logistics

Logistics Management

I, (Ms.) Pournima Dhage , Student of third Year Bachelor of Management

Studies, Semester V (2008 - 2009). Being the leader of the group, I hereby

declare that we have completed the project on,

“Inventory Management”

(Inventory Analysis)

Sub: Elements of Logistics Management

The information submitted is true and original to the best of my knowledge.

Thanking you.

Signature of Leader

(Pournima Dhage.)

Invincible Group

INVINCIBLE: TYBMS – A

JOSHI BEDEKAR COLLEGE - THANE

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This project has given us the opportunity to know numerous things about

Inventory ~ its ethnicity, its history, its populace, its importance, its

management and related concepts; and especially about the companies on

which we have studied (WIPRO AND PAT Consulting). This project has also

helped us boost-up our self-confidence and competency.

As every project is completed with the contribution of enormous people

directly or indirectly & this one is not different. It could not be possible without

their help & guidance. So we take up on an opportunity to acknowledge each

and every one who gave us the guidance and assist to make this report.

We would like to express gratitude towards Prof. (Mrs.) ALKA

MAHAJAN, professor of Elemelnts of Logistics Management, for giving immense

opportunity by assigning this project, for providing with valuable information and

guidance wherever n whenever we required it.

We would also like to thank our group members and other friends, who

conveyed the ideas for the preparation of this project.

Thanking you.

Signature of Leader

(Pournima Dhage.)

Invincible Group

EXECUTIVE SUMMARYEXECUTIVE SUMMARY

“THE CAT IS ON THE MAT,” is not the story.

“THE CAT IS ON THE DOG’S MAT,” now that’s the story.



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Inventory can be considered a smaterial which passes througha firm,

inout as raw material and output as product to the distribution channel

customer, owned by the firm during the process. Thus, it can be seen that all

material which is owned by a firm while passing through the firm in the process

of conversion of raw material into finished products within the firm in termas as

inventory or stock. Inventory is a necessary evil for firms whether

manufacturing, wholesale or retail. necessary due to the functions inventory

serves in the firm and evil due to risks to the firm of holding inventory. The

extent of necessity for holding inventory is basically determined by whether a

firm caters to order-based products or to firecast based products. Made-to-order

product system do not require receipt of customer orders. in comparison,

forecast-based production requires manufacturing of products in anticipation of

orders, and hence, as to wait for customer orders to dissipate inventory. From a

logical viewpoint, the answer to inventory questions today do not involve

minimizing inventory, but rather, to balance service level to customers with cost.

Too litle inventory may not be able ot provide the service levels required by

customer due to stockout resulting in lowered logistical performance. Too much

inventory, on the other hand, will increase costs and reduce profitability.

Inventory planning and management is one of the most misunderstood

activities in integrated logistics management. Inventory decisions are high risk

and high importance form the perspective of logistics operation. A number of

logistics activities become necessary because of the commitment to a particular

inventory assortment, sales would be lost and customer satisfaction would

decline. Also, inventory planing is critical to mnaufacturing line or alter a

production schedule, which in turn will result in increased expenses and

shortage of fiinished goods. Just as lack of inventory can disrupt planned

marketing and production operations, overstocked inventories also create

problems. Overstocking increses costs and reduces profitability through added

warehousing working capital needs, deterioration, insurance, taxes and

obsolescence.

Objective of the Project:



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The objective of this project is to learn the importance of Inventory

Management in today’s business scenario.

So don’t confuse the menu with meal

It is observed that “Far too many people are leading their lives lie they’re

driving their cars with brakes on” this projects will enable you to know how your

foot is taken off that brake pedal.

Research Methodology:

The information is gathered from various sources like books, periodicals

and journals and sites.

Limitations:

The limitations of this projects were quite a few; as in the information is

not the primary or first hand. its been procure from one or the other source.

thus, it may be different from the original business point of view, whih are used

in practical.

SYNOPSIS:

I have selected India’s most reputed companies for my Project Work to

understand its Logistics management performance. The name of the company is WIPRO

and PAT Consultancy.

TITLE:

Title to a project means, it gives a short idea of what the project is all about. Title is

the basic thing, which every project should carry. It gives the project the main structure.



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TERMS & CONCEPTS:

The terms and concepts used in the project are:-

Acknowledgment

Executive summary

Aims & Objectives

Scope

Methodology

Introduction

Data collection & analysis

Conclusion

NEED & IMPORTANCE OF STUDY:

This project is very important as well as it is the need for studying BMS. This project

helps us in understanding the basic concepts of how the inventory management plays

vital to minimize the costs and maximize the profits. It also gives us the experience of

how to make a good project report with collecting all the data and sorting it out.

CONTRIBUTION:

The contribution, which we made towards the Project Study, is that the research

process which we made. We had made a deep research by checking out through the

Internet as well as magazines.

TYPE OF PROJECT:

The project is descriptive, explanatory as well as statistical. The project contains

the descriptive idea of the inventory, and company’s inventory management. The reader

can easily analyze as well as understand the project.



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SIGNIFICANCE:

This project signifies the importance of the Inventory Management to minimize

the costs and maximize the profits. It is the final word or the final report of the study or

research done on the Project.

