logistics - final project-775
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Logistics Management
I, (Ms.) Pournima Dhage , Student of third Year Bachelor of Management
Studies, Semester V (2008 - 2009). Being the leader of the group, I hereby
declare that we have completed the project on,
“Inventory Management”
(Inventory Analysis)
Sub: Elements of Logistics Management
The information submitted is true and original to the best of my knowledge.
Thanking you.
Signature of Leader
(Pournima Dhage.)
Invincible Group
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This project has given us the opportunity to know numerous things about
Inventory ~ its ethnicity, its history, its populace, its importance, its
management and related concepts; and especially about the companies on
which we have studied (WIPRO AND PAT Consulting). This project has also
helped us boost-up our self-confidence and competency.
As every project is completed with the contribution of enormous people
directly or indirectly & this one is not different. It could not be possible without
their help & guidance. So we take up on an opportunity to acknowledge each
and every one who gave us the guidance and assist to make this report.
We would like to express gratitude towards Prof. (Mrs.) ALKA
MAHAJAN, professor of Elemelnts of Logistics Management, for giving immense
opportunity by assigning this project, for providing with valuable information and
guidance wherever n whenever we required it.
We would also like to thank our group members and other friends, who
conveyed the ideas for the preparation of this project.
Thanking you.
Signature of Leader
(Pournima Dhage.)
Invincible Group
EXECUTIVE SUMMARYEXECUTIVE SUMMARY
“THE CAT IS ON THE MAT,” is not the story.
“THE CAT IS ON THE DOG’S MAT,” now that’s the story.
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Inventory can be considered a smaterial which passes througha firm,
inout as raw material and output as product to the distribution channel
customer, owned by the firm during the process. Thus, it can be seen that all
material which is owned by a firm while passing through the firm in the process
of conversion of raw material into finished products within the firm in termas as
inventory or stock. Inventory is a necessary evil for firms whether
manufacturing, wholesale or retail. necessary due to the functions inventory
serves in the firm and evil due to risks to the firm of holding inventory. The
extent of necessity for holding inventory is basically determined by whether a
firm caters to order-based products or to firecast based products. Made-to-order
product system do not require receipt of customer orders. in comparison,
forecast-based production requires manufacturing of products in anticipation of
orders, and hence, as to wait for customer orders to dissipate inventory. From a
logical viewpoint, the answer to inventory questions today do not involve
minimizing inventory, but rather, to balance service level to customers with cost.
Too litle inventory may not be able ot provide the service levels required by
customer due to stockout resulting in lowered logistical performance. Too much
inventory, on the other hand, will increase costs and reduce profitability.
Inventory planning and management is one of the most misunderstood
activities in integrated logistics management. Inventory decisions are high risk
and high importance form the perspective of logistics operation. A number of
logistics activities become necessary because of the commitment to a particular
inventory assortment, sales would be lost and customer satisfaction would
decline. Also, inventory planing is critical to mnaufacturing line or alter a
production schedule, which in turn will result in increased expenses and
shortage of fiinished goods. Just as lack of inventory can disrupt planned
marketing and production operations, overstocked inventories also create
problems. Overstocking increses costs and reduces profitability through added
warehousing working capital needs, deterioration, insurance, taxes and
obsolescence.
Objective of the Project:
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The objective of this project is to learn the importance of Inventory
Management in today’s business scenario.
So don’t confuse the menu with meal
It is observed that “Far too many people are leading their lives lie they’re
driving their cars with brakes on” this projects will enable you to know how your
foot is taken off that brake pedal.
Research Methodology:
The information is gathered from various sources like books, periodicals
and journals and sites.
Limitations:
The limitations of this projects were quite a few; as in the information is
not the primary or first hand. its been procure from one or the other source.
thus, it may be different from the original business point of view, whih are used
in practical.
SYNOPSIS:
I have selected India’s most reputed companies for my Project Work to
understand its Logistics management performance. The name of the company is WIPRO
and PAT Consultancy.
TITLE:
Title to a project means, it gives a short idea of what the project is all about. Title is
the basic thing, which every project should carry. It gives the project the main structure.
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TERMS & CONCEPTS:
The terms and concepts used in the project are:-
Acknowledgment
Executive summary
Aims & Objectives
Scope
Methodology
Introduction
Data collection & analysis
Conclusion
NEED & IMPORTANCE OF STUDY:
This project is very important as well as it is the need for studying BMS. This project
helps us in understanding the basic concepts of how the inventory management plays
vital to minimize the costs and maximize the profits. It also gives us the experience of
how to make a good project report with collecting all the data and sorting it out.
CONTRIBUTION:
The contribution, which we made towards the Project Study, is that the research
process which we made. We had made a deep research by checking out through the
Internet as well as magazines.
TYPE OF PROJECT:
The project is descriptive, explanatory as well as statistical. The project contains
the descriptive idea of the inventory, and company’s inventory management. The reader
can easily analyze as well as understand the project.
