Service Operations Management – Individual Assignment Part 1

Critical Analysis of Research Findings

INVENTORY MANAGEMENT

“Inventory Management in Service Operations”

Submitted by: Ankitha Kuriakose Submitted to: Dr. Simon Jacob C

MBA (III Semester) Professor, RCBS
RCBS

Date of Submission: 30th July, 2019

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 Critical Analysis of Research Findings
INVENTORY MANAGEMENT

“Inventory Management in Service Operations”

Introduction

Inventory is defined as the stock of items kept on hand by an organization to be used to meet
customer demand. Inventory plays a very important role in services. Most of the services take
goods or materials as inputs like food-joints, maintenance and repair services to provide service
bundle. Providing inadequate service or no service due to unavailability of output material may
result in loss of customer forever. Maintaining the right amount of inventory is critical due to the
following reasons:
 Inventories represent resources acquired at a cost, thereby locking up substantial working
capital.
 Inventories allow for smooth offering of services by ensuring that adequate supply of the
physical goods required to offer the service are available.
 Inventories serve as buffers against uncertain and fluctuating demand and reduce stock-out
situations.
Inventory management focuses on maintaining the optimum quantity of inventory at all points of
time. Different inventory management models are used in different business scenarios. Most of the
inventory management models involve a tradeoff between inventory costs and customer service.

Definition of Inventory Management:

Inventory management refers to all the activities involved in developing and managing the
inventory levels either the inventory is raw materials, semi-finished material or finished good, so
the adequate supplies must be always available and the form must make sure the cost of over or
under stocks are always low (P. Kotler, 2002). The role of inventory management is to maintain a
desired stock level for every specific product or items, where the systems that plan and control

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inventory must be based on the product, customer, and the process for product that available in the
inventory (J. W. Toomey, 2000).

Benefits of Inventory Management:

A good inventory management strategy offers the following main benefits:

 Improves the accuracy of inventory orders
 Leads to a more organized warehouse
 Helps save time and money
 Increases efficiency and productivity
 Increases customer loyalty and retention

Some Findings:

International Scenario:

1. Emre Berk and Ülkü Gürler (2008) in their article titled "Analysis of the (Q, r) Inventory
Model for Perishables with Positive Lead Times and Lost Sales", developed an analytical
model for perishables with constant life times and replenishment lead times in the
presence of non-negligible ordering costs under the (Q,r) control policy with r < Q. They
also introduced the concept of effective shelf life and the inventory system was
characterized through a continuous valued state space embedded Markov chain (A Markov
chain is a stochastic model describing a sequence of possible events in which the
probability of each event depends only on the state attained in the previous event). They
had also observed that computation of the (Q,r) policy parameters exactly as modeled in
their research paper can result in significant cost savings.

2. Dongmei Ni and Guoping Xia (2012) in their research paper titled "The Optimal Problem
of Partial Backorder Inventory System with Service Level Constraint", proposed a
mathematical model regarding inventory control for a buyer who employs the
continuous review policy, where both the changeable lead time and the partial
backordered situation are involved to help buyers make right decisions. They have
adopted a more reasonable assumption that the lead time is changeable and unmet

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 demand is backordered partially (In the partial backorder inventory system, when
demand is not satisfied, unmet demand would be backordered partially. Either backorder
or lost sales would make the cost increase). Furthermore, the optimal inventory level, order
quantity and safe inventory gained by the Lagrange method, is shaped to account for the
service level restriction. The optimal solution of the proposed inventory model arrived at,
involves a trade-off between the cost for crashing lead time and the saving aroused. It
is crucial to find a balance point among the inventory cost, the lead time and the service
level because they are closely related with each other.

