INTRODUCTION
Inventory Management Theory
Companies used to measure their muscle by the size of their inventory. Bigger was better. Vast warehouses filled to capacity ensured efficient assembly lines and guaranteed that, come hell or high water, production would never stop.
Lowering inventories is one of the quickest ways to decrease working capital needs. Performance measurements, such as the old standby ROA (return on assets) and the newer EVA (economic value added), as well as other measures that gauge how efficiently capital is used, have become more common organizational drivers. In fact, many times an executive’s bonus depends, at least in part, on how efficiently capital is used. Couple the drive for efficient capital use with the need to respond more quickly to changes in customer demand, with shorter and shorter order-to-delivery cycle times, and you have a problem that is challenging many organizations.
Leaner and Meaner
Inventory as a percent of GDP held steady at 3.8percent from 1992 to 2000. Rather than being eliminated, inventory has been pushed down into the lower reaches of the supply chain from manufacturers to top-tier suppliers to lower-tier suppliers.GM, for example, improved inventory turns, a common metric that measures total cost of goods sold divided by average inventory, and serves as a valuable indication of how often a company sells out its inventory (the higher the better) – 55.2 percent between 1996and 2001. However, the company that supplies its tires, Good year, saw its inventory turns decline 21 percent during that same time. In other words, lower-tier suppliers are left holding the bag for the big boys like GM and Wal-Mart.
Inventory Management Theory
Inventory and the management thereof belong to everyone in the company but nobody wants to own it. Inventory Management is truly interdisciplinary and spans from financial and managerial accounting, to operations research, material handling to logistics. The following is a quick overview of Inventory Control/Management terminology and theory.
Reasons for Holding Inventory:
• Inventory balances supply and demand
• Inventory acts as a buffer between critical Supply Chain interfaces
o supplier – procurement
o procurement – production
o production – marketing
o marketing – distribution
o distribution – intermediary
o intermediary – user
• Inventory allows for economies of scale in
o Purchasing
o Transportation
o manufacturing
There are various reasons for holding inventory. Inventory acts as a buffer between supply and demand fluctuations and irons out supply chain system failures. The smoother your supply chain operates and the better you are able to forecast the less inventory you have to hold, unless you gain some economies of scale in purchasing, transportation and or manufacturing.
Categories of Inventory
• Raw Material Inventory
• Work-in-progress Inventory
• Finished Goods Inventory
There are three categories of inventory; too much in either may be a bad thing unless you have reasons for it such as seasonality, production runs, and prevention of stockouts or improvement of customer satisfaction levels.
Types of Inventory/Stock
• Cycle stock
• In-transit stock
• Safety or buffer stock
• Speculative stock
• Seasonal stock
• Dead stock
If demand and lead time is constant, only cycle stock is necessary. In transit inventory is usually accounted for on the place of shipment as it is not available at the destination. In-transit stock can be reduced through faster modes of transportation. Safety or buffer stock is a result of uncertainty of demand and lead time. Speculative stock is inventory held for reasons other than satisfying current demand, often acquired to reach economies of scale or to generate seasonal stock. Dead stock includes items for which no demand has been registered and may become obsolete.
Inventory Management Conditions
• Certainty
• Uncertainty
The best ordering policy can be determined by minimizing the total of inventory carrying costs and ordering costs using the Economic Order Quantity (EOQ) model.
EOQ = 2PD √ CV
P = ordering cost ($/order)
D = annual demand (number of units)
C = annual inventory carrying cost (% of product cost)
V = average cost of one unit of inventory ($/unit)
Inventory Management Systems/Analysis
• ABC Analysis
• Forecasting
• Advanced Order Processing Systems
• Enterprise Resource Planning (ERP
• Electronic Data Interchange (EDI)
• Knowledge Management (KM) Systems
• Vendor-Managed inventory (VMI)
ABC analysis is a tool to classify items according to the irrelative importance/profitability (Category A items are more important than category B items, and so on). A distribution by value report usually forms the basis of an ABC analysis. Better sales forecasting and advanced order processing systems as part ofa larger marketing plan will reduce inventory. And Enterprise Resource Planning (ERP) system such as SAP will eliminate stovepipes and information silos and contribute to information sharing along with a company knowledge management (KM) system. Top management may see Vendor-Managed Inventory (VMI) as a way to out-source the inventory problem. But one has to be careful as it requires a high degree of transparency and integration between the partners. Such a marriage may bring a lot of benefits during the honeymoon period but also may have a costly divorce lurking in the background.
Inventory is a good investment alternative for cash, but imperative to achieve required service levels. Maintaining the appropriate levels and types of inventory is essential to providing quality, timely service and products to your customers. Preventing stock-outs without overstocking products requires a disciplined process and information system that can dynamically manage this balance. Two of the keys to optimizing inventories are to improve reliability and reduce variability in the supply chain to meet your customer’s demand while being cost effective. To order just in time and just enough.
