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A Study of Inventory Management System Case Study
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Jour of Adv Research in Dynamical & Control Systems, Vol. 10, 10-Special Issue, 2018
*Corresponding Author: Nazar Sohail Article History: Received: April 19, 2018, Accepted: May 22, 2018
A Study of Inventory Management System
Case Study
1*Nazar Sohail, Krukshetra University (^2) Tariq Hussain Sheikh, Govt. Degree college Poonch, [email protected] Abstract---Inventory management is a challenging problem area in supply chain management. Companies need to have inventories in warehouses in order to fulfil customer demand, meanwhile these inventories have holding costs and this is frozen fund that can be lost. Therefore, the task of inventory management is to find the quantity of inventories that will fulfil the demand, avoiding overstocks. This paper presents a case study for the steel manufacturing industry (Small Scale Industry) on inventory management. The relationship between the inventory management and company performance was determined based on inventory days and return on asset (ROA) analysis. The research found that company X had a few inventory problems such as unorganized inventory arrangement, large amount of inventory days / no cycle counting and no accurate records balance due to unskilled workers. The study also proved that there was a significant relationship between return on asset (ROA) and inventory days. This paper also provides recommendation to the company and for further research. Keywords --- ABC classification, demand forecasting methods, inventory management, replenishment policies. I. Introduction Inventory is the supply of raw materials, partially finished goods called work-in-progress and finished goods, an organization maintains to meet its operational needs. It represents a sizeable investment and a potential source of waste that needs to be carefully controlled. Inventory is defined as a stock of goods that is maintained by a business in anticipation of some future demand. The quantity to which inventory must fall in order to signal that an order must be placed to replenish an item. Using an extension of a standard inventory-dependent demand model provide a convenient characterization of products that require early replenishment. The optimal cycle time is largely governed by the conventional trade-off between ordering and holding costs, whereas the reorder point relates to a promotions-oriented cost-benefit perspective. The optimal policy yields significantly higher profits than cost-based inventory policies, underscoring the importance of profit-driven inventory management. To work towards perfect order metrics, there has to be aggressive inventory management, restructuring supply chain operations, and updating standards to the perfect standard. When updating the metrics, this would include the cases shipped vs. the orders on-time delivery, data synchronization, damages and unusable products, days in supply, the ordering time cycle, and shelf level of service. Inventory problems of too great or too small quantities on hand can cause business failures. If an organization experiences stock-out of a critical inventory item, production halts could result. Inventory management indicates the broad frame work of managing inventory. The inventory management technique is more useful in determine the optimum level of inventory and finding answers to problem of safety stock and lead time. Inventory management has become highly developed to meet the rising challenges in most Corporate entities and this is in response to the fact that inventory is an asset of distinct feature. Figure 1. Showing production of raw material into finished goods
Jour of Adv Research in Dynamical & Control Systems, Vol. 10, 10-Special Issue, 2018
*Corresponding Author: Nazar Sohail Article History: Received: April 19, 2018, Accepted: May 22, 2018 And remaining items are classified into “class – C”. The financial manager has to monitor the items belonging to monitor the items belonging to different groups in that order of priority and depending upon the consumptions. The items with the highest values is given priority and soon and are more controlled then low value item. The re- rational limits are as follows. Category % of items % of total cost of materials A 5-15 60- B 15-25 15- C 60-75 5- f. Procedure I. Items with the highest value is given top priority and soon. II. There after cumulative totals of annual value consumption are Expressed as percentage of total value of consumption. III. Then these percentage values are divided into three categories. ABC analysis helps in allocating managerial efforts in proportion to importance of various items of inventory. VI. ABC Analysis
a. Raw Material (At Closing Stock)
Table 1 YEAR AMOUNT OF RAW MATERIALS 2011 130. 2012 95. 2013 102. 2014 30. Figure 2
b. Interpretation:
0 20 40 60 80 100 120 140 2011 2012 2013 2014 Raw material (at closing stock) AMOUNT IN LAKHS
A Study of Inventory Management System Case Study The above graph shows the amount of raw materials at cost. In 2011 the cost of material is 130.35Rs decreased in this year and in 2012.It is decreased to 95.65Rs and in 2013 it is increased to Rs102.37and in 2014 it is decreased to 30.22.