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SIGNIFICANCE:
This project signifies the importance of the Inventory Management to minimize
the costs and maximize the profits. It is the final word or the final report of the study or
research done on the Project.
TECHNIQUES USED:
The techniques used for making the project are of proper research and the use of
technology like the Internet, laptop/pc as well as some useful software’s. The techniques
used are very useful up to our knowledge.
METHODS USED FOR INVESTIGATION:
The methods used for investigation are: -
1. Using the Internet. The net has provided me with lots of data; it has helped me in
finding out the financial report of the company.
2. Reading and taking the information from magazines and newspapers.
3. Through conducting proper research in the field, which I am working.
MEANING: Inventory is a list for goods and materials, or those goods and
materials themselves, held available in stock by a business. Inventory are held in
order to manage and hide from the customer the fact that manufacture/supply
delay is longer than delivery delay, and also to ease the effect of imperfections
in the manufacturing process that lower production efficiencies if production
capacity stands idle for lack of materials.
WHAT IS INVENTORY MANAGEMENT?
The most important objective or inventory control is to determine and
maintain an optimum level of investment in the inventory. Most companies have
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now successfully installed one or the other system of inventory planning and
control.
Inventory Management and Inventory Control must be designed to meet
the dictates of the marketplace and support the company's strategic
plan. The many changes in market demand, new opportunities due to worldwide
marketing, global sourcing of materials, and new manufacturing technology,
means many companies need to change their Inventory Management approach
and change the process for Inventory Control.
Despite the many changes that companies go through, the basic
principles of Inventory Management and Inventory Control remain the same.
Some of the new approaches and techniques are wrapped in new terminology,
but the underlying principles for accomplishing good Inventory
Management and Inventory activities have not changed.
The Inventory Management system and the Inventory Control Process
provides information to efficiently manage the flow of materials, effectively
utilize people and equipment, coordinate internal activities, and
communicate with customers. Inventory Management and the activities of
Inventory Control do not make decisions or manage operations; they provide the
information to Managers who make more accurate and timely decisions to
manage their operations.
The basic building blocks for the Inventory Management system and
Inventory Control activities are:
Sales Forecasting or Demand Management
Sales and Operations Planning
Production Planning
Material Requirements Planning
Inventory Reduction
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The emphases on each area will vary depending on the company and how
it operates, and what requirements are placed on it due to market demands.
Each of the areas above will need to be addressed in some form or another
to have a successful program of Inventory Management and Inventory
Control.
IMPORTANCE OF INVENTORY MANAGEMENT:
Inventory management refers to the process of managing the stocks of
finished products, semi-finished products and raw materials by a firm. Inventory
management, if done properly, can bring down costs and increase the revenue
of a firm.
How much one should invest in inventory management? The answer to
this question depends on the volume and value of inventory as a percentage of
the total assets of a firm. The importance of inventory management varies
according to industries. For example, an automobile dealer has very high
inventories, sometimes as high as 50 per cent of the total assets, whereas in the
hotel industry it may be as low as 2 to 5 per cent.
The process of inventory management is a continuous one and there are
various kinds of solutions available. It is advisable to employ specialized staff for
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The inventory management process begins as soon as one has started
production and ordered raw materials, semi-finished products or any other thing
from a supplier. If you are a retailer, then this process begins as soon you have
placed your first order with the wholesaler.
Once orders have been placed, there is generally a short period of time
available to a firm to put an inventory management plan in place before the
supplies are delivered. Inventory management helps a firm to decide in advance
where these supplies should be stored. If a firm is getting supplies of small-sized
goods, it may not be much of a problem to store them, but in the case of large
goods, one has to be careful so that the warehousing space is optimally utilized.
From invoices to purchase orders, there is lot of paperwork and
documentation involved in inventory management. Several software programs
are available in market, which help in inventory management.
Inventory Management provides detailed information on Inventory
Management, Inventory Management Software, Supply Chain Inventory
Management, Inventory Management Systems and more. Inventory
Management is affiliated with E-Procurement Services.
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TYPES OF INVENTORY
Four kinds of inventories may be identified:
1. Raw materials Inventory: This consists of basic materials that have not yet
been committed to production in a manufacturing firm. Raw materials that are
purchased from firms to be used in the firm's production operations range from
iron ore awaiting processing into steel to electronic components to be
incorporated into stereo amplifiers. The purpose of maintaining raw material
inventory is to uncouple the production function from the purchasing function so
that delays in shipment of raw materials do not cause production delays.
2. Stores and Spares: This category includes those products, which are
accessories to the main products produced for the purpose of sale. Examples of
stores and spares items are bolts, nuts, clamps, screws etc. These spare parts
are usually bought from outside or some times they are manufactured in the
company also.
3. Work-in-Process Inventory: This category includes those materials that
have been committed to the production process but have not been completed.
The more complex and lengthy the production process, the larger will be the
investment in work-in-process inventory. Its purpose is to uncouple the various
operations in the production process so that machine failures and work
stoppages in one operation will not affect the other operations.
