Application Of Inventory Model In Industry.

(1)

(2)

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. Laporan PSM adalah hak milik Universiti Teknikal Malaysia Melaka dan

penulis.

2. Perpustakaan Universiti Teknikal Malaysia Melaka dibenarkan membuat

salinan untuk tujuan pengajian sahaja dengan izin penulis.

3. Perpustakaan dibenarkan membuat salinan laporan PSM ini sebagai bahan

pertukaran antara institusi pengajian tinggi.

4. *Sila tandakan (√)

SULIT

TERHAD

TIDAK TERHAD

(Mengandungi maklumat yang berdarjah keselamatan atau kepentingan Malaysia yang termaktub di dalam AKTA RAHSIA RASMI 1972)

(Mengandungi maklumat TERHAD yang telah ditentukan oleh organisasi/badan di mana penyelidikan dijalankan)

(3)

ii

FAKULTI KEJURUTERAAN PEMBUATAN

Rujukan Kami (Our Ref) : 15 Mei 2008

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,

Karung Berkunci 1200, Ayer Keroh, 75450 Melaka

(4)

iii

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

(5)

iv

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

(6)

v

ABSTRACT

(7)

vi

ABSTRAK

(8)

vii

DEDICATION

For my parents Foong Chan Meng and Lee Yong

(9)

viii

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.

(10)

ix

List Of Abbreviations, Symbols, Specialized Nomenclature……….xv

1. INTRODUCTION………_...1

2.1Definition of Inventory………....…...5

2.2Inventory Management………..……...6

2.2.1 Inventory Management Gurus……….…...7

2.2.2 Inventory Management Techniques………....9

2.2.2.1Demand Forecasting………...9

2.2.2.2Material Requirement Planning………..10

2.3Inventory Counting System……….…...……11

2.3.1 Periodic System……….…...11

2.3.2 Perpetual Inventory System………...11

2.4Inventory Costs………...………12

2.4.1 Holding Costs………..……..……..12

(11)

x

2.5.1.1Economic Order Quantity………...……14

2.5.1.2Economic Production Quantity………..……….17

2.5.1.3Quantity Discount………....…...19

2.5.2 Ordering Time Interval………..……...20

(12)

xi

5.2Current Inventory Problem………...39

5.3Inventory Costs………40

5.3.1 Inventory Assumption Costs……….40

5.3.1.1Average Sales……….………40

5.3.1.2Average Inventory Quantity………...41

5.3.1.3Average Inventory Value………...41

5.3.1.4Bank Interest………...41

5.3.1.5Obsolescence Percentage………41

5.3.1.6Electricity and Water Bill………...41

5.3.1.7Transportation Fee………...42

5.3.1.8Ordering Time………...42

5.3.2 Main Inventory Costs………...42

5.3.2.1Holding Costs………...42

5.4.1 Economic Order Quantity………...45

5.4.2 Economic Production Quantity………45

5.5Application of The Economic Order Quantity……….46

5.5.1 Ordering Quantity……….48

5.5.1.1Safety Shoes Outsole Size Four………...48

5.5.1.2Safety Shoes Outsole Size Five………...49

5.5.1.3Safety Shoes Outsole Size Six………...51

5.5.1.4Safety Shoes Outsole Size Seven………...53

5.5.1.5Safety Shoes Outsole Size Eight………55

5.5.1.6Safety Shoes Outsole Size Nine………...57

5.5.1.7Safety Shoes Outsole Size Ten………...59

5.5.1.8Safety Shoes Outsole Size Eleven………..61

5.5.1.9Safety Shoes Outsole Size Twelve………...63

(13)

xii

5.5.2.1Safety Shoes Outsole Size Four………...65

5.5.2.2Safety Shoes Outsole Size Five………...66

5.5.2.3Safety Shoes Outsole Size Six………...67

5.5.2.4Safety Shoes Outsole Size Seven………...68

5.5.2.5Safety Shoes Outsole Size Eight………69

5.5.2.6Safety Shoes Outsole Size Nine………...70

5.5.2.7Safety Shoes Outsole Size Ten………...71

5.5.2.8Safety Shoes Outsole Size Eleven………..72

5.5.2.9Safety 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

(14)

xiii

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 75

5.12 Order Quantity, Reorder Point and Safety Level for Each Size of

Safety Shoes Outsole 78

(15)

xiv

LIST OF TABLES

2.1 Forecasting Techniques and Formulation 9

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

(16)

xv

LIST OF ABBREVIATIONS, SYMBOLS, SPECIALIZED

NOMENCLATURE

EOQ - Economic Order Quantity EPQ - Economic Production Quantity

QD - Quantity Discount

ROP - Reorder Point

ROI - Return-On-Invest

(17)

1

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

p d fMachine

A pdf w rit er t hat produces qualit y PDF files w it h ease!

Produce quality PDF files in seconds and preserve the integrity of your original docum ents. Com patible across nearly all Windows platform s, if you can print from a windows application yo u can use pdfMachine.

(18)

2

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.

p d fMachine

(19)

3

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. 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.

p d fMachine

(20)

4

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.

p d fMachine

(21)

5

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.

p d fMachine

(22)

6

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.

p d fMachine

(23)

7

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.

p d fMachine

(24)

8

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-to-day 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.

p d fMachine