TECHNIQUES USED:

The techniques used for making the project are of proper research and the use of

technology like the Internet, laptop/pc as well as some useful software’s. The techniques

used are very useful up to our knowledge.

METHODS USED FOR INVESTIGATION:

The methods used for investigation are: -

1. Using the Internet. The net has provided me with lots of data; it has helped me in

finding out the financial report of the company.

2. Reading and taking the information from magazines and newspapers.

3. Through conducting proper research in the field, which I am working.

MEANING: Inventory is a list for goods and materials, or those goods and

materials themselves, held available in stock by a business. Inventory are held in

order to manage and hide from the customer the fact that manufacture/supply

delay is longer than delivery delay, and also to ease the effect of imperfections

in the manufacturing process that lower production efficiencies if production

capacity stands idle for lack of materials.

WHAT IS INVENTORY MANAGEMENT?

The most important objective or inventory control is to determine and

maintain an optimum level of investment in the inventory. Most companies have



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now successfully installed one or the other system of inventory planning and

control.

Inventory Management and Inventory Control must be designed to meet

the dictates of the marketplace and support the company's strategic

plan. The many changes in market demand, new opportunities due to worldwide

marketing, global sourcing of materials, and new manufacturing technology,

means many companies need to change their Inventory Management approach

and change the process for Inventory Control.

Despite the many changes that companies go through, the basic

principles of Inventory Management and Inventory Control remain the same.

Some of the new approaches and techniques are wrapped in new terminology,

but the underlying principles for accomplishing good Inventory

Management and Inventory activities have not changed.

The Inventory Management system and the Inventory Control Process

provides information to efficiently manage the flow of materials, effectively

utilize people and equipment, coordinate internal activities, and

communicate with customers. Inventory Management and the activities of

Inventory Control do not make decisions or manage operations; they provide the

information to Managers who make more accurate and timely decisions to

manage their operations.

The basic building blocks for the Inventory Management system and

Inventory Control activities are:

Sales Forecasting or Demand Management

Sales and Operations Planning

Production Planning

Material Requirements Planning

Inventory Reduction



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The emphases on each area will vary depending on the company and how

it operates, and what requirements are placed on it due to market demands.

Each of the areas above will need to be addressed in some form or another

to have a successful program of Inventory Management and Inventory

Control.

IMPORTANCE OF INVENTORY MANAGEMENT:

Inventory management refers to the process of managing the stocks of

finished products, semi-finished products and raw materials by a firm. Inventory

management, if done properly, can bring down costs and increase the revenue

of a firm.

How much one should invest in inventory management? The answer to

this question depends on the volume and value of inventory as a percentage of

the total assets of a firm. The importance of inventory management varies

according to industries. For example, an automobile dealer has very high

inventories, sometimes as high as 50 per cent of the total assets, whereas in the

hotel industry it may be as low as 2 to 5 per cent.

The process of inventory management is a continuous one and there are

various kinds of solutions available. It is advisable to employ specialized staff for

inventory management.INVINCIBLE: TYBMS – A


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The inventory management process begins as soon as one has started

production and ordered raw materials, semi-finished products or any other thing

from a supplier. If you are a retailer, then this process begins as soon you have

placed your first order with the wholesaler.

Once orders have been placed, there is generally a short period of time

available to a firm to put an inventory management plan in place before the

supplies are delivered. Inventory management helps a firm to decide in advance

where these supplies should be stored. If a firm is getting supplies of small-sized

goods, it may not be much of a problem to store them, but in the case of large

goods, one has to be careful so that the warehousing space is optimally utilized.

From invoices to purchase orders, there is lot of paperwork and

documentation involved in inventory management. Several software programs

are available in market, which help in inventory management.

Inventory Management provides detailed information on Inventory

Management, Inventory Management Software, Supply Chain Inventory

Management, Inventory Management Systems and more. Inventory

Management is affiliated with E-Procurement Services.



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http://www.E-ProcurementZone.com/

http://www.i-InventoryManagement.com/


TYPES OF INVENTORY

Four kinds of inventories may be identified:

1. Raw materials Inventory: This consists of basic materials that have not yet

been committed to production in a manufacturing firm. Raw materials that are

purchased from firms to be used in the firm's production operations range from

iron ore awaiting processing into steel to electronic components to be

incorporated into stereo amplifiers. The purpose of maintaining raw material

inventory is to uncouple the production function from the purchasing function so

that delays in shipment of raw materials do not cause production delays.

2. Stores and Spares: This category includes those products, which are

accessories to the main products produced for the purpose of sale. Examples of

stores and spares items are bolts, nuts, clamps, screws etc. These spare parts

are usually bought from outside or some times they are manufactured in the

company also.

3. Work-in-Process Inventory: This category includes those materials that

have been committed to the production process but have not been completed.

The more complex and lengthy the production process, the larger will be the

investment in work-in-process inventory. Its purpose is to uncouple the various

operations in the production process so that machine failures and work

stoppages in one operation will not affect the other operations.

4. Finished Goods Inventory: These are completed products awaiting sale.

The purpose of finished goods inventory is to uncouple the productions and sales



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functions so that it no longer is necessary to produce the goods before a sale

can occur.