c. Stock in Process (At Closing Stock):-
Table 2 YEAR AMOUNT OF STOCK IN PROCESS 2011 167 2012 110. 2013 76. 2014 25 Figure 3
d. Interpretation:
The above graph shows the amount of raw materials at cost. In 2011 the cost of material is 167Rs increased in this year and in 2012.It is decreased to 110.07Rs and in 2013 it is decreased to Rs76.08 and in 2014 it is 25.
e. Finished Goods (at Closing Stock):-
Table 3 YEAR AMOUNT OF FINISHED GOODS 2011 157. 2012 194 2013 190 2014 80 167
25 0 20 40 60 80 100 120 140 160 180 2011 2012 2013 2014 Stock in process (at closing stock)
A Study of Inventory Management System Case Study Figure 5
h. Interpretation:
The above graph shows the amount of raw materials at cost. In 2011 the cost of material is 157.74Rs decreased in this year and in 2012.It is increased to 160Rs and in 2013 it is decreased to Rs137.11 and in 2014 it is decreased to Rs85.
i. Raw Material Consumed:-
Table 5 Figure 6
j. Interpretation:
The above graph shows consumption of raw materials .The consumption of raw material in the year 2011 is Rs 75.45 the consumption of raw material increased in the year 2012 in the rs 99.7. And it is decreased to Rs 50.70 in the year 2013 and it decreased to Rs 50.70 in the year 2014 it is decreased to 16.36 Rs. VII. Economic Order Quantity
During 2011-2012:
The firm requires below given units of material for manufacturing of steel. The following are the details of their operation during 2011-2012. Table 6 PARTICULARS Billets/Blooms 2,889 (MT) Ordering cost per Order Rs. 2500 Carrying cost 12%
0 20 40 60 80 100 120 2011 2012 2013 2014 Raw material consumed AMOUNT
YEAR AMOUNT
Jour of Adv Research in Dynamical & Control Systems, Vol. 10, 10-Special Issue, 2018
*Corresponding Author: Nazar Sohail Article History: Received: April 19, 2018, Accepted: May 22, 2018 Purchase price per unit 500 Calculation of EOQ:- Total units required (A) = The ordering cost per order (O) = Rs. Carrying cost per unit (C) = 12% (i.e.) 12% of Rs.500 =Rs. EOQ =√2AO/C =√ (2×2889× 2500)/ =Rs.490. Number of orders for the year = A/EOQ =2889/490. =5.89~6 orders Total annual cost = carrying cost + ordering cost = 116162+ 15000 = Rs. order size = A/no of orders =2889/ = 481.5~ Average inventory = order size/ 2 Average inventory =482/ 2 = Rs. Carrying cost = order size × average inventory Carrying cost = 482×S = Rs. Ordering cost = cost per order × no of orders = 2500× =Rs. VIII. EOQ During 2012- The firm requires below given units of material for manufacturing of steel. The following are the details of their operation during 2012-2013. Table 7 Calculation of EOQ:-
PARTICULARS
Billets/Blooms 3,596Qty (Mt) Ordering cost per order 2700 Carrying cost 12% Purchase price per unit 520
Jour of Adv Research in Dynamical & Control Systems, Vol. 10, 10-Special Issue, 2018
*Corresponding Author: Nazar Sohail Article History: Received: April 19, 2018, Accepted: May 22, 2018
EOQ =√2AO/C
=√ 2 × 2066 × 2800 /75.
