Final Report on Inventory Management

Inventory Management Page 1

FINAL TERM PROJECT

INVENTORY MANAGEMENT

PAKISTAN SUZUKI MOTORS COMPANY LTD.

August 5, 2013

Submitted by:

Omair Khimani (10905)

Talha Ghaffar (9130)

Mir Ruman (10789)

INSTITUTE OF BUSINESS MANAGEMENT

COLLEGE OF COMPUTER SCIENE AND INFORMATION SYSTEMS

DEPARTMENT OF INDUSTRIAL ENGINEERING AND MANAGEMENT


MEMORANDUM OF TRANSMITTAL

To : Dr. M. Irshad Khan From : Omair Hanif Khimani Mir Muhammad Ruman

Talha Ghaffar Pidda Date : 2 September 2013 Section : A Detailed Report on Inventory Management. We are pleased to submit our report on “Inventory Management at Pak Suzuki.” to you. During all the phases and stages of this report including analysis, writing and designing the report, we have gained very useful knowledge and experience with respect to the application of the concepts of Inventory Management in real life at organizations. We have tried the best of our efforts to apply all the relevant concepts appropriately and properly to develop this report. We hope that the report will serve its purpose. We acknowledge your help and support for this report and we look forward to your feedback as it will be the most valuable feature for us in the entire process.


LETTER OF ACKNOWLEDGEMENT

Dear Readers,

All praises and thanks to Almighty ALLAH, Who is the Lord and Creator of this universe and by whose power and glory all good things are accomplished. He is the most merciful, who bestowed upon us the potential, ability and an opportunity to work on this report. We are thankful to the Last and Final Messenger of Allah, Prophet Mohammad (P.B.U.H) for leaving an unbeatable example of leadership which we can feel proud to own, learn and follow. We are also thankful to our parents for bearing with our hectic schedules and always being a marvelous support. We would like to extend sincere gratitude to our respected mentor Mr. Fahad bin Abdullah for his constant support, encouragement and guidance, without which we could not have successfully achieved our task. Moreover he gave us the opportunity to search and write a report on the topic: Inventory Management Being a vast topic it has offered much for our learning purposes. Cordially,

Omair Hanif Khimani Mir Muhammad Ruman Talha Ghaffar Pidda


ABSTRACT

Inventory is a central process within any manufacturing unit. This Inventory is a concern

to all departments i.e., from Planning Department to Production Department, Logistic

Department, Finance Department, Costing Department, and Commercial Department

etc. So managing of Inventory has a significantly wide scope in the company.

Inventory management being a very important concept in all the company’s having a

void coverage often calls for the managerial attention. In the modern times inventory

management has become the integral part of the all companies, thus all firms give

special importance to inventory management. The major objective of the study is to

examine the effectiveness of inventory management system adopted by Pak Suzuki

Motors; the study mainly focuses on the techniques used by the company to control the

inventory followed by our recommendations as to how it can be enhanced to reduce

costs and lead to optimum productivity.


TContents

MEMORANDUM OF TRANSMITTAL ..................................................................................................... 2

LETTER OF ACKNOWLEDGEMENT ..................................................................................................... 3

ABSTRACT ................................................................................................................................................. 4

1.0 INTRODUCTION ................................................................................................................................. 8

1.1 What is Inventory? .............................................................................................................................. 8

1.2 Why keep Inventory? .......................................................................................................................... 8

1.2.1 Advantages and Disadvantages of Keeping Inventory ....................................................... 9

1.3 What is Inventory Management? ..................................................................................................... 10

1.4 Why Inventory Management is Critical?........................................................................................... 10

1.5 What is Inventory Planning? ............................................................................................................. 10

1.5.1 The objectives of Inventory Planning and Control ............................................................. 12

1.6 Different Approaches to Inventory Management ............................................................................ 13

1.6.1 Pull Approach .......................................................................................................................... 13

1.6.2 Push Approach ....................................................................................................................... 13

1.7 Causes of Excess Inventories and Related Problems ........................................................................ 13

1.7.1 Causes of excess inventory .................................................................................................. 14

1.7.2 Problems with excess inventory ........................................................................................... 14

1.8 Benefits of Reducing Inventories ...................................................................................................... 15

1.9 The changing trend ........................................................................................................................... 16

2.0 PAK SUZUKI MOTOR COMPANY LTD. ....................................................................................... 17

2.1 Introduction ...................................................................................................................................... 17

2.2 Inventory Practices ........................................................................................................................... 17

3.0 PROBLEM IDENTIFICATION & PROPOSED SOLUTIONS ................................................. 19

3.1 Constraints ........................................................................................................................................ 19

3.2 Literature Review .............................................................................................................................. 19

3.2.2 Solution & Benefits ................................................................................................................. 20

3.4 Inventory Analysis using Inventory Turnover Ratio .......................................................................... 28

3.4.2 Analysis .................................................................................................................................... 28

3.4.2 Proposed Solutions ................................................................................................................ 30


3.5 Inventory Management through Inventory Quality Ratio (IQR) ....................................................... 31

3.5.1 IQR benefits ............................................................................................................................ 32

3.5.2 Typical Results of using IQR ................................................................................................ 32

3.6 Inventory Management Using PDCA ................................................................................................ 33

3.7 Inventory Management using ABC Analysis ..................................................................................... 33

3.7.1 Tolerances ............................................................................................................................... 36

3.7.2 Inventory Record Accuracy ................................................................................................... 36

3.7.3 Reasons for Inaccuracy ......................................................................................................... 37

4.0 ANALYSIS .......................................................................................................................................... 38

4.1 Material Holding Capacity and Closing Stock.................................................................................... 38

4.2 Unit Production Requirement and Closing Stock.............................................................................. 41

4.3 Preliminary Stock and Optimum Safety Stock .................................................................................. 44

4.4 Costs of Holding Inventory ................................................................................................................ 47

4.5 Recommendations ............................................................................................................................ 54

REFERENCES ......................................................................................................................................... 56


TABLE OF FIGURES

Figure 1………………………………………………………………………………………………...15

Figure 2………………………………………………………………………………………………...16

Figure 3………………………………………………………………………………………………...18

Figure 4………………………………………………………………………………………………...29

Figure 5………………………………………………………………………………………………...30

Figure 6………………………………………………………………………………………………...34

Figure 7………………………………………………………………………………………………...35

Figure 8………………………………………………………………………………………………...36

Figure 9………………………………………………………………………………………………...40

Figure 10……………………………………………………………………………………………….43

Figure 11……………………………………………………………………………………………….46

Figure 12……………………………………………………………………………………………….50

Figure 13……………………………………………………………………………………………….53


1.0 INTRODUCTION

1.1 What is Inventory?

Inventory is a current asset that is owned by a business that has the express purpose of being sold to a customer. This includes items sold to end customers or distributors. It includes raw materials, work in process, and finished goods.

Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.

1.2 Why keep Inventory?

There are three basic reasons for keeping an inventory:

1. Time: The time lags present in the supply chain, from supplier to user at every stage, require that you maintain certain amounts of inventory to use in this lead time.

2. Uncertainty: Inventories are maintained as buffers to meet uncertainties in demand, supply, and movements of goods.

3. Economies of scale: The ideal condition of "one unit at a time at a place where a user needs it, when he needs it" tends to incur lots of costs in terms of logistics. This results in bulk buying, movement, and storing.

Another reason for holding inventory is to keep up to the production activities unhampered. It is neither physically possible nor economically justifiable to wait for the stock to arrive at the time when they are actually required. Therefore, keeping of inventory is a must for the efficient working of a business unit.

https://www.boundless.com/management/definition/economies-of-scale--2/


1.2.1 Advantages and Disadvantages of Keeping Inventory

Advantages Disadvantages

1. Inventory allows customers to be

served quickly and conveniently (otherwise you would have to make everything as the customer requested it).

2. Inventory can be used so a company can buy in bulk, which is usually cheaper.

3. Inventory allows operations to meet unexpected surges in demand.

4. Inventory is insurance if there is an unexpected interruption in supply from outside the operation or within the operation.

5. Inventory allows different parts of the operation to be ‘decoupled’. This means that they can operate independently to suit their own constraints and convenience while the stock of items between them absorbs short-term differences between supply and demand. In many ways this is the most significant advantage of inventory.

1. It is expensive. Keeping inventory

means the company has to fund the gap between paying for the stock to be produced and getting revenue in by selling it. This is known as working capital. There is also the cost of keeping the stock in warehouses or containers.

