2 LITERATURE REVIEW 2.1 Introduction
Of course, no one thought of an issue in the same way, but the profit of the companies depends on the good management , an issue that seems to be unanimous among the leaders of the company. This is what happened here, when we try to examine and examine the past and present work that deals with inventory management and the development of an economic quantity model suitable for contractor companies. The subject of inventory management has sparked much debate in public debates, workshops and symposia, at the local, national and international levels, between public institutions and policy makers, organizations and academics. Various efforts have been made through the management of new businesses through projects, incentives, etc. For the organization of workshops in the same field. A study of most scripts in inventory management has some common and interesting features. Many of these writings deal with most of the problems associated with inventory management; others still focus on the best inventory management model.
This literature review was largely based on journals, some ,owner interview and expert opinions on issues relevant to the objectives of this study. It is divided into the following items:
? Historical sketch of inventory problems
? Specification of an inventory system
? Problem of inventory management
? Inventory Management Techniques
? Re-Order Level
? Economic Order Quantity
? Vendor Managed Inventory
? Activity Based Costing ( ABC )
? The balanced scorecard
2.2 Inventory management
Inventory management could be a bargains with administration of settled and current resources. Moreover, it involves the management of day by day operational supplies and in our case. Stock is additionally a basic resource in any organization in
spite of the fact that agreeing to Barnes (2008) stock is looked at as a risk beneath the just-in-time (JIT) control framework. He agrees with the way accountants treat stock as an resource to the organization. Within the explanation of money related position, stock shows up beneath the current resources of the organization in any case whether it’s for benefit or not for benefit organization. Stock plays a major role and its administration goes a long way in making a difference a firm to develop because it relates to its external customers as well as the inner clients (Gibson, 2013). Therefore, stock is basic within the operation of Aref Contractor Company since they may hold stock as finished products, work in progress or raw materials for advance preparing (Fellows and Rottger (2005) and Shapiro (2009)). Shapiro, (2009) also advises that stock plays a crucial part when it comes to demand 15 planning and as a result, the organization needs to be flexible in its management of its stock when it comes to occasional or regular inventories.
Directors cannot avoid inventory management since it shapes the basis of their in general performance through disposal of uncertainties in their management. For the boards and management of Aref Contractor Company to find out that they are performing over standards, inventory management metric measures should be over board so that they may keep up the management’s certainty (Shapiro, 2009). Subsequently, Just-in-time concept has been found to have a few outlandish hidden cost that increment the cost of doing business in a few cases such as little suppliers to expansive companies .
In any case, the management of stock is important because the firm will be keen to guarantee that its resources and stock are well managed and request estimating is improved to avoid spontaneous acquirement. Stock can double up as stock and resources respectively. Therefore, when an organization improves request estimating, it enables the minimization of operational costs as well as client satisfaction (Hines and Bruce, 2007). When this is often done, it enables an organization plan for the longer term consequently applying different factors that an organization can use for its objective achievement to be specific: request and supply, taken a toll and staff requirements.
2.3 HISTORICAL SKETCH OF INVENTORY PROBLEMS: Although inventory problems are as old as history itself, it has only been since the turn of the century that any attempts has been made to employ analytical techniques in studying these problems. The initial impetus for the use of mathematical methods in inventory analysisseems to have been supplied by the concurrent growth of the contractor company and the various branches of engineering, – especially industrial engineering. The real need for analysis was first recognized in industries that had a combination of production scheduling problems and inventory problems i.e. in situations in which items were produced in lots – the cost of set up being fairly high – and then stored at a factory warehouse (Ardichvili, A., Cardozo, R. and Ray, S., 2003).
2.4 SPECIFICATION OF AN INVENTORY SYSTEM:
The inventory system is basically an input-output system. In order to arrive at the best inventory policy i.e. the best decision rules for when and how much to order, it is necessary to have a clear picture of the inventory system.
Figure 1 An input-Output representation of an Inventory System.
2.5 PROBLEM OF INVENTORY MANAGEMENT:
The problem of inventory involves the formulation of decision rules that answer two important questions:
1. When to place an order (or configure it for production) to restoreinventory?
2. How much should you ask for (or produce) for each supply? the decision-making rules should aim to meet the expected demand at a minimum or maximum cost of benefits. (Puche, J., Ponte, B., Costas, J., Pino, R. and De la Fuente, D., 2016).
In many situations, our assumptions about known quatity and zero or constant delay are not valid. Demand and delay are often variable quantities, so we know best only their probability distribution. If we assume that the question and the delay are random variables, the analysis of the inventory management problem will become very complex. It has been found, however, that reasonably good situations can be obtained for many practical inventory management problems by assuming that the delay is a known constant.
