Final Report On Inventory Management

INSTITUTE OF BUSINESS MANAGEMENT
COLLEGE OF COMPUTER SCIENE AND INFORMATION SYSTEMS

DEPARTMENT OF INDUSTRIAL ENGINEERING AND MANAGEMENT
FINAL TERM PROJECT

INVENTORY MANAGEMENT
PAKISTAN SUZUKI MOTORS COMPANY LTD.
August 5, 2013
Submitted by:
Omair Khimani (10905)
Talha Ghaffar (9130)
Mir Ruman (10789)
Inventory Management
Page 1
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.
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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
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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 companys 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.
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Contents
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
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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
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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
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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.
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1.2.1 Advantages and Disadvantages of Keeping Inventory

Advantages
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.
Disadvantages
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.
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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
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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 subassembly, 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.
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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 companys 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.
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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
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1.7.1 Causes of excess inventory

1.
2.
3.
4.
5.
6.
7.
8.
Protection against things that can go wrong (breakdowns, defects)

Large lot production
Unreliable forecasts
Poor scheduling
Unbalanced workload
Unreliable shipments by suppliers
Communication problems with suppliers and customers
Management decisions
1.7.2 Problems with excess inventory

1.
2.
3.
4.
5.
6.
7.
8.
9.
Space problem
Reduced profit
Storage costs
Wastes
Maintenance
Re-work
Material aging
Obsolete
Decreased Flexibility
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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.
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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 challenges i 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.
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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 years 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.
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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
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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 companys supply strategy.
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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 tools standard functionalities were substantiated in order to
support the demands of MSILs 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.
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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 articleASP,
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,".
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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 companys 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 dont have enough experience,
are neglectful in their job, or dont 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
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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
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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 companys 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
Page 24
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 preapproval 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.
Page 25
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.
Page 26
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 Gnie 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.
Page 27
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 organizations financial reports of respective years.
Year
2008
2009
2010
2011
2012
Inventory Turnover Ratio

5.1
3.7
4.8
3.9
5.3
No. of days stock held

72
98
77
93
69
Table 1 - This table represents the annual Inventory Turnover Ratio and the Number of Days Stock was Held,
from 2008 to 2012.
Page 28
6
5
4
3
2
1
0
2008
2009
2010
2011
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 organizations 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.
Page 29
120
100
80
60
40
20
0
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.
Page 30
2. Also raw materials, WIP, engine and spare parts and even finished products
would become damaged or obsolete due to slow turnover. Rather than stockpiling 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 companys 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.
Page 31
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.
2.
3.
4.
5.
Improve cash flow & capital immediately

Reduce inventory 20% to 40%
Increase turns with fewer shortages
Maximize planner & buyer productivity
Continuously improve overall inventory performance
Page 32
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
Class A
Class B
Class C
Importance
Extremely important,
highest financial value
Average importance,
moderate financial
value
Least important, low
financial value
% of Inventory
10 20% of the total
inventory items
30% of total
inventory items
50% of total
inventory items
Type of Control
Accurate records,
very tight control
Decent records, a
little less tight
control
Only essential
records, light
controls
Table 1 - This table explains how inventory items can be stocked using the ABC analysis.
Page 33
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.
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%
140800
14080
154880
1800
278784000
39%
100%
714384000
100%
Tyres
The table above is sorted into descending order, in respect to Annual Usage Cumulative
%age to produce the table below.
Page 34
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%
Tyres
140800
14080
154880
1800
278784000
39%
82%
Seats
140800
14080
154880
350
54208000
8%
90%
Head Lights
70400
7040
77440
325
25168000
4%
93%
Radiator
35200
3520
38720
650
25168000
4%
97%
Silencer
35200
3520
38720
250
9680000
1%
98%
Floor Mats
211200
21120
232320
30
6969600
1%
99%
Dashboard
35200
3520
38720
120
4646400
1%
100%
714384000
100%
350
100%
90%
300
250
70%
60%
200
50%
150
40%
30%
100
Annual Usage Cumulative %
Annual Usage (in millions)
80%
20%
50
10%
0%
Engine
Tyres
Seats
Head
Lights
Radiator
Silencer Floor Mats Dashboard
Figure 7 A Pareto Chart depicting the different categories of inventories based on their Annual Usage (PKR
amount)
Page 35
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 days cycle counting, or the annual
physical audit.
To count as accurate, a record should meet three criteria:
Page 36
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.
Page 37
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
STRUT SET,FRONT SUSPENSION,L
35
13
15
525
356
STRUT SET,FRONT SUSPENSION,R
35
13
15
525
356
SILENCER COMP,DASH PANEL
40
240
152
SHELF COMP,RR PARCEL,MAIN
60
420
486
STRUT SET,REAR SUSPENSION
30
19
21
630
336
30
16
18
540
340
30
16
18
540
340
TRIM COMP.FRT.DOOR'R(VXR)
12
10
12
144
142
TRIM COMP.FRT.DOOR'L(VXR)
12
10
12
144
142
10
TRIM COMP.RR.DOOR'R(VXR)
12
10
12
144
142
11
TRIM COMP RR DOOR'L
12
10
12
144
142
12
FRAME COMP,FRONT SUSPENSION
40
11
440
192
13
SHAFT COMP,PROPELLER
48
12
14
672
560
14
35
13
15
525
242
15
STRUT ASSY,FRONT SUSPENSION,R
35
10
350
242
Page 38
16
LID SET,REAR FLOOR FRONT SVCE
100
500
376
17
MEMBER COMP,REAR FLOOR