2. Items can deteriorate while they are being kept. Clearly this is significant for the food industry whose products have a limited life. However, it is also an issue for any other company because stock could be accidentally damaged while it is being stored.

3. Products can become obsolescent while they are being stored. Fashion may change or commercial rivals may introduce better products.

4. Stock is confusing. Large piles of inventory around the place need to be managed. They need to be counted, looked after and so on.


1.3 What is Inventory Management?

Inventory management refers mainly to when a firm strives to attain and uphold an optimal inventory of goods while also taking note of all orders, shipping and handling, and other associated costs.

Inventories should neither be excessive nor inadequate. If inventories are kept at a high level, higher interest and storage costs would be incurred; on the other hand, a low level of inventories may result in frequent interruption in the production schedule resulting in underutilization of capacity and lower sales. The objective of inventory management is therefore to determine and maintain the optimum level of investment in inventories which help in achieving the required objective.

Inventory management also includes making essential connections between the replenishment lead time of goods, asset management, the carrying costs of inventory, future inventory price forecasting, physical inventory, and available space for inventory, demand forecasting, etc.

1.4 Why Inventory Management is Critical?

A business's inventory is one of its major assets and represents an investment that is tied up until the item is sold or used in the production of an item that is sold. It also costs money to store, track and insure inventory. Inventories that are mismanaged can create significant financial problems for a business, whether the mismanagement results in an inventory glut or an inventory shortage.

The management of inventory is important as the storage and distribution of excess stock is expensive. It is also vital that sufficient inventory is always on hand to meet the demand of customers.

1.5 What is Inventory Planning?

The process of determining the optimal quantity and timing of inventory for the purpose of aligning it with sales and production capacity. Inventory planning has a direct impact a company's cash flow and profit margins especially for smaller businesses that rely upon a quick turnover of goods or materials.

Inventory planning is driven by accurate data pertaining to:

1. On-hand inventory 2. Open orders (sales, production and purchase) 3. Lead time

http://www.businessdictionary.com/definition/process.html

http://www.businessdictionary.com/definition/optimal.html

http://www.businessdictionary.com/definition/quantity.html

http://www.businessdictionary.com/definition/inventory.html

http://www.businessdictionary.com/definition/sales.html

http://www.businessdictionary.com/definition/production-capacity.html

http://www.businessdictionary.com/definition/impact.html

http://www.businessdictionary.com/definition/company.html

http://www.businessdictionary.com/definition/cash-flow.html

http://www.businessdictionary.com/definition/profit-margin.html

http://www.businessdictionary.com/definition/business.html

http://www.businessdictionary.com/definition/turnover.html

http://www.businessdictionary.com/definition/goods.html

http://www.businessdictionary.com/definition/material.html


4. Standard or average cost 5. Bill of material (BOM)

Developing an overall inventory plan should involve the following steps:

1. Classify parts into three segments: raw, work-in-process or sub-assembly, and finished goods.

2. Categorize each segment into stock and non-stock categories (purchase to order or make to order).

3. Plan for each segment, independent of the other others involved in the process.

4. Classify raw material stock using multi-criteria inventory classification to lay a good foundation for success.

5. Calculate safety stock and minimum order quantities by part to optimize inventory and transaction costs while achieving service targets. Develop a theoretical raw material inventory plan based on calculated safety stocks and order quantities.

6. Repeat the exercise for other segments and come up with an overall inventory plan to meet the desired service levels.

7. Identify initial inventory impact and planned inventory investment.

8. Once a plan is developed, upload the planning parameters into transactional systems. Classify parts into three segments: raw, work-in-process or sub-assembly, and finished goods.

9. Categorize each segment into stock and non-stock categories (purchase to order or make to order).

10. Plan for each segment, independent of the other others involved in the process.

11. Classify raw material stock using multi-criteria inventory classification to lay a good foundation for success.

12. Calculate safety stock and minimum order quantities by part to optimize inventory and transaction costs while achieving service targets. Develop a theoretical raw material inventory plan based on calculated safety stocks and order quantities.

13. Repeat the exercise for other segments and come up with an overall inventory plan to meet the desired service levels.

14. Identify initial inventory impact and planned inventory investment.


15. Once a plan is developed, upload the planning parameters into transactional systems.

Executing to the plan involves the following steps:

1. Ensure tight adherence to inventory planning and ordering policies at part level.

2. Establish process controls to ensure data quality and consistency.

3. Synchronize production schedules to the materials plan.

4. Establish a robust supplier performance management process that captures effective contract management, performance measurement and metrics. Timely raw material availability is the key to optimal inventory planning, as poor quality of materials could lead to poor yields and costly reworks.

1.5.1 The objectives of Inventory Planning and Control

Generally the operations objectives of managing the company’s inventories include the following.

1. Quality – products need to be maintained in as good a condition as possible while they are being stored. For perishable products this means not storing them for very long.

2. Speed – inventories must be in the right place to ensure fast response to customer requests.

3. Dependability – the right stock must be in the right place at the right time to satisfy customer demand. There is no point having the wrong products in stock.

4. Flexibility – stock should be managed to allow the operation to be flexible. For example, that may mean keeping sufficient stock to allow the operations processes to switch to producing something else and yet being able to satisfy customers during that period from existing stock levels.

5. Cost – if possible the total cost of managing stock levels should be minimized.


1.6 Different Approaches to Inventory Management Inventory can be managed using the pull approach, the push approach or a combination of the two.

1.6.1 Pull Approach

A pull approach to inventory management maintains that customer orders are used to move products through the supply chain. For example, a manufacturer only holds enough inventories to meet its current orders. When new orders are received, the level of inventory is increased accordingly.

This method is most effective with products that have a short production time or where demand is very predictable and holding excess inventory isn't necessary. It can also be used in specialized manufacturing or when each product is unique and holding inventory isn't a feasible option.

1.6.2 Push Approach

The push approach works on the basis that inventory is replenished in anticipation of future demand. For example, a manufacturer forecasts the level of demand for their product in the coming season and builds up their inventory accordingly. The advantage of this approach is that you avoid the risk of running out of inventory to supply to your customers.

1.7 Causes of Excess Inventories and Related Problems

There is a difference between Inventory and Excess Inventory. One is planned and explained (while improvement still exists) and the other is a result of out-of-control inputs leading to waste and other side effects such as tying up a machine to make another product due.

Inventories hide many types of management inefficiencies, including: processing problems, quality problems, ineffective procedures and poor demand management.

Excess inventories directly contribute to increased overhead rates because they result in additional liabilities to the organization. These include overstocks, customer returns, and discontinued items


1.7.1 Causes of excess inventory

1. Protection against things that can go wrong (breakdowns, defects) 2. Large lot production 3. Unreliable forecasts 4. Poor scheduling 5. Unbalanced workload 6. Unreliable shipments by suppliers 7. Communication problems with suppliers and customers 8. Management decisions

1.7.2 Problems with excess inventory

1. Space problem

2. Reduced profit

3. Storage costs

4. Wastes

5. Maintenance

6. Re-work

7. Material aging

8. Obsolete

9. Decreased Flexibility


Figure 1 - The figure shows how the flexibility of inventory is affected as the raw materials are processed into finished goods. The increased volume of WIP and Finished Goods inventory not only increases the investment but also reduces the flexibility of how the inventory can be used in the case of errors or faults.

1.8 Benefits of Reducing Inventories Inventory reduction benefits can be broken down into Reduction in Inventory (Balance Sheet impact), Reduction in Inventory Carrying Cost (P&L impact), and Reduction in Labor Expense. 2009, LeanLogistics, Inc.

1. Reduction in Inventory - This is accomplished by highlighting bottlenecks in the supply chain, gaining confidence in delivery schedules, decreasing cycle times, and integrating supply chain data with other systems to enable better coordination of product delivery and reduce safety stock.

2. Reduction in Inventory Carrying Cost - Reduction in inventory reduces the

subsequent on-going costs associated with financing, storage, handling, insurance, obsolescence, and damage.

3. Reduction in Labor Expense - Providing a single source for all supply chain

information enables users to reduce time spent tracking and tracing shipments.


Figure 2 – This table represents the various practices which are implemented for reduction in inventory.

1.9 The changing trend

As global supply chains are devising ways and means to respond to unpredictable customer demand and increased competition, one of the greatest challenges they face is achieving inventory optimization while maintaining higher customer service levels and reduced variable costs.

