Inventory Management Proposal

Table of Contents 1.0 BACK GROUND........................................................................................................................ 1.1 PROBLEM STATEMENT.......................................................................................................... 1.2 OBJECTIVES.............................................................................................................................. 1.2.1 Main objective....................................................................................................................... 1.2.2 Specific objectives................................................................................................................ 1.3 PURPOSE OF THE STUDY....................................................................................................... 1.4 RESEARCH QUESTIONS......................................................................................................... 1.5 SCOPE OF THE STUDY............................................................................................................ 1.6 SIGNIFICANCE OF THE STUDY............................................................................................ 2.0 BRIEF LITERATURE................................................................................................................ 2.1 Definition of inventory............................................................................................................. 2.3 Motives of holding inventory................................................................................................... 2.4 Inventory costs......................................................................................................................... 3.0 METHODOLOGY...................................................................................................................... 3.1 Study area................................................................................................................................. 3.2 Research design........................................................................................................................ 3.3 Sampling procedure................................................................................................................. 3.4 Data sources............................................................................................................................. 3.5 Data analysis............................................................................................................................ 3.6 Design methods........................................................................................................................ 4.0 PROJECT TASK SCHEDULE................................................................................................... 5.0 Resource budget........................................................................................................................... 6.0 CONCLUSION AND RECOMENGATIONS............................................................................ 7.0 References....................................................................................................................................

1.0 BACK GROUND The project will be carried out at Tuff Foam (U) ltd which is located at Bwaise- kawempe division along Bombo Rd just after shell Bwaise. Tuff Foam (U) ltd is mattress foaming company having many competitors in the same industry like Royal foam,Euro foam, Vita foam companies etc. The foaming industry in Uganda is composed of customers and companies that are price sensitive were a slight increase in price can result into a big negative effect on sales obtained, therefore, tuff Foam competes with others using a cost effective strategy. Tuff Foam Uganda uses series of inventories including; raw materials (chemicals), polyethylene material, inprocessed materials like (foamed blocks), clothes as mattress covers, finished mattress ready for dispatch, MRO inventory etc. At tuff foam, materials/inventory forms the biggest and most significant asset to the company, meaning that a lot of capital is tied there. However, from the analysis of the Tuff Foam’s audited books of accounts for the business years 2008.2009 and 2010, it was realized that the company is operating under highly increasing direct production inventory cost, on average 74.5% of the total production cost and that a lot of money value was/is lost inform of capital tied in inventory. This has resulted into a drastic decrease in the profit margin by 10%. The drastic increase in the production cost was due to rapid increase in the direct inventory cost, it has greatly become a concern, and it has caused questions like why, what and how the problem be solved so as to increase the profits of company with decrease in the direct production material cost. The prevailing situation has brought a need for the design of an effective inventory management system which can plan and control the direct production material/inventory.

1.1 PROBLEM STATEMENT Tuff Foam is operating under rapidly increasing direct production inventory cost of 74.5% (average for the business year 2008 2009 and 2010) of the total production cost, the company is hit by rising inventory holding costs, spoilage, direct storage costs, obsolescence, pilferage and cost of losing the use of funds tied up in inventory. This is greatly affecting the profits attained by the company.

1.2 OBJECTIVES 1.2.1 Main objective To design an inventory management system for Tuff Foam (U) ltd 1.2.2 Specific objectives •To classify inventory according to their function group. •To determine the economic order quantity, safety stock and reorder levels for each function group •To restructure the store layout and codification system

1.3 PURPOSE OF THE STUDY To design an effective inventory management system for Tuff foam (U) ltd which will reduce the inventory cost to the optimum level.

1.4 RESEARCH QUESTIONS What are different production inventories used at Tuff Foam and their functional group? What is the economic order quantity, safety stock and reorder levels for each inventory functional group? How best can the store layout and codification system be made? 1.5 SCOPE OF THE STUDY The study will be based on the inventories used in the production of mattresses at tuff foam (U) ltd, the researcher will limit himself only on the direct production input materials/ inventory to the production of mattress. 1.6 SIGNIFICANCE OF THE STUDY The inventory management system will provide an intelligent planning and control over direct production inventory. This will have the following significance: •

It will control the levels of stock and the investment in direct production materials, this will reduce the company’s money/capital invested and tied in inventory, thus giving high

options and opportunities for the company to utilize the capital in other profit making businesses. •

It will also reduce the loss and cost incurred by the company inform of obsolescent materials ( chemicals).

•

The project will reduce the storage cost.

•

The project will also help the researcher to complete his program since the project is one of the requirements for the partial fulfillment for the award of degree in bachelor of engineering in industrial engineering and management.

2.0 BRIEF LITERATURE 2.1 Definition of inventory Pandey (2006) defines the term inventory as products a company manufacture for sale and components that make up finished product that are kept in stock. According to Render (2005) and star, inventory is any resourced used to satisfy a current or future need. 2.2 Types of inventory Inventory differs according to organization, but they generally categorized according to the following; 1. Raw material inventory: materials waiting for dispatchment to the production system for conversion into finished products. 2. Inprocess inventory: this is work in process e.g. partially produced/worked on products awaiting for further processing to completion. 3. Finished product inventory: this is finished products awaiting for dispatchement to the final consumers. 4. MRO (Maintenance, Repair and Operations) inventory: this is the inventory of materials that are useful in the maintenance, repair and operations of systems e.g. spare parts, lubricates and other oils, machineries etc. 2.3 Motives of holding inventory Organizations hold inventory for several motives. These include; •

Transaction motive; to achieve continuous profit making since it emphasizes the need to hold the inventory to facilitate smooth production and sales.

