Application Of Inventory Model In Industry.
UTeM Library (Pind.1/2007)
UNIVERSITI TEKNIKAL MALAYSIA MELAKA
BORANG PENGESAHAN STATUS TESIS*
JUDUL:
Application of Inventory Models in Industry
SESI PENGAJIAN: Semester 2 2007/2008
Saya Foong Weng Kang
mengaku membenarkan laporan PSM (Sarjana/Doktor Falsafah) ini disimpan di
Perpustakaan Universiti Teknikal Malaysia Melaka (UTeM) dengan syarat-syarat
kegunaan seperti berikut:
1.
2.
3.
4.
Laporan PSM adalah hak milik Universiti Teknikal Malaysia Melaka dan
penulis.
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salinan untuk tujuan pengajian sahaja dengan izin penulis.
Perpustakaan dibenarkan membuat salinan laporan PSM ini sebagai bahan
pertukaran antara institusi pengajian tinggi.
*Sila tandakan (√)
SULIT
(Mengandungi maklumat yang berdarjah keselamatan atau
kepentingan Malaysia yang termaktub di dalam AKTA RAHSIA
RASMI 1972)
TERHAD
(Mengandungi maklumat TERHAD yang telah ditentukan oleh
organisasi/badan di mana penyelidikan dijalankan)
TIDAK TERHAD
(FOONG WENG KANG)
Alamat Tetap:
No, 43 Rumah Murah,
26300 Gambang, Kuantan,
Pahang.
Tarikh: 20 May 2008
(CIK. MUZALNA BT MOHD JUSOH)
Cop Rasmi:
Tarikh: _______________________
* Jika laporan PSM ini SULIT atau TERHAD, sila lampirkan surat daripada pihak organisasi berkenaan
dengan menyatakan sekali sebab dan tempoh laporan ini perlu dikelaskan sebagai SULIT atau
TERHAD.
UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Karung Berkunci 1200, Ayer Keroh, 75450 Melaka
Tel : 06-233 2421, Faks : 06 233 2414
Email : fkp@kutkm.edu.my
FAKULTI KEJURUTERAAN PEMBUATAN
15 Mei 2008
Rujukan Kami (Our Ref) :
Rujukan Tuan (Your Ref):
Pustakawan
Perpustakaan Universiti Teknikal Malaysia Melaka (UTeM)
Taman Tasik Utama, Hang Tuah Jaya,
Ayer Keroh, 75450, Melaka
Saudara,
PENGKELASAN LAPORAN PSM SEBAGAI SULIT/TERHAD
- LAPORAN PSM SARJANA MUDA KEJURUTERAAN PEMBUATAN
(MANAGEMENT): Foong Weng Kang
TAJUK: Application of Inventory model in Industry
Sukacita dimaklumkan bahawa laporan yang tersebut di atas bertajuk
“Application of Inventory model in Industry” mohon dikelaskan sebagai
terhad untuk tempoh lima (5) tahun dari tarikh surat ini memandangkan ia
mempunyai nilai dan potensi untuk dikomersialkan di masa hadapan.
Sekian dimaklumkan. Terima kasih.
“BERKHIDMAT UNTUK NEGARA KERANA ALLAH”
Yang benar,
……………………………………………………..
CIK. MUZALNA BT MOHD JUSOH
Pensyarah,
Fakulti Kejuruteraan Pembuatan
ii
APPROVAL
This report is submitted to the Faculty of Manufacturing Engineering of UTeM as a
partial fulfillment of the requirements for the degree of Bachelor of Manufacturing
Engineering (Management). The members of the supervisory committee are as
follow:
Muzalna Bt Mohd Jusoh
(PSM Supervisor)
iii
DECLARATION
I hereby, declared this thesis entitled
“Application of Inventory Model in Industry”
is the results of my own research except as cited in references.
Signature
:
Author’s Name
: FOONG WENG KANG
Date
: 25 MARCH 2008
iv
ABSTRACT
This study discusses the inventory models used at Ngee Ming Shoe Manufacturer
Sdn. Bhd, Selangor. The objective of the study is to identify and analyze the most
appropriate inventory models to be used in the company in term to decide the
ordering quantity and ordering time interval. The data gathered from interviews,
observations, journals, books, internet and company inventory record. The result was
analyzed, there are three inventory models used to determine the ordering quantity
and ordering interval time; Economic Order Quantity (EOQ), Economic Production
Quantity (EPQ) and Quantity Discount (QD). Each model has different
characteristic, where EOQ is focus on inventory cost, EPQ is focus on the production
and demand rate and QD is focus on the available of the discount benefit. After
overall the data analysis, Economic Order Quantity (EOQ) is the most suitable model
to apply into the company. This model provides minimum total cost, and continuous
review system with track on-hand inventory. If this model is used properly, it can be
consider as a company competitive advantages and order winner. Thus, the company
will gain a satisfactory from the customers and achieve a major success in providing
products with minimal defect in time delivery and insufficient stock.
v
ABSTRAK
Kajian ini membincangkan tentang penggunaan model inventori di Syarikat Ngee
Ming Sdn. Bhd, Selangor. Objektif utama kajian ini adalah untuk menentukan dan
menganalisis model inventori yang paling sesuai dilaksanakan dalam syarikat
tersebut untuk menentukan kuantiti dan kekerapan pesanan. Data diperolehi daripada
temuduga, permerhatian, buku, jurnal, laman web dan data inventori syarikat.
Selepas data dianalisis, tiga model inventori digunakan bagi menentukan kuantiti dan
kekerapan pesanan iaitu kuantiti pesanan ekonomi, pengeluaran kuantiti ekonomi
dan kuantiti diskaun. Setiap model inventori mempunyai kriteria yang berbeza,
dimana kuantiti pesanan ekonomi menfokus kepada kos-kos penyimpanan,
pengeluaran kuantiti pesanan menfokus kepada kadar pengeluaran dan penggunaan
manakala kuantiti diskaun menfokus kepada kesediaan diskaun semasa pesanan
dibuat. Selepas menganalisis semua data, model kuantiti pesanan ekonomi adalah
model paling sesuai diaplikasikan di syarikat tersebut. Model ini memberikan jumlah
kos yang rendah dan boleh menunjukkan bilangan simpanan yang masih ada secara
berterusan. Jika model inventori ini digunakan dengan sepenuhnya, ia akan menjadi
kelebihan persaingan dengan syarikat lain. Oleh itu, syarikat akan dapat memenuhi
keperluan perlanggan dengan kemampuan menyediakan barangan pada kelemahan
yang minima.
vi
DEDICATION
For my parents Foong Chan Meng and Lee Yong
and my siblings
vii
ACKNOWLEDGEMENTS
First and foremost, thank God for giving me a chance to complete my PSM. I would
also like to thank my parents Foong Chan Meng and Lee Yong, my siblings and my
friends for giving me their support and motivation during my good and hard times.