=Rs.391.199~ Number of orders for the year = A/EOQ = 2066 /391. =5. 28 ~6orders Total annual cost = carrying cost + ordering cost = 5. 493154 + 76800 = Rs. a. Carrying cost = order size ×average inventory b. Order size = A/no of orders = 2066 / 6 = 344. c. Average inventory = order size/ = 344.33/ 2 = Rs.172. d. Carrying cost = 344.33×172. = Rs.59282. e. Ordering cost = cost per order × no of orders = 2800× 6 = Rs. X. VED Analysis Vital Essential and Desirable analysis is done mainly for control of spare parts keeping in view of the criticality to production. Vital spares are spare the stock – out of which even for a short time will stop production for quite some time. Essential spares are spares the absence of which cannot be tolerated for more than a few hours a day. Desirable spare are those, which are needed, but their absence for even a week or so will lead to stoppage of production. Table 9 XI. The Re-Order Level
MATERIAL CLASS VALUE PRIORITY MATERIAL
10% “A” 70% V 10%
E 20%
D 70%
20% “B” 20% V 10%
E 20%
D 70%
70% “C” 10% V 10%
E 20%
D 70%
A Study of Inventory Management System Case Study The re-order level is the level of inventory at which the fresh order for that item must be placed to procure fresh supply. The re-order level depends upon.
- Length of time between the placement of an order and receiving the supply.
- The usage rate of the item. The inventory is constantly being used up. The rate at which the inventory is being used up. The rate at which the inventory is being used up is called the usage rate.
The Reorder Level can be Determined as Follows:
R= M+TU
R=Reorder level M=Minimum level of inventory T=time gap/delivery time U=Usage Rate The reorder level and inventory patterns have be shown as follows: The figure shows that if the usage rate is constant, the order are made at even intervals for the same amounts each time and the inventory goes to zero just before an order is received.
Safety Stock:
The safety stock protects firm from tradeoffs due to unanticipated demand for the items level of inventory investments is however increased by the amount of safety stock. Safety level is ascertained in inventory as a part because there is always an uncertainly involved in time lag usage rate or other factors. Usually smaller the safety level greater the risk of stock – outs. If stock levels are predictable then there is a chance of stock out occurring. However stock inflows and outflows are unpredictable or lesser predictable it becomes to carry additional safety to prevent unexpected stock outs so usage rate is estimated if cost is low then no safety stock is needed.
Just - In -Time Inventory:
The Basic concept is that every firm should keep a minimum level of inventory on hand, relying suppliers to furnish just in time as and when required. JIT helps in emphasizing sufficient level of stock to ensure that production will not be interrupted. Although the large inventories may be had idea due to heavy carrying JIT is a modern approach to inventory management and the goal is essentially to minimize such inventories and there by maximizing turnover. JIT system significantly reduces inventory carrying cost be requiring that the raw material be procured just in time to be placed into production. Additionally the work in process inventory is minimized by eliminating inventory buffers between different production departments. If JIT is to be implemented successfully there must be a high degree of coordination and cooperation between the supplier and manufacturer and among different production centers. JIT does not appear to have any relation with EOQ however it is in fact alters some of the assumptions of EOQ model. The average inventory level under the EOQ model is defined as Average inventory =1/2EOQ+safety level JIT attacks this equation in two ways.
- By reducing the order cost.
- By reducing the safety stock The basic philosophy in JIT is that benefits, associated with reducing inventory and delivery time to a bare minimum through adjustment EOQ model, will more than offset the costs associated with the increased possibility of stock – outs. XII. Inventory Turnover Ratio
What it is
This ratio is often a firm’s inventory turns over during the course of the year. Because inventories are the least liquid form of assets, a high inventory turnover ratio is generally positive. On the other hand, and usually high ratio compared to the average for the industry could mean a business is losing sales because of inadequate stock on hand.