3. Wei-Min MA and Bing-Bing QIU (2012) in their research article titled "Distribution-
Free Continuous Review Inventory Model with Controllable Lead Time and Setup Cost in
the Presence of a Service Level Constraint", considering the difficulty in measuring
shortage cost, proposed a distribution-free continuous review inventory model in the
presence of a service level constraint. In the proposed model, the lead-time-dependent cost
is assumed to be a power function in the length of lead time, and the capital investment in
setup cost (ordering cost) reduction is assumed to be a logarithmic function in setup cost.
The proposed model guarantees that the service level constraint can be satisfied at
the worst case and takes ordering quantity, safety coefficient, length of lead time and
setup cost as decision variables. They have also discussed the optimal solution of the
proposed model and have developed an effective solution procedure. Moreover, the results
contained in this research are illustrated and verified by a numerical example.

4. An Pan, Chi-Leung Hui, and Frency Ng (2014) in their research article titled "An
Optimization of (𝑄, 𝑟) Inventory Policy Based on Health Care Apparel Products with
Compound Poisson Demands", focused on designing an inventory policy to find an optimal
order quantity to minimize average cost including inventory and ordering cost under the
situation of limited inventory capacity especially under a stochastic environment. They
proposed an inventory system with restriction on capacity for the case of health care center
based on (𝑄, 𝑟) policy. Firstly, they derived the expression of optimal order quantity, when
the reorder point determined by service level is given. Secondly, in the absence of service
level definition, they proposed a genetic algorithm to generate optimal 𝑄 and 𝑟 for the

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 capacitated inventory system. Thirdly, they derived a model extension on discrete
demands. With comparisons to the results of experience based decision on 𝑄 (order
quantity) and 𝑟 (reorder point), the optimal policies they provided lead to an average cost
reduction by 17 to 20%.

5. Jaideep GUPTE and Stephen ARO-GORDON (2016) in their article titled

"Contemporary Inventory Management Techniques: A Conceptual Investigation",
investigated and summarized contemporary techniques for inventory management as a key
area of concern in corporate administration. The study, identified and presented twelve
emerging pivotal inventory management techniques, revisiting their basic features for
robust inventory management. They found that the adoption of an appropriate
combination of some of these approaches can improve service delivery in terms
ensuring steady flow of materials while also minimizing the attendant
carrying/handling costs. The authors had given the following suggestions for improving
inventory management practices in developing economies:
a. Do not maintain too much inventory in your warehouse. Make use of accurate
forecasting methods to help you efficiently procure the goods in a timely manner
before demand escalates.
b. Make sure that you track your inventory items properly. Using bar codes and
inventory tracking software can help. Having the proper software with data backup
modules can also facilitate efficient inventory management.
c. Order products based on priorities. Fast-moving products should be ordered first
rather than randomly storing products into your inventory, thereby making your
organization to incur huge storage costs unnecessarily.
d. You should always have a backup plan in case of system failures. Backup your
inventory data into remote systems (cloud computing) in case you experience
accidental loss of inventory data. A good backup plan can go a long way in making
your inventory control a more efficient system.
e. Process review: Organizations should explore the prospects of renegotiating terms
and lower prices with inventory vendors, but mindful of maintaining product
quality.

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 f. Capacity-building: Promotion of inventory management culture should form part
of the renewed campaigns to plug leakages, loopholes and wastages in public
finance. Additionally, continuous training and re-training of staff in order to
enhance professionalism and productivity should continue to attract senior
management attention, particularly with regards to cost-effective computerized
inventory control system.

6. Salwinder Gill, Paras Khullar and Narinder Pal Singh (2016) in their article titled "A
Review on Various Approaches of Spare Parts Inventory Management System", provided
a detailed literature review of different techniques for efficient control of the inventory
management system as the inventory control management is the most important aspect of
optimizing the spare parts demand by effectively managing spare parts inventory in
different aspects according to need of the organization. This is particularly relevant in
product support which comprises services like installation, repair services and
maintenance, documentation, spare parts availability, functionality, dealing with customer,
warranty, etc. An efficient management of spare parts inventory is explained to be vital in
providing efficient product support which in turn plays major role to achieve loyalty and
customer satisfaction.