Thank you to all UTeM lecturers and staffs involved in this study especially my
supervisor, Ms Muzalna Bt Mohd Jusoh. She was helping me a lot in providing a
guideline and ideas along the study. Not forgetting all Ngee Ming General Manager
Mrs Fong and all staffs that had been helpful in providing information needed to
make this study a success. Without all of you, I could not have achieved what I have
tday.
Thank you again.
Foong Weng Kang
viii
TABLE OF CONTENTS
Abstract……………………………………………………………………………....v
Abstrak……………………………………………………………………………….vi
Dedication…………………………………………………………………………...vii
Acknowledgements………………………………………………………………..viii
Table of Contents…………………………………………………………………....ix
List Of Figures……………………………………………………………………xiii
List Of Tables………………………………………………………………..…….xiv
List Of Abbreviations, Symbols, Specialized Nomenclature…………………….xv
1. INTRODUCTION……………………………………………………..............1
1.1 Company Background………………………………………………………1
1.2 Statement of the Problem……………………………………………….…….2
1.3 Objectives…………………………………………………………....…...3
1.4 Scopes……………………………………………………………...…..……3
1.5 Important of The Project……………………………………………...….4
1.6 Summary………………………………………………………………..…...4
2. LITERATURE REVIEW……………………………………...……………...5
2.1 Definition of Inventory………………………………………………....…...5
2.2 Inventory Management………………………………………………..……...6
2.2.1
Inventory Management Gurus………………………………….…...7
2.2.2
Inventory Management Techniques………………………………....9
2.2.2.1 Demand Forecasting…………………………………………...9
2.2.2.2 Material Requirement Planning………………………………..10
2.3 Inventory Counting System……………………………………….…...……11
2.3.1
Periodic System………………………………………….….......11
2.3.2
Perpetual Inventory System……………………………………......11
2.4 Inventory Costs………………………………………………….....………12
2.4.1
Holding Costs…………………………………………..……..……..12
2.4.1.1 Capital Cost……………………………………………..…….....12
ix
2.4.1.2 Taxes…………………………………………………...………13
2.4.1.3 Insurance………………………………………………...……..13
2.4.1.4 Obsolescence…………………………………………....……..13
2.4.1.5 Storage…………………………………………………………13
2.4.2
Ordering Costs………………………………………………..…...14
2.4.3
Shortage Costs…………………………………………….………...14
2.5 Inventory Models…………………………………………………..….…...14
2.5.1
Ordering Quantity……………………………………..……....…...14
2.5.1.1 Economic Order Quantity………………………………...……14
2.5.1.2 Economic Production Quantity………………………..……….17
2.5.1.3 Quantity Discount………………………………………....…...19
2.5.2
Ordering Time Interval……………………………………..……...20
3. METHODOLOGY……………………………………………………….…..23
3.1 Introduction…………………………………………………………….….23
3.2 Planning of Study…………………………………………………...…..…23
3.2.1
Flow Chart……………………………………………………...….24
3.2.2
Gantt Chart………………………………………………….…….…25
3.3 Method…………………………………………………………….……....27
3.3.1
Field Observation………………………………………………....…27
3.3.2
Interview…………………………………………………………...27
3.3.3
Books, Journals and Internet ………………………………..…...28
3.4 Discussion Method…………………………………………………………..29
3.4.1
Inventory Cycle……………………………………………………...29
4. RESULT……………………………………………………………….……...30
4.1 Introduction……………………………………………………...………...30
4.2 Inventory Level……………………………………………………..……..30
4.3 Sales Demand……………………………………………………………...33
5. DISCUSSION……………………………………………………………........39
5.1 Introduction…………………………………………………………..……39
x
5.2 Current Inventory Problem……………………………………………......39
5.3 Inventory Costs……………………………………………………………40
5.3.1
Inventory Assumption Costs……………………………………….40
5.3.1.1 Average Sales………………………………………….………40
5.3.1.2 Average Inventory Quantity…………………………………...41
5.3.1.3 Average Inventory Value……………………………………...41
5.3.1.4 Bank Interest…………………………………………………...41
5.3.1.5 Obsolescence Percentage………………………………………41
5.3.1.6 Electricity and Water Bill……………………………………...41
5.3.1.7 Transportation Fee…………………………………………......42
5.3.1.8 Ordering Time……………………………………………........42
5.3.2
Main Inventory Costs……………………………………………...42
5.3.2.1 Holding Costs……………………………………………….....42
a) Capital Cost……………………………………………………......42
b) Obsolescence Cost…………………………………………………43
c) Storage Cost………………………………………………………..43
5.3.2.2 Ordering Costs…………………………………………………44
5.4 Total Cost of Inventory Models…………………………………………...44
5.4.1
Economic Order Quantity……………………………………….....45
5.4.2
Economic Production Quantity……………………………………45
5.5 Application of The Economic Order Quantity…………………………….46
5.5.1
Ordering Quantity………………………………………………….48
5.5.1.1 Safety Shoes Outsole Size Four…………………………….....48
5.5.1.2 Safety Shoes Outsole Size Five……………………………......49
5.5.1.3 Safety Shoes Outsole Size Six……………………………........51
5.5.1.4 Safety Shoes Outsole Size Seven……………………………...53
5.5.1.5 Safety Shoes Outsole Size Eight………………………………55
5.5.1.6 Safety Shoes Outsole Size Nine………………………….....57
5.5.1.7 Safety Shoes Outsole Size Ten………………………………...59
5.5.1.8 Safety Shoes Outsole Size Eleven……………………………..61
5.5.1.9 Safety Shoes Outsole Size Twelve………………………….....63
5.5.2
Total Inventory Cost……………………………………………….65
xi
5.5.2.1 Safety Shoes Outsole Size Four…………………………….....65
5.5.2.2 Safety Shoes Outsole Size Five……………………………......66
5.5.2.3 Safety Shoes Outsole Size Six……………………………........67
5.5.2.4 Safety Shoes Outsole Size Seven……………………………...68
5.5.2.5 Safety Shoes Outsole Size Eight………………………………69
5.5.2.6 Safety Shoes Outsole Size Nine…………………………….....70
5.5.2.7 Safety Shoes Outsole Size Ten………………………………...71
5.5.2.8 Safety Shoes Outsole Size Eleven……………………………..72
5.5.2.9 Safety Shoes Outsole Size Twelve………………………….....73
6. CONCLUSION…………………………………………………………….....79
6.1 Introduction………………………………………………………………..79
6.2 Conclusion…………………………………………………………………79
6.3 Recommendation………………………………………………………......80
6.3.1
Company Suggestion………………………………………………80
6.3.2
Further Study………………………………………………………81