4. Finished Goods Inventory: These are completed products awaiting sale.
The purpose of finished goods inventory is to uncouple the productions and sales
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functions so that it no longer is necessary to produce the goods before a sale
can occur.
Raw materials: The purchased items or extracted materials that are
transformed into components or products.
Components: Parts or subassemblies used in building the final product.
Work-in-process (WIP): Any item that is in some stage of completion in the
manufacturing process.
Finished goods: Completed products that will be delivered to customers.
Distribution inventory: Finished goods and spare parts that are at various
points in the distribution system.
Maintenance, repair, and operational (MRO) inventory (often called
supplies): Items that are used in manufacturing but do not become part of the
finished product.
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COST OF CARRYING INVENTORY
Carrying material in inventory is expensive. A number of studies indicated that
the annual cost of carrying a production inventory averaged approximately 25%
of the value of the inventory. The escalating and volatile cost of money has
escalated the annual inventory carrying cost to a figure between 25% - 35% of
the value of the inventory. The following five elements make up this cost:
1) Opportunity cost (12% -20%)
2) Insurance cost (2% – 4%)
3) Property taxes (1% - 3%)
4) Storage costs (1%- 3%)
5) Obsolescence and deterioration (4% - 10%)
Total carrying cost (20% - 40%)
Let us briefly look into these costs:
Opportunity cost of invested funds
When a firm uses money to buy production material and keeps it in the
inventory, it simply has this much less cash to spend for other purposes. Money
invested in external securities or in productive equipment earns a return for the
company. Thus it is logical to charge all money invested in inventory an amount
equal to that it could earn elsewhere in the company. This is the opportunity
cost associated with inventory investment.
Insurance cost
Most firms insure the assets against possible losses from fire and other forms of
damage.
Property taxes
This is levied on the assessed value of a firm’s assets, the greater the inventory
value, the greater the asset value and consequently the higher the firm’s tax bill.
Storage costs
The warehouse is depreciated every year over the length of its life. This cost can
be charged against the inventory occupying the space.
Obsolescence and deterioration
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In most inventory operations, a certain percentage of the stock spoils, is
damaged, is pilfered, or eventually becomes obsolete. A certain number always
takes place even if they are handled with utmost care.
Generally speaking, this group of carrying costs rises and falls nearly
proportionately to the rise and fall of the inventory level.
Moreover, the inventory level is directly proportional to the quantity in
which the ordered material is delivered. Hence costs of carrying inventory vary
nearly directly with the size of the delivery quantity. This relationship is
illustrated as follows:
(Carrying Cost per year) = (Average inventory value) x
(Inventory carrying cost as a % of inventory value)
ECONOMIC ORDER QUANTITY
Economic order quantity is that level of inventory that minimizes the total of
inventory holding cost and ordering cost. The framework used to determine this
order quantity is also known as Wilson EOQ Model. The model was developed
by F. W. Harris in 1913. But still R. H. Wilson is given credit for his early in-depth
analysis of the model.
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Underlying assumptions
1. The ordering cost is constant.
2. The annual (or monthly or whatever periodicity you desire, here we will
use annual) demand for the item is constant over time and it is known to
the firm.
3. Quantity discounts doesn't exist.
4. The order is received immediately after placing the order.
Variables
Q = order quantity
Q * = optimal order quantity
D = annual demand quantity of the product
P = purchase cost per unit
C = fixed cost per order (not per unit, in addition to unit cost)
H = annual holding cost per unit (also known as carrying cost) (warehouse
space, refrigeration, insurance, etc. usually not related to the unit cost)
The Total Cost function
The single-item EOQ formula finds the minimum point of the following cost
function:
Total Cost = purchase cost + ordering cost + holding cost
- Purchase cost: This is the variable cost of goods: purchase unit price × annual
demand quantity. This is P×D
- Ordering cost: This is the cost of placing orders: each order has a fixed cost C,
and we need to order D/Q times per year. This is C × D/Q
- Holding cost: the average quantity in stock (between fully replenished and
empty) is Q/2, so this cost is H × Q/2
.
In order to determine the minimum point of the total cost curve, set its
derivative equal to zero:
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.
The result of this derivation is:
.
Solving for Q gives Q* (the optimal order quantity):
Therefore: .
Note that interestingly, Q* is independent of P, it is a function of only C, D, H.
Just-in-time (JIT) is an inventory strategy implemented to improve the return
on investment of a business by reducing in-process inventory and its associated
carrying costs. In order to achieve JIT the process must have signals of what is
going on elsewhere within the process. This means that the process is often
driven by a series of signals, which can be Kanban, that tell production
processes when to make the next part. Kanban are usually 'tickets' but can be
simple visual signals, such as the presence or absence of a part on a shelf. When
implemented correctly, JIT can lead to dramatic improvements in a
manufacturing organization's return on investment, quality, and efficiency. Some
have suggested that "Just on Time" would be a more appropriate name since it
emphasizes that production should create items that arrive when needed and
neither earlier nor later.