Mani Iyer, Senior Business Manager at Genpact, lists the challengesi being faced by industries in the modern today as mentioned:

1. Ineffective Master Data Management 2. Individual goals not aligned to overall objectives 3. Lack of communication and collaboration

“Lowering the inventory by 10% would result in $1 million dollar savings”

SMC Data Systems, IBM Business Partners, How to Avoid Excess Inventory – Dan Kaplan

Source: www.smcdata.com/pdf/Excess-Inv-Web-v7.pdf,

Website: http://www.smcdata.com:

Site hosted by: The Ribaudo Group, 594 Broadway, Suite 1206 • NYC 10012

Site visited: 17/09/2013.

http://www.smcdata.com/pdf/Excess-Inv-Web-v7.pdf

http://www.smcdata.com/


2.0 PAK SUZUKI MOTOR COMPANY LTD.

2.1 Introduction

Pak Suzuki Motor Company (PSMCL) is a Pakistani subsidiary of Japanese automaker Suzuki Motor Corporation. It is the Pakistani assembler and distributor of cars manufactured by Suzuki and its subsidiaries and foreign divisions. Currently Pak Suzuki is the largest car assembler in Pakistan. The firm was founded in 1983 as a joint venture between PAK and Suzuki, formalizing the arrangement by which Awami Auto Ltd. had produced the SuzukiSS80 from 1982. Suzuki originally owned 25% of the stock, and has gradually increased their holding; they now own 73.09%. The company now assembles a wide range of Suzuki vehicles and aims to produce 150,000 vehicles per year. Last year’s production output was 100,000 unitsii.

2.2 Inventory Practices

Pak Suzuki has multiple vendors and buys material from local suppliers and as well as import from South-East countries. The imported parts are sourced from different countries like Japan, Korea and Thailand. Inventory is calculated by the following formulae:

Closing Inventory is one in which we have safety stock and as well as next day production.

https://en.wikipedia.org/wiki/Suzuki

https://en.wikipedia.org/wiki/Suzuki


Figure 3 - Flow Chart for Inventory management procedure being practiced at Pak Suzuki Motors

Fact: Toyota Suppliers deliver materials to the assembly line every two hours


3.0 PROBLEM IDENTIFICATION & PROPOSED SOLUTIONS

The main problem identified for this project was the excess inventory that was locking considerable investment, taking up space and also causing material and parts to be returned to the suppliers. There was also a need to redefine the safety stock. Furthermore, a lack of trust and partnership was observed between the vendors and Pak Suzuki Motor Co. which also has been addressed.

3.1 Constraints

When carrying out the study, following limitations were found and were considered where appropriate.

1. Maximum Truck Load 2. Minimum Truck Load 3. Capacity in warehouse

3.2 Literature Review

Maruti Suzuki implements tightly coupled demand forecasting and inventory optimization engines for managing Spare Parts business.

Better planning improves inventory turns, frees up working capital and increases cash

flow.

3.2.1 Business Need

Maruti Suzuki India Limited (MSIL) was looking for a solution that would help the company create a holistic demand and inventory optimization plan for its spare parts supply chain. To enable precision in demand planning and better control, it was imperative to implement a strategic forecasting and inventory optimization tool with inbuilt statistical algorithms which could handle trends, seasonality, event impacts and demand intermittencies. Apart from planning the distribution of 37,000 parts to multiple locations, the tool would also have to handle vendor order management and provide information that would help management decide the company’s supply strategy.


3.2.2 Solution & Benefits

MSIL implemented tightly coupled demand forecasting and inventory optimization engines with robust forecasting capabilities. IBM ILOG Supply Chain Analyst has helped MSIL to accurately perform demand forecasting for spare parts and achieve optimum inventory levels while maintaining the targeted service ratio. The strategic positioning of inventory throughout the supply chain improves inventory turns, frees up working capital and increases cash flow. Customer service also improved as a result. The IT-based system has proven to be a real business enabler for MSIL by directly increasing the profitability of the Spare Parts business with features and functionalities that include:

1. Customization: The tool’s standard functionalities were substantiated in order to support the demands of MSIL’s extensive spare parts supply chain. This was made possible through a feature facilitating easy creation of data maintenance rules for handling and controlling processing. Configuring parameters was also simplified through the tool.

2. Optimal Intervention: Intelligent heuristics were developed to minimize the need

for manual processes. However, the solution allowed manual intervention at necessary points, resulting in an optimized combination of automation and user intervention to enable achieving the best results.

3. Business Dynamism: For ease of use and information retrieval the tool featured a

dashboard with an integrated alerting mechanism that sent alerts based on specific exception rules. Increasing business dynamism, alert conditions were made configurable so that exceptions could be identified and corrective action taken.

4. Forecasting Accuracy: The tool had the capability to detect and automatically

adjust abnormal demand data, which improved forecast accuracy significantly. Further aiding accuracy, the tool featured exceptions and logs for tracing and resolving issues encountered during processing.

5. Simplified Data Transfer: Facilitating easier import/export of data and reports, the

tool is compatible with the third-party software used by the company.

Suzuki implements tightly coupled demand forecasting and inventory optimization engines for managing Spare Parts business. Vijay Kumar, the Great Mind Challenge for Business Book, 2012.


3.3 Literature Review Brent D. Williams and Travis Tokar, (2008) in their study “A review of inventory management research in major logistics journals: Themes and future directions", discussed that 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. Logistics researchers have more recently focused on examining inventory management through collaborative models. C. Clifford Defee, Brent Williams, Wesley S. Randall, Rodney Thomas, (2010) in their research paper "An inventory of theory in logistics and SCM research", analysed the theoretical categories and presented to explain the type and frequency of theory usage. They concluded that over 180 specific theories were found within the sampled articles. Theories grouped under the competitive and microeconomics categories made up over 40 per cent of the theoretical incidences. This does not imply all articles utilize theory. The research found that theory was explicitly used in approximately 53 per cent of the sampled articles. Vikram Tiwari, Srinagesh Gavirneni, (2007) in their article“ASP, The Art and Science of Practice: Recoupling Inventory Control Research and Practice: Guidelines for Achieving Synergy” focused on the widening disconnect between inventory-control research and practice, people debate the value of incremental theory building. While practitioners make decisions in a complex and uncoordinated environment, researchers often adopt a simplistic environment for the sake of rigorous analysis. The stakeholders‟ mismatched objectives and motivations may cause this lack of synergy. Controlling and reducing this disconnect would benefit both practitioners and researchers. The existing empirical analysis of companies‟ business improvements based on academic inventory-management theories is inconclusive. Even so, some businesses have successfully implemented inventory theory; however, in most cases, they have greatly modified the inventory models developed by academics. Richard Pibernik, (2004) in his study “Advanced available-to-promise: Classification, selected methods and requirements for operations and inventory management” gives the theoretical framework for the development of models and algorithms supporting order quantity and due date quoting. At first, alternative generic AATP systems will be identified on the basis of relevant classification criteria. Based upon this classification, the AATP planning mechanisms will be detailed for two generic AATP types. On the basis of the introduced AATP types and the description of selected models we finally derive requirements, which operations and inventory management have to meet in order to ensure a successful application of AATP. B.J. Grablowsky, (2005) in his paper “Financial management of inventory” surveyed small business inventory management practices and compared with techniques commonly employed by large corporations. It appears that smaller firms rely on simple controls. Large businesses rely more on quantitative techniques, such as EOQ and linear programming, to provide additional information for decision-making, while small firms are more likely to use management judgment without the quantitative back-up. Of those small firms which did not use quantitative methods for determining inventory order and stock levels, the most common qualitative methods were "past experience" and "executive judgment,".


