Inventory_System

Valuable information was sought from related literature and studies in order to have a thorough grasp of the technical, statistical and financial aspects of the project. These were sourced from the internet, books, research papers and other similar references. An approach in the improvement of service level originates from control theories which are concerned to decision-making based on analytical method. Related Literature The discussion below deals with literature that has been gathered through a series of books which pertains to knowledge on industrial engineering concepts of process and system improvement. The following subject matters were taken into consideration in order to make a successful study on the project. Approaches such as ABC analysis, forecasting and Mean Absolute Deviation will be discussed. All are concerned on the decision-making of the model. In order to lower the inventory cost, Just in Time Management shall be practiced. Inventory control Shim and siegel (1999) says that the most common problems facing operations manager is inventory planning because inventory usually represents a sizable portion of a firm’s total assets and more specifically, on the average, more than 30% of total current assets in the U.S. industry. Excessive money tied up in inventory is a drag on profitability. Inventories may contain materials that have either dependent demand or independent demand. Dependent demand inventories consist of items whose demand depends on the demands for other items also held in inventory. Demand (or usage) or subassemblies and component parts is derived from the number of finished units that will be assembled. A classic example is demand for wheels for new automobiles. Independent demand items are the finished goods or other end- items. Its demand is independent of the demand for any other item carried in the inventory. Shim and siegel (1999) also says that the purpose of inventory planning is to develop policies that will achieve an optimal investment in inventory. This objective is achieved by determining the optimal level of inventory necessary to minimize inventory related costs. Inventory-related costs fall into three categories: ● Ordering costs, which include all costs associated with preparing a purchase order ● Carrying (holding) costs, which include storage costs for inventory items plus the cost of money tied up in inventory ● Shortage (stockout) costs, which include those incurred when an item is out of stock. These include the lost contribution margin on sales plus the lost customer goodwill Many inventory planning models are available. They all try to answer basically the following two questions: ● How much to order' ● When to order' An article by Lee (2002) presents ‘the uncertainty framework’ considers dimensions of demand and supply uncertainties. This framework can be a simple but powerful way to characterize a product; which can be useful in devising an appropriate supply strategy for that product. Uncertainties in demand and supply can result in excessive inventories and deteriorated customer service, indicating out of control supply chain. In the presence of uncertainties, it is difficult to foresee the final effects of the actions taken and hence to manage the inventories efficiently. In general, it is observed that stochastic lead times and demand have their greatest impact in combination (Zipkin, 2000). In this era of outsourcing and /or off shoring longer lead times are common, especially because the transportation time might be considerable. Usually, long lead times and uncertain demand hamper the performance of inventory control systems. Also, there are hardly any supply processes which have completely avoided the issues of limited capacity and unpredictable quality. These issues have even more pronounced effects in the presence of stochastic lead times. Hence, considering further stochastic features in inventory control models will bring our study closer to practical problems. In inventory systems with stochastic elements, it is important to consider the effect of shortages and to trade off the cost of shortages against the cost of holding inventory. One way of dealing with shortages can be through backordering, where demand is backlogged if cannot be satisfied immediately from the inventory. Lost sales represent another way in which shortages might result. Lost sales might be interpreted as a definite loss of a sales opportunity, and the case where the demand cannot be satisfied by the inventory system considered, but is eventually satisfied outside this system, e.g. by using expedited ordering or special supplies. The study by Corsten and Gruen (2004) shows that, in retail industry almost half of the cases of shortages result in lost sales. One reason is that fundamental results from the backorder case do not hold for the lost sales. Lost sales also appear to be a typical mechanism for handling shortages in some spare parts’ industries. So far in inventory theory tremendous work has been done on policies with backorders. More sparsely studied is the case of lost sales. One reason is that fundamental results from the backorder case do not hold for the lost sales case, which makes the latter much more complicated to model exactly. Hence it would be reasonable to say that with expanding retail and spare parts’ industries, the lost-sales case deserves more attention in research industries. We mainly consider single–item inventory systems. However, these systems may also be found embedded as building blocks in larger systems with multiple items and/or multi echelon structures, commonly known as supply chains. We hope that our understanding of the smaller systems can be further exploited when studying more complicated supply networks. ABC analysis Ghulam (2000) says maintaining inventory through counting, placing orders, receiving stocks and so on takes personnel time and costs money. When there are limits on these resources the logical move is to try to use the available resources to control inventory in the most efficient way; to achieve this, an ABC analysis is one way to control the inventory effectively. ABC analysis is based on the Pareto principle, after the nineteenth-century Italian philosopher who illustrated graphically the fact a small portion of the population owned that most of the wealth in Italy. It is sometimes called the 80:20 rule, as 20% of the population owned 80% of the wealth. In the context of an inventory system this suggest that there are a few items which contribute most of the inventory costs and a large number of items whose costs are relatively low. This is also known as the 80-20 phenomenon, as approximately 20 percent of items contribute 80percent of the cost and the remaining 80 percent of items account for only 20 percent of costs. Obviously, it is important to maintain tight controls on the 20% and moderate controls on the rest, in other words, it means that 80% of inventory items need 20% of the attention, while remaining 20% of items need 80% of the attention, thus controlling the cost of only a few items will contribute to effective control of a large of costs. Clerical costs are reduced and inventory costs will be well-controlled. Therefore, ABC analysis is a useful and appropriate technique for classifying inventory items according to the importance of their contribution to the annual cost of the entire inventory system. Inventory has been divided