Raw materials: The purchased items or extracted materials that are

transformed into components or products.

Components: Parts or subassemblies used in building the final product.

Work-in-process (WIP): Any item that is in some stage of completion in the

manufacturing process.

Finished goods: Completed products that will be delivered to customers.

Distribution inventory: Finished goods and spare parts that are at various

points in the distribution system.

Maintenance, repair, and operational (MRO) inventory (often called

supplies): Items that are used in manufacturing but do not become part of the

finished product.



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COST OF CARRYING INVENTORY

Carrying material in inventory is expensive. A number of studies indicated that

the annual cost of carrying a production inventory averaged approximately 25%

of the value of the inventory. The escalating and volatile cost of money has

escalated the annual inventory carrying cost to a figure between 25% - 35% of

the value of the inventory. The following five elements make up this cost:

1) Opportunity cost (12% -20%)

2) Insurance cost (2% – 4%)

3) Property taxes (1% - 3%)

4) Storage costs (1%- 3%)

5) Obsolescence and deterioration (4% - 10%)

Total carrying cost (20% - 40%)

Let us briefly look into these costs:

Opportunity cost of invested funds

When a firm uses money to buy production material and keeps it in the

inventory, it simply has this much less cash to spend for other purposes. Money

invested in external securities or in productive equipment earns a return for the

company. Thus it is logical to charge all money invested in inventory an amount

equal to that it could earn elsewhere in the company. This is the opportunity

cost associated with inventory investment.

Insurance cost

Most firms insure the assets against possible losses from fire and other forms of

damage.

Property taxes

This is levied on the assessed value of a firm’s assets, the greater the inventory

value, the greater the asset value and consequently the higher the firm’s tax bill.

Storage costs

The warehouse is depreciated every year over the length of its life. This cost can

be charged against the inventory occupying the space.

Obsolescence and deterioration



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In most inventory operations, a certain percentage of the stock spoils, is

damaged, is pilfered, or eventually becomes obsolete. A certain number always

takes place even if they are handled with utmost care.

Generally speaking, this group of carrying costs rises and falls nearly

proportionately to the rise and fall of the inventory level.

Moreover, the inventory level is directly proportional to the quantity in

which the ordered material is delivered. Hence costs of carrying inventory vary

nearly directly with the size of the delivery quantity. This relationship is

illustrated as follows:

(Carrying Cost per year) = (Average inventory value) x

(Inventory carrying cost as a % of inventory value)

ECONOMIC ORDER QUANTITY

Economic order quantity is that level of inventory that minimizes the total of

inventory holding cost and ordering cost. The framework used to determine this

order quantity is also known as Wilson EOQ Model. The model was developed

by F. W. Harris in 1913. But still R. H. Wilson is given credit for his early in-depth

analysis of the model.



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Underlying assumptions

1. The ordering cost is constant.

2. The annual (or monthly or whatever periodicity you desire, here we will

use annual) demand for the item is constant over time and it is known to

the firm.

3. Quantity discounts doesn't exist.

4. The order is received immediately after placing the order.

Variables

Q = order quantity

Q * = optimal order quantity

D = annual demand quantity of the product

P = purchase cost per unit

C = fixed cost per order (not per unit, in addition to unit cost)

H = annual holding cost per unit (also known as carrying cost) (warehouse

space, refrigeration, insurance, etc. usually not related to the unit cost)

The Total Cost function

The single-item EOQ formula finds the minimum point of the following cost

function:

Total Cost = purchase cost + ordering cost + holding cost

- Purchase cost: This is the variable cost of goods: purchase unit price × annual

demand quantity. This is P×D

- Ordering cost: This is the cost of placing orders: each order has a fixed cost C,

and we need to order D/Q times per year. This is C × D/Q

- Holding cost: the average quantity in stock (between fully replenished and

empty) is Q/2, so this cost is H × Q/2

.

In order to determine the minimum point of the total cost curve, set its

derivative equal to zero:



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.

The result of this derivation is:

.

Solving for Q gives Q* (the optimal order quantity):

Therefore: .

Note that interestingly, Q* is independent of P, it is a function of only C, D, H.

Just-in-time (JIT) is an inventory strategy implemented to improve the return

on investment of a business by reducing in-process inventory and its associated

carrying costs. In order to achieve JIT the process must have signals of what is

going on elsewhere within the process. This means that the process is often

driven by a series of signals, which can be Kanban, that tell production

processes when to make the next part. Kanban are usually 'tickets' but can be

simple visual signals, such as the presence or absence of a part on a shelf. When

implemented correctly, JIT can lead to dramatic improvements in a

manufacturing organization's return on investment, quality, and efficiency. Some

have suggested that "Just on Time" would be a more appropriate name since it

emphasizes that production should create items that arrive when needed and

neither earlier nor later.