When to Use it
A Study of Inventory Management System Case Study = (109.63) + 288. = 385. Safety stock = usage * period of safety stock/ total working days in a year = 288930/ = 288. Average usage = usage/total working days in a year = 2889/ = 9. Minimum stock level = re-order level – (Average usage * Average lead time) = 385.2– (9.63* 10+20/2) = 240. Maximum stock level = re-order level + re-ordering quantity- (Minimum usage * minimum lead time) = 385.2+490-(9.6310) = 875.2-96. = 778. Danger level = Average usage * Maximum re-order period for emergency purchases = 9.63 = 192. Average stock level = ½(Minimum stock level + Maximum stock level) = 240.8+778.9/ = 509. XIV. Stock Levels
During 2012-
The company requires 3596 units of billets/blooms to manufacture of steel for the year 2012-13.EOQ is 553.429~554 units. The company makes safety stock equal to 30 day requirement and the normal lead time is 10- days. The company works for 300days in a year. Reorder level = lead timeAverage usage+ safety stock = (1012) + 359. = 478.6~ Safety stock = usage * period of safety stock/ total working days in a year = 359630/ = 359.6~ Average usage = usage/total working days in a year = 3596/ = 11.9~ Minimum stock level = re-order level – (Average usage * Average lead time) = 480 – (12 10+20/2) = 300 Maximum stock level = re-order level + re-ordering quantity- (Minimum usage * minimum lead time)
Jour of Adv Research in Dynamical & Control Systems, Vol. 10, 10-Special Issue, 2018
*Corresponding Author: Nazar Sohail Article History: Received: April 19, 2018, Accepted: May 22, 2018
Danger level = Average usage * Maximum re-order period for emergency purchases = 12* = 240 Average stock level = ½(Minimum stock level + Maximum stock level) = 300+914/ = 607 XV. Stock Levels
a. During 2013-
The company requires 2066 units of billets/blooms to manufacture of steel for the year 2013-14.EOQ is 392 units. The company makes safety stock equal to 30 day requirement and the normal lead time is 10-20 days. The company works for 300days in a year. i. Reorder level = lead timeAverage usage+ safety stock = (107) + 206. = 276. ii. Safety stock = usage * period of safety stock/ total working days in a year = 206630/ = 206. iii. Average usage = usage/total working days in a year = 2066/ = 6.88~ iv. Minimum stock level = re-order level – (Average usage * Average lead time) = 276.6– (7 10+20/2) = 171. v. Maximum stock level = re-order level + re-ordering quantity- (Minimum usage * minimum lead time) = 276.6+392-(710) = 598. vi. Danger level = Average usage * Maximum re-order period for emergency purchases = 7 = 140 vii. Average stock level = ½(Minimum stock level + Maximum stock level) = 171.6+598.6/ = 385.1~ XVI. Findings & Suggestions
- The company is having good sales for their products during all the early years of the study.
- The inventory turnover ratio is on a declining trend year after year in the period of the study.
- It indicates inefficiency of management in turning of their inventory into sales.
Jour of Adv Research in Dynamical & Control Systems, Vol. 10, 10-Special Issue, 2018
*Corresponding Author: Nazar Sohail Article History: Received: April 19, 2018, Accepted: May 22, 2018 [13] Demand Forecasting Methods. [Online] Available: http://www.forecastingmethods.net/Demand- Forecasting-Methods.html [Accessed: Sept. 25, 2015] [14] R.B. Chase, F.R. Jacobs, N.J. Aquilano, Operations Management for Competitive Advantage. [Online] Available: http://highered.mheducation.com/sites/dl/free/0073525235/940447/jacob s3e_sample_ch11.pdf [Accessed: Sept. 25, 2015] [15] Chapter 15: Inventory Models [Online] Available: http://web4.uwindsor.ca/users/b/baki%20fazle/70- 604.nsf/b6176c6e57429a9f8525692100621c8f/0c 694c005e3040/$FILE/Lecture4_Inv_f06_604.ppt [Accessed: Sept. 25, 2015] [16] www.capital line .com [17] www.economictimes.com [18] www.blonnet.com [19] www.moneycontrol.com [20] www.reportgallery.com [21] www.annualreportservice.com [22] www.pwcglobal.com [23] www.nse-india.com [24] www.ft.com [25] www.sebi.in [26] www.sec.gov [27] www.business-standard .com [28] in.finance.yahoo.com View publication statsView publication stats
