ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD (Department of Business Administration) FINANCIAL MANAGEMENT (562) Submitted By: Husnain Khalid Roll # AD511764 Submitted To: Mr. Asif Mehmood An Assignment is submitted in partial fulfillment of the requirement for the degree of MBA ASSIGNMENT No. 2 ISSUE CRITICALLY EVALUATE THE KEY CONCEPTS OF EFFECTIVE INVENTORY MANAGEMENT AND CONTROL. GIVE PRACTICAL EXAMPLE OF A PAKISTANI ORGANIZATION IN SUPPORT OF YOUR ANSWER.
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ALLAMA IQBAL OPEN UNIVERSITY, ISLAMABAD
(Department of Business Administration)
FINANCIAL MANAGEMENT (562)
Submitted By: Husnain Khalid
Roll # AD511764
Submitted To: Mr. Asif Mehmood
An Assignment is submitted in partial fulfillment of the requirement for the degreeof MBA
ASSIGNMENT No. 2
ISSUE
CRITICALLY EVALUATE THE KEY CONCEPTS OF EFFECTIVE
INVENTORY MANAGEMENT AND CONTROL. GIVE PRACTICAL
EXAMPLE OF A PAKISTANI ORGANIZATION IN SUPPORT OF YOUR
ANSWER.
ACKNOWLEDGEMENTSFirst of all, I would like to say Alhamdulillah, for giving me the strength and
health to do this project work until it done Not forgotten to my family for
providing everything, such as money, to buy anything that are related to this
project work and their advise, which is the most needed for this project. Internet,
books, computers and all that as my source to complete this project. They also
supported me and encouraged me to complete this task so that I will not
procrastinate in doing it.
Then I would like to thank my teacher for guiding me and my friends throughout
this project. We had some difficulties in doing this task, but he taught us patiently
until we knew what to do. He tried and tried to teach us until we understand what
we supposed to do with the project work.
Last but not least, my friends who were doing this project with me and sharing
our ideas. They were helpful that when we combined and discussed together, we
had this task done.
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ABSTRACTIn the simplest method, the purchase man periodically reviews the stock, perhaps
visually; to see what inventory items are in short supplies and places order when
he thinks a minimum level has been reached or when the inventory of a particular
item is exhausted. No inventory levels are kept on records. Obviously, such a
method is likely to incur excessive purchasing and carrying costs on the one hand
and stock out costs on the other. While excess purchase would lead to excessive
investment in obsolete or slow moving goods, shortage or inventory may disrupt
production or sales may be permanently lost.
To improve upon the visual method a re-order line may be drawn in the bin or
storage area so that when stock reaches this line, order will be placed. The re-
order line in the bin would be high enough to cover normal usage until the new
order arrives. A variation of this method is to use the two bins systems: an order is
placed when the working stock bin is empty.
Another inventory control approach is through the perpetual inventory system.
Managers are already familiar with the principles and procedures of this system.
Another method used to assist in the control of inventory is the ABC
classification. Here the inventory items are classified into groups, usually three,
according to the annual cost of the item used and ranked according to the rupee
value of the usage. It may, however , be pointed out here that ABC analysis is not
actually a control system in itself: it shows the way to decide which items are
most in need of strict control system. It is ultimately the management who decides
how best to control each class of items.
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TABLE OF CONTENTS
INTRODUCTION
COST OF CARRYING
REORDER LEVEL
MINIMUM INVENTORY
FIFO vs LIFO
PRACTICAL STUDY # 1
INTRODUCTION
DIRECTOR S PROFILE‟
CLIENTELE
DISTRIBUTION AREAS
IT SYSTEMS
HR INFRASTRUCTURE
INVENTORY CONTROL SYSTEM IN UDL
APPLICATIONS
MANAGING INVENTORY
COMPANY S INVENTORY SOFTWARE FEATURES‟
EXAMPLES
PRACTICAL STUDY # 1
ASKARI BANK
SWOT ANALYSIS
STRENGTHS
WEAKNESSES
OPPORTUNITIES
THREATS
CONCLUSION
RECOMMENDATIONS
REFERENCES
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INTRODUCTIONInventory 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 PlanningMaterial Requirements Planning
Inventory ReductionThe 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
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form or another to have a successful program of Inventory
Management and Inventory Control.
Inventory control is concerned with minimizing the total cost of inventory. In the
U.K. the term often used is stock control. The three main factors in inventory
control decision making process are:
The cost of holding the stock (e.g., based on the interest rate).