2.6 Inventory management techniques
Inventory management techniques are extremely critical for business operations because their success and cost decrease of the firm’s use require improved supply chain performance and information to the workers (Lambert, 2008). These procedures are basic and information in them is profoundly desirable in this way, managers and obtainment staff need to be able to apply the procedures for the advantage of the organization (Fellows and Rottger, 2005).
Wild (2002) suggests, proper warehousing of stock so that when products items are requested, they are kept at the warehouse for the least time possible minimizing holding cost of stock. Consequently, other operational costs may increase inventory management costs. The way an organization is able to maintain its costs at low levels the way better it is for the year end profits (Palevich, (2012), Wisner, Tan and Leong (2011)). Organizations purchase and sell their stock; there continuously arises balance at the end of the year which have to be be carried over to the next year. Once an organization realizes this, it can create online stock management tool to monitor its stock information by breaking it down into groups by
connecting the categories with its clients. Since organizations works differently in numerous fields, the stock can be classifies by either seasons or financial year conclusion of your most critical clients thus, request forecasting got to be employed to have an proficient supply chain (Poiger, 2010).
2.6.1 Re-Order Level
As organization endeavor to achieve effectiveness, they should be able to understand their ReOrder Levels (ROL) which empowers them know when to order and when not to order. This may be accomplished through the use of quantitative strategies which require proper inventory management (Apte, 2010). Re-Order level is critical for Aref Contractor Company to attain optimal efficiency and be successful leading to high supply chain performance and client satisfaction, at that point they need to have two reorder levels one that’s normal whereas the other is an emergency one in case of disaster (Beamon and Kotleba, 2006).
2.6.2 Economic Order Quantity
Bachetti, Plebani, Saccani and Syntetos (2010) contends that inventory management got to be organized in a consistent way so that the organization can be able to know when to order and how much to order. This will only be accomplished through the Economic Order Amount (EOQ) computation. Economic order amount enables organization to plan their stock replenishment on a timely basis such as month to month, quarterly, half yearly or yearly basis. By so doing, it empowers firms to have minimal storage costs or zero within their warehouses since stock is coming in and going out instantly. In this way, this tends towards the just in time concept of supply chain management received by Toyota motor Organization in Japan which helps in having zero holding costs, (Schonberger, 2008). In this way, as
organizations try to progress on the stock management, the Economic Order Quantity (EOQ) and Re-order Point (ROP) are critical tools that organizations can use to guarantee that stock supply does not hit a stock out as explained by Gonzalez and Gonzalez (2010). Over time, organizations have been keeping up their stock in a haphazard way which has required a change within the way firms conduct their business. Stock outs have been experienced adversely leading to client dissatisfaction hence; firms are changing their approach to be able to stay important by employing Economic Order Quantity (EOQ) and Re-order Point (ROP) for client satisfaction.
The derivation of the basic EOQ model (Quantity of economic order) is quite simple in a situation
Figure 2 EQO Equivalents
To determine the economic order quantity given the fixed demand assumption, we can
evaluate the following model:
D = Total annual demand in unit
Q = Economic order quantity in unit
D/Q = Number of orders placed and received during the year
Q/2 = Average inventory
Co = Cost of placing an order
Cc = Carrying cost per unit of inventory during the year
Total inventory cost is defined as the whole of ordering cost and carrying cost. To define total inventory cost in terms of the controllable variable order amount (Q), we must express both types of cost in terms of amount. Total ordering cost can be gotten by multiplying the number of orders D/Q by the cost of placing an order (Co), consequently:
Annual ordering cost = D/Q Co
So also, annual carrying cost can be found by multiplying the carrying cost per unit of inventory (Cc) by the average number of units in stock (Q/2). This expression for average inventory accept a steady rate of demand all through the year.
Annual carrying cost = D/2 Cc
Combining the two components, we get total inventory cost for the period:
TC = D/Q Co + Q/2 Cc
Review that this variable can be controlled by management to yield the least cost for inventory amid a particular time period. From Fig. 2.5.2 we know that optimum solution is that quantity (Q*) that can therefore be gotten by setting the equation for ordering cost equals to the equation for carrying cost and solving for Q: thus:
Annual carrying cost = annual carrying cost
Cc Q/2 = DCo/Q
Cc Q2 = 2DCo
Q2 = 2DCo/Cc
The ideal solution is also obtained by separating the total cost function to get an equation that