REFERENCES…………………………………………………………………...82
APPENDICES…………………………………………………………………….84
Appendix A………………………………………………………………..84
Appendix B………………………………………………………….........86
Appendix C………………………………………………………….........90
Appendix D…………………………………………………………........93
Appendix E………………………………………………………….........94
Appendix F……………………………………………………….………95
Appendix G………………………………………………………...…….96
xii
LIST OF FIGURES
1.1
Ngee Ming Building
1
2.1
The Inventory Cycle: Profile of Inventory Level Over Time
15
2.2
Total Cost Curve
16
2.3
Safety Stock Reduces Risk of Stockout During Lead Time
20
2.4
The ROP Based On A Normal Distribution of Lead Time Demand
21
3.1
Flow Chart for Planning of Study
24
3.2
Inventory Cycle
29
4.1
Total Demand Outsole Year 2007
38
5.1
Economic Order Quantity Inventory Cycle
47
5.2
The Inventory Cycle for Safety Shoes Outsole Size Four
48
5.3
The Inventory Cycle for Safety Shoes Outsole Size Five
50
5.4
The Inventory Cycle for Safety Shoes Outsole Size Six
52
5.5
The Inventory Cycle for Safety Shoes Outsole Size Seven
54
5.6
The Inventory Cycle for Safety Shoes Outsole Size Eight
56
5.7
The Inventory Cycle for Safety Shoes Outsole Size Nine
58
5.8
The Inventory Cycle for Safety Shoes Outsole Size Ten
60
5.9
The Inventory Cycle for Safety Shoes Outsole Size Eleven
62
5.10
The Inventory Cycle for Safety Shoes Outsole Size Twelve
64
5.11
Holding Cost, Ordering Cost and Total Cost for Safety Shoes
Outsole Size Four
5.12
75
Order Quantity, Reorder Point and Safety Level for Each Size of
Safety Shoes Outsole
78
xiii
LIST OF TABLES
2.1
Forecasting Techniques and Formulation
2.2
Comparison between Periodic and Perpetual Inventory Counting System 12
3.1
Gantt Chart
26
4.1
Outsole Inventory Level for July 2007
31
4.2
Total Sales Order Year 2007
34
4.3
Total Outsole Order for Each Size of Safety Shoes
38
xiv
9
LIST OF ABBREVIATIONS, SYMBOLS, SPECIALIZED
NOMENCLATURE
EOQ
-
Economic Order Quantity
EPQ
-
Economic Production Quantity
QD
-
Quantity Discount
ROP
-
Reorder Point
ROI
-
Return-On-Invest
UTeM
-
Universiti Teknikal Malaysia Melaka
UPC
-
Universal Product Code
xv
CHAPTER 1
INTRODUCTION
1.1
Company Background
Ngee Ming Shoe Manufacturers Sdn. Bhd. has successfully developed a complete
range of industrial safety shoe suitable for various working conditions. The company
has been specialized in providing steel toe, safety footwear for thousands of
hardworking people throughout Malaysia. They produce a wide range of products
named Oscar Safety Shoes and they manufactured by ISO 9001:2000 accredited
facilities and adhere to international quality standards.
Ngee Ming Shoes Manufacturers Sdn. Bhd. is located in Serdang, Selangor. Ngee
Ming main building is shown in Figure 1.1.
Figure 1.1: Ngee Ming building
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The facilities, especially designed for advanced safety shoes manufacturing, consist
of high technology machine includes clicking machines, skiving machines, sewing
machines, back-part mount machines, eyeleting machines, PU injection machines
and lasting machines. Most of the machines are imported from Germany.
The company has produced a lot of product, such as tough industrial boots and shoes,
rugged work boots and shoes, work casual boots and shoes, government contract
shoes, tender shoes, men fashions shoes and ladies safety shoes.
1.2
Problem Statement
The Ngee Ming Shoe Manufacturers have a systematic in marketing, production,
sales, and human resource department operation system. However, the inventory
management had potential to be improved. There were few problems that occurred in
inventory management, such as the warehouse arrangement was not systematic,
some frequent used items were placed at higher rack where they were hard to be
found by the workers; there were also obsolesce items placed at the warehouse
entrance.
Besides that, inventory counting system was also having a problem with the accuracy
of inventory record. The company had periodic inventory counting system where the
inventory amount will be count interval in a month. There was always a deviation
with the record in finished good inventory; this problem was occurred when the
transfer of finished good products from production department to the warehouse was
not recorded.
The worst problem was insufficiency of raw material such as outsole to supply to the
production line, thus it delayed and cease the production. The raw material was
ordering at inappropriate time and quantity. Therefore, sometimes it happened to be
exceeding inventory. This may increase the carrying cost, inventory cost and capital
cost. As the result, the return on invest was not satisfy.
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1.3
Objectives
There are several study objectives;
a) To identify the most appropriate inventory model to apply into the
company.
b) To protect against uncertainties such as supply, demand and lead time, so
safety stocks are required.
c) To allow economic production and purchase, it is more economic to
produce materials in a lot size because it can reduce the ordering costs,
quantity costs and transportation costs.
d) To ensure the company has gain customers satisfactory and competitive
advantages.
e) To ensure the products have delivered before due date and avoid loss
sales due to stock out.
1.4
Scope
This project has mainly focus on two subjects; one is the ordering quantity and
another is the time interval to make an order for the outsole. There are some
inventory management technique and models is discussed in the report on how to
apply these models and which model and technique is more suitable for the company.