7. An Pan and Chi-Leung Hui (2017) in their research paper titled "Inventory Control
System for a Healthcare Apparel Service Centre with Stockout Risk: A Case Analysis",
studied and proposed a novel optimal (Q,r) policy which can incorporate the stockout risk,
storage capacity, and partial backlog (the situation where some of the demands are lost
while some are backlogged because some customers are willing to wait but not all ) into
the optimization model. The derived inventory control model is important not only because
it helps significantly improve the operations’ efficiency in the specific healthcare apparel
service center as explored in the paper but it also has good implications to a more general
domain: First, the service level is considered in their inventory model. For many real-
world practices, it is necessary to keep an appropriate service level so that stock out cost is
controlled. Second, under the proposed policy, the expected average cost on a finite
horizon is minimized so that a better budget allocation can be achieved and resources can

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 be fully utilized. This is critical to nonprofit-making charity organizations. Third, free
waiting and partial backorders are both allowed in this model. The inventory cost
function with partial backordering cost is hence more comprehensive and closer to real-
world practices. Fourth, they have derived various propositions on the model’s
structural properties which also supplement the existing literature on inventory control.
Fifth, a case-based sensitivity analysis had been conducted to reveal important insights
on how each major model parameter affects the optimal inventory policy and its
performance (measured in cost).

Indian Scenario:

1. Dr. Ashok Kumar Panigrahi (2013) in his research paper titled "RELATIONSHIP
BETWEEN INVENTORY MANAGEMENT AND PROFITABILITY: AN EMPIRICAL
ANALYSIS OF INDIAN CEMENT COMPANIES", has studied in depth the inventory
management practices of Indian cement companies and its impact on working capital
efficiency. The purpose of this paper is to examine the relationship between inventory
conversion period and firms' profitability. The dependent variable, gross operating profit
is used as a measure of profitability and the relation between inventory management and
profitability is investigated for a sample of five top Indian cement companies over a period
of ten years from 2001-2010. This study employs Regression analysis to determine the
impact of inventory conversion period (ICP) over gross operating profit (GOP) taking
current ratio, size of the firm, financial debt ratio as control variables.
Note:
 Bulk of current assets (90%) is made up of inventory.
 Current ratio = current assets / current liabilities
 Financial debt ratio = total liabilities / total assets (where total assets = fixed assets
+ current assets)
 From the formulas the impact of current assets (inventory) on current ratio and
financial debt ratio are clear. This is why current ratio and financial debt ratio have
been chosen as control variables in the regression analysis to determine the impact
of ICP on GOP
The findings of this study were as below:

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 a) Inventory conversion period (ICP) has an inverse relationship with firms'
profitability i.e. when the ICP days increase the profitability of firm decreases and
vice versa. The relationship in this study is significant because for every one day
decrease of ICP the increase in profit was found to be 0.12 percent.
b) The firm size, current ratio and financial debt ratio are the variables which appear
in the regression model as control variables. In the regression model it was found
that, the firms' profitability as measured by Gross Operating Profit (GOP) has a
negative relationship with financial debt ratio. This implied that profitability
increases with decrease in financial debt ratio.
c) Furthermore in this study the relationship between the firm size and GOP was
positive which indicated that profitability increases with an increase in firm size.
d) The relationship between current ratio and the GOP was found to be negative.

2. Dr. Srinivasa Rao Kasisomayajula (2014) in his research paper titled "An Analytical
Study on Inventory Management in Commercial Vehicle Industry in India", evaluated the
practices and performances in inventory management in the Commercial Vehicle Industry
in India. The paper came up with the following suggestions and findings:
a. While managing the inventory position of the company we have to concentrate
mainly on four aspects of inventory management, which include size, composition,
circulation and growth of inventory.
b. As per the study, which has done an overall analysis of inventory of all units, the
Indian commercial vehicle industry is very good in their management of inventory.
c. Among the firms studied in the commercial vehicle industry TML (Tata Motors
Ltd.) occupies the first place in the management of inventory. It is evidently proved
through strong correlation between inventory and sales.
d. FML's (Force Motors Ltd) average growth rate of sales was found to be more than
the growth rate of inventory which indicated very good administration of inventory,
but the moderate correlation registered between sales and inventory. It indicated
that FML has to improve its inventory level as per the operating requirements.