Quick communication of the consumption of old stock which triggers new stock

to be ordered is key to JIT and inventory reduction. This saves warehouse space

and costs. However since stock levels are determined by historical demand any



15

http://en.wikipedia.org/wiki/Demand_and_supply

http://en.wikipedia.org/wiki/Warehouse

http://en.wikipedia.org/wiki/Return_on_investment

http://en.wikipedia.org/wiki/Kanban

http://en.wikipedia.org/wiki/Carrying_cost

http://en.wikipedia.org/wiki/Inventory

http://en.wikipedia.org/wiki/Business




sudden demand rises above the historical average demand, the firm will deplete

inventory faster than usual and cause customer service issues. Some[1] have

suggested that recycling Kanban faster can also help flex the system by as much

as 10-30%. In recent years manufacturers have touted a trailing 13 week

average as a better predictor for JIT planning than most forecasters could

provide.

Stocks

JIT emphasizes inventory as one of the seven wastes (overproduction, waiting

time, transportation, inventory, processing, motion and product defect), and as

such its practice involves the philosophical aim of reducing input buffer

inventory to zero. Zero buffer inventories means that production is not protected

from exogenous (external) shocks. As a result, exogenous shocks reducing the

supply of input can easily slow or stop production with significant negative

consequences. For example,[3] Toyota suffered a major supplier failure as a result

of the 1997 Aisin fire which rendered one of its suppliers incapable of fulfilling

Toyota's orders. In the U.S., the 1992 railway strikes resulted in General Motors

having to idle a 75,000-worker plant because they had no supplies coming in.

JIT Implementation Design

Based on a diagram modeled after the one used by Hewlett-Packard’s Boise

plant to accomplish its JIT program.

1) F Design Flow Process

- F Redesign/relayout for flow

- L Reduce lot sizes

- O Link operations

- W Balance workstation capacity

- M Preventative maintenance

- S Reduce Setup Times

2) Q Total quality control

- C worker compliance

- I Automatic inspection

- M quality measures

- M fail-safe methods



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http://en.wikipedia.org/wiki/#cite_note-2

http://en.wikipedia.org/wiki/#cite_note-0

http://en.wikipedia.org/wiki/Customer_service

http://en.wikipedia.org/wiki/Arithmetic_mean


- W Worker participation

3) S Stabilize Schedule

- S Level Schedule

- W establish freeze windows

- UC Underutilize Capacity

4) K Kanban Pull System

- D Demand pull

- B Backflush

- L Reduce lot sizes

5) V Work with vendors

- L Reduce lead time

- D Frequent deliveries

- U Project usage requirements

- Q Quality Expectations

6) I Further reduce inventory in other areas

- S Stores

- T Transit

- C Implement Carroussel to reduce motion waste

- C Implement Conveyor belts to reduce motion waste

7) P Improve Product Design

- P Standard Production Configuration

- P Standardize and reduce the number of parts

- P Process design with product design

- Q Quality Expectations

Effects

Some of the initial results at Toyota were horrible, but in contrast to that a huge

amount of cash appeared, apparently from nowhere, as in-process inventory was

built out and sold. This by itself generated tremendous enthusiasm in upper

management.



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Another surprising effect was that the response time of the factory fell to about a

day. This improved customer satisfaction by providing vehicles usually within a

day or two of the minimum economic shipping delay.

Also, many vehicles began to be built to order, completely eliminating the risk

they would not be sold. This dramatically improved the company's return on

equity by eliminating a major source of risk.

Since assemblers no longer had a choice of which part to use, every part had to

fit perfectly. The result was a severe quality assurance crisis, and a dramatic

improvement in product quality. Eventually, Toyota redesigned every part of its

vehicles to eliminate or widen tolerances, while simultaneously implementing

careful statistical controls for quality control. Toyota had to test and train

suppliers of parts in order to assure quality and delivery. In some cases, the

company eliminated multiple suppliers.

When a process problem or bad parts surfaced on the production line, the entire

production line had to be slowed or even stopped. No inventory meant that a

line could not operate from in-process inventory while a production problem was

fixed. Many people in Toyota confidently predicted that the initiative would be

abandoned for this reason. In the first week, line stops occurred almost hourly.

But by the end of the first month, the rate had fallen to a few line stops per day.

After six months, line stops had so little economic effect that Toyota installed an

overhead pull-line, similar to a bus bell-pull, that permitted any worker on the

production line to order a line stop for a process or quality problem. Even with

this, line stops fell to a few per week.

The result was a factory that eventually became the envy of the industrialized

world, and has since been widely emulated.

The just-in-time philosophy was also applied to other segments of the supply

chain in several types of industries. In the commercial sector, it meant

eliminating one or all of the warehouses in the link between a factory and a retail

establishment.

Benefits

As most companies use an inventory system best suited for their company, the

Just-In-Time Inventory System (JIT) can have many benefits resulting from it. The

main benefits of JIT are listed below.



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1. Set up times are significantly reduced in the factory. Cutting down the set

up time to be more productive will allow the company to improve their

bottom line to look more efficient and focus time spent on other areas that

may need improvement. This allows the reduction or elimination of the

inventory held to cover the "changeover" time, the tool used here is

SMED.

2. The flows of goods from warehouse to shelves are improved. Having

employees focused on specific areas of the system will allow them to

process goods faster instead of having them vulnerable to fatigue from

doing too many jobs at once and simplifies the tasks at hand. Small or

individual piece lot sizes reduce lot delay inventories which simplifies

inventory flow and its management.