The cost of placing an order (e.g., for row material stocks) or the set-up cost of
production.
The cost of shortage, i.e., what is lost if the stock is insufficient to meet all
demand.
The third element is the most difficult to measure and is often handled by
establishing a "service level" policy, e. g, certain percentage of demand will be
met from stock without delay.
The ABC Classification The ABC classification system is to grouping items
according to annual sales volume, in an attempt to identify the small number of
items that will account for most of the sales volume and that are the most
important ones to control for effective inventory management.
Reorder Point: The inventory level R in which an order is placed where R = D.L,
D = demand rate (demand rate period (day, week, etc), and L = lead time.
Safety Stock: Remaining inventory between the times that an order is placed and
when new stock is received. If there are not enough inventories then a shortage
may occur.
Safety stock is a hedge against running out of inventory. It is an extra inventory to
take care on unexpected events. It is often called buffer stock. The absence of
inventory is called a shortage.
Quantity Discount Model Calculation Steps:
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Compute EOQ for each quantity discount price.
Is computed EOQ in the discount range?
If not, use lowest cost quantity in the discount range.
Compute Total Cost for EOQ or lowest cost quantity in discount range.
Select quantity with the lowest Total Cost, including the cost of the items
purchased.
Techniques of inventory control:
1. Economic purchase order quantity (How much to order)
2. Reorder level (when to order)
3. Minimum inventory or safety stock.
Economic Purchase Order Quantities: In order to control inventory a decision
model has been developed to determine the optimum quantity of materials to be
purchased on each purchase order. The model determines the optimum working
stock level to be maintained. Each time a purchase order is placed, the company
incurs certain costs. In order to minimize the costs of placing purchase orders, the
company could increase the order quantity to meet the company s entire needs for‟
the year at one time, incurring only the cost of one purchase order. However, such
a practice will lead to having a large average inventory of working stock, resulting
in increased carrying costs. The costs of ordering and costs of carrying inventory
may be summarized as follows:
Cost of Ordering:
- Preparing purchase or production orders, receiving and preparing and processing
related documents.
- Incremental costs of purchasing or transportation for frequent orders (Purchase
in small lots is often costlier and transportation costs also increase)
- Out of pocket costs of postage, telephones, telegrams, cost of stationery,
traveling etc.
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- Extra costs of numerous small production runs, overtime, setups, training etc. In
addition- fixed costs in form of salaries, wages of employees connected with this
work in purchasing, receiving, inspection and Material handling Departments.
Costs of Carrying:
- Interest on Investment.
- Losses from obsolescence and deterioration, spoilage.
- Storage-space costs, including Rent, Rates, Taxes, Electricity, etcs.
- Insurance, in addition- fixed costs in form of salaries, wages etc of employees
connected with this work in stores and Material handling Departments.
It should be noted that in the consideration of the optimum inventory decision, the
costs of buying the inventory would usually be irrelevant, because it is assumed
that the quantity required for the year would be the same for various alternative.
The important relevant costs to be considered are the costs of ordering and the
costs of carrying.
Reorder Level:
Lead time is the time interval between placing an order and receiving delivery. If
the lead time and the quantity of demand during lead time are known with
certaininty the recorder point may be determined. If in the above example, lead
time is 2 weeks and the average usage is 18 per week, the recorder point will be
18*2=36units. The day the level of stock falls to 36 units, an order for 173 units
will be placed. By the time these are delivered, the stock would be nil and on the
day of delivery it will shoot up again to 173 units and so on.
Minimum Inventory or Safety Stock:
In our previous paragraph, we had assumed with certainity that 18 units would be
used per week. In practice, we seldom come across such a situation and demand
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cannot be forecast accurately. Actually the demand may fluctuate from period to
period. If, therefore the usage per week at anytime goes beyond 18 units per
week, the company will be out of stock for sometime. Hence arise the need for
providing for some safety stock, i.e. some minimum or buffer as inventory as a
cushion against such stock outs. The recorder point is inter-related with the safety
stocks because as the recorder point is moved upwards, the amount of the cushion
is increased. Thus the recorder point is the resultant of the demand during lead-
time plus safety stock. By increasing the safety allowance the recorder point is
increased by the same amount. It should be noted that the economic order quantity
does not come into the picture and is independent of safety stock analysis.