The result is more concentrated in mathematically and statistically. Besides that,
there is little touch on the total cost inventory because the profit is the most important
consideration for company.
In the other hand, this project will not include other department field, and also the
design of the warehouse layout, inventory classification and many other departments
which is not related with the main goal for the project. Beside that, the calculations
of the study is more on assumption, the value is not precise as actual value.
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1.5
Important of The Project
The project is to determine the ordering quantity and timing in a minimum cost. This
project is important because with a suitable inventory model applied can succeed the
business operation and supply chain. A good inventory model can also reduce the
capital cost where the company can manage the buying amount without the problem
of exceed inventory. The capital can be invested in other investment to gain higher
turnover. Therefore, the turnover ratio is increased. Besides that, it can give more
empty spaces in the warehouse for other purposes. The capital can be invested in
other investment where have higher turnover.
The appropriate ordering time and quantity is important to ensure the company have
sufficient shoes supply to the customer during the production lead time. This is to
avoid the problems of delaying in products delivery time to customer where it may
caused the customer to switch to another supplier. Therefore, the company has loss in
sales and customer satisfactory. The company reputation will also drop and it is hard
to gain the customer loyalty for a period of time.
1.6
Summary
As a conclusion, the Ngee Ming Shoe Manufacturers have many potential to be
improved on inventory management. There are some inventory models that can be
applied in the company inventory management to determine the most appropriate
ordering time and quantity. A good inventory model is important because it
determine the development of the company to bring it into a success.
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CHAPTER 2
LITERATURE REVIEW
2.1
Definition of Inventory
Inventory is stock or store of goods (Stevenson, 2007). In manufacturing, inventory
consists of raw materials, work-in-process, and finished goods. In wholesaling and
retailing, inventory is the stock of merchandise on hand. In direct marketing,
inventory may refer to direct-mail package components that are available for mailing
when needed. In the broadcast and print media industry, inventory is the time or
space available for sale to advertisers. In magazine publishing, inventory is the
number of copies of each issue available for distribution.
An ample inventory ensures that sales will not be lost or deadlines missed but can
require a substantial cash investment in both material and storage space. There are
also risks associated with excessive inventory, such as a change in circumstances that
reduces or eliminates demand for an item in inventory or that renders the item
obsolete or illegal, or the risk of loss due to theft, fire, aging, and so forth. The costs
and risks must be weighed against the cost of lost sales and missed deadlines to
determine the optimal inventory level. Inventory control is to achieve desired
customer service with minimum inventory commitment. Excessive inventories may
compensate for deficiencies in basic design of a logistics system but will ultimately
result in higher than necessary total logistic cost.
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A firm can typically stock many of items in inventory. Thus, manufacturing firm
carry supplies of raw materials, purchased parts, partially finished item and finished
goods. Inventories may represent a significant portion of total assets, a reduction of
inventories can result in a significant increase in return on investment (ROI).
However, many of items have a limited life time, so carrying large quantities would
mean having to dispose of unused, costly supplies.
Another consideration has been take is the space requirements of inventory. Space
limitation may pose restrictions on inventory storage capability, more space can
increase the storage capability thus more item can stored but also increase the
inventory holding costs. So it is depend on the functions of inventory. The most
important functions are to meet anticipated customer demand, to smooth production
requirement, to decouple operations, to protect against stock outs, to take advantage
of order cycles, to hedge against price increases, to permit operations and take
advantage of quantity discounts.
2.2
Inventory Management
Inventory management is the process that implements inventory policy or model.
The reactive or pull inventory approach uses customer demand to pull product
through the distribution channel. An alternative philosophy is a planning approach
that proactively allocates inventory based on forecasted demand and product
availability. A third, or hybrid, logic uses a combination of push and pull (Donald
J.bowersox, 2002).
A good inventory management is important for successful operation of most
businesses and their supply chains, nevertheless, it will hampers operations,
diminishes customer satisfaction, and increase operating costs and reduce
profitability as a result of added warehousing, working capital, insurance, taxes, and
obsolescence.
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Inventory control is the managerial procedure for implementing an inventory model.
The accountability aspect of control measures units on hand at a specific location and
tracks additions and deletions. Accountability and tracking can be performed on a
manual or computerized basis.
Inventory control has two main concerns; one is the level of customer service, which
is to have the right goods, in sufficient quantities, in right place, at right time. The
other is the costs of ordering and carrying inventories.
The overall objective of inventory control is to achieve satisfactory levels of
customer service while keeping inventory cost within reasonable bounds. Other
objectives are like the following;
f) To protect against uncertainties such as supply, demand and lead time, so
safety stocks are required.
g) To allow economic production and purchase, it is more economic to
produce materials in a lots size because it will reduce the ordering costs,
quantity and transportation costs.
h) To cover anticipated changes in demand or supply because the price of
the material is changeable and the demand required also enable to forecast
accurately, so inventory can make sure the sales is maintain in averages
costs.
2.2.1
Inventory Management Gurus
The management practices in modern inventory management solutions began to
develop during the industrial revolution in the late 1800s. Soon after inventory
management training consultants developed programs to educate distribution
managers. There are many gurus that have a high contribution in development of the
inventory management, the famous gurus are such as Gordon Graham, Charles
Bodenstab and Jon Schreibfeder.
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In the software era Gordon Graham paved the road for today's inventory
management consultants. Gordon managed a consulting and training company for
over 25 years. Gordon spent many years consulting with distributors on how to
implement quality inventory management practices. Business practices that are easily
understood and which provide proven results on the distributors bottom line profits
(Gordon Graham, 1990).
Charles Bodenstab views order history as an inventory management database and
brings to it the power of statistical analysis. Charles Bodenstab's involvement during
the 1950's and 1960's with developing some of the earliest qualitative automated
approaches to inventory management. Charles has said “much of the statistical
theory built into automated inventory control systems completely ignored the day-today business realities of the typical distributor”.
Jon Schreibfeder studied inventory management with industry "gurus" such as Alan
"Buddy" Silver and Gordon Graham and he has designed several inventory
management computer systems and has also served as a distribution industry
"troubleshooter" for two major computer companies. Over the past eighteen years,
Jon has helped hundreds of hard-goods distributors improve their productivity and
profitability by leading them through the implementation of effective inventory
management systems. Jon Schreibfeder has introduced the techniques managers will
find in their inventory management software and these three resources for further
learning.