Quick communication of the consumption of old stock which triggers new stock
to be ordered is key to JIT and inventory reduction. This saves warehouse space
and costs. However since stock levels are determined by historical demand any
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sudden demand rises above the historical average demand, the firm will deplete
inventory faster than usual and cause customer service issues. Some[1] have
suggested that recycling Kanban faster can also help flex the system by as much
as 10-30%. In recent years manufacturers have touted a trailing 13 week
average as a better predictor for JIT planning than most forecasters could
provide.
Stocks
JIT emphasizes inventory as one of the seven wastes (overproduction, waiting
time, transportation, inventory, processing, motion and product defect), and as
such its practice involves the philosophical aim of reducing input buffer
inventory to zero. Zero buffer inventories means that production is not protected
from exogenous (external) shocks. As a result, exogenous shocks reducing the
supply of input can easily slow or stop production with significant negative
consequences. For example,[3] Toyota suffered a major supplier failure as a result
of the 1997 Aisin fire which rendered one of its suppliers incapable of fulfilling
Toyota's orders. In the U.S., the 1992 railway strikes resulted in General Motors
having to idle a 75,000-worker plant because they had no supplies coming in.
JIT Implementation Design
Based on a diagram modeled after the one used by Hewlett-Packard’s Boise
plant to accomplish its JIT program.
1) F Design Flow Process
- F Redesign/relayout for flow
- L Reduce lot sizes
- O Link operations
- W Balance workstation capacity
- M Preventative maintenance
- S Reduce Setup Times
2) Q Total quality control
- C worker compliance
- I Automatic inspection
- M quality measures
- M fail-safe methods
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- W Worker participation
3) S Stabilize Schedule
- S Level Schedule
- W establish freeze windows
- UC Underutilize Capacity
4) K Kanban Pull System
- D Demand pull
- B Backflush
- L Reduce lot sizes
5) V Work with vendors
- L Reduce lead time
- D Frequent deliveries
- U Project usage requirements
- Q Quality Expectations
6) I Further reduce inventory in other areas
- S Stores
- T Transit
- C Implement Carroussel to reduce motion waste
- C Implement Conveyor belts to reduce motion waste
7) P Improve Product Design
- P Standard Production Configuration
- P Standardize and reduce the number of parts
- P Process design with product design
- Q Quality Expectations
Effects
Some of the initial results at Toyota were horrible, but in contrast to that a huge
amount of cash appeared, apparently from nowhere, as in-process inventory was
built out and sold. This by itself generated tremendous enthusiasm in upper
management.
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Another surprising effect was that the response time of the factory fell to about a
day. This improved customer satisfaction by providing vehicles usually within a
day or two of the minimum economic shipping delay.
Also, many vehicles began to be built to order, completely eliminating the risk
they would not be sold. This dramatically improved the company's return on
equity by eliminating a major source of risk.
Since assemblers no longer had a choice of which part to use, every part had to
fit perfectly. The result was a severe quality assurance crisis, and a dramatic
improvement in product quality. Eventually, Toyota redesigned every part of its
vehicles to eliminate or widen tolerances, while simultaneously implementing
careful statistical controls for quality control. Toyota had to test and train
suppliers of parts in order to assure quality and delivery. In some cases, the
company eliminated multiple suppliers.
When a process problem or bad parts surfaced on the production line, the entire
production line had to be slowed or even stopped. No inventory meant that a
line could not operate from in-process inventory while a production problem was
fixed. Many people in Toyota confidently predicted that the initiative would be
abandoned for this reason. In the first week, line stops occurred almost hourly.
But by the end of the first month, the rate had fallen to a few line stops per day.
After six months, line stops had so little economic effect that Toyota installed an
overhead pull-line, similar to a bus bell-pull, that permitted any worker on the
production line to order a line stop for a process or quality problem. Even with
this, line stops fell to a few per week.
The result was a factory that eventually became the envy of the industrialized
world, and has since been widely emulated.
The just-in-time philosophy was also applied to other segments of the supply
chain in several types of industries. In the commercial sector, it meant
eliminating one or all of the warehouses in the link between a factory and a retail
establishment.
Benefits
As most companies use an inventory system best suited for their company, the
Just-In-Time Inventory System (JIT) can have many benefits resulting from it. The
main benefits of JIT are listed below.
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1. Set up times are significantly reduced in the factory. Cutting down the set
up time to be more productive will allow the company to improve their
bottom line to look more efficient and focus time spent on other areas that
may need improvement. This allows the reduction or elimination of the
inventory held to cover the "changeover" time, the tool used here is
SMED.
2. The flows of goods from warehouse to shelves are improved. Having
employees focused on specific areas of the system will allow them to
process goods faster instead of having them vulnerable to fatigue from
doing too many jobs at once and simplifies the tasks at hand. Small or
individual piece lot sizes reduce lot delay inventories which simplifies
inventory flow and its management.
3. Employees who possess multiple skills are utilized more efficiently. Having
employees trained to work on different parts of the inventory cycle system
will allow companies to use workers in situations where they are needed
when there is a shortage of workers and a high demand for a particular
product.