There are several methods determining safety stock levels. A rough and ready
method followed by many companies is to provide a constant safety stock of say,
one or two month s usage requirements regardless of the item. Another method‟
mainly based on intuition is to have large safety stock when quantity usage is
high, lead time is long or the ordering schedule is frequent. Small safety stocks
can be maintained when there is low usage, short lead time or infrequent ordering.
Another method makes a statistical analysis of the probability of a stock out by
predicting the dispersion of usage around average usage and the dispersion of lead
times around the average lead time. The above discussions of inventory control
are based on the two bins or constant order quantity system.
FIFO vs. LIFO accounting
When a dealer buys goods from inventory, the value of the inventory is reduced
by the cost of goods sold (CoG sold). This is simple where the CoG has not varied
across those held in stock; but where it has, then an agreed method must be
derived to evaluate it. For commodity items that one cannot track individually,
accountants must choose a method that fits the nature of the sale. Two popular
methods which normally exist are: FIFO and LIFO accounting (first in - first out,
last in - first out). FIFO regards the first unit that arrived in inventory as the first
one sold. LIFO considers the last unit arriving in inventory as the first one sold.
As pioneers in distribution in the subcontinent over 100 yearsago, we gave the term „distribution„ a new meaning. Ourbusiness was established in 1887 in India for distribution ofCigarettes in India, Burma & Ceylon. The business was shiftedto Pakistan in 1947. We enjoy a rich history of nearly 125 yearsin satisfying our domestic and international clients in the field ofImport, Warehousing and Logistics, Door to Door
Distribution Marketing.
Our annual sales turnover for the year 2007-2008 was Rs. 12.81billion (US $ 168 million) with annual growth in salesexceeding 15% each year for the last 5 years. Our networkcomprises 25 branches (Sales Offices) in 16 towns of Pakistanwith 3 central warehouses located in Karachi, Lahore &Islamabad.
Keeping pace with the cutting edge of technologicaladvancement in IT, we are considered to be way ahead of ourcompetitors.
This is why companies having a long term vision, demandingreliability and quality of service, prefer to be associated withus.
BSc, MBA, former President Karachi Chamber of Commerce and Industry,former Trustee and Vice Chairman Karachi Port Trust
36 yearsSales and Marketing, Relationship Building, Distribution and Trade, Import and
Export
Mr.NasirAbdulla53years
Business.Graduate33years
Banking and Finance, HR Management, Distribution and Logistics, Import andExport
Mr.Arshad.Abdullah45
BusinessGraduate19years
Sales and Marketing, IT, Distribution
Mr.AhsanKhaliq32years
BSc,ExecutiveMBA11 years (inclusive of 5 years International Shipping Experience with 2 years
expatriation in Vietnam)IT, Administration
Shakeel-ur-Rahman51years
CharteredAccountant26years
Finance and Accounts
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THE COMPANY ENJOYS EXCELLENT COORDINATION BETWEEN ITS HIGH PROFILE,TRULY DEDICATED AND RESULT ORIENTED PROFESSIONAL STAFF IN ALLDEPARTMENTS, INCLUDING SALES & MARKETING, ADMIN., HR, IT, LOGISTICES, ETC.,WHO INTERACT WITH EACH OTHER TO DELIVER TO THE BEST INTEREST OF OURHIGHLY ESTEEMED CLIENTS.
WE ALWAYS MAKE SURE, OUR EACH AND EVERY INITIATIVE LEADS TO THEPROSPERITY AND DEVELOPMENT OF OUR CLIENTS BECAUSE, WE FIRMLYBELIEVE THAT IT IS DIRECTLY RELATED TO OUR OWN SUCCESS.
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Our state of the art ERP system helps us do our business efficiently by providing analytical reportsfrom data which enable our principals to understand the buying pattern, behavior of customers andmarket trends. Not only they can take operational decisions based on the reports provided, they canalso strategically manage their field force based on our extensive reporting capabilities which ensuretransparency and accountability. Our fully automated and integrated “Distribution Business System(DBS)” is a highly scalable, flexible, secure, and efficient system which can be customized to the
requirements of our clients.
We are also providing password protected access to our website so that our clients can access onlinereports, no matter whether they are in office or travelling. This helps our clients to remain updatedand always connected to the sales trends. They can also monitor their products inventories online and‟
arrange their production schedules and forecasts accordingly.
In today s world of supply chain management, data availability is critical. We always strive to provide‟optimal solutions to our clients so that they can better predict and be responsive to the toughrequirements of the market.