S. M. Disney and D. R. Towill (2003) in their research “The effect of vendor managed inventory (VMI) dynamics on the Bullwhip Effect in supply chain” compares the expected performance of a vendor managed inventory (VMI) supply chain with a traditional “serially linked” supply chain. The emphasis of this investigation is the impact these two alternative structures have on the “Bullwhip Effect” generated in the supply chain. We pay particular attention to the manufacturer's production ordering activities via a simulation model based on difference equations. VMI is thereby shown to be significantly better at responding to volatile changes in demand such as those due to discounted ordering or price variations. Inventory recovery as measured by the integral of time*absolute error performance metric is also substantially improved via VMI. Noise bandwidth, that is a measure of capacity requirements, is then used to estimate the order rate variance in response to random customer demand. Finally, the paper simulates the VMI and traditional supply chain response to a representative retail sales pattern. The results are in accordance with “rich picture” performance predictions made from deterministic inputs. Julius A. Sharma, Dinesh K. Sharma, Hari P (2004) discussed Supply Chain (SC), which involves the configuration, coordination, and improvement of sequentially related set of operations in establishments, integrates technology and human resource capacity for optimal management of operations to reduce inventory requirements and provide support to enterprises in pursuance of a competitive advantage in the marketplace. This paper addresses the structures of supply chain management (SCM) and the activities involved in SCM decisions that help promote profound improvement in efficiency and effectiveness in business operations. In broader context, the paper examines the types of activities involved in SCM decisions; the dynamics of the traditional SCM, the complementarities of technology in achieving effective management of operations through enablers of electronic data interchange (EDI) and quick response (QR) disciplines to implement Just-in-Time (JIT) management techniques; and integrated SC and inventory control as it relates to capacity imbalances and transaction costs. Inventory management problems can interfere with a company’s profits and customer service. They can cost a business more money and can lead to an excess of inventory overstock that is difficult to move. Most of these problems are usually due to poor inventory processes and out-of-date systems. There are a number of problems that can cause havoc with inventory management. Some happen more frequently than others. Here are some of the more common problems with inventory systems. Some Common Challenges faced by organizations in Inventory Management are:

1. Unqualified employees in charge of inventory. Too many companies put people in charge of their inventory distribution who either don’t have enough experience, are neglectful in their job, or don’t have adequate training.

2. The processes they use are not wide enough and do not encompass all the

aspects and factors in the company.

3. A flawed or unrealistic business plan for a business for the future. To predict how well a company may do in the future, you have to collect enough data and


accurately analyze it. This affects inventory management because if a company predicts more growth than they actually experience, it can lead to an overstock of inventory.

4. A supervisor in charge of inventory management failed to look over their

inventory on a regular basis to make sure enough products are in stock. Identifying shortages ahead of time is an important factor in achieving Customer Satisfaction. Waiting for the shipment to come in can slow down the supply chain process. Not having enough products in stock to meet customer demand can lead to bad customer relations.

5. Bottlenecks and weak points can interfere with on-time product delivery. This

means that if too many orders come in for outgoing shipments and do not get handled in an efficient manner, they can build up, or „bottleneck‟.

6. Falling victim to the “bullwhip effect”. This is an over-reaction by a company to

changes in the market. As the demand of a market changes, a company may panic and order an overstock of inventory, thinking the new market conditions will move the inventory.

7. Too much distressed stock in inventory. Distressed stock is products or materials

in inventory that has or will soon pass the point where it can be sold at the normal price before it expires. This happens all the time in grocery stores. As a particular food product nears its expiration date, the business will discount the item in order to move it quickly before it expires.

8. Excessive inventory in stock and unable to move it quickly enough. This is

probably the most common problem for most businesses. Cash-flow comes from moving inventory. If a company buys an amount of product for their inventory and they do not move it, the company ends up losing money.

9. Computer assessment of inventory items for sale is inaccurate. Nothing is more

frustrating than going to a business that says it has a product, but it turns out that they do not. The quantities are off and the actual items are not available. Too many people assume that the computer records are infallible. Inaccurate inventory records can easily result in loss of money and strained customer service.

10. Computer inventory systems are too complicated. There are many inventory

software programs available for business use. The problem is that many of these programs are not user-friendly. A company does not always have the time and money to invest in training of personnel to use software effectively.

11. Items in-stock gets misplaced. Even if the computer accurately shows the item as

in stock, it may have been misplaced somewhere at the warehouse, or in the wrong location within a store. This can lead to a decrease in profits due to lost


sales and higher inventory costs because the item must be re-ordered. Plus, the company must spend the time for employees to track down the misplaced item.

12. Not keeping up with the rising price of raw materials. This falls more into the

accounting end of inventory management. By not keeping current with the rising price of raw materials, a company will lose profits because they are not adjusting the price of their finished products. Finished items in inventory must be relative to the cost of raw goods.

3.3.1 Ideas for Improvement Inventory management simply means the methods you use to organize, store and replace inventory, to keep an adequate supply of goods while minimizing costs. Each location where goods are kept will require different methods of inventory management. Keeping an inventory, or stock of goods, is a necessity in retail. Customers often prefer to physically touch what they are considering purchasing, so you must have items on hand. In addition, most customers prefer to have it now, rather than wait for something to be ordered from a distributor. In manufacturing, inventory management is event more important to keep production running. Every minute that is spent down because the supply of raw materials was interrupted costs the company unplanned expenses. Counting Current Stock All businesses must know what they have on hand and evaluate stock levels with respect to current and forecasted demands. You must know what you have in stock to ensure you can meet the demands of customers and production and to be sure you are ordering enough stock in the future. Counting is also important because it is the only way you will know if there is a problem with theft occurring at some point in the supply chain. When you become aware of such problems you can take steps to eliminate them. Managing Small Items Inventory control simply knows how much inventory you have. It is a means to control loss of goods. Businesses that use large quantities of small items often use an “80/20” or ABC rule in which they keep track of 20 percent of the largest value inventory items and use it to represent the whole. “A” items are the top valued 20 percent of the company’s inventory, both in terms of the cost of the item and the need for the item in the manufacturing or sales process. Controlling this top 20 percent will control 80 percent of their inventory costs. “B” items are those of mid-range value and “C” items are cheap and rarely in demand. The retailer or manufacturer can now categorize all items in the inventory into one of these three classes and then monitor the stock according to value. "A" items would be counted and tracked regularly, while "B" and "C" items would be counted only monthly or quarterly. Cyclical Counting Many companies prefer to count inventory on a cyclical basis to avoid the need for shutting down operations while stock is counted. This means that a particular section of the warehouse or plant is counted at particular times, rather than counting all inventory at once. In this way, the company takes a physical count of inventory, but never counts the entire inventory at once. While this method may be less accurate than counting the whole, it is much more cost effective. Controlling Supply and Demand Whenever possible, obtain a commitment from a customer for a purchase. In


this way, you ensure that the items you order will not take space in your inventory for long. When this is not possible, you may be able to share responsibility for the cost of carrying goods with the salesperson, to ensure that an order placed actually results in a sale. You can also keep a list of goods that can easily be sold to another party, should a customer cancel. Such goods can be ordered without prior approval. Stock Control Approval procedures should be arranged around several factors. You should set minimum and maximum quantities which your buyers can order without prior approval. This ensures that you are maximizing any volume discounts available through your vendors and preventing over-ordering of stock. It is also important to require pre-approval on goods with a high carrying cost. Keeping Accurate Records Any time items arrive at or leave a warehouse, accurate paperwork should be kept, itemizing the goods. When inventory arrives, this is when you will find breakage or loss on the goods you ordered. Inventory leaving your warehouse must be counted to prevent loss between the warehouse and the point of sale. Even samples should be recorded, making the salesperson responsible for the goods until they are returned to the storage facility. Records should be processed quickly, at least in the same day that the withdrawal of stock occurred. Managing Employees Buyers are the employees who make stock purchases for your company. Reward systems should be set in place that encourage high levels of customer service and return on investment for the product lines the buyer manages. Warehouse employees should be educated on the costs of improper inventory management. Be sure they understand that the lower your profit margin, the more sales must be generated to make up for the lost goods. Incentive programs can help employees keep this in perspective. When they see a difference in their paychecks from poor inventory management, they are more likely to take precautions to prevent shrinkage. Inventory management should be a part of your overall strategic business plan. As the business climate evolves towards a green economy, businesses are looking for ways to leverage this trend as part of the “big picture”. It can also mean putting in place recycling procedures for packaging or other materials. In this way, inventory management is more than a means to control costs; it becomes a way to promote your business.

3.3.2 Implementation and Execution Building a better solution from start to finish will yield results for Increased Inventory Management. More efficient operations provide bottom-line results. Improving Inventory Management is an activity-based solution designed specifically to create maximum efficiency and optimum cost-control throughout your department, which will:

1. Define inventory processes, activities and controls from a results-driven standpoint.

2. Define tasks and inventory process parameters in measurable and verifiable

terms that emphasize efficiencies to produce desired results.


3. Validate task performance to attain the highest efficiencies in inventory processes through task monitoring, measurement and validation, put the right people in the right jobs.

4. Continuously provide real-time, real-performance task and process data for

efficiency as well as inventory micro-adjustments.

5. Implement all activity-based management initiatives through to full execution in inventory for maximum efficiency, productivity, cost-containment and profitability.

Inventory Management Delivering Profits through Stock Management, Aarti Deveshwar and Dhawal Modi, Deen Bandhu Chhotu Ram University of Science and Technology, 2004.