4. Better consistency of scheduling and consistency of employee work hours.
If there is no demand for a product at the time, workers don’t have to be
working. This can save the company money by not having to pay workers
for a job not completed or could have them focus on other jobs around the
warehouse that would not necessarily be done on a normal day.
5. Increased emphasis on supplier relationships. No company wants a break
in their inventory system that would create a shortage of supplies while
not having inventory sit on shelves. Having a trusting supplier relationship
means that you can rely on goods being there when you need them in
order to satisfy the company and keep the company name in good
standing with the public.
6. Supplies continue around the clock keeping workers productive and
businesses focused on turnover. Having management focused on meeting
deadlines will make employees work hard to meet the company goals to
see benefits in terms of job satisfaction, promotion or even higher pay.
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Problems within a JIT system
The major problem with just-in-time operation is that it leaves the supplier and
downstream consumers open to supply shocks and large supply or demand
changes. For internal reasons, this was seen as a feature rather than a bug by
Ohno, who used the analogy of lowering the level of water in a river in order to
expose the rocks to explain how removing inventory showed where flow of
production was interrupted. Once the barriers were exposed, they could be
removed; since one of the main barriers was rework, lowering inventory forced
each shop to improve its own quality or cause a holdup in the next downstream
area. One of the other key tools to manage this weakness is production levelling
to remove these variations. Just-in-time is a means to improving performance of
the system, not an end.
With very low stock levels meaning that there are shipments of the same part
coming in sometimes several times per day, Toyota is especially susceptible to
an interruption in the flow. For that reason, Toyota is careful to use two suppliers
for most assemblies. As noted in Liker (2003), there was an exception to this rule
that put the entire company at risk by the 1997 Aisin fire. However, since Toyota
also makes a point of maintaining high quality relations with its entire supplier
network, several other suppliers immediately took up production of the Aisin-
built parts by using existing capability and documentation. Thus, a strong, long-
term relationship with a few suppliers is preferred to short-term, price-based
relationships with competing suppliers. This long-term relationship has also been
used by Toyota to send Toyota staff into their suppliers to improve their
suppliers' processes. These interventions have now been going on for twenty
years and result in improved margins for Toyota and the supplier as well as
lower final customer costs and a more reliable supply chain. Toyota encourages
their suppliers to duplicate this work with their own suppliers.
WIPRO - Inventory Management
A typical Wholesale distributor’s revenue mix is d ominated by sales
from company owned inventory and a distributor’s inventory
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management practices play a crucial role in determining the operational
efficiency of the enterprise. It is not uncommon for Food Wholesale distributors
to carry over 60,000 food items to serve the changing needs of their customers.
This ever increasing SKU count also demands that distributors use accurate
measures like Gross Margin Return on Investment (GMROI) that combine gross
margin and inventory turns to determine the efficacy of their inventory
management practices.
Poor inventory management practices can undermine a distributor’s
competitiveness and result in:
Increased inventory carrying costs and hence a reduction in ROI
Lost investment buying opportunities
Stock outs and lost revenues again leading to a reduction in ROI
Wipro’s Inventory Management expertise can help any distributor to:
Enhance inventory visibility across locations
Integrate disparate inventory management systems across the enterprise
Reduce shrinkage by deploying efficient POS exception reporting systems
Identify fast moving and slow moving items in the product portfolio
Welcome to PAT Consulting, where we help our customers grow their
business profitably.
PAT Consulting has been enabling companies
make their businesses more valuable for over 9
years. PAT consulting works closely with leading
companies nationwide to achieve breakthrough
business results-fast. Since 1998, we've delivered
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measurable value to our clients. We measure our success by 'our clients'
results.
Our corporate office is located in Mumbai, India. Our 'learning by doing'
workshops and programs have helped many organizations achieve significant
improvements in their bottom line.
PAT Consulting has practices in new product development, supply chain
improvements and operations, project management and strategy development
systems. We serve clients in multiple industry sectors including Construction,
Industrial Equipment, Retail, Electrical Engineering, Automotive, Petrochemicals
and many more.
Our Mission
To drive measurable improvements in your business processes, productivity and
quality, that transfer to the bottom line.
How do we achieve this?
We work very closely with our customers.
We provide them with specific actionable recommendations.
We work with them to implement the same to achieve results.
How are we different?
We build capabilities.
We provide a comprehensive approach integrating content with
process.
We offer only implementable recommendations and help you implement
them.
We recommend business assignments only if we are able to add value.
Sudhir Patwardhan, Founder & CEO
After obtaining B Tech (IIT-Kanpur) and MS (USA) in 1971, Sudhir Patwardhan
worked in a large US firm manufacturing gas turbine engines.
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After returning to Mumbai to join Tata Consulting engineers (TCE). he
worked with TATAs on Hydro, Thermal, and Nuclear Power Project
Management.
He joined Godrej Soaps Ltd. (Now Godrej Consumer Products Ltd./Godrej
Industries Ltd.) in 1973 where he worked for 23 years, reaching the position of
Senior Vice president (Mfg) and later Managing Director of Godrej's French Joint
venture-Godrej-KIS
He has been responsible for setting up Kalyani Cranfield Manufacturing
Management centre at Pune as Director (July 1996).