In this millennium the only sustainable advantage will come from people. Winning organizations willnot only have to bring the best people but also to get the best out of the people.
At present the business employs over 1000 dedicated people providing their utmost in every area ofthe distribution business. Whether it is a delivery van driver or a sales manager, a computer operatoror an accounts officer, the entire human resource strength is knitted in one “UDL Family”.
The business is managed by over 100 professional managers having support of equal number ofsupervisors. With almost 600 Sales Support staff, we ensure access to 50,000 outlets. Our fleet of150 delivery vans reaches the farthest areas of the country providing coverage in over 600 towns andvillages.
A process for keeping track of objects or materials. In common usage, the termmay also refer to just the software components.
Modern inventory control systems rely upon barcodes, and potentially RFID tags,to provide automatic identification of inventory objects. In an academic studyperformed at Wal-Mart, RFID reduced Out of Stocks by 30 percent for productsselling between 0.1 and 15 units a day. Inventory objects could include any kindof physical asset: merchandise, consumables, fixed assets, circulating tools,library books, or capital equipment. To record an inventory transaction, thesystem uses a barcode scanner or RFID reader to automatically identify theinventory object, and then collects additional information from the operators viafixed terminals (workstations), or mobile computers.
Applications
An inventory control system may be used to automate a sales order fulfillmentprocess. Such a system contains a list of order to be filled, and then promptsworkers to pick the necessary items, and provides them with packaging andshipping information.
Real time inventory control systems use wireless, mobile terminals to recordinventory transactions at the moment they occur. A wireless LAN transmits thetransaction information to a central database.
Physical inventory counting and cycle counting are features of many inventorycontrol systems which can enhance the organization.
Inventory software are now available so that task becomes much more easier.
Managing Inventory
Devising an efficient system of counting and maintaining a stock of inventoryitems has long been an arduous task for many shop owners. But the old methodsof cataloging by part or item numbers have all but disappeared since theproliferation of electronic catalogs and the use of computer software programs totrack stock-keeping units (SKUs).
Inventory management is necessary for owners who want to maintain a stockingservice for quick turnaround to help ensure total customer satisfaction. The "fillrate" of an item on a managed inventory list must be maintained to avoidshortages of frequently used items. Even when utilizing an inventory managementsystem, occasional shortages will still occur.
To be successful in today's fast-paced, highly-competitive environment, shopsneed to have the necessary parts in stock or have reliable suppliers to meetcustomer demands at a moment's notice. Either way, shops must have a practical,efficient method for managing inventory in order to stay in business and satisfytheir customers.
Shops in larger cities tend to have more options for inventory stocking. Sincethere are often numerous parts suppliers nearby, there is less of a need to stockcertain parts. Shops that stock belts, hoses or other hard part items sometimes doso only to find a marketing niche in their area. Stocking inventory can sometimesyield the benefit of bulk discounts.
However, some shops refuse to stock any items at all. Frequently, the philosophyhere is that the shop does not want to "tie up" money in unused inventory thatoften depreciates while sitting on the shelf. The plus side of this philosophy is thatthe shop does not spend much time or money on an inventory system since itdepends solely on its parts suppliers to stock the items the shop moves frequently.
Profit drain, with regard to lost sales, is always one risk a shop takes when itdepends upon a parts network outside of its in-house forum to supply inventorymanagement needs. Shops that are outside of the "net" of a warehouse supplyarea, as well as those which depend upon niche markets for their success, can useautomotive computer software programs to list, count and order partsautomatically.
The benefits of keeping significant quantities of parts in stock are not alwaysclear. The financial benefit must be high enough to justify not only the cashexpenditures for the stocked items, but also the time and money spent managingthe inventory, whether it is for employee time or for computer hardware andsoftware.
One Missouri shop owner said he routinely stocks accelerator and clutch cables atthe expense of a couple thousand dollars at a time. His philosophy follows instride with the manufacturers' recommendations that these items be replaced attime/mileage intervals or whenever a clutch replacement is being handled, and hesaid his customers usually accept his suggestion that these parts be replaced. His
bottom line, he says, has been better since the shop started stocking its owncables.
He also reiterates the fact that he has few comebacks by following this practice.
Graham Automotive of Springfield, Mo., has been in business 27 years. OwnerDan Stomboli said that inventory management has pretty much become a thing ofthe past since parts houses have "geared up" with electronic ordering. Still, heconcedes, his shop has a limited amount of inventory that is tracked with asoftware program, and daily ordering has become the ordinary business practicethat his facility uses to keep inventory management at a relatively simple levelthat can be grasped by anyone in the organization.