SIDE,R
48
240
168
18

SIDE,L
48
240
168
19
MEMBER COMP,FRONT UPPER
70
15
16
1120
706
20
PANEL COMP REAR SKIRT
100
800
216
21
CROSS MEMBER COMP,DASH

LOWER
64
320
256
22
CROSSMEMBER COMP,FRONT
LOWER
90
504
84
23
RAIL,ROOF SIDE INNER REAR,R
150
600
156
24
RAIL,ROOF SIDE INNER REAR,L
150
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.
Page 39
1200
Closing Stock
CAPACITY OF MHD E=(AxD)
1000
800
600
400
200
0
1
10
11
12
13
14
15
16
17
18
19
20
21
22
23
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.
Page 40
24
4.2 Unit Production Requirement and Closing Stock
SR.#
PART DESCRIPTION
PRODUCTION
Closing
Stock
166
356
166
356
56
152
56
486
56
336
56
340
56
340
56
142
56
142
10
56
142
11
TRIM COMP RR DOOR'L
56
142
12
FRAME COMP,FRONT
SUSPENSION
41
192
13
41
560
14
41
242
15
41
242
16
51
376
Page 41
17

SIDE,R
165
192
18

SIDE,L
165
192
19
166
706
20
166
216
21

LOWER
56
256
22
LOWER
56
84
23
56
156
24
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.
Page 42
800
PRODUCTION
Closing Stock
700
600
500
400
300
200
100
0
1
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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%.
Page 43
4.3 Preliminary Stock and Optimal Safety Stock
SR.#
PART DESCRIPTION
Preliminary
Stock
OP
SAFETY
STOCK
166
183
166
183
56
62
56
62
56
62
56
62
56
62
56
62
56
62
56
62
10
11
TRIM COMP RR DOOR'L
56
62
12
41
45
13
41
45
14
41
45
15
41
45
16
51
56
Page 44
17
MEMBER COMP,REAR FLOOR SIDE,R
165
182
18
MEMBER COMP,REAR FLOOR SIDE,L
165
182
19
166
183
20
166
183
21
CROSS MEMBER COMP,DASH LOWER
56
62
22
LOWER
56
62
23
56
62
24
56
62
25
PANEL COMP,BACK
56
58
26
48
54
27
41
45
28
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.
Page 45
200
Preliminary Stock
OP SAFETY STOCK
180
160
140
120
100
80
60
40
20
0
1
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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.
Page 46
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
356
35
12460
12460
3115
356
35
12460
24920
6230
152
38
5776
30696
7674
486
38
18468
49164
12291
336
35
11760
60924
15231
340
35
11900
72824
18206
340
35
11900
84724
21181
142
42
5964
90688
22672
142
42
5964
96652
24163
Page 47
10
142
45
6390
103042
25760.5
11
TRIM COMP RR DOOR'L
142
51
7242
110284
27571
12
192
54
10368
120652
30163
13
560
47
26320
146972
36743
14
242
48
11616
158588
39647
15
242
48
11616
170204
42551
16
376
38
14288
184492
46123
17