Sudhir has extensive experience in Supply Chain Management, Inventory
Management, New Product Design system, Packaging Systems Development and
Institutional Marketing. Armed with vast industrial experience in India and
abroad, he has lectured in several management schools, and has founded
Manufacturing Round-Table in Pune.
We offer this unique service to your retail store in order to support your
efforts to improve Customer Service, simultaneously reducing the total
inventory carried by them. Unlocking cash for better alternative investment, we
help you redeploy your cash and also quality management time, for better &
bigger benefits.
Here are some ways in which our consulting services will benefit your
organization
Tangible
Improve profits by Reducing Shortages (or lost Sales)
Reduce / Eliminate thefts
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Improve Cash flow by Reducing Inventory (less carrying costs)
Offer more variety / greater choice to your customers by improving space
utilization.
Improve Spend Productivity (adopting best practices in Purchasing & Supply
Management)
Live / continuous Management of Inventory-no sales disruptions.
Intangible
Frequent and focused management feedback, leading to rapid corrective
actions.
Creating continuously Learning & Improving culture.
Developing focused sales strategy.
Services
Lean Management Project Management
Kaizen and Waste Elimination
Supply Chain Management Inventory Management
New Product Development
Training Programs
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CASE STUDY: Best Practices in Inventory Management
A leading consumer products company dealing in cosmetics and other personal
care products was seeking ways to:
Reduce inventory levels across their forward supply chain
Improve Inventory Record Accuracy at their storage points
Accurately track damaged goods at various points in the supply chain
The above problems together were a significant burden to the company.
Implementation of best practices after a detailed business analysis resulted in
the following benefits:
Inventory Record Accuracy improved to 95% within 2 months
Stock levels reduced by about 30% across stocking points in the supply
chain
Complete visibility was achieved in the supply chain with respect to
damaged goods inventory
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Organisation Background:
The firm was a leading consumer products company dealing in cosmetics and
personal care products with its head office located overseas. The company had a
supply chain network of 3 factories with bonded stock rooms (BSR) attached for
despatch to the depots and 35 depots for servicing distributors. Goods move
from the factory to the BSR. BSR dispatches stocks to Mother CFAs (depot).
Other depots receive stocks from the Mother depot and sell them to distributors.
Key Concerns for the Company:
1. To reduce inventory level at the BSR and depots.
2. To improve inventory accuracy at stocking points including both BSRs and
depots
3. To identify the damaged stocks across the chain and initiate action in a timely
manner
Focus of Study
A study was completed focusing on the
1. Inventory-related issues at BSRs and depots. These included:
Inventory holding as a proportion of sales
Practices employed for track goods in the warehouse
Proportion of fast and slow moving stocks to the total inventory
Linkages of factory dispatches to BSR with patterns of BSR dispatches to
depots
Accuracy of inventory records especially of fast selling lines
2. Demand Planning process. The study looked at:
Forecast Accuracy and process of reviewing and revising forecasts
Level of safety stock at each location combined with process to review
and reset the same
Linkages of forecasts and consequent dispatches with relevant available
closing stocks at depots.
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Findings
Key Business Indicators
1. Total average inventory holding at BSRs was 8.2 weeks of sales
2. Average inventory holding at the depots was 6.5 weeks of sales
3. Depots were holding
High inventory of old/withdrawn stocks
Damaged stocks for a long time (over 3 months)
4. Book and physical stocks had discrepancy of over 30%
Conclusions
1. High Inventory Levels: Inventory levels were very high across the distribution
chain on account of:
Sales and dispatch forecasts that were not in line with actual primary /
secondary sales
There was no process to periodically review and refine the Annual
Forecasts, in line with market feedback
Stocking across all points in the distribution chain was driven by a push-
oriented system that did not have provisions to be tuned to market
requirements
Actual safety stocks maintained at depots were significantly higher that
target safety stocks agreed at the beginning of the year. No system was in
place to monitor and correct the same during the year
Stock allocation from depots was manual. Orders received from
distributors were manually processes and no process was in place to
automatically collate orders and allocate stocks
2. High Levels of Old / Withdrawn / Damaged / Slow-moving stocks: Dead stocks
were allowed to accumulate in the system mainly because:
There was an absence of visibility into inventory details across stocking
points
The process to monitor and act on dead stocks was not adhered to
Records of slow-moving / old / withdrawn / damaged stocks were not
maintained methodically at the stocking points. Records were inaccurate.
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Communication of details of dead stocks to the relevant teams was based
on manually filed reports which was time-taking and open to error.
3. Inaccuracy in inventory records:
The organization did not have a clear policy on periodic reconciliation of
physical stock with book records
Inaccuracies grew over time, compounded with process failure on
accounting for dead stocks
Action Steps Advised and Undertaken
Process Improvements
1. Bin card system was implemented for each rack at the CFAs and the delivery
staff was trained in relevant bind card maintenance practices.