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UNIVERSITI TEKNIKAL MALAYSIA MELAKA
BORANG PENGESAHAN STATUS TESIS*
JUDUL:
Application of Inventory Models in Industry
SESI PENGAJIAN: Semester 2 2007/2008
Saya Foong Weng Kang
mengaku membenarkan laporan PSM (Sarjana/Doktor Falsafah) ini disimpan di
Perpustakaan Universiti Teknikal Malaysia Melaka (UTeM) dengan syarat-syarat
kegunaan seperti berikut:
1.
2.
3.
4.
Laporan PSM adalah hak milik Universiti Teknikal Malaysia Melaka dan
penulis.
Perpustakaan Universiti Teknikal Malaysia Melaka dibenarkan membuat
salinan untuk tujuan pengajian sahaja dengan izin penulis.
Perpustakaan dibenarkan membuat salinan laporan PSM ini sebagai bahan
pertukaran antara institusi pengajian tinggi.
*Sila tandakan (√)
SULIT
(Mengandungi maklumat yang berdarjah keselamatan atau
kepentingan Malaysia yang termaktub di dalam AKTA RAHSIA
RASMI 1972)
TERHAD
(Mengandungi maklumat TERHAD yang telah ditentukan oleh
organisasi/badan di mana penyelidikan dijalankan)
TIDAK TERHAD
(FOONG WENG KANG)
Alamat Tetap:
No, 43 Rumah Murah,
26300 Gambang, Kuantan,
Pahang.
Tarikh: 20 May 2008
(CIK. MUZALNA BT MOHD JUSOH)
Cop Rasmi:
Tarikh: _______________________
* Jika laporan PSM ini SULIT atau TERHAD, sila lampirkan surat daripada pihak organisasi berkenaan
dengan menyatakan sekali sebab dan tempoh laporan ini perlu dikelaskan sebagai SULIT atau
TERHAD.
UNIVERSITI TEKNIKAL MALAYSIA MELAKA
Karung Berkunci 1200, Ayer Keroh, 75450 Melaka
Tel : 06-233 2421, Faks : 06 233 2414
Email : fkp@kutkm.edu.my
FAKULTI KEJURUTERAAN PEMBUATAN
15 Mei 2008
Rujukan Kami (Our Ref) :
Rujukan Tuan (Your Ref):
Pustakawan
Perpustakaan Universiti Teknikal Malaysia Melaka (UTeM)
Taman Tasik Utama, Hang Tuah Jaya,
Ayer Keroh, 75450, Melaka
Saudara,
PENGKELASAN LAPORAN PSM SEBAGAI SULIT/TERHAD
- LAPORAN PSM SARJANA MUDA KEJURUTERAAN PEMBUATAN
(MANAGEMENT): Foong Weng Kang
TAJUK: Application of Inventory model in Industry
Sukacita dimaklumkan bahawa laporan yang tersebut di atas bertajuk
“Application of Inventory model in Industry” mohon dikelaskan sebagai
terhad untuk tempoh lima (5) tahun dari tarikh surat ini memandangkan ia
mempunyai nilai dan potensi untuk dikomersialkan di masa hadapan.
Sekian dimaklumkan. Terima kasih.
“BERKHIDMAT UNTUK NEGARA KERANA ALLAH”
Yang benar,
……………………………………………………..
CIK. MUZALNA BT MOHD JUSOH
Pensyarah,
Fakulti Kejuruteraan Pembuatan
ii
APPROVAL
This report is submitted to the Faculty of Manufacturing Engineering of UTeM as a
partial fulfillment of the requirements for the degree of Bachelor of Manufacturing
Engineering (Management). The members of the supervisory committee are as
follow:
Muzalna Bt Mohd Jusoh
(PSM Supervisor)
iii
DECLARATION
I hereby, declared this thesis entitled
“Application of Inventory Model in Industry”
is the results of my own research except as cited in references.
Signature
:
Author’s Name
: FOONG WENG KANG
Date
: 25 MARCH 2008
iv
ABSTRACT
This study discusses the inventory models used at Ngee Ming Shoe Manufacturer
Sdn. Bhd, Selangor. The objective of the study is to identify and analyze the most
appropriate inventory models to be used in the company in term to decide the
ordering quantity and ordering time interval. The data gathered from interviews,
observations, journals, books, internet and company inventory record. The result was
analyzed, there are three inventory models used to determine the ordering quantity
and ordering interval time; Economic Order Quantity (EOQ), Economic Production
Quantity (EPQ) and Quantity Discount (QD). Each model has different
characteristic, where EOQ is focus on inventory cost, EPQ is focus on the production
and demand rate and QD is focus on the available of the discount benefit. After
overall the data analysis, Economic Order Quantity (EOQ) is the most suitable model
to apply into the company. This model provides minimum total cost, and continuous
review system with track on-hand inventory. If this model is used properly, it can be
consider as a company competitive advantages and order winner. Thus, the company
will gain a satisfactory from the customers and achieve a major success in providing
products with minimal defect in time delivery and insufficient stock.
v
ABSTRAK
Kajian ini membincangkan tentang penggunaan model inventori di Syarikat Ngee
Ming Sdn. Bhd, Selangor. Objektif utama kajian ini adalah untuk menentukan dan
menganalisis model inventori yang paling sesuai dilaksanakan dalam syarikat
tersebut untuk menentukan kuantiti dan kekerapan pesanan. Data diperolehi daripada
temuduga, permerhatian, buku, jurnal, laman web dan data inventori syarikat.
Selepas data dianalisis, tiga model inventori digunakan bagi menentukan kuantiti dan
kekerapan pesanan iaitu kuantiti pesanan ekonomi, pengeluaran kuantiti ekonomi
dan kuantiti diskaun. Setiap model inventori mempunyai kriteria yang berbeza,
dimana kuantiti pesanan ekonomi menfokus kepada kos-kos penyimpanan,
pengeluaran kuantiti pesanan menfokus kepada kadar pengeluaran dan penggunaan
manakala kuantiti diskaun menfokus kepada kesediaan diskaun semasa pesanan
dibuat. Selepas menganalisis semua data, model kuantiti pesanan ekonomi adalah
model paling sesuai diaplikasikan di syarikat tersebut. Model ini memberikan jumlah
kos yang rendah dan boleh menunjukkan bilangan simpanan yang masih ada secara
berterusan. Jika model inventori ini digunakan dengan sepenuhnya, ia akan menjadi
kelebihan persaingan dengan syarikat lain. Oleh itu, syarikat akan dapat memenuhi
keperluan perlanggan dengan kemampuan menyediakan barangan pada kelemahan
yang minima.
vi
DEDICATION
For my parents Foong Chan Meng and Lee Yong
and my siblings
vii
ACKNOWLEDGEMENTS
First and foremost, thank God for giving me a chance to complete my PSM. I would
also like to thank my parents Foong Chan Meng and Lee Yong, my siblings and my
friends for giving me their support and motivation during my good and hard times.