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 e. Inventory is the largest asset among current assets in manufacturing concerns. Thus,
proper management of inventory is important to maintain and improve the health
of an organization.
f. Efficient management of inventories will improve the profitability of the
organization.

3. Punam Khobragade, Roshni Selokar, Rina Maraskolhe and Prof.Manjusha Talmale

(2018) in their article titled "Research paper on Inventory management system", has done
an in depth evaluation of the Inventory Management System, which is a windows
application software used for inventory control and thus helps businesses to operate their
hardware stores, where the storeowner keeps the records of sales and purchase. The study
which was conducted with the intention of finding further improvements in the software's
applications based on the exact requirements of the store owners came out with the
following findings about the software:
a. Inventory management system is a straightforward desktop application that
maintains a network with the distribution centers so that the information of
inventory movement into and out of the store is recorded accurately.
b. It is a secure application that ensure that no information on inentory spills out
from the stock room.
c. It provides simplified one table views on required information on inventory so
that at the month end the storekeeper can get an exact picture on the inventory
levels and when a reorder has to be made.

Critical Analysis:

1. A large number of mathematical models are available for inventory control. The ideal
intention of most of the models is to maintain an optimal quantity of inventory that would
minimize the inventory costs (holding costs, ordering costs and shortage costs). Each
model tries to calculate an optimal order quantity and reorder point so as to determine the
level of inventory to be maintained, based on certain assumptions. The closeness of the
results computed by the models to the real life inventory requirements would depend on
the assumptions used by each of the models. The complexity of mathematical models used
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 for inventory control increases when more realistic assumptions are used. For e.g. A model
that assumes the lead time to be constant would be far simpler (mathematically) compared
to a model that more realistically assumes the lead time to be changing. The constraints
involved too will vary from one model to another. Say, for e.g. some models will take
service level constraints, inventory holding capacity, etc. into consideration while
formulating an optimal inventory policy.
2. Adopting a suitable inventory control model is crucial for service firms including
restaurants, health care apparel services, motor repair shops, etc. In majority of the service
facilities, inventory shortage would primarily result in stock out rather than back order
situations. This directly decreases the profit of the business.
3. In case of non-profit service organizations the main focus of the inventory control system
shall be to minimize the expected average cost within a finite time horizon. This is vital for
the nonprofit organizations to carry on with their activities.
4. The type of inventory control system to be adopted, would also depend on the nature of the
items. For e.g. Perishable items might require more frequent orders with lesser order size
compared to items having a longer life time.
5. Effective management of inventory can have a significant impact on the profitability of the
firm. This is so because, almost 90% of the total current assets of an organization is made
up of some or the other kind of inventory. The Return on Investment (ROI) of a firm is
given by the below formula,
ROI = Profit/Investment = Profit/ (Fixed Assets + Current Assets)
It is evident from the above formula that reducing the current assets through proper
inventory control systems can lead to a significant increase in the firm's ROI or
profitability.
6. In India, the commercial vehicle industry sets a good example for inventory management.
The firms that are ranked on top for good inventory management practices showed a strong
correlation between inventory and sales.
7. Increasing use of software applications for inventory control increases the accuracy of
inventory information and at the same time relieves the store managers of the tedious task
of manual monitoring and control of inventory.

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Future Trends:

1. More of software based applications are in use for inventory control today. There is thus
definitely scope for research to build up more accurate inventory control systems which
can produce results that are close to real life inventory situations through more realistic
assumptions.
2. Simulation tools can be used further for studies like sensitivity analysis to see the effect to
different inventory policies on the firm's profitability, growth rate, etc. Effective
simulations can help businesses to arrive at the most optimal inventory policy.
3. Most of the researches done on inventory systems assumes a single item in inventory.
However, most of the time, in real business situations, the available inventory capacity
would have to be shared by different items of different nature (composition, shelf life,
criticality, etc.). Thus there exists a good scope for future research in multi-product or
multi-item inventory control systems.