3. Employees who possess multiple skills are utilized more efficiently. Having

employees trained to work on different parts of the inventory cycle system

will allow companies to use workers in situations where they are needed

when there is a shortage of workers and a high demand for a particular

product.

4. Better consistency of scheduling and consistency of employee work hours.

If there is no demand for a product at the time, workers don’t have to be

working. This can save the company money by not having to pay workers

for a job not completed or could have them focus on other jobs around the

warehouse that would not necessarily be done on a normal day.

5. Increased emphasis on supplier relationships. No company wants a break

in their inventory system that would create a shortage of supplies while

not having inventory sit on shelves. Having a trusting supplier relationship

means that you can rely on goods being there when you need them in

order to satisfy the company and keep the company name in good

standing with the public.

6. Supplies continue around the clock keeping workers productive and

businesses focused on turnover. Having management focused on meeting

deadlines will make employees work hard to meet the company goals to

see benefits in terms of job satisfaction, promotion or even higher pay.



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Problems within a JIT system

The major problem with just-in-time operation is that it leaves the supplier and

downstream consumers open to supply shocks and large supply or demand

changes. For internal reasons, this was seen as a feature rather than a bug by

Ohno, who used the analogy of lowering the level of water in a river in order to

expose the rocks to explain how removing inventory showed where flow of

production was interrupted. Once the barriers were exposed, they could be

removed; since one of the main barriers was rework, lowering inventory forced

each shop to improve its own quality or cause a holdup in the next downstream

area. One of the other key tools to manage this weakness is production levelling

to remove these variations. Just-in-time is a means to improving performance of

the system, not an end.

With very low stock levels meaning that there are shipments of the same part

coming in sometimes several times per day, Toyota is especially susceptible to

an interruption in the flow. For that reason, Toyota is careful to use two suppliers

for most assemblies. As noted in Liker (2003), there was an exception to this rule

that put the entire company at risk by the 1997 Aisin fire. However, since Toyota

also makes a point of maintaining high quality relations with its entire supplier

network, several other suppliers immediately took up production of the Aisin-

built parts by using existing capability and documentation. Thus, a strong, long-

term relationship with a few suppliers is preferred to short-term, price-based

relationships with competing suppliers. This long-term relationship has also been

used by Toyota to send Toyota staff into their suppliers to improve their

suppliers' processes. These interventions have now been going on for twenty

years and result in improved margins for Toyota and the supplier as well as

lower final customer costs and a more reliable supply chain. Toyota encourages

their suppliers to duplicate this work with their own suppliers.

WIPRO - Inventory Management

A typical Wholesale distributor’s revenue mix is d ominated by sales

from company owned inventory and a distributor’s inventory



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management practices play a crucial role in determining the operational

efficiency of the enterprise. It is not uncommon for Food Wholesale distributors

to carry over 60,000 food items to serve the changing needs of their customers.

This ever increasing SKU count also demands that distributors use accurate

measures like Gross Margin Return on Investment (GMROI) that combine gross

margin and inventory turns to determine the efficacy of their inventory

management practices.

Poor inventory management practices can undermine a distributor’s

competitiveness and result in:

Increased inventory carrying costs and hence a reduction in ROI

Lost investment buying opportunities

Stock outs and lost revenues again leading to a reduction in ROI

Wipro’s Inventory Management expertise can help any distributor to:

Enhance inventory visibility across locations

Integrate disparate inventory management systems across the enterprise

Reduce shrinkage by deploying efficient POS exception reporting systems

Identify fast moving and slow moving items in the product portfolio

Welcome to PAT Consulting, where we help our customers grow their

business profitably.

PAT Consulting has been enabling companies

make their businesses more valuable for over 9

years. PAT consulting works closely with leading

companies nationwide to achieve breakthrough

business results-fast. Since 1998, we've delivered



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measurable value to our clients. We measure our success by 'our clients'

results.

Our corporate office is located in Mumbai, India. Our 'learning by doing'

workshops and programs have helped many organizations achieve significant

improvements in their bottom line.

PAT Consulting has practices in new product development, supply chain

improvements and operations, project management and strategy development

systems. We serve clients in multiple industry sectors including Construction,

Industrial Equipment, Retail, Electrical Engineering, Automotive, Petrochemicals

and many more.

Our Mission

To drive measurable improvements in your business processes, productivity and

quality, that transfer to the bottom line.

How do we achieve this?

We work very closely with our customers.

We provide them with specific actionable recommendations.

We work with them to implement the same to achieve results.

How are we different?

We build capabilities.

We provide a comprehensive approach integrating content with

process.

We offer only implementable recommendations and help you implement

them.

We recommend business assignments only if we are able to add value.

Sudhir Patwardhan, Founder & CEO

After obtaining B Tech (IIT-Kanpur) and MS (USA) in 1971, Sudhir Patwardhan

worked in a large US firm manufacturing gas turbine engines.



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After returning to Mumbai to join Tata Consulting engineers (TCE). he

worked with TATAs on Hydro, Thermal, and Nuclear Power Project

Management.

He joined Godrej Soaps Ltd. (Now Godrej Consumer Products Ltd./Godrej

Industries Ltd.) in 1973 where he worked for 23 years, reaching the position of

Senior Vice president (Mfg) and later Managing Director of Godrej's French Joint

venture-Godrej-KIS

He has been responsible for setting up Kalyani Cranfield Manufacturing

Management centre at Pune as Director (July 1996).