Thank you to all UTeM lecturers and staffs involved in this study especially my
supervisor, Ms Muzalna Bt Mohd Jusoh. She was helping me a lot in providing a
guideline and ideas along the study. Not forgetting all Ngee Ming General Manager
Mrs Fong and all staffs that had been helpful in providing information needed to
make this study a success. Without all of you, I could not have achieved what I have
tday.
Thank you again.
Foong Weng Kang
viii
TABLE OF CONTENTS
Abstract……………………………………………………………………………....v
Abstrak……………………………………………………………………………….vi
Dedication…………………………………………………………………………...vii
Acknowledgements………………………………………………………………..viii
Table of Contents…………………………………………………………………....ix
List Of Figures……………………………………………………………………xiii
List Of Tables………………………………………………………………..…….xiv
List Of Abbreviations, Symbols, Specialized Nomenclature…………………….xv
1. INTRODUCTION……………………………………………………..............1
1.1 Company Background………………………………………………………1
1.2 Statement of the Problem……………………………………………….…….2
1.3 Objectives…………………………………………………………....…...3
1.4 Scopes……………………………………………………………...…..……3
1.5 Important of The Project……………………………………………...….4
1.6 Summary………………………………………………………………..…...4
2. LITERATURE REVIEW……………………………………...……………...5
2.1 Definition of Inventory………………………………………………....…...5
2.2 Inventory Management………………………………………………..……...6
2.2.1
Inventory Management Gurus………………………………….…...7
2.2.2
Inventory Management Techniques………………………………....9
2.2.2.1 Demand Forecasting…………………………………………...9
2.2.2.2 Material Requirement Planning………………………………..10
2.3 Inventory Counting System……………………………………….…...……11
2.3.1
Periodic System………………………………………….….......11
2.3.2
Perpetual Inventory System……………………………………......11
2.4 Inventory Costs………………………………………………….....………12
2.4.1
Holding Costs…………………………………………..……..……..12
2.4.1.1 Capital Cost……………………………………………..…….....12
ix
2.4.1.2 Taxes…………………………………………………...………13
2.4.1.3 Insurance………………………………………………...……..13
2.4.1.4 Obsolescence…………………………………………....……..13
2.4.1.5 Storage…………………………………………………………13
2.4.2
Ordering Costs………………………………………………..…...14
2.4.3
Shortage Costs…………………………………………….………...14
2.5 Inventory Models…………………………………………………..….…...14
2.5.1
Ordering Quantity……………………………………..……....…...14
2.5.1.1 Economic Order Quantity………………………………...……14
2.5.1.2 Economic Production Quantity………………………..……….17
2.5.1.3 Quantity Discount………………………………………....…...19
2.5.2
Ordering Time Interval……………………………………..……...20
3. METHODOLOGY……………………………………………………….…..23
3.1 Introduction…………………………………………………………….….23
3.2 Planning of Study…………………………………………………...…..…23
3.2.1
Flow Chart……………………………………………………...….24
3.2.2
Gantt Chart………………………………………………….…….…25
3.3 Method…………………………………………………………….……....27
3.3.1
Field Observation………………………………………………....…27
3.3.2
Interview…………………………………………………………...27
3.3.3
Books, Journals and Internet ………………………………..…...28
3.4 Discussion Method…………………………………………………………..29
3.4.1
Inventory Cycle……………………………………………………...29
4. RESULT……………………………………………………………….……...30
4.1 Introduction……………………………………………………...………...30
4.2 Inventory Level……………………………………………………..……..30
4.3 Sales Demand……………………………………………………………...33
5. DISCUSSION……………………………………………………………........39
5.1 Introduction…………………………………………………………..……39
x
5.2 Current Inventory Problem……………………………………………......39
5.3 Inventory Costs……………………………………………………………40
5.3.1
Inventory Assumption Costs……………………………………….40
5.3.1.1 Average Sales………………………………………….………40
5.3.1.2 Average Inventory Quantity…………………………………...41
5.3.1.3 Average Inventory Value……………………………………...41
5.3.1.4 Bank Interest…………………………………………………...41
5.3.1.5 Obsolescence Percentage………………………………………41
5.3.1.6 Electricity and Water Bill……………………………………...41
5.3.1.7 Transportation Fee…………………………………………......42
5.3.1.8 Ordering Time……………………………………………........42
5.3.2
Main Inventory Costs……………………………………………...42
5.3.2.1 Holding Costs……………………………………………….....42
a) Capital Cost……………………………………………………......42
b) Obsolescence Cost…………………………………………………43
c) Storage Cost………………………………………………………..43
5.3.2.2 Ordering Costs…………………………………………………44
5.4 Total Cost of Inventory Models…………………………………………...44
5.4.1
Economic Order Quantity……………………………………….....45
5.4.2
Economic Production Quantity……………………………………45
5.5 Application of The Economic Order Quantity…………………………….46
5.5.1
Ordering Quantity………………………………………………….48
5.5.1.1 Safety Shoes Outsole Size Four…………………………….....48
5.5.1.2 Safety Shoes Outsole Size Five……………………………......49
5.5.1.3 Safety Shoes Outsole Size Six……………………………........51
5.5.1.4 Safety Shoes Outsole Size Seven……………………………...53
5.5.1.5 Safety Shoes Outsole Size Eight………………………………55
5.5.1.6 Safety Shoes Outsole Size Nine………………………….....57
5.5.1.7 Safety Shoes Outsole Size Ten………………………………...59
5.5.1.8 Safety Shoes Outsole Size Eleven……………………………..61
5.5.1.9 Safety Shoes Outsole Size Twelve………………………….....63
5.5.2
Total Inventory Cost……………………………………………….65
xi
5.5.2.1 Safety Shoes Outsole Size Four…………………………….....65
5.5.2.2 Safety Shoes Outsole Size Five……………………………......66
5.5.2.3 Safety Shoes Outsole Size Six……………………………........67
5.5.2.4 Safety Shoes Outsole Size Seven……………………………...68
5.5.2.5 Safety Shoes Outsole Size Eight………………………………69
5.5.2.6 Safety Shoes Outsole Size Nine…………………………….....70
5.5.2.7 Safety Shoes Outsole Size Ten………………………………...71
5.5.2.8 Safety Shoes Outsole Size Eleven……………………………..72
5.5.2.9 Safety Shoes Outsole Size Twelve………………………….....73
6. CONCLUSION…………………………………………………………….....79
6.1 Introduction………………………………………………………………..79
6.2 Conclusion…………………………………………………………………79
6.3 Recommendation………………………………………………………......80
6.3.1
Company Suggestion………………………………………………80
6.3.2
Further Study………………………………………………………81