A LITERATURE REVIEW ON THE IMPACT OF INVENTORY DATA RECORD INACCURACIES ON INVENTORY MANAGEMENT AND THE POTENTIAL OF THE RFID TECHNOLOGY TO TACKLE THIS ISSUE

Evren SAHIN, Yves DALLERY Laboratoire Génie Industriel, Ecole Centrale Paris, 2004.

MerchantOS argued that "the easiest way to manage inventory is with a computer inventory management s ystem" (Merchant, 2010). The systems below help to reduce the time spent in managing inventory:

1. Point-of-sale terminals: this system updates stock level automatically and provides a more error free sales transaction.

2. Barcodes and barcode readers which proved a way to effectively input inventory and "stock takes" faster into the system.

3. Job costing and inventory systems which are systems that also automatically update stock counts as orders are being made.

4. Electronic Supplier product catalogs: allows the use of electronic devices like CD/DVDs to record inventory data.

These systems ensure accurate inventory records through the use of electronic and wireless technologies that provide error free data. These systems are very efficient in that they:

1. Keep only up-to-date records of items and remove all sold items from the system.

2. It is possible to Review stock reports periodically to check the products status and identify low demand products.

3. Periodically check record to ensure the level of accuracy of the system and to check against physical stock quantities.

The inventory on the racks is not stored for optimum picking and bottlenecks occur when new inventory is received in the warehouse.


3.4 Inventory Analysis using Inventory Turnover Ratio

3.4.1 Inventory turnover This is the ratio of cost of goods sold by a business to its average inventory during a given accounting period. It is an activity ratio measuring the number of times per period; a business sells and replaces its entire batch of inventory again.

Inventory turnover ratio is calculated using the following formula:

Cost of goods sold figure is obtained from the income of a business whereas average inventory is calculated as the sum of the inventory at the beginning and at the end of the period divided by 2. The values of beginning and ending inventory are obtained from the balance sheets at the start and at the end of the accounting period.

3.4.2 Analysis

Inventory turnover ratio is used to measure the inventory management efficiency of a business. In general, a higher value of inventory turnover indicates better performance and lower value means inefficiency in controlling inventory levels. A lower inventory turnover ratio may be an indication of over-stocking which may pose risk of obsolescence and increased inventory holding costs. However, a very high value of this ratio may be accompanied by loss of sales due to inventory shortage.

The inventory turnover ratios of Pak Suzuki Motor Company from the year 2008 to 2012 are listed in the table below along with the no. of days the inventory was held. The data has been obtained from organization’s financial reports of respective years.

Year Inventory Turnover Ratio No. of days stock held

2008 5.1 72

2009 3.7 98

2010 4.8 77

2011 3.9 93

2012 5.3 69 Table 1 - This table represents the annual Inventory Turnover Ratio and the Number of Days Stock was Held, from 2008 to 2012.


Figure 4 - The graph shows the variation in Inventory Turnover ratios through a period of 5-years, from 2008 to 2012.

The trend depicts the inconsistent performance of organization’s inventory. This can be connected to internal factors like inaccurate sales forecasts, over production, uneven sales and external factors like competition from imported automobiles, decreasing buying power of the end-user, inflation, etc. The lower turnover ratios of 2009 and 2011 indicates the presence of slow moving stock and this also hampered the profits during those years.

Another factor that affects demand is consumer standardization. Consumers may begin buying your line of products for several months before they develop a preference for one or more products. When consumers standardize on a product in your line, the other products will see a drastic decrease in inventory turnover times.

Furthermore, the graph below shows the trend of the number of days stock was held during 2008 to 2012.

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2008 2009 2010 2011 2012


Figure 5 - This graph shows the trend of number of days the inventory was held during the years 2008 to 2012. Formula for calculating no. of days of inventory is:

1. A high number of days inventory indicates that there is a lack of demand for the product being sold.

2. A low days inventory ratio (inventory holding period) may indicate that the company is not keeping enough stock on hand to meet demands.

Assume Pak Suzuki reduces the days of inventory in 2013 to 67, a 3-day reduction in inventory or a 2.89% reduction in overall inventory. The total gross benefit of a 3-day inventory reduction on the Balance Sheet and P&L Statement will have value in millions of rupees. The reduction in inventory carrying cost is calculated using the assumption that inventory carrying charges are 10% of actual inventory.

3.4.2 Proposed Solutions

1. Sales Cycles of all the products should be studied to have an idea of periodic demand during different times of the year. It can be that Swift models would record more sales during some specific times say August to October but after that the sales may decline. This will help in planning the inventory and scheduling production on a more profitable basis.

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2. Also raw materials, WIP, engine and spare parts and even finished products would become damaged or obsolete due to slow turnover. Rather than stock-piling these, it is better to have demand-driven supply chain practices in which vendors can supply the actual number of parts when required.

While this calculation is the “standard”, it does not provide realistic turns on a monthly basis because it uses averages. To get an assessment of what the business is doing in terms of current inventory performance, substitute actual ending inventory dollars for the month in the denominator. Tracking both measurements will give both a short and long term view of the velocity of the company’s inventory.

Deloitte helped identify potential cost savings worth several million dollars for an automobile company, while reducing orderable configurations by 66 percent. The North America division ended 2007 with a 4.5 percent volume

increase over 2006.iii

Improving Automobile Product Offerings and Inventory Management

Source: http://www.deloitte.com/view/en_US/us/5e426466f1e02210VgnVCM200000bb42f00aRCRD.htm

3.5 Inventory Management through Inventory Quality Ratio (IQR)

The Inventory Quality Ratio (IQR) is a simple, straightforward way of measuring inventory performance, managing inventory dollars and identifying inventory reduction opportunities. The IQR logic was developed collectively by the materials managers of 35 companies. It was used by them to reduce inventories a total of $500 million (25% average reduction) while improving on-time deliveries. It has since been used by planners and buyers in manufacturing and distribution companies worldwide to reduce inventories 20% to 40%.

Using the data from any existing MRP system, the IQR logic first divides inventory into three groups:

1. items with future requirements 2. items with no future requirements but with recent past usage 3. items with neither

The items in these groups are then stratified into typical ABC-type classifications based on their future dollar requirements, their past dollar usage, or their current dollar balances, respectively. A target inventory level expressed in days' supply is set for each item based on its classification. The balance on hand of each item is compared to the target, and the dollars of each item are categorized as either Active, Excess, Slow Moving or Obsolete. These are called the inventory quality categories.


The Inventory Quality Ratio is the ratio of the active inventory dollars to total inventory dollars.

In a theoretically perfect situation (i.e., with no excess, slow moving or obsolete inventories) the IQR would be 100%.

Most manufacturing companies have an IQR of about 40%, meaning that 60% of their inventory dollars are non-active. Approximately 50% of their inventories are Excess and 10% are Slow Moving or Obsolete. Excess inventories offer not only the largest but also the best opportunities to reduce inventories. This is because deferring incoming purchases until the Excess inventory is consumed not only increases inventory turns but also improves cash flow and avoids future write-offs.

We all know that inventory reduction is a two-step process - getting the inventories down and then keeping them down. Done properly, the second step never ends. The IQR methodology combines best practices in a continuous improvement process to address inventory reduction in several ways.

1. First, to reduce excess inventories, avoid shortages and improve cash flow. 2. Second, to clean house of slow moving and obsolete inventories. 3. And third, to routinely evaluate and revise the MRP ordering rules so they remain

in synch with current demand and consistent with company inventory policies.

According to Gary Gossardiv, one world-class company was already turning inventories 30 times when it started using IQR. Within six months they increased to 40 turns and later to 42 turns. Whatever a company's current inventory performance may be, there are improvements that can be made by focusing on the dollars.

3.5.1 IQR benefits

1. Provides a dollar focus 2. Measures inventory performance based on future requirements 3. Dynamically calculates ABC Classes

3.5.2 Typical Results of using IQR

1. Improve cash flow & capital immediately 2. Reduce inventory 20% to 40% 3. Increase turns with fewer shortages 4. Maximize planner & buyer productivity 5. Continuously improve overall inventory performance


3.6 Inventory Management Using PDCA

1. Plan a. Define the desired amount of inventory b. Measure the current amount of inventory c. Set inventory improvement targets

2. Do

a. Take steps to reduce inventory

3. Check a. Track progress to target

4. Act

a. Identify root cause of high inventory levels & correct

In 2010, British Airways reduced their inventory holdings from £38 million to £12 million by applying inventory management techniques proposed by

JDA – The Supply Chain Company ®v

3.7 Inventory Management using ABC Analysis

The ABC classification process is an analysis of a range of objects, such as finished products, items lying in inventory or customers into three categories. The method usually categorizes inventory into three classes with each class having a different management control associated:

Class Importance % of Inventory Type of Control

Class A Extremely important, highest financial value

10 – 20% of the total inventory items

Accurate records, very tight control

Class B Average importance, moderate financial value

30% of total inventory items

Decent records, a little less tight control

Class C Least important, low financial value

50% of total inventory items

Only essential records, light controls

Table 1 - This table explains how inventory items can be stocked using the ABC analysis.