Sudhir has extensive experience in Supply Chain Management, Inventory

Management, New Product Design system, Packaging Systems Development and

Institutional Marketing. Armed with vast industrial experience in India and

abroad, he has lectured in several management schools, and has founded

Manufacturing Round-Table in Pune.

We offer this unique service to your retail store in order to support your

efforts to improve Customer Service, simultaneously reducing the total

inventory carried by them. Unlocking cash for better alternative investment, we

help you redeploy your cash and also quality management time, for better &

bigger benefits.

Here are some ways in which our consulting services will benefit your

organization

Tangible

Improve profits by Reducing Shortages (or lost Sales)

Reduce / Eliminate thefts



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Improve Cash flow by Reducing Inventory (less carrying costs)

Offer more variety / greater choice to your customers by improving space

utilization.

Improve Spend Productivity (adopting best practices in Purchasing & Supply

Management)

Live / continuous Management of Inventory-no sales disruptions.

Intangible

Frequent and focused management feedback, leading to rapid corrective

actions.

Creating continuously Learning & Improving culture.

Developing focused sales strategy.

Services

Lean Management Project Management

Kaizen and Waste Elimination

Supply Chain Management Inventory Management

New Product Development

Training Programs



24

http://www.patconsultingindia.com/our-training.htm

http://www.patconsultingindia.com/new-product.htm

http://www.patconsultingindia.com/inventory-management.htm

http://www.patconsultingindia.com/supply-chain.htm

http://www.patconsultingindia.com/kaizen-waste.htm

http://www.patconsultingindia.com/project-management.htm

http://www.patconsultingindia.com/lean-management.htm


CASE STUDY: Best Practices in Inventory Management

A leading consumer products company dealing in cosmetics and other personal

care products was seeking ways to:

Reduce inventory levels across their forward supply chain

Improve Inventory Record Accuracy at their storage points

Accurately track damaged goods at various points in the supply chain

The above problems together were a significant burden to the company.

Implementation of best practices after a detailed business analysis resulted in

the following benefits:

Inventory Record Accuracy improved to 95% within 2 months

Stock levels reduced by about 30% across stocking points in the supply

chain

Complete visibility was achieved in the supply chain with respect to

damaged goods inventory



25


Organisation Background:

The firm was a leading consumer products company dealing in cosmetics and

personal care products with its head office located overseas. The company had a

supply chain network of 3 factories with bonded stock rooms (BSR) attached for

despatch to the depots and 35 depots for servicing distributors. Goods move

from the factory to the BSR. BSR dispatches stocks to Mother CFAs (depot).

Other depots receive stocks from the Mother depot and sell them to distributors.

Key Concerns for the Company:

1. To reduce inventory level at the BSR and depots.

2. To improve inventory accuracy at stocking points including both BSRs and

depots

3. To identify the damaged stocks across the chain and initiate action in a timely

manner

Focus of Study

A study was completed focusing on the

1. Inventory-related issues at BSRs and depots. These included:

Inventory holding as a proportion of sales

Practices employed for track goods in the warehouse

Proportion of fast and slow moving stocks to the total inventory

Linkages of factory dispatches to BSR with patterns of BSR dispatches to

depots

Accuracy of inventory records especially of fast selling lines

2. Demand Planning process. The study looked at:

Forecast Accuracy and process of reviewing and revising forecasts

Level of safety stock at each location combined with process to review

and reset the same

Linkages of forecasts and consequent dispatches with relevant available

closing stocks at depots.



26


Findings

Key Business Indicators

1. Total average inventory holding at BSRs was 8.2 weeks of sales

2. Average inventory holding at the depots was 6.5 weeks of sales

3. Depots were holding

High inventory of old/withdrawn stocks

Damaged stocks for a long time (over 3 months)

4. Book and physical stocks had discrepancy of over 30%

Conclusions

1. High Inventory Levels: Inventory levels were very high across the distribution

chain on account of:

Sales and dispatch forecasts that were not in line with actual primary /

secondary sales

There was no process to periodically review and refine the Annual

Forecasts, in line with market feedback

Stocking across all points in the distribution chain was driven by a push-

oriented system that did not have provisions to be tuned to market

requirements

Actual safety stocks maintained at depots were significantly higher that

target safety stocks agreed at the beginning of the year. No system was in

place to monitor and correct the same during the year

Stock allocation from depots was manual. Orders received from

distributors were manually processes and no process was in place to

automatically collate orders and allocate stocks

2. High Levels of Old / Withdrawn / Damaged / Slow-moving stocks: Dead stocks

were allowed to accumulate in the system mainly because:

There was an absence of visibility into inventory details across stocking

points

The process to monitor and act on dead stocks was not adhered to

Records of slow-moving / old / withdrawn / damaged stocks were not

maintained methodically at the stocking points. Records were inaccurate.



27


Communication of details of dead stocks to the relevant teams was based

on manually filed reports which was time-taking and open to error.