into the following categories: A items are expensive = 70-80% of total cost or value of all items (10-20% of all items) and requiring special care. B items are ordinary = 15-20% of total cost of all items (20-40% of all items) and requiring standard care. C items are cheap = 5-10% of total cost of all items (40-70% of all items) and require little care. The ABC method can be used for material, purchased parts, subassemblies, component parts, or products, depending on what form of inventory the company usually carries. The procedure for an ABC analysis starts by taking each item and multiplying the number of units used in a year by the unit cost. This gives the total annual use of items in terms of usage value, A items will be at the top of the list and C items will be at the bottom of the list. The unit cost of an item is not the sole determinant of the classification. Supply Chain Management Supply chain management is a set of approaches utilized to efficiently and fully integrate the network of all organizations and their related activities in producing/completing and delivering a product, a service, or a project so that systemwide costs are minimized while maintaining or exceeding customer-service-level requirements. This definition implies that a supply chain is composed of a sequence of organizations, beginning with the basic suppliers of raw materials, and extends all the way up to the final customer. Supply chains are often referred to as value chains, as value is added to the product, service, or project as they progress through the various stages of the chain. The Need to Manage Supply Chains Business organizations in the past have focused only on the performance and success of their individual firms. Such firm-focused approaches, however, will not help companies achieve a competitive edge in the current global business environment. Survival, let alone success, hinges on the ability of companies to manage their total supply chain. There are several reasons that make it necessary for companies to adopt supply chain management approaches. First, businesses are encountering competition that is no longer regional or national: it is global. Competitive pressure from foreign competitors in both domestic and international markets is intense. Customers increasingly are seeking the best value for their money, and the advances in information technology and transportation have provided them the ability to buy from any company anywhere in the world that will provide that value. To win over these customers, business organizations need to reduce and add value, not just for their individual firm, but throughout their supply chain. Second, inventory is a non-value-adding asset and is a significant cost element for businesses. The increasing variability in demand as we move up in the supply chain, known as the “bull-whip effect”, can force some individual members of the supply chain to carry very high levels of inventory that can substantially increase the final cost of the product,. Effective supply chain management approaches can enable a business to achieve a visible and seamless flow of inventory, thereby reducing inventory-related costs throughout the supply chain. Third, the chain of organizations involved in producing and delivering a product or completing and delivering a project is becoming increasingly complex and is fraught with many inherent uncertainties. For example, inaccurate forecasts, late deliveries, equipment breakdowns, substandard raw material quality, scope creep, resource constraints, and so on can contribute to significant schedule and cost overruns for a project organization. The more complex the supply chain, the greater would be the degree of uncertainty and hence the more adverse the impact on the supply chain. Supply chain management approaches such as partnering, information, and risk sharing can greatly reduce the impact of these uncertainties on the supply chain. Finally, management approaches such as lean production and TQM (total quality management) enabled many organizations to realize major gains by eliminating waste in terms of time and cost out of their systems. New opportunities for business to improve operations even further now rest largely in the supply chain areas of purchasing, distribution, and logistics (Stevenson, 2002). Economic Order Quantity Model Osowski (2004) relates that the economic order quantity model (EOQ) is one of the fundamental models used in logistics management to determine the optimal order pattern. It seeks to maximize expected profits based on a given distribution of the item under varying types of demand. This conventional approach does not place any asset or option value on inventory carried within the firm. Standard tools used for strategic investments are limited and might not have managers asking the right questions for investments to succeed and allow future growth. A firm must have a strategic vision that is integrated into a framework of market analysis so they know when their strategic value is increasing. Osowski (2004) also stated that the uncertainty within the marketplace has forced many agribusinesses to find other means of managing inventory. One of these tools is the contingent claims approach using real options. A contingent claims approach investment decision is one that depends on an uncertain outcome. Many managers of strategic investment decisions think of uncertainty as costly, but using the real options approach, this uncertainty creates opportunities for profit. Related Studies Foreign studies Hewlett-Packard cut deskjet printer supply costs by 25% with the help of inventory models analyzing the effect of different locations of inventories within its supply chain. This analysis convinced Hewlett-Packard to adopt a modular design and postponement for its deskjet printers (Lee and Billington,1995). Campbell Soup reduced retailer inventories on average by 66% while maintaining or increasing average fill rates by improving forecasts and introducing simple inventory management rules (Cachon and Fisher,1998). IBM applied its Asset Management Tool, consisting of analytical performance optimization and simulation, to its personal systems division, saving material costs and price-protection expenses of more than $750 million in 1998 (Lin et al., 2000). BASF introduced vendor managed inventory with five key customers in its textile colours division. With the help of an Advanced Planning System it has been possible to raise the fill rate of its customers’ inventory to almost 100%. Customers profited from eliminating safety stocks while it allowed BASF to generate less costly transportation and production schedules (Grupp,1998). These impressive gains show the potential of coordinating organizational units and integrating information flows and planning efforts along a supply chain. These increases cannot be achieved by one company alone, because companies have attempted to concentrate their busi- ness on those activities which they know best – their core competencies. As a result, all other activities have been outsourced to other firms, when possible. Consequently, the characteristics and the quality of a product or service sold to a customer largely depend on several firms involved in its creation. This brought about new challenges for the integration of legally separated firms and the coordination of materials, information and financial flows not experienced in this magnitude before.