REFERENCES…………………………………………………………………...82
APPENDICES…………………………………………………………………….84
Appendix A………………………………………………………………..84
Appendix B………………………………………………………….........86
Appendix C………………………………………………………….........90
Appendix D…………………………………………………………........93
Appendix E………………………………………………………….........94
Appendix F……………………………………………………….………95
Appendix G………………………………………………………...…….96
xii
LIST OF FIGURES
1.1
Ngee Ming Building
1
2.1
The Inventory Cycle: Profile of Inventory Level Over Time
15
2.2
Total Cost Curve
16
2.3
Safety Stock Reduces Risk of Stockout During Lead Time
20
2.4
The ROP Based On A Normal Distribution of Lead Time Demand
21
3.1
Flow Chart for Planning of Study
24
3.2
Inventory Cycle
29
4.1
Total Demand Outsole Year 2007
38
5.1
Economic Order Quantity Inventory Cycle
47
5.2
The Inventory Cycle for Safety Shoes Outsole Size Four
48
5.3
The Inventory Cycle for Safety Shoes Outsole Size Five
50
5.4
The Inventory Cycle for Safety Shoes Outsole Size Six
52
5.5
The Inventory Cycle for Safety Shoes Outsole Size Seven
54
5.6
The Inventory Cycle for Safety Shoes Outsole Size Eight
56
5.7
The Inventory Cycle for Safety Shoes Outsole Size Nine
58
5.8
The Inventory Cycle for Safety Shoes Outsole Size Ten
60
5.9
The Inventory Cycle for Safety Shoes Outsole Size Eleven
62
5.10
The Inventory Cycle for Safety Shoes Outsole Size Twelve
64
5.11
Holding Cost, Ordering Cost and Total Cost for Safety Shoes
Outsole Size Four
5.12
75
Order Quantity, Reorder Point and Safety Level for Each Size of
Safety Shoes Outsole
78
xiii
LIST OF TABLES
2.1
Forecasting Techniques and Formulation
2.2
Comparison between Periodic and Perpetual Inventory Counting System 12
3.1
Gantt Chart
26
4.1
Outsole Inventory Level for July 2007
31
4.2
Total Sales Order Year 2007
34
4.3
Total Outsole Order for Each Size of Safety Shoes
38
xiv
9
LIST OF ABBREVIATIONS, SYMBOLS, SPECIALIZED
NOMENCLATURE
EOQ
-
Economic Order Quantity
EPQ
-
Economic Production Quantity
QD
-
Quantity Discount
ROP
-
Reorder Point
ROI
-
Return-On-Invest
UTeM
-
Universiti Teknikal Malaysia Melaka
UPC
-
Universal Product Code
xv
CHAPTER 1
INTRODUCTION
1.1
Company Background
Ngee Ming Shoe Manufacturers Sdn. Bhd. has successfully developed a complete
range of industrial safety shoe suitable for various working conditions. The company
has been specialized in providing steel toe, safety footwear for thousands of
hardworking people throughout Malaysia. They produce a wide range of products
named Oscar Safety Shoes and they manufactured by ISO 9001:2000 accredited
facilities and adhere to international quality standards.
Ngee Ming Shoes Manufacturers Sdn. Bhd. is located in Serdang, Selangor. Ngee
Ming main building is shown in Figure 1.1.
Figure 1.1: Ngee Ming building
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The facilities, especially designed for advanced safety shoes manufacturing, consist
of high technology machine includes clicking machines, skiving machines, sewing
machines, back-part mount machines, eyeleting machines, PU injection machines
and lasting machines. Most of the machines are imported from Germany.
The company has produced a lot of product, such as tough industrial boots and shoes,
rugged work boots and shoes, work casual boots and shoes, government contract
shoes, tender shoes, men fashions shoes and ladies safety shoes.
1.2
Problem Statement
The Ngee Ming Shoe Manufacturers have a systematic in marketing, production,
sales, and human resource department operation system. However, the inventory
management had potential to be improved. There were few problems that occurred in
inventory management, such as the warehouse arrangement was not systematic,
some frequent used items were placed at higher rack where they were hard to be
found by the workers; there were also obsolesce items placed at the warehouse
entrance.
Besides that, inventory counting system was also having a problem with the accuracy
of inventory record. The company had periodic inventory counting system where the
inventory amount will be count interval in a month. There was always a deviation
with the record in finished good inventory; this problem was occurred when the
transfer of finished good products from production department to the warehouse was
not recorded.
The worst problem was insufficiency of raw material such as outsole to supply to the
production line, thus it delayed and cease the production. The raw material was
ordering at inappropriate time and quantity. Therefore, sometimes it happened to be
exceeding inventory. This may increase the carrying cost, inventory cost and capital
cost. As the result, the return on invest was not satisfy.
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1.3
Objectives
There are several study objectives;
a) To identify the most appropriate inventory model to apply into the
company.
b) To protect against uncertainties such as supply, demand and lead time, so
safety stocks are required.
c) To allow economic production and purchase, it is more economic to
produce materials in a lot size because it can reduce the ordering costs,
quantity costs and transportation costs.
d) To ensure the company has gain customers satisfactory and competitive
advantages.
e) To ensure the products have delivered before due date and avoid loss
sales due to stock out.
1.4
Scope
This project has mainly focus on two subjects; one is the ordering quantity and
another is the time interval to make an order for the outsole. There are some
inventory management technique and models is discussed in the report on how to
apply these models and which model and technique is more suitable for the company.
