonded warehouse acts in two capacities. Firstly, it
acts as a landlord who provides storage facilities on rent
and secondly, it acts as a bile of the goods.
7.1.3 Order Processing system
• Order Processing is the receipt and transmission of
sales order information.
• Efficient order processing can reduce time, increases
speed of movement of goods and customer satisfaction
level.
The following are the sub-systems of order processing are
1.Order Entry: - Here the order is received from sales
person, retailer or customer. This is received in person, by
phone, though mail order or e-mail.
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2. Order handling:- In this step, the order is
transmitted / handled over to the warehouse and
credit department in account section. Here the
warehouse checks the availability of product, and
account section examines price and other sales terms.
In addition the credit rating of the customer is also
considered in this phase. If credit rating OK, sales
terms are acceptable and if item is available in store,
it goes to next step is order delivery. If item is not in
stock, order goes to manufacturer.
3.Order delivery: - In this stage, the item is packed
for shipping, invoice/bills are prepared and credit
wherever applicable, is granted. Communication to
these effects goes to the customer.
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4. Manual or automatic: - Order processing can be done
automatically thorough computer or manual process. Low
volume orders can be handled manually. Errors are more
here, so also the delays.
Computer processing can integrate following functions
more effectively.
• Production planning and control
• Inventory control
• Accounting and credit rating
• Transportation and
• Effective communication

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7.2 Inventory Control system-High CSL and
low CSL:-
• Inventory costs money. At the same time availability of
inventory enable prompt delivery which increases
customer satisfaction. Hence we have two main
objectives of inventory management.
• Provide high customer satisfaction level and
• Provide low cost.
• Inventory control therefore affects physical distribution
cost and level of customer service. For example, if the
firm stocks Hugh inventory which are stored for longer
periods before issue, this will increase costs and not
only reduce profit some times it leads to loss also.
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• On the other hand, if stocks levels are too low, it leads to
frequent stock out, low turnover and customer
dissatisfaction. Thus we find inventory control is a
balancing act between the two extremes and determine
that level which not only gives fairly high C.S.L. but will
minimize the total inventory.
1. Inventory costs:- There are two costs associated with
inventory. These are 1. Order processing cost. And another
one is Inventory carrying cost i.e. maintenance cost. We
know as the number of orders increases, the ordering cost
also increases. However, higher the number of orders,
lowers the quantity per order.
This makes average inventory less and so also the
carrying cost. In other words, higher the order quantity
higher the inventory cost and lower the ordering cost.
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2. Economic Order Quantity: - We find as the number of
orders per year goes down quantity per order goes up. This
will cause increase carrying costs but decrease in ordering
costs. Since carrying costs and ordering costs show opposite
pattern of behavior, (i.e. increasing Vs decreasing) there is
bound to be an optimum point at which both these costs are the
same. The order quantity at that point where ordering cost
become equal to carrying cost is called Economic Order
Quantity (EOQ)
3. Just-in-time (J.I.T.) Inventory:- This is another technique,
here the company maintain low level or Zero level inventory.
In this case the order quantity is just sufficient for each day or
shift, production requirement, leaving nothing for carrying
forward for the next day or shift. Here, according to demand
they supplied and produced goods. Generally, according to
order they are producing the goods or services. J.I.T. is
possible in a distribution net work, provided there is close co-
ordination and integration between channel members.
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4. Coordination and communication: - Inventory
management is a balancing act. It balances conflicting
objectives of individual constituent members of the physical
distribution. Net work and between different functionaries
within each of such member unit. It often calls for trade off
consideration. In other words, need perfect understanding.
This is possible through better communication,
motivation and leadership.
7.3 Material handling equipment-objectives, principles,
types
• Physical handling of materials is very essential in
different stages of channel distribution such as at
production, warehouses, and retailing. Handling equipment
also vary with method of leading and modes of transport used
like trucks, rail etc.
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To summarize the type of handling equipment used depends on
the following.
• Nature of material/product i.e. solid, liquid or gases.
• Mode of transport i.e. vehicle, rail and others.
• Place of operation i.e. production floor, warehouse and the
retailers/departmental stores.
Objectives:- Material handling equipment serve following
purposes
a. Easy to handle.
b. Reduce damages.
c. Increase speed of operation or movement
d. Reduce costs,
e. Increase/ expand useable capacity of production floor or
warehouses,
f. Improve efficiency, convenience and productivity, and
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Principles:-
1.Select most appropriate equipment.
2.Proper planning is very need not only economy and also
safety.
3.The design of warehouse and selection of transportation
modes may change with time. Selection must consider future
changes so that such equipment will not become obsolete or
useless.
4.Selection of equipment costs must be minimized.
• Types:-
1.Static Types:- Examples are platforms, pellets and silages.
2.Fixed Type:-Examples are rack, boxes and containers, flat
conveyors(manual and electronically operated),
roller/wheeler/trolley conveyors, electric hoist, and chain hoist,
gantry crane, bridge crane and job crane etc.
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3.Vehicles:- Examples are pallet trucks, fork lift trucks, and
industrial vehicles etc.
4. Containerization: - Containerization is gaining
popularity in transportation. Here shipment of products
is enclosed in large metal or wooden containers. These
containers are transported from one place to another
without opening. These can be transported by truck-
tailors on road, on rail, on ships and on aircrafts.

THANK YOU

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