Conclusion:
Inventory management is an inevitable component for the success of any service
operations. The amount of inventory to be maintained by the various service organizations can
vary from one to another depending on the nature of the service offered. Based on these differences
the inventory control policy that best suits each of these organizations can vary. The inventory
requirements of the organization will have to be analyzed very well prior to adopting an inventory
control system. For e.g. A nonprofit organization like a health care apparel service center that
provides custom tailored apparels for patients might require a larger stock of cloth inventory that
has to be monitored continuously, while a psychiatry consultation service might require a very
minimal amount of physical goods to be ordered on a regular basis, and might require just a simple
manual inventory control system.
Maintaining complex inventory control systems will involve higher costs compared to
simple inventory systems involving lesser number of inventory checks, etc. The most appropriate
inventory control systems shall be adopted based on the nature of the service offered and the nature
of the item to be ordered. Inventory control plays a vital role in the profitability of any business as
a huge proportion of current assets of a firm at any given time is made up of some or the other kind
of inventory.

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References:
1) Emre Berk and Ülkü Gürler (2008), "Analysis of the (Q, r) Inventory Model for Perishables
with Positive Lead Times and Lost Sales", OPERATIONS RESEARCH, Vol. 56, No. 5,
September–October 2008, pp. 1238–1246

2) Wei-Min MA and Bing-Bing QIU (2012), "Distribution-Free Continuous Review Inventory

Model with Controllable Lead Time and Setup Cost in the Presence of a Service Level
Constraint", Hindawi Publishing Corporation,Mathematical Problems in
Engineering,Volume 2012

3) Dongmei Ni and Guoping Xia (2012), "The Optimal Problem of Partial Backorder Inventory
System with Service Level Constraint"

4) Dr. Ashok Kumar Panigrahi (2013), "Relationship Between Inventory Management And
Profitability: An Empirical Analysis Of Indian Cement Companies", Asia Pacific Journal of
Marketing & Management Review, Vol.2 (7), July (2013)

5) An Pan, Chi-Leung Hui, and Frency Ng (2014), "An Optimization of (𝑄, 𝑟) Inventory Policy
Based on Health Care Apparel Products with Compound Poisson Demands", Hindawi
Publishing Corporation, Mathematical Problems in Engineering, Volume 2014

6) Dr. Srinivasa Rao Kasisomayajula (2014), "An Analytical Study on Inventory Management
in Commercial Vehicle Industry in India", International Journal of Engineering Research,
Volume No.3, Issue No.6, pp : 378-383

7) Jaideep GUPTE and Stephen ARO-GORDON (2016), "Contemporary Inventory

Management Techniques:A Conceptual Investigation", International Conference on
Operations Management and Research : (ICOMAR 2016) – “Towards Operational
Excellence” January 21-22, 2016, Mysuru, India

8) Salwinder Gill, Paras Khullar and Narinder Pal Singh (2016), "A Review on Various
Approaches of Spare Parts Inventory Management System", Indian Journal of Science and
Technology, Vol 9(48), DOI: 10.17485/ijst/2016/v9i48/101473, December 2016

9) An Pan and Chi-Leung Hui (2017), "An Optimization of (𝑄, 𝑟) Inventory Policy Based on
Health Care Apparel Products with Compound Poisson Demands", Hindawi Journal of
Healthcare Engineering, Volume 2017

10) Punam Khobragade, Roshni Selokar, Rina Maraskolhe,Prof.Manjusha Talmale (2018),

"Research paper on Inventory management system", International Research Journal of
Engineering and Technology (IRJET), Volume: 05 Issue: 04 | Apr-2018

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