Figure 6 - A matrix showing relation between the risk and investment of ABC categories of inventories. “A” category stocks are critically important and hence have levels of risk and high investments.

Assuming Pak Suzuki manufactured 35,200 Mehran car models in 2012, the table

below shows an estimated data required for ABC Inventory analysis and Pareto chart.

1 2 3 4 5 6 7 8 9

Part Name Annual

Demand

Safety Stock (10%)

(2+3) Unit Price

Annual Usage

Annual Usage

%

Annual Usage

Cumulative % Category

Silencer 35200 3520 38720 250 9680000 1% 1%

Dashboard 35200 3520 38720 120 4646400 1% 2%

Floor Mats 211200 21120 232320 30 6969600 1% 3%

Seats 140800 14080 154880 350 54208000 8% 11%

Engine 35200 3520 38720 8000 309760000 43% 54%

Head Lights 70400 7040 77440 325 25168000 4% 57%

Radiator 35200 3520 38720 650 25168000 4% 61%

Tyres 140800 14080 154880 1800 278784000 39% 100%

714384000 100%

The table above is sorted into descending order, in respect to Annual Usage Cumulative

%age to produce the table below.


1 2 3 4 5 6 7 8 9

Part Name Annual

Demand

Safety Stock (10%)

(2+3) Unit Price

Annual Usage

Annual Usage

%

Annual Usage

Cumulative % Category

Engine 35200 3520 38720 8000 309760000 43% 43% A

Tyres 140800 14080 154880 1800 278784000 39% 82% A

Seats 140800 14080 154880 350 54208000 8% 90% B

Head Lights 70400 7040 77440 325 25168000 4% 93% C

Radiator 35200 3520 38720 650 25168000 4% 97% C

Silencer 35200 3520 38720 250 9680000 1% 98% C

Floor Mats 211200 21120 232320 30 6969600 1% 99% C

Dashboard 35200 3520 38720 120 4646400 1% 100% C

714384000 100%

Figure 7 – A Pareto Chart depicting the different categories of inventories based on their Annual Usage (PKR amount)

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3.7.1 Tolerances

It is not unrealistic to expect that the physical count and record will exactly match for every item; nor is it practical. An inventory record should be considered accurate if it matches the physical count within a reasonable tolerance. Most often, count tolerances are based on the ABC classification. The typical tolerances are in Figure below.

Figure 4 Level of tolerances for different categories of inventory. Note that how tolerance level decreases as the priority of the inventory category changes. Hence, “A” category inventory items have the least tolerance and their records must match with the physical counts

3.7.2 Inventory Record Accuracy

The actual calculation of inventory accuracy is quite simple. It is the percentage of items having accurate records. The formula is:

The formula applies to inventory as a whole and also to each class (ABC) within the database. You can use it to calculate accuracy for a day’s cycle counting, or the annual physical audit. To count as accurate, a record should meet three criteria:


1. The quantity on record must match the physical count within the tolerance for that item. 2. The location on record must match the physical location. 3. The item should have no outstanding transactions.

3.7.3 Reasons for Inaccuracy

There are many causes for inaccurate records. People may enter data inaccurately or not at all. Confusing location codes cause discrepancies between recorded and actual locations. Occasionally, software bugs introduce errors. The thousands of possible causes are either process-related or volume-related.

1. Process Related Errors: Each step in a transaction process introduces some probability for error, even if that probability is small. To reduce process-related errors, we must change the process.

2. Volume-Related Errors: Every transaction process has an inherent error rate or probability of error resulting from the structure and execution of the process. Over time, and with many transactions, the number of new errors per week or per thousand transactions is relatively constant, if the process remains unchanged. The more transactions, the more errors.


4.0 ANALYSIS

4.1 Material Holding Capacity and Closing Stock

SR.# PART DESCRIPTION QTY PER TROLLEY

(A)

LOCATION TROLLEY QTY (B)

LINE TROLLEY QTY ( C )

NO OF TROLLEY D=(B+C)

CAPACITY OF MHD E=(AxD)

Closing Stock

1 STRUT SET,FRONT SUSPENSION,L 35 13 2 15 525 356

2 STRUT SET,FRONT SUSPENSION,R 35 13 2 15 525 356

3 SILENCER COMP,DASH PANEL 40 4 2 6 240 152

4 SHELF COMP,RR PARCEL,MAIN 60 5 2 7 420 486

5 STRUT SET,REAR SUSPENSION 30 19 2 21 630 336


7 STRUT SET,FRONT SUSPENSION,R 30 16 2 18 540 340

8 TRIM COMP.FRT.DOOR'R(VXR) 12 10 2 12 144 142

9 TRIM COMP.FRT.DOOR'L(VXR) 12 10 2 12 144 142

10 TRIM COMP.RR.DOOR'R(VXR) 12 10 2 12 144 142

11 TRIM COMP RR DOOR'L 12 10 2 12 144 142

12 FRAME COMP,FRONT SUSPENSION 40 9 2 11 440 192

13 SHAFT COMP,PROPELLER 48 12 2 14 672 560


15 STRUT ASSY,FRONT SUSPENSION,R 35 8 2 10 350 242


16 LID SET,REAR FLOOR FRONT SVCE 100 3 2 5 500 376

17 MEMBER COMP,REAR FLOOR SIDE,R

48 4 1 5 240 168

18 MEMBER COMP,REAR FLOOR SIDE,L

48 4 1 5 240 168

19 MEMBER COMP,FRONT UPPER 70 15 1 16 1120 706

20 PANEL COMP REAR SKIRT 100 7 1 8 800 216

21 CROSS MEMBER COMP,DASH LOWER

64 4 1 5 320 256

22 CROSSMEMBER COMP,FRONT LOWER

90 5 1 6 504 84

23 RAIL,ROOF SIDE INNER REAR,R 150 3 1 4 600 156

24 RAIL,ROOF SIDE INNER REAR,L 150 3 1 4 600 156

The table above is used to represent the Holding Capacity assigned to each of the 24 parts taken under consideration, and provides information as to how many units of these parts are available as Closing Stock.

Column A displays the number of units for each item that can be placed within a single handling trolley. Column B represents the number of trolleys assigned to each part on location, while Column C shows the quantity of trolleys in line for replenishment. The sum of B and C is represented in Column D, which is the total number of trolleys available to each of the 24 parts. It can also be seen from the table that parts which are made in pairs of left and right, have been assigned the same number of trolleys.

Column E represents the Total Material Handling Capacity. This means the total number of units’ per-part, which can be held within their respective trolleys. This was calculated as the product of values in Column A and D.

The Closing Stock is the representation of the physical count which identifies how many units of each part are available at the end of the manufacturing process.

Based on this data, we have generated a graph to show the comparison between the Total Material Holding Capacity and the Closing Stocks.


Figure 9

This graph is generated with the help of the data given in the table. This shows us a clear comparison between the Material Holding Capacity and the Closing Stock.

According to this, we can say that mostly all Parts have been given sufficient storage capacity to hold the closing inventory at the end of the day. However; it is also evident that with a bit more planning and control, the storage capacity can be equally distributed amongst all parts. This means that more units of each part can be produced and stocked.

This would further mean that more units can be produced at a given time as storage capacity is optimized. This would allow the company to further maintain safety stock as many of these parts would be used for assembly.