3. Inaccuracy in inventory records:

The organization did not have a clear policy on periodic reconciliation of

physical stock with book records

Inaccuracies grew over time, compounded with process failure on

accounting for dead stocks

Action Steps Advised and Undertaken

Process Improvements

1. Bin card system was implemented for each rack at the CFAs and the delivery

staff was trained in relevant bind card maintenance practices.

2. A process to regularly reconcile physical and book stocks using the cycle-

count process was mandated

3. An IT solution was identified and implemented for

Accounting the Cycle count process, providing MIS on deviations and

accounting the adjustment notes

Computing the forecast using consolidated orders, with factoring for

promotions and seasonality

Calculating safety stock level based on number of weeks of sales target

Facilitating communication of closing stock data from BSR and depots to

logistics department

Facilitating communication of damaged and un-saleable stock quantity to

commercial department

Automatically allocating stocks using FIFO principle at the depots

4. Demand planning and forecasting were made a periodic activity using the

above IT solution to align forecasting with market orders and actual sales. The

process of setting safety stocks at depots was made periodic and dynamic,

based on updated sales data.

5. Norms were set to act on damaged / old and other dead stocks. Clear action

steps were laid down to liquidate or destroy these stocks. Responsibility and

accountability were set to in the organisation to monitor and authorize activities

inINVINCIBLE: TYBMS – A


28


this regard based on visibility provided by the IT solution.

Benefits:

1. The organisation achieved an inventory record accuracy (book stocks

correctly reflecting physical stocks) of 95% within 2 months.

2. The company achieved (Within 2 Planning cycles i.e. 2 Months)

a. Stock level reduction

From 8.2 weeks to 5.5 weeks at the BSR

From 6.5 weeks to 4 weeks at the depots which included Damaged

Inventory

Reduction in stock Value holding across the supply chain

b. Transparency of saleable and damaged stocks quantities across the supply

chain resulting in more accurate demand planning, stock allocation and

production.

c. Better management of damaged and un-saleable stocks:

Sales realization on salvaging and selling damaged stocks at a discounted

price

Timely destruction of unusable and potentially harmful products

Timely action on transport, handling, stock management and product

development fronts to reduce damages

d. Reduction in proportion of old and damaged stocks; Facilitation of ensuring

fresher stocks in the market. This was achieved mainly by reducing inventory

levels across the chain and also by better stock management at the depots

ARTICLE



29


Inventory Control

Inventory control is the implementation of management's inventory

policies in a manner that assures that the goals of inventory management are

met. Wise control of inventory is often a critical factor in the success of

businesses in which inventories are significant. The goal of inventory control is to

be sure that optimum levels of inventories are available, that there are minimal

stock outs (i.e., running out of stock), and that inventory is maintained in a safe,

secure place and is always readily accessible to the proper personnel.

Policies relate to what levels of inventories are to be maintained and which

vendors will be supplying the inventory. How and when inventories will be

replenished, how inventory records are created, managed, and analyzed, and

what aspects of inventory management will be outsourced are also important

components of proper inventory management.

In The Beginning

Prior to the eighteenth century, possessing inventory was considered a sign of

wealth. Generally, the more inventories you had, the more prosperous you were.

Inventory existed as stores of wheat, herds of cattle, and rooms full of pottery or

other manufactured goods.

This phenomenon occurred for good reason. There were a number of concerns

for businesspeople then. Communication was difficult and unreliable, easily

interrupted, and often took long periods of time to complete. Stocks were

difficult to obtain, and supply was uncertain, erratic, and subject to a wide

variety of pitfalls. Quality was inconsistent. More often than not, receiving credit

for a purchase was not an option and a person had to pay for merchandise

before taking possession of it. The financial markets were not as complex or as

willing to meet the needs of business as they are today. In addition, the pace of

life was a lot slower. Because change occurred gradually, it was relatively easy

to forecast market needs, trends, and desires. Businesses were able to maintain

large quantities of goods without fear of sudden shifts in the market, and these

inventories served as buffers in the supply line. Customers had a sense of



30


security, knowing that there was a ready supply of merchandise in storage, and

that comfort often helped to minimize hoarding.

In the eighteenth and early nineteenth centuries, markets were very specialized.

There was often one supplier for each market in each area of business. Except

for the basic necessities of life, there was much local specialization and distinct

specialization by region. For example, although there might be more than one

grist-mill in a community, there would often be only one general store. If

customers were unhappy with their existing supplier,

A properly organized warehouse aids in inventory control; BENJAMIN

RONDEL/CORBIS

They had to suffer some inconvenience to find an alternate source because of

the monopolies that existed. This made it easier for businesses to market their

products and allowed them to maintain large stocks if they had the capital to do

so.

Inventory management was a concern then, as it is in the early twenty-first

century. Inventories had to be monitored for accuracy and quality. They had to

be protected from the elements, from theft, from spoiling, and from changes in

the local economy. Tax laws could have an enormous impact on inventory levels.