2. A process to regularly reconcile physical and book stocks using the cycle-
count process was mandated
3. An IT solution was identified and implemented for
Accounting the Cycle count process, providing MIS on deviations and
accounting the adjustment notes
Computing the forecast using consolidated orders, with factoring for
promotions and seasonality
Calculating safety stock level based on number of weeks of sales target
Facilitating communication of closing stock data from BSR and depots to
logistics department
Facilitating communication of damaged and un-saleable stock quantity to
commercial department
Automatically allocating stocks using FIFO principle at the depots
4. Demand planning and forecasting were made a periodic activity using the
above IT solution to align forecasting with market orders and actual sales. The
process of setting safety stocks at depots was made periodic and dynamic,
based on updated sales data.
5. Norms were set to act on damaged / old and other dead stocks. Clear action
steps were laid down to liquidate or destroy these stocks. Responsibility and
accountability were set to in the organisation to monitor and authorize activities
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this regard based on visibility provided by the IT solution.
Benefits:
1. The organisation achieved an inventory record accuracy (book stocks
correctly reflecting physical stocks) of 95% within 2 months.
2. The company achieved (Within 2 Planning cycles i.e. 2 Months)
a. Stock level reduction
From 8.2 weeks to 5.5 weeks at the BSR
From 6.5 weeks to 4 weeks at the depots which included Damaged
Inventory
Reduction in stock Value holding across the supply chain
b. Transparency of saleable and damaged stocks quantities across the supply
chain resulting in more accurate demand planning, stock allocation and
production.
c. Better management of damaged and un-saleable stocks:
Sales realization on salvaging and selling damaged stocks at a discounted
price
Timely destruction of unusable and potentially harmful products
Timely action on transport, handling, stock management and product
development fronts to reduce damages
d. Reduction in proportion of old and damaged stocks; Facilitation of ensuring
fresher stocks in the market. This was achieved mainly by reducing inventory
levels across the chain and also by better stock management at the depots
ARTICLE
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Inventory Control
Inventory control is the implementation of management's inventory
policies in a manner that assures that the goals of inventory management are
met. Wise control of inventory is often a critical factor in the success of
businesses in which inventories are significant. The goal of inventory control is to
be sure that optimum levels of inventories are available, that there are minimal
stock outs (i.e., running out of stock), and that inventory is maintained in a safe,
secure place and is always readily accessible to the proper personnel.
Policies relate to what levels of inventories are to be maintained and which
vendors will be supplying the inventory. How and when inventories will be
replenished, how inventory records are created, managed, and analyzed, and
what aspects of inventory management will be outsourced are also important
components of proper inventory management.
In The Beginning
Prior to the eighteenth century, possessing inventory was considered a sign of
wealth. Generally, the more inventories you had, the more prosperous you were.
Inventory existed as stores of wheat, herds of cattle, and rooms full of pottery or
other manufactured goods.
This phenomenon occurred for good reason. There were a number of concerns
for businesspeople then. Communication was difficult and unreliable, easily
interrupted, and often took long periods of time to complete. Stocks were
difficult to obtain, and supply was uncertain, erratic, and subject to a wide
variety of pitfalls. Quality was inconsistent. More often than not, receiving credit
for a purchase was not an option and a person had to pay for merchandise
before taking possession of it. The financial markets were not as complex or as
willing to meet the needs of business as they are today. In addition, the pace of
life was a lot slower. Because change occurred gradually, it was relatively easy
to forecast market needs, trends, and desires. Businesses were able to maintain
large quantities of goods without fear of sudden shifts in the market, and these
inventories served as buffers in the supply line. Customers had a sense of
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security, knowing that there was a ready supply of merchandise in storage, and
that comfort often helped to minimize hoarding.
In the eighteenth and early nineteenth centuries, markets were very specialized.
There was often one supplier for each market in each area of business. Except
for the basic necessities of life, there was much local specialization and distinct
specialization by region. For example, although there might be more than one
grist-mill in a community, there would often be only one general store. If
customers were unhappy with their existing supplier,
A properly organized warehouse aids in inventory control; BENJAMIN
RONDEL/CORBIS
They had to suffer some inconvenience to find an alternate source because of
the monopolies that existed. This made it easier for businesses to market their
products and allowed them to maintain large stocks if they had the capital to do
so.
Inventory management was a concern then, as it is in the early twenty-first
century. Inventories had to be monitored for accuracy and quality. They had to
be protected from the elements, from theft, from spoiling, and from changes in
the local economy. Tax laws could have an enormous impact on inventory levels.
The Early Twenty-First Century
The business world of the early twenty-first century shares few similarities with
that of earlier times. Communication is quick, easy, reliable, and available
through a host of media. Supply is certain and regular in most environments of
merchandising and manufacturing. Tax laws are generally consistent and
reliable. However, market changes can be abrupt and difficult to forecast. Global
competition exists everywhere for almost everything. Products are available
from anywhere in the world, with delivery possible within in one day in many
cases.} Competition is driving the price of most products down to minimum
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profit levels. Inventories are managed for minimum stocking levels and
maximum turnover. In the twenty-first century, high inventory is a sign of either
mismanagement or a troubled economy. It is expensive and wasteful to hold and
maintain high inventory levels. Proper utilization of space is also a critical
component in today’s business world, whether one is a retailer, wholesaler, or a
manufacturer.