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Closing Stock

CAPACITY OF MHD E=(AxD)


4.2 Unit Production Requirement and Closing Stock

SR.# PART DESCRIPTION PRODUCTION Closing Stock

1 STRUT SET,FRONT SUSPENSION,L 166 356

2 STRUT SET,FRONT SUSPENSION,R 166 356

3 SILENCER COMP,DASH PANEL 56 152

4 SHELF COMP,RR PARCEL,MAIN 56 486

5 STRUT SET,REAR SUSPENSION 56 336



8 TRIM COMP.FRT.DOOR'R(VXR) 56 142

9 TRIM COMP.FRT.DOOR'L(VXR) 56 142

10 TRIM COMP.RR.DOOR'R(VXR) 56 142

11 TRIM COMP RR DOOR'L 56 142

12 FRAME COMP,FRONT SUSPENSION

41 192

13 SHAFT COMP,PROPELLER 41 560


15 STRUT ASSY,FRONT SUSPENSION,R 41 242

16 LID SET,REAR FLOOR FRONT SVCE 51 376



165 192

18 MEMBER COMP,REAR FLOOR SIDE,L

165 192

19 MEMBER COMP,FRONT UPPER 166 706

20 PANEL COMP REAR SKIRT 166 216


56 256


56 84

23 RAIL,ROOF SIDE INNER REAR,R 56 156

24 RAIL,ROOF SIDE INNER REAR,L 56 156

25 PANEL COMP,BACK 56 96

26 PANEL COMP,PARTITION 42 152

27 COVER,FRAME CENTER,R 41 116

28 COVER,FRAME CENTER,L 41 116

This table represents a set of 28 vehicle components along with the production

requirement of each part on a given day, as well as the number of units available at the

end as closing stock.

A graph has been generated to further understand the comparison between these two

variables.


Figure 10

The X-axis of the graph defines the serial number of each of the 28 parts e.g. 1-28. The

Y-axis is used to define the number of units.

It is quite clear here that there is major difference between the parts produced on a daily

basis and the closing stock at the end of the day. Based on the previous graph on page

38, we saw that there is sufficient capacity to increase production further. However; in

contrast to that, here we can see that there is already a great number of units that are

being held as inventory, this is also because all supplies are purchased at Maximum

truck load. This means increased costs of both material holding as well as production.

This goes on to contradict that although production can be enhanced, it should not be

as it will only increase the costs of an already high level of inventory. In fact, instead of

maintaining such a high number of units, the company must simply use a safety buffer

of 10%.

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PRODUCTION

Closing Stock


4.3 Preliminary Stock and Optimal Safety Stock

SR.# PART DESCRIPTION Preliminary

Stock

OP SAFETY STOCK



3 SILENCER COMP,DASH PANEL 56 62

4 SHELF COMP,RR PARCEL,MAIN 56 62

5 STRUT SET,REAR SUSPENSION 56 62



8 TRIM COMP.FRT.DOOR'R(VXR) 56 62

9 TRIM COMP.FRT.DOOR'L(VXR) 56 62

10 TRIM COMP.RR.DOOR'R(VXR) 56 62

11 TRIM COMP RR DOOR'L 56 62

12 FRAME COMP,FRONT SUSPENSION 41 45

13 SHAFT COMP,PROPELLER 41 45


15 STRUT ASSY,FRONT SUSPENSION,R 41 45

16 LID SET,REAR FLOOR FRONT SVCE 51 56


17 MEMBER COMP,REAR FLOOR SIDE,R 165 182

18 MEMBER COMP,REAR FLOOR SIDE,L 165 182

19 MEMBER COMP,FRONT UPPER 166 183

20 PANEL COMP REAR SKIRT 166 183

21 CROSS MEMBER COMP,DASH LOWER 56 62


56 62

23 RAIL,ROOF SIDE INNER REAR,R 56 62

24 RAIL,ROOF SIDE INNER REAR,L 56 62

25 PANEL COMP,BACK 56 58

26 PANEL COMP,PARTITION 48 54

27 COVER,FRAME CENTER,R 41 45

28 COVER,FRAME CENTER,L 41 45

The amount of safety stock an organization chooses to keep on hand can dramatically

affect their business. Too much safety stock can result in high holding costs of

inventory. In addition, products which are stored for too long a time can spoil, expire, or

break during the warehousing process. Too little safety stock can result in lost sales

and, thus, a higher rate of customer turnover. As a result, finding the right balance

between too much and too little safety stock is essential.

This table is used to define each of the 28 parts which were taken into consideration

previously. The number of units for production will now be considered as preliminary

stock, while instead of taking the previous closing stock; we have added a new column

as Optimum Safety Stock, which is a 10% increase.

We believe doing so can be beneficial for the company, financially as well as practically

because it can swiftly also be generated using the ERP system, and would also require

very little planning.


Figure 11

Here, we can see that both plots have very small difference in terms of units. This

means reduction in excess inventory by almost half, while also maintaining a safety

buffer in case of unforeseen circumstances. This means reduction in inventory holding

costs, and since there are fewer units in stock, it reduces the changes of asset on-shelf

depreciation.

Once the next line of supplies is delivered, the units which are currently held as

Optimum Safety will be pushed towards the production line while the newly arrived parts

will be held as safety stock for the next day. This in turn will reduce the total value of

inventory and contribute towards high turnover, considering the fact that demand for the

new Suzuki Swift has been at the peak since the start of the year.

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Preliminary Stock

OP SAFETY STOCK


4.4 Costs of Holding Inventory

SR.# PART DESCRIPTION (A)

Closing Stock

(B) Unit Price

(C) Total Price

(D) Total Cumulative

Price of Inventory

(E) Holding Cost

1 STRUT SET,FRONT SUSPENSION,L 356 35 12460 12460 3115

2 STRUT SET,FRONT SUSPENSION,R 356 35 12460 24920 6230

3 SILENCER COMP,DASH PANEL 152 38 5776 30696 7674

4 SHELF COMP,RR PARCEL,MAIN 486 38 18468 49164 12291

5 STRUT SET,REAR SUSPENSION 336 35 11760 60924 15231


7 STRUT SET,FRONT SUSPENSION,R 340 35 11900 84724 21181

8 TRIM COMP.FRT.DOOR'R(VXR) 142 42 5964 90688 22672

9 TRIM COMP.FRT.DOOR'L(VXR) 142 42 5964 96652 24163


10 TRIM COMP.RR.DOOR'R(VXR) 142 45 6390 103042 25760.5

11 TRIM COMP RR DOOR'L 142 51 7242 110284 27571

12 FRAME COMP,FRONT SUSPENSION 192 54 10368 120652 30163

13 SHAFT COMP,PROPELLER 560 47 26320 146972 36743


15 STRUT ASSY,FRONT SUSPENSION,R 242 48 11616 170204 42551

16 LID SET,REAR FLOOR FRONT SVCE 376 38 14288 184492 46123


192 49 9408 193900 48475

18 MEMBER COMP,REAR FLOOR SIDE,L 192 49 9408 203308 50827

19 MEMBER COMP,FRONT UPPER 706 50 35300 238608 59652

20 PANEL COMP REAR SKIRT 216 60 12960 251568 62892


256 68 17408 268976 67244



84 65 5460 274436 68609

23 RAIL,ROOF SIDE INNER REAR,R 156 42 6552 280988 70247

24 RAIL,ROOF SIDE INNER REAR,L 156 42 6552 287540 71885

25 PANEL COMP,BACK 96 54 5184 292724 73181

26 PANEL COMP,PARTITION 152 62 9424 302148 75537

27 COVER,FRAME CENTER,R 116 48 5568 307716 76929

28 COVER,FRAME CENTER,L 116 52 6032 313748 78437

When companies are looking to reduce costs, a great many times they ignore the

inventory sitting in their warehouses and the cost of carrying that inventory. It is

important for businesses to carefully examine all the costs of carrying inventory and

determine where they can make changes to reduce that cost and help with the

company’s bottom line.

Taking into consideration the Closing Stock from Section 4.2 of our report, we used that

data to generate the total cost of holding that number of units.

In the table shown above, Column A represents the number of units while Column B

represents the price of a single unit. The Total Cost of holding each part is represented

in Column C, which was calculated by taking the product of Columns A and B. Column

D is the cumulative sum of the cost of all components. The holding cost shown in

Column E was taken as 10% of the cumulative Inventory costs.


Figure 12

The graph clearly shows that the total holding cost of all components is quite low, but

the total price of inventory held is extremely high. This is because excess inventory is

being held but is not being used. This is not efficient because first it is a waste of money

and space. Also, this means that many items being held may deteriorate and would not

provide the quality required. So basically, the company is paying costs for items it does

not need.