•

Precautionary motive, which necessitates holding of the inventory to guard against the risk of unpredictable changes in demand and supply forces and other factors (Render and Star, 2005)

•

Speculative motive, keeping inventory with the fear of increase in price if price inflation is being experienced by your supplier and in the entire market.

2.4 Inventory costs Ordering costs

These are the entire cost of acquiring materials/ raw materials. They include cost incured in the following activities: Requisition, purchasing ordering, transporting, receiving, inspecting and sorting. Ordering cost increase in proportion to the number of orders, thus the more frequently inventory is acquired, the higher the company’s ordering costs. On the other hand, if the firm maintains large inventory levels, there will be four orders placed and ordering cost will be relatively small. Thus ordering cost decreases with increasing size of inventory (Pandey, 2006) Carrying cost Costs incurred for maintaining a given level of inventory are called carrying costs. They include storage, insurance, taxes, and alteration and also license. The storage costs comprise of cost of storage space (warehousing costs), stores handling and clerical and staff service cost incurred in the recording and providing special facilities such as fencing, line tracks etc. carrying costs vary with inventory size. This behave is contrary to that of ordering costs which declines with increase in inventory size (paddey, 2006) Stock out cost These include loss of future sales because customer go elsewhere, lost contribution through a lost sale, cost of production stoppages and extra cost associated with urgent small quantity replenishment order (Lucey, 2002)

3.0 METHODOLOGY The methodology high light the methods that will be used when carrying the project, it will show the study area, research design, sampling procedures, data sources, collection methods and analysis methods. It will further show inventory control models, methods, replenishment methods and store management system that will be used. 3.1 Study area The project will be carried out at Tuff Foam (U) ltd, its mainly centered on designing an inventory management system for direct production inventory/ materials for the company. 3.2 Research design The research project will involve collection of data and information to facilitate the design, this will be done through direct visual observation (where phenomenon will be observed from factory), face to face interview and desk research. Obtained data will be analyzed. 3.3 Sampling procedure Only employees from the production, procurement, finance, sales and marketing will be contacted, and only two resourceful people from each department will be interviewed. 3.4 Data sources Both primary and secondary sources will used; primary data will be generated by research himself using methods like direct observation and face to face interviews. Secondary data source which will be used will include; inventory procurement, store, production and sales records. 3.5 Data analysis The collected data will be analyzed qualitatively and quantitatively using graphs and tables in Microsoft Excel. Basing on the analyses that will be obtained, the system will be designed. 3.6 Design methods Inventory planning tools like ABC analysis, Pareto analysis, VED analysis and alphabetical codification will be used during the planning process. Under Inventory control, continuous or fixed order quantity methods will be used, economic order quantity, safety and reorder levels will be determined to facilitate proper control of inventory.

4.0 PROJECT TASK SCHEDULE ID

TASK NAME

1

research more on inventory

2

design questionnaires

3

collect primary data

4

collect secondary data

5

obtained data

6 7

data analysis classify material

8

determine economic order qty determine safety stock

9

DURATIO START N (wks) TIME 4 10/3/201 1 1 10/24/20 11 4 10/3/201 1 4 11/22/20 11 11/22/20 11 4 2/8/2012 1 3/8/2012

FINISH TIME 11/1/201 1 11/21/20 11 11/1/201 1 12/21/20 11 1/19/201 2 3/7/2012 3/15/201 2 3/16/201 3/23/201 2 2 3/23/201 3/30/201 2 2 3/30/201 4/9/2012 2 4/9/2012 4/16/201 2 4/16/201 5/7/2012 2 3/8/3012 5/7/2012

1 1

10 determine reorder level

1

11 determine replenishment system 12 restructure store layout

1 3

13 designed inventory mgt system 14 conclusion and recommendation 15 prepare presentation

2

16 report preparation

4

17 report handing over

1

5/2/2012 5/16/201 2 6/22/201 6/25/201 2 2 7/1/2012 7/31/201 2 7/30/201 9/26/201 2 2

2

PREDECES SOR 1 1 2,3

5 5 6 6 6 5,6,7,8,9,10 6,7

6,13 13,14 13,14,15 16

5.0 Resource budget design cost for the inventory system resouce name Stationary Internet

Column1 Column2 Column3 Column4 type

quantity Rate 10 GB

amount 50,000 50000 100000

3G+ modem air time Transport Total implementation cost Computer

1

HP dual core

human resource office setup cost total lump sum

100000

100000 100000 200000 550,000

2 12oooo0

2,400,000

1

2000000 1000000 5,400,000 5,950,00 0

2000000 1000000

6.0 CONCLUSION AND RECOMENGATIONS Conclusion and recommendations will be derived from the findings and the designed system. 7.0 References Company production records for 2009 to 2011 Company direct production records for 2009 to 2011 Tuff foam financial reports for years 2009 to 2011 www. Inventorymanagement.com www.wikipedia.org/wik/inventory D. Clay Whybark, inventory management, indian University, 2007 bloomington