Modern retailers and manufacturers are equipped with an array of tools and
support mechanisms to enable them to manage inventory. Technology is used in
almost every area of inventory management to help control, monitor, and
analyze inventory. Computers, especially, play an enormous role in modern
inventory management.
Inventory Management Systems
Ongoing analyses of both inventory management and manufacturing processes
have led to innovative management systems, such as just-in-time inventory or
the economic-order quantity decision model.
Just-in-time inventory is a process developed by the Japanese based on a
process invented by Henry Ford. David Wren (1999) describes how the process
started:
Henry Ford managed to cut his inventory by forty million dollars by changing
how he obtained materials to produce automobiles. Through a process called
vertical integration, Ford purchased mines and smelting operations to better
control the source and supply of material to produce cars. In this way, he was
able to reduce his standing inventory and increase turnover. In the Taiichi Ohno,
a mechanical engineer working for Toyota Motorcar Company, refined this
process into what we know today as Just-in-Time inventory Just-in-time inventory
usually requires a dominant face—a major partner that has the
resources to start the process and keep it organized and controlled—that
organizes the flow and communication so that all the parties in the supply
process know exactly how many parts are needed to complete a cycle and how
much time is needed in between cycles. By having and sharing this information,
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companies are able to deliver just the right amount of product or inventory at a
given time. This requires a close working relationship between all the parties
involved and greatly minimizes the amount of standing or idle inventory.
The Inventory Process
Inventory is generally ordered by computer, through a modem, directly from a
supplier or manufacturer. The persons ordering the product have an inventory
sales or usage history, which enables them to properly forecast short-term needs
and also to know which products are not being sold or consumed. The computer
helps management with control by tying in with the sales or manufacturing
department. Whenever a sale is made or units of a product are consumed in the
manufacturing process, the product is deleted from inventory and made part of
a history file that can be reviewed manually or automatically, depending on how
management wishes to organize that department. The supplier and the buyer
often have a close working relationship; the buyer will keep the supplier
informed about product changes and developments in the industry in order to
maintain proper stock levels, and the supplier will often dedicate equipment and
personnel to assist the buyer.
Even though small companies may work closely with larger suppliers, it is still
very important that these small companies manage their inventory properly.
Goods need to be stored in a suitable warehouse that meets the needs of the
products. Some products require refrigeration, for example, while others require
a warm and dry environment. Space is usually a critical factor in this ever
shrinking world since it is important to have enough space to meet the needs of
customers and keep the warehouse from becoming overcrowded. Inventory
needs to be monitored to prevent theft and inaccuracies. Taking physical
inventory physically checking each item against a list of items on hand is a
routine that should be performed a number of times a year. At the very least,
inventories should always be checked each year just before the end of the fiscal
year and compared against & book or quantities listed as on hand in the
computer or manual ledger. Adjustments can then be made to correct any
inaccuracies. Taking inventory more than once a year, and thus looking at stocks
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over shorter periods of time, often results in discovering accounting or
processing errors. It also serves as a notice to employees that management is
watching the inventory closely, often deterring pilferage.
Alarm systems and closed-circuit television are just a few of the ways inventories
can be monitored. Making sure that everyone allowed into inventory
management systems has and uses his or her own password is critical to
effective inventory control. By having redundant systems, management can also
compare the two to make sure there is a balance. If they go too far out of
balance, management is alerted. Maintaining a clean, orderly, properly lighted,
and secure warehouse or stockroom is the basic key to maintaining inventory
control. Adding computer technology to aid in management and administration
creates a system that is current and competitive. Properly training employees in
modern techniques and standards results in a system that will be effective and
profitable.
CONCLUSION:
A firms different functional areas may view inventory differently. For
instance, marketing wants high inventories over a broad range of products to
allow quick response to customer demands. Manufacturing wants high
inventories to support long productions runs and also to ensure that there will
not be nay production stoppage due to non-availability of raw materials and
components parts. Also, manufacturing want to gain advantage of economics of
scale by producing large batches of product, so that the per unit fixed costs can
be reduced. Finance generally prefers low inventories so as to increase inventory
turn-over ratio, reduce current assets and increase return on assets. Integrated
logistics concurs with the point of view of finance. High inventory increase
inventory carrying costs, warehousing costs, packaging costs and material
handling costs. Both finance and integrated logistics recognize the need for
some inventory which should be optional.
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For all this, inventory management can opt JUST – IN – TIME process,
which we think is the best option for any organization.
BIBLIOGRAPHY
Internet:
1) www.google.com
2) www.britanica.com
BUSINESS WORLD magazines.
TIMES OF INDIA.
ECONOMIC TIMES.
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