0

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

(C) Total Price

(D) Total Cumulative Price of Inventory

(E) Holding Cost


SR.# PART DESCRIPTION Preliminary

Stock

OP SAFETY STOCK

Unit Price Total Price

Optimum Cumulative

Total

Optimum Total Holding

Cost

1 STRUT SET,FRONT SUSPENSION,L 166 183 35 6391 6391 1597.75

2 STRUT SET,FRONT SUSPENSION,R 166 183 35 6391 12782 3195.5

3 SILENCER COMP,DASH PANEL 56 62 38 2340.8 15122.8 3780.7

4 SHELF COMP,RR PARCEL,MAIN 56 62 38 2340.8 17463.6 4365.9

5 STRUT SET,REAR SUSPENSION 56 62 35 2156 19619.6 4904.9

6 STRUT SET,FRONT SUSPENSION,L 56 62 35 2156 21775.6 5443.9

7 STRUT SET,FRONT SUSPENSION,R 56 62 35 2156 23931.6 5982.9

8 TRIM COMP.FRT.DOOR'R(VXR) 56 62 42 2587.2 26518.8 6629.7

9 TRIM COMP.FRT.DOOR'L(VXR) 56 62 42 2587.2 29106 7276.5

10 TRIM COMP.RR.DOOR'R(VXR) 56 62 45 2772 31878 7969.5

11 TRIM COMP RR DOOR'L 56 62 51 3141.6 35019.6 8754.9

12 FRAME COMP,FRONT SUSPENSION 41 45 54 2435.4 37455 9363.75

13 SHAFT COMP,PROPELLER 41 45 47 2119.7 39574.7 9893.675

14 STRUT SET,FRONT SUSPENSION,L 41 45 48 2164.8 41739.5 10434.875

15 STRUT ASSY,FRONT SUSPENSION,R 41 45 48 2164.8 43904.3 10976.075

16 LID SET,REAR FLOOR FRONT SVCE 51 56 38 2131.8 46036.1 11509.025



165 182 49 8893.5 54929.6 13732.4

18 MEMBER COMP,REAR FLOOR SIDE,L 165 182 49 8893.5 63823.1 15955.775

19 MEMBER COMP,FRONT UPPER 166 183 50 9130 72953.1 18238.275

20 PANEL COMP REAR SKIRT 166 183 60 10956 83909.1 20977.275


56 62 68 4188.8 88097.9 22024.475


56 62 65 4004 92101.9 23025.475

23 RAIL,ROOF SIDE INNER REAR,R 56 62 42 2587.2 94689.1 23672.275

24 RAIL,ROOF SIDE INNER REAR,L 56 62 42 2587.2 97276.3 24319.075

25 PANEL COMP,BACK 56 62 54 3326.4 100602.7 25150.675

26 PANEL COMP,PARTITION 48 53 62 3273.6 103876.3 25969.075

27 COVER,FRAME CENTER,R 41 45 48 2164.8 106041.1 26510.275

28 COVER,FRAME CENTER,L 41 45 52 2345.2 108386.3 27096.575

Understanding that the Total inventory being held was not an efficient way, we decided

to apply the inventory cost calculation on the Optimum Safety Inventory we had

calculated in section 4.3.

Considering that the purchase of supplies is stopped for one day, we decided to divide

the Closing Stock into 2 sections, preliminary and optimum stock. The preliminary stock

is that which would be used for production, while the Optimum stock is a 10% increase

on that. This means we are basically applying the FIFO method to first use the items

which were stored first. Once the next order arrives, it would be stocked while the

current optimum inventory would then be used as preliminary.

We have generated the graph to compare the two methods.


Figure 13

From this graph, we can see that the applying the Optimum Stock method reduced the

inventory by almost half, that too in just a short period of time. It also means that parts

were used before they depreciated. This leads to an efficient use of resources. This is

turn means that holding costs also reduced by a significant amount. Considering that

the same number of vehicles is sold this year, this reduction in holding inventory will

result in higher turnover, which will in turn mean an increase in revenue and profits.

Savings in Holding Inventory Costs = 78, 437-27,096

= Rs. 51,340

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Initial Cumulative Price of Inventory

Initial Holding Cost

Optimum Cumulative Total

Optimum Total Holding Cost


4.5 Recommendations

A Six Sigma team should strive to remove the largest amount of time to reduce

the mean lead time of a value stream AND the input creating the most variation

within the value stream (whether it is in one process or multiple, systems,

transactional, or elsewhere).

Put the tightest control with the highest amount of poka-yokes around the high dollar products. After that, put medium controls and resources towards the mid-level valued products. As time goes on more attention can be focused on the non-vital few working your way down the Pareto Diagram.

Supplier scorecards with delivery, costs, quality, responsiveness and reliability related metrics highlight top and poor performing suppliers.

Workforce productivity to drive “first time right” culture and to minimize rework and associated wastes that would consume quality time of workforce.

All inventory projections rely on accurate purchase order information. Ensure that daily and weekly processes are in place to continually review and revalidate the accuracy of that data.

Apply FIFO approach in warehouse movements. This ensures that stocked items do not lose their performance capability or depreciate in value. This also means that quality is not being compromised.

Work with suppliers to ensure supplies of zero-defect parts to reduce lead time, re-orders and re-works.

Reduce lead times to gain following benefits:

Demand forecast becomes less important and hence reduces chances of errors.

Customer service levels improve.

Safety stocks reduced as production process speeds up.

Publish and measure lead time for every business unit activity

Implement Vendor Managed Inventory (VMI) to reduce purchasing cycle lead time.


Calculate current inventory accuracy rate and aim towards 95% accuracy in inventory forecasting

Inventory Record Accuracy (IRA) is a measure of how closely official inventory records match the physical inventory

o MRP and ERP systems require very high accuracies (95%-99%) to function well.vi

Treat suppliers as partners. Upon purchase of materials, it is beneficial to share details with suppliers such as demand, lead time and production requirement. Being taken under consideration shows trust and signs of a strong partnership.

Eliminate the risk of having unauthorized people walking around the place where your inventory is stashed. This reduces the changes of damage and theft. Also, ensure that Inventory managing team is fully functional and alert.

Adjoining ERP system with that of suppliers. The manufacturers must develop an algorithm to replenish inventory by identifying re-order point, on the basis of future demand and production schedules.

Give your warehouse the chance to finish order processing and clean up before they clock out. By the end of the day your warehouse will be organized and your inventory will be right where it belongs, instead of just lying around waiting for the next day to start in disarray. You can probably imagine how much faster your employees will clean up at the end of their work day so they can clock out and get home, as compared to how sluggishly they’ll get it done in the morning.vii

Look for alternative suppliers. The company faces shortage of supplies due to non-availability of materials. Single source vendors create such problems and look to increase costs on the basis of monopoly.

Perform continuous and appropriate periodic review of inventory. It shouldn’t be a one-time activity. Promotions don’t happen only once. The nature of the supply chain is that things can happen all the time.

Standardize the data so that everybody can see the same information and standardize the process so they know what to do with that information.


REFERENCES

● Aarti Deveshwar, A. D. and Dhawal Modi, D. M. Inventory Management

Delivering Profits through Stock Management, Deen Bandhu Chhotu Ram

University of Science and Technology, 2004.

● S. L. Adeyemi and A. O. Salami, Inventory Management: A Tool of Optimizing Resources in a Manufacturing Industry - A Case Study of Coca-Cola Bottling Company, Ilorin Plant, Journal of Social Sciences, 2010.

● Evren Sahin and Yves Dallery, A Literature Review On The Impact Of Inventory Data Record Inaccuracies On Inventory Management And The Potential Of The RFID Technology To Tackle This Issue, Laboratoire Génie Industriel, Ecole Centrale Paris 2004.

● Geoff Relph, G. R. and Laurie Browne, L. B. Improved Inventory Performance

into the 21st Century, BPICS Control, University of Sunderland. June/July 1994

● Les Oakshott, Essential Quantitative Methods(5th Ed.), Chapter 16, 2001

● Cecil Bozarth and Robert Handfield, Introduction to Operations and Supply Chain

Management, Prentice-Hall, Upper Saddle River, New Jersey. 2006

● Jeremy Quittner, Taking Stock of Inventory Management, Bloomberg Business

Week Magazine, October 16 2008

● Article Financial Impact of Inventory Reduction, Lean Logistics Inc., 2009


i Inventory Optimization: Five Steps to Improve Process Effectiveness – Mani Iyer,

Industry Week - Jul. 24, 2012

ii Pak Suzuki Annual Financial Report for year 2012, Author: Corporate Communication

iii Improving Automobile Product Offerings and Inventory Management - Making the complex more simple iv Eric Matson, Garry Gossard, Improve Inventory Turns with Lean Logic. 50th

APICS

International Conference and Expo, October 21-23, 2007, in Denver, Colorado

v The JDA Website.

vi Strategos Guide To Cycle Counting & Inventory Accuracy – Quarterman Lee, Published in Kansas City, Missouri. 2009

vii 10 Ways to Improve Warehouse Efficiency and Inventory Management, Andy

Yeastes, SkuVault ecommerce Blog, Feb 2013

Documents

Final Report on Inventory Management