The Early Twenty-First Century

The business world of the early twenty-first century shares few similarities with

that of earlier times. Communication is quick, easy, reliable, and available

through a host of media. Supply is certain and regular in most environments of

merchandising and manufacturing. Tax laws are generally consistent and

reliable. However, market changes can be abrupt and difficult to forecast. Global

competition exists everywhere for almost everything. Products are available

from anywhere in the world, with delivery possible within in one day in many

cases.} Competition is driving the price of most products down to minimum



31


profit levels. Inventories are managed for minimum stocking levels and

maximum turnover. In the twenty-first century, high inventory is a sign of either

mismanagement or a troubled economy. It is expensive and wasteful to hold and

maintain high inventory levels. Proper utilization of space is also a critical

component in today’s business world, whether one is a retailer, wholesaler, or a

manufacturer.

Modern retailers and manufacturers are equipped with an array of tools and

support mechanisms to enable them to manage inventory. Technology is used in

almost every area of inventory management to help control, monitor, and

analyze inventory. Computers, especially, play an enormous role in modern

inventory management.

Inventory Management Systems

Ongoing analyses of both inventory management and manufacturing processes

have led to innovative management systems, such as just-in-time inventory or

the economic-order quantity decision model.

Just-in-time inventory is a process developed by the Japanese based on a

process invented by Henry Ford. David Wren (1999) describes how the process

started:

Henry Ford managed to cut his inventory by forty million dollars by changing

how he obtained materials to produce automobiles. Through a process called

vertical integration, Ford purchased mines and smelting operations to better

control the source and supply of material to produce cars. In this way, he was

able to reduce his standing inventory and increase turnover. In the Taiichi Ohno,

a mechanical engineer working for Toyota Motorcar Company, refined this

process into what we know today as Just-in-Time inventory Just-in-time inventory

usually requires a dominant face—a major partner that has the

resources to start the process and keep it organized and controlled—that

organizes the flow and communication so that all the parties in the supply

process know exactly how many parts are needed to complete a cycle and how

much time is needed in between cycles. By having and sharing this information,



32


companies are able to deliver just the right amount of product or inventory at a

given time. This requires a close working relationship between all the parties

involved and greatly minimizes the amount of standing or idle inventory.

The Inventory Process

Inventory is generally ordered by computer, through a modem, directly from a

supplier or manufacturer. The persons ordering the product have an inventory

sales or usage history, which enables them to properly forecast short-term needs

and also to know which products are not being sold or consumed. The computer

helps management with control by tying in with the sales or manufacturing

department. Whenever a sale is made or units of a product are consumed in the

manufacturing process, the product is deleted from inventory and made part of

a history file that can be reviewed manually or automatically, depending on how

management wishes to organize that department. The supplier and the buyer

often have a close working relationship; the buyer will keep the supplier

informed about product changes and developments in the industry in order to

maintain proper stock levels, and the supplier will often dedicate equipment and

personnel to assist the buyer.

Even though small companies may work closely with larger suppliers, it is still

very important that these small companies manage their inventory properly.

Goods need to be stored in a suitable warehouse that meets the needs of the

products. Some products require refrigeration, for example, while others require

a warm and dry environment. Space is usually a critical factor in this ever

shrinking world since it is important to have enough space to meet the needs of

customers and keep the warehouse from becoming overcrowded. Inventory

needs to be monitored to prevent theft and inaccuracies. Taking physical

inventory physically checking each item against a list of items on hand is a

routine that should be performed a number of times a year. At the very least,

inventories should always be checked each year just before the end of the fiscal

year and compared against & book or quantities listed as on hand in the

computer or manual ledger. Adjustments can then be made to correct any

inaccuracies. Taking inventory more than once a year, and thus looking at stocks



33


over shorter periods of time, often results in discovering accounting or

processing errors. It also serves as a notice to employees that management is

watching the inventory closely, often deterring pilferage.

Alarm systems and closed-circuit television are just a few of the ways inventories

can be monitored. Making sure that everyone allowed into inventory

management systems has and uses his or her own password is critical to

effective inventory control. By having redundant systems, management can also

compare the two to make sure there is a balance. If they go too far out of

balance, management is alerted. Maintaining a clean, orderly, properly lighted,

and secure warehouse or stockroom is the basic key to maintaining inventory

control. Adding computer technology to aid in management and administration

creates a system that is current and competitive. Properly training employees in

modern techniques and standards results in a system that will be effective and

profitable.

CONCLUSION:

A firms different functional areas may view inventory differently. For

instance, marketing wants high inventories over a broad range of products to

allow quick response to customer demands. Manufacturing wants high

inventories to support long productions runs and also to ensure that there will

not be nay production stoppage due to non-availability of raw materials and

components parts. Also, manufacturing want to gain advantage of economics of

scale by producing large batches of product, so that the per unit fixed costs can

be reduced. Finance generally prefers low inventories so as to increase inventory

turn-over ratio, reduce current assets and increase return on assets. Integrated

logistics concurs with the point of view of finance. High inventory increase

inventory carrying costs, warehousing costs, packaging costs and material

handling costs. Both finance and integrated logistics recognize the need for

some inventory which should be optional.



34


For all this, inventory management can opt JUST – IN – TIME process,

which we think is the best option for any organization.

BIBLIOGRAPHY

Internet:

1) www.google.com

2) www.britanica.com

BUSINESS WORLD magazines.

TIMES OF INDIA.

ECONOMIC TIMES.



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http://www.britanica.com/

http://www.google.com/

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