SIDE,R
192
49
9408
193900
48475
18
192
49
9408
203308
50827
19
706
50
35300
238608
59652
20
216
60
12960
251568
62892
21

LOWER
256
68
17408
268976
67244
Page 48
22
LOWER
84
65
5460
274436
68609
23
156
42
6552
280988
70247
24
156
42
6552
287540
71885
25
PANEL COMP,BACK
96
54
5184
292724
73181
26
152
62
9424
302148
75537
27
116
48
5568
307716
76929
28
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
companys 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.
Page 49
350000
300000
250000
(C) Total Price
200000
(D) Total Cumulative Price of
Inventory
150000
(E) Holding Cost
100000
50000
0
1
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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.
Page 50
SR.#
PART DESCRIPTION
Preliminary
Stock
OP
SAFETY
STOCK
Unit Price
Total
Price
Optimum
Cumulative
Total
Optimum
Total Holding
Cost
166
183
35
6391
6391
1597.75
166
183
35
6391
12782
3195.5
56
62
38
2340.8
15122.8
3780.7
56
62
38
2340.8
17463.6
4365.9
56
62
35
2156
19619.6
4904.9
56
62
35
2156
21775.6
5443.9
56
62
35
2156
23931.6
5982.9
56
62
42
2587.2
26518.8
6629.7
56
62
42
2587.2
29106
7276.5
10
56
62
45
2772
31878
7969.5
11
TRIM COMP RR DOOR'L
56
62
51
3141.6
35019.6
8754.9
12
41
45
54
2435.4
37455
9363.75
13
41
45
47
2119.7
39574.7
9893.675
14
41
45
48
2164.8
41739.5
10434.875
15
41
45
48
2164.8
43904.3
10976.075
16
51
56
38
2131.8
46036.1
11509.025
Page 51
17

SIDE,R
165
182
49
8893.5
54929.6
13732.4
18
165
182
49
8893.5
63823.1
15955.775
19
166
183
50
9130
72953.1
18238.275
20
166
183
60
10956
83909.1
20977.275
21

LOWER
56
62
68
4188.8
88097.9
22024.475
22
LOWER
56
62
65
4004
92101.9
23025.475
23
56
62
42
2587.2
94689.1
23672.275
24
56
62
42
2587.2
97276.3
24319.075
25
PANEL COMP,BACK
56
62
54
3326.4
100602.7
25150.675
26
48
53
62
3273.6
103876.3
25969.075
27
41
45
48
2164.8
106041.1
26510.275
28
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.
Page 52
350000
Initial Cumulative Price of Inventory
Initial Holding Cost
300000
Optimum Cumulative Total

Optimum Total Holding Cost
250000
200000
150000
100000
50000
0
1
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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
Page 53
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 midlevel 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.
Page 54
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 theyll 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 shouldnt be a

one-time activity. Promotions dont 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.
Page 55
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 Gnie 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
Page 56
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
Page 57

Final Report On Inventory Management

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Final Report On Inventory Management

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INSTITUTE OF BUSINESS MANAGEMENT

COLLEGE OF COMPUTER SCIENE AND INFORMATION SYSTEMS

FINAL TERM PROJECT

: Dr. M. Irshad Khan

: Omair Hanif Khimani

: A Detailed Report on Inventory Management.

We are pleased to submit our report on Inventory Management at Pak Suzuki. to

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

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

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

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

1.2 Why keep Inventory?

1.2.1 Advantages and Disadvantages of Keeping Inventory

Inventory allows different parts of

1.3 What is Inventory Management?

1.4 Why Inventory Management is Critical?

1.5 What is Inventory Planning?

4. Standard or average cost

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

Classify raw material stock using multi-criteria inventory classification to lay a

Identify initial inventory impact and planned inventory investment.

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

Classify raw material stock using multi-criteria inventory classification to lay a

Identify initial inventory impact and planned inventory investment.

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

Executing to the plan involves the following steps:

Establish process controls to ensure data quality and consistency.

Synchronize production schedules to the materials plan.

Establish a robust supplier performance management process that captures

1.5.1 The objectives of Inventory Planning and Control

Quality products need to be maintained in as good a condition as possible

Speed inventories must be in the right place to ensure fast response to

Flexibility stock should be managed to allow the operation to be flexible. For

1.6 Different Approaches to Inventory Management

1.6.1 Pull Approach

1.6.2 Push Approach

1.7 Causes of Excess Inventories and Related Problems

1.7.1 Causes of excess inventory

Protection against things that can go wrong (breakdowns, defects)

1.7.2 Problems with excess inventory

1.8 Benefits of Reducing Inventories

1.9 The changing trend

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

2.0 PAK SUZUKI MOTOR COMPANY LTD.

2.2 Inventory Practices

Fact: Toyota Suppliers deliver materials to the assembly line every

3.0 PROBLEM IDENTIFICATION & PROPOSED

3.2 Literature Review

3.2.1 Business Need

3.2.2 Solution & Benefits

3.3 Literature Review

accurately analyze it. This affects inventory management because if a company

3.3.1 Ideas for Improvement

3.3.2 Implementation and Execution

3. Validate task performance to attain the highest efficiencies in inventory

A LITERATURE REVIEW ON THE IMPACT OF INVENTORY DATA RECORD

3.4 Inventory Analysis using Inventory Turnover Ratio

Inventory Turnover Ratio

No. of days stock held

Formula for calculating no. of days of inventory is:

3.4.2 Proposed Solutions

3.5 Inventory Management through Inventory Quality Ratio

In a theoretically perfect situation (i.e., with no excess, slow moving or obsolete