Another Springfield shop owner said he carries only those items that mightotherwise hold up a job by having to be back ordered, even though his shopmoves these parts only once or twice a year. He stocks the items and sells themfor "premium" prices because he has them immediately available for installation.In addition to consumers paying these premium prices, other shops sometimesbuy these parts from him when they need them immediately.
Some shop owners think simple "garage-keeper" software programs are the bestbuys for inventory management. Some use customized programs, and others relyon integrated shop management systems or similar "do all" package systems.
Tire stores tend to use some of the best inventory systems on the market. Thereason is not surprising considering the fluid nature of the tire business and theimportance of having the right tires in stock. Custom-designed software systemsare the most often used programs for these businesses. Many tire dealers alsodepend on "corporate designed" systems for total shop management as well asinventory control when they are associated with a franchise. The biggest plus ofhaving one of these systems, according to several shop owners, is having acomprehensive, proven inventory management system that tracks problem areasand automatically makes corrections when needed.
Body shops use integrated management systems to track inventory, in addition toperforming tasks such as payroll and estimating. St. Louis Auto Body,Springfield, Mo., keeps parts on-hand only for jobs already on site. Parts arestored in a separate building until they are needed for the repair.
Inventory of paint in body shops is usually kept in stock and managed withcustomized inventory systems integrated as part of the shop's master managementprogram.
Shops that have been using computers for estimating and for technical programsshould look to expand those efforts toward a good inventory software program.The most important part of any inventory programming effort is finding the timeto set it up properly.
Comprehensive business software programs that incorporate inventory functionsas merely one of many features are not always the best choice for a shop. Take thetime to search out automotive-related programs, establish that the program willperform the functions you need and make sure to find out which systems havebeen working well for your fellow association members.
Take the leap into the new millennium with a well-devised management plan, andmake that plan part of your business operation. By counting on a quality inventorymanagement program to bring you into the next century, you will facilitate thesuccess that comes from good overall management techniques.
Charitable InventoryDo you have old, unused inventory that has been accumulating dust on yourshelves for years and has little or no chance of ever being used? Considerdonating the parts and supplies. Educational Assistance Ltd. (EAL) acceptsdonations of new and used excess inventory from companies and corporationsnationwide.
By exchanging these goods for scholarships within their own national network ofaccredited colleges and universities, EAL provides educational assistance formany needy persons each year. Items not appropriate for trade-off to colleges canbe sold outright to support the program and its efforts.
Inventory Software FeaturesFollowing are some standard features that adequate shop inventory managementsoftware programs should include:
Encryption: Represents a dealer code for any particular item to befollowed on inventory roles.Tax digest information: Answers whether the item taxed at the time ofsale (retail) or by the purchaser (resale).Inventory tracked: Represents the majority of items found as SKUs intypical automotive inventory. In some cases, software will trackoperations and automatically reorder parts or supplies when needed. Atypical example is a case of grease cartridges for chassis lubrication. If 12typical lube jobs deplete a cartridge, and there are 12 cartridges to a case,then after 144 lube jobs have been tracked by the inventory block,automatic reorder will take place.
Sales price: Items may be bumped up or down individually or as part of atrend across the inventory block. Criteria for pricing up or down may beinitiated by a single vendor code on the last reorder.Last sale date: This is important data used to measure the amount of timean item sits on a shelf, or the "movement rate" of that particular item.Costs: This refers to the standard buying prices of items stocked. Thisarea may also track trends in price increases on items.Sales traffic: Shows the total activity of a product or group of products asthey move in or out of inventory. This function is used by programs toidentify trends through a graphing format, or to alert inventory managersof changing factors that may affect gross profits or result in bottlenecks inoperations.Quantity price structuring: Used by inventory programs to track andmaintain quantity levels, and ensure adequate buying levels set in theprogram's directory. In any given program, the upgrade of an item becauseof increased upward traffic will cause the program to automatically seekout the next buying level during the automated reorder.Alternative vending: Used to store a second or third choice of a stockeditem from an on-site or off-site source. This data may be manipulated byoff-site vendors with regard to each individual shop's buying venue.Register, totalizer records: Includes the on-hand dollars, purchase units,purchase dollars, unit sales total, etc. Shipping dates may be projected, andorder confirmations will be accumulative if more than one order date hasbeen set.