The result is more concentrated in mathematically and statistically. Besides that,
there is little touch on the total cost inventory because the profit is the most important
consideration for company.
In the other hand, this project will not include other department field, and also the
design of the warehouse layout, inventory classification and many other departments
which is not related with the main goal for the project. Beside that, the calculations
of the study is more on assumption, the value is not precise as actual value.
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1.5
Important of The Project
The project is to determine the ordering quantity and timing in a minimum cost. This
project is important because with a suitable inventory model applied can succeed the
business operation and supply chain. A good inventory model can also reduce the
capital cost where the company can manage the buying amount without the problem
of exceed inventory. The capital can be invested in other investment to gain higher
turnover. Therefore, the turnover ratio is increased. Besides that, it can give more
empty spaces in the warehouse for other purposes. The capital can be invested in
other investment where have higher turnover.
The appropriate ordering time and quantity is important to ensure the company have
sufficient shoes supply to the customer during the production lead time. This is to
avoid the problems of delaying in products delivery time to customer where it may
caused the customer to switch to another supplier. Therefore, the company has loss in
sales and customer satisfactory. The company reputation will also drop and it is hard
to gain the customer loyalty for a period of time.
1.6
Summary
As a conclusion, the Ngee Ming Shoe Manufacturers have many potential to be
improved on inventory management. There are some inventory models that can be
applied in the company inventory management to determine the most appropriate
ordering time and quantity. A good inventory model is important because it
determine the development of the company to bring it into a success.
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CHAPTER 2
LITERATURE REVIEW
2.1
Definition of Inventory
Inventory is stock or store of goods (Stevenson, 2007). In manufacturing, inventory
consists of raw materials, work-in-process, and finished goods. In wholesaling and
retailing, inventory is the stock of merchandise on hand. In direct marketing,
inventory may refer to direct-mail package components that are available for mailing
when needed. In the broadcast and print media industry, inventory is the time or
space available for sale to advertisers. In magazine publishing, inventory is the
number of copies of each issue available for distribution.
An ample inventory ensures that sales will not be lost or deadlines missed but can
require a substantial cash investment in both material and storage space. There are
also risks associated with excessive inventory, such as a change in circumstances that
reduces or eliminates demand for an item in inventory or that renders the item
obsolete or illegal, or the risk of loss due to theft, fire, aging, and so forth. The costs
and risks must be weighed against the cost of lost sales and missed deadlines to
determine the optimal inventory level. Inventory control is to achieve desired
customer service with minimum inventory commitment. Excessive inventories may
compensate for deficiencies in basic design of a logistics system but will ultimately
result in higher than necessary total logistic cost.
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A firm can typically stock many of items in inventory. Thus, manufacturing firm
carry supplies of raw materials, purchased parts, partially finished item and finished
goods. Inventories may represent a significant portion of total assets, a reduction of
inventories can result in a significant increase in return on investment (ROI).
However, many of items have a limited life time, so carrying large quantities would
mean having to dispose of unused, costly supplies.
Another consideration has been take is the space requirements of inventory. Space
limitation may pose restrictions on inventory storage capability, more space can
increase the storage capability thus more item can stored but also increase the
inventory holding costs. So it is depend on the functions of inventory. The most
important functions are to meet anticipated customer demand, to smooth production
requirement, to decouple operations, to protect against stock outs, to take advantage
of order cycles, to hedge against price increases, to permit operations and take
advantage of quantity discounts.
2.2
Inventory Management
Inventory management is the process that implements inventory policy or model.
The reactive or pull inventory approach uses customer demand to pull product
through the distribution channel. An alternative philosophy is a planning approach
that proactively allocates inventory based on forecasted demand and product
availability. A third, or hybrid, logic uses a combination of push and pull (Donald
J.bowersox, 2002).
A good inventory management is important for successful operation of most
businesses and their supply chains, nevertheless, it will hampers operations,
diminishes customer satisfaction, and increase operating costs and reduce
profitability as a result of added warehousing, working capital, insurance, taxes, and
obsolescence.
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Inventory control is the managerial procedure for implementing an inventory model.
The accountability aspect of control measures units on hand at a specific location and
tracks additions and deletions. Accountability and tracking can be performed on a
manual or computerized basis.
Inventory control has two main concerns; one is the level of customer service, which
is to have the right goods, in sufficient quantities, in right place, at right time. The
other is the costs of ordering and carrying inventories.
The overall objective of inventory control is to achieve satisfactory levels of
customer service while keeping inventory cost within reasonable bounds. Other
objectives are like the following;
f) To protect against uncertainties such as supply, demand and lead time, so
safety stocks are required.
g) To allow economic production and purchase, it is more economic to
produce materials in a lots size because it will reduce the ordering costs,
quantity and transportation costs.
h) To cover anticipated changes in demand or supply because the price of
the material is changeable and the demand required also enable to forecast
accurately, so inventory can make sure the sales is maintain in averages
costs.
2.2.1
Inventory Management Gurus
The management practices in modern inventory management solutions began to
develop during the industrial revolution in the late 1800s. Soon after inventory
management training consultants developed programs to educate distribution
managers. There are many gurus that have a high contribution in development of the
inventory management, the famous gurus are such as Gordon Graham, Charles
Bodenstab and Jon Schreibfeder.
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In the software era Gordon Graham paved the road for today's inventory
management consultants. Gordon managed a consulting and training company for
over 25 years. Gordon spent many years consulting with distributors on how to
implement quality inventory management practices. Business practices that are easily
understood and which provide proven results on the distributors bottom line profits
(Gordon Graham, 1990).
Charles Bodenstab views order history as an inventory management database and
brings to it the power of statistical analysis. Charles Bodenstab's involvement during
the 1950's and 1960's with developing some of the earliest qualitative automated
approaches to inventory management. Charles has said “much of the statistical
theory built into automated inventory control systems completely ignored the day-today business realities of the typical distributor”.
Jon Schreibfeder studied inventory management with industry "gurus" such as Alan
"Buddy" Silver and Gordon Graham and he has designed several inventory
management computer systems and has also served as a distribution industry
"troubleshooter" for two major computer companies. Over the past eighteen years,
Jon has helped hundreds of hard-goods distributors improve their productivity and
profitability by leading them through the implementation of effective inventory
management systems. Jon Schreibfeder has introduced the techniques managers will
find in their inventory management software and these three resources for further
learning.
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