A term inventory refers to the stock file of the products a firm is offering for sale and the components that make up the product. In other words, inventory is composed of assets that will be showed in future in the normal course of the business operations. The assets which firms store as inventory in anticipation of need are:
1) Raw materials
2) Work in process (Semi Finished goods)
3) Finished goods
The raw material inventory contains item that are purchased by the firm from other and are converted into finished goods through the manufacturing (production) process. They are an important input of the final product. The working process inventory consists of items currently being used in the production process. They are normally semi finished goods that are at various stages of production in a multistage production process. A finished goods represented final or completed products which are available for sale .The inventory of such goods consists of items that have been produced but are yet be sold. Inventory is a current asset.
The aspects covered are:
a. Determination of the type of control required.
b. The basic economic order quantity
c. The reorder point, and
d. Safety stocks.
As a matter of fact, the inventory management techniques are a part of production management. But a familiarity with them is of great help to the financial managers in planning and budgeting inventory.
NEED TO HOLD INVENTORIES
Martin and miller identified three general motives for holding inventories
TRANSACTION MOTIVE:
This refers to the need of maintaining inventory to facilitate smooth production and sales operations.
PRECAUTIONARY MOTIVE:
Precautionary motive for holding inventory is to provide a safeguard when then actual level of activity is differ than anticipated. This inventory serves when there is a unpredictable changes in the demand and supply forces.
SPECULATIVE MOTIVE:
This motive influences the decision to increase or decrease the levels of inventory to take the advantage of price fluctuations.
PROBLEM STATEMENT
Inventory is an important aspect for any manufacturing concern who deal with the production and distribution of physical products. The Finished product is the final product which undergoes different phases viz., raw material, semi-finished products and finally finished product.
Any firm or concern to be successful has to fulfil the market forces requirements or the consumer requirements. Hence, timely deliveries and availability of the goods on the shelves of retails is all the more necessary for a firm or concern to transact sales and earn revenue and profit.
To sustain in the economic world all business models of any organization has to fulfil the requirements and desires of the Consumer. Consumer who is the King, dictates to the manufacturers and obviously creates competition in the market and catalyzes the economic activates in a free market economy and ensures perfect competition market.
All the above points towards one direction viz., deliveries of goods on time and continuous availability of the finished goods on the shelves of the retails. Prompt deliveries and pipeline stocks of raw materials, semi-finished goods and finished goods ensures revenue / sales to the a firm or concern which will check competition in the market place and earn sales revenue and obviously profitability.
Hence, Inventory Planning is of PARAMOUNT IMPORTANCE to any Manufacturing Concern / Organization.
Therefore, ideal Inventory Management ensures robust Supply Chain Management right from the raw materials phase to production and finished goods and supply to the distributor’s warehouses.
This enables and ensures the Sales Revenue and Profitability and hence the Ideal Inventory Management System ensures Robust Supply Chain Management Systems and emphatically ensures the Revenue Earning and sustainable business model in the perfect competition Market.
Symptoms of Poor Inventory Management
1) Increasing number of backorders
2) Increasing cancelled orders
3) Increasing numbers of returns
4) High customer turnover rate
5) Large number of obsolete items
6) Periodic lack of storage space
You know you have a problem if your backorders continue to increase and at the same time you are faced with increasing cancelled orders. Reverse logistics may be tasking as well as your number of returns increase, and you end up loosing customers, while accumulating obsolete items which among other things may lead to lack of storage space. You may face these inventory symptoms, but the causes may be part of the bigger picture.
Ways to Reduce Inventory Levels
1) Lead-time analysis
2) Delivery-time analysis
3) Eliminate low turnover items
4) Eliminate obsolete items
5) Analysis of package size
6) Analysis of discount structure
7) Examine returned goods procedures
8) Measurement of fill rate by stock-keeping unit(SKU)
9) Analysis of customer demand
10) Improve forecasting
11) Improve Electronic data interchange with vendors/suppliers
RESEARCH OBJECTIVES
1) To study about the ordering levels for the important components of inventory.
2) To understand and measure economic order quantity for the selected raw material items.
3) To analyze its inventory management methods with the help of ABC analysis, VED Analysis etc.
4) To evaluate the inventory management practices
5) To offer suitable suggestions for the improvement of inventory management practices.
RESEARCH METHOD:
Analytical and Descriptive Research, in which the researcher uses factors or information already available and analysis it to make a critical evaluation of the material. On the other hand Descriptive research determines and reports the way things are. It is not merely collection of data, but it is more than that, it involves measurement, classification, analysis, comparison and interpretation. Descriptive research answers to the studies conducts on shopping frequency, brand popularity of products and services, buying behaviour and consumer preferences, etc.
Sampling
Non-probability sampling is any sampling method where some elements of the population have no chance of selection (these are sometimes referred to as ‘out of coverage’/’under covered’), or where the probability of selection can’t be accurately determined. It involves the selection of elements based on assumptions regarding the population of interest, which forms the criteria for selection. Hence, because the selection of elements is non-random, non-probability sampling does not allow the estimation of sampling errors. These conditions give rise to exclusion bias, placing limits on how much information a sample can provide about the population. Information about the relationship between sample and population is limited, making it difficult to extrapolate from the sample to the population.
Data Collection:-
Primary Data will be collected through various methods, including questionnaires and telephone interviews in market research or experiments and direct observations in the physical sciences, amongst others.
Secondary data is data collected by someone other than the user. Common sources of secondary data for social science include censuses, organisational records and data collected through qualitative methodologies or qualitative research. Primary data, by contrast, are collected by the investigator conducting the research.
Nature of Data:
Secondary data analysis saves time that would otherwise be spent collecting data and, particularly in the case of quantitative data, provides larger and higher-quality databases that would be unfeasible for any individual researcher to collect on their own. In addition, analysts of social and economic change consider secondary data essential, since it is impossible to conduct a new survey that can adequately capture past change and/or developments.
Data Source:
Basically collecting the Secondary data from the Company Officials who are directly employed in Stores and Inventory Management. However, secondary information is also collected through other sources such as Company brochures, documents, websites, journals, newspapers reports, magazines, etc. Therefore, Secondary Data is essential and the same is collected for the research.
The types of Data which will be collected are as follows:-
1) Historical Data of 2 -3 years of raw material inventory in terms of value and also quantity
2) Historical Data of 2 -3 years of Finished Goods inventory in terms of value and also quantity
3) Historical Data of 2 -3 years of Work-in-progress inventory in terms of value and also quantity
4) Inventory Models used
5) Tools and Techniques used in Invenentory Management System.
6) Material Movements and Logistics of the Materials and handling system
7) Packaging Materials Data
8) Computer Software and ERP utilized
9) Any other relevant information related to project
LITERATURE REVIEW:-
ARTICLE -1
Title: A review of inventory management research in major logistics journals: Themes and
future directions
Author(s): Brent D. Williams, (Department of Marketing and Logistics, Sam M. Walton College of Business, University of Arkansas, Fayetteville, Arkansas, USA), Travis Tokar, (The Ohio State University, Fisher College of Business, Marketing and Logistics, Columbus, Ohio, USA) Citation: Brent D. Williams, Travis Tokar, (2008) “A review of inventory management research
in major logistics journals: Themes and future directions”, International Journal of Logistics Management, The, Vol. 19 Iss: 2, pp.212 – 232
DOI: 10.1108/09574090810895960 (Permanent URL)
Publisher: Emerald Group Publishing Limited
Abstract: Purpose – The purpose of this paper is to provide a review of inventory management
articles published in major logistics outlets, identify themes from the literature and provide future direction for inventory management research to be published in logistics journals.
Articles published in major logistics articles, beginning in 1976, which contribute to the inventory management literature are reviewed and catalogued. The articles are segmented based on major themes extracted from the literature as well as key assumptions made by the particular inventory management model. Findings – Two major themes are found to emerge from logistics research focused on inventory management. First, logistics researchers have focused considerable attention on integrating traditional logistics decisions, such as transportation and warehousing, with inventory management decisions, using traditional inventory control models. Second, logistics researchers have more recently focused on examining inventory management through collaborative models.
Originality/value – This paper catalogues the inventory management articles published in the major logistics journals facilitates the awareness and appreciation of such work, and stands to guide future inventory management research by highlighting gaps and unexplored topics in the extant literature.
ARTICLE -2
Title: Risk Aversion in Inventory Management
Author(s): Xin Chen
Department of Industrial and Enterprise Systems Engineering, University of Illinois at
Urbana–Champaign, Urbana, Illinois 61801, xinchen@uiuc.edu
Melvyn Sim
Singapore-MIT Alliance and NUS Business School, National University of Singapore,
Singapore,dscsimm@nus.edu.sg
David Simchi-Levi
Department of Civil and Environmental Engineering and Engineering System Division,
Massachusetts Institute of Technology,
Cambridge, Massachusetts 02139, dslevi@mit.edu
Eng Sun Fuqua School of Business, Duke University, Durham, North Carolina 27708,
psun@duke.
Citation: Subject classification: inventory/production: policies, uncertainty; decision analysis.
Keywords: Inventory management, Research, RManufacturing, Service , and Service, and Supply
chain operations.
Qualitative Approach
The data will be gathered through interaction and discussions with the executives working. Some important information will be gathered through couple of unstructured interviews of Executive Annual reports and other magazines published and are used for collecting the required information. Direct Observation and Interview Method stating the objectives of the project, identifies the needed data sources, and describes the methodology of conducting the study. Subsequently, the same will be tabulated, converted into Bar and Pie Charts to data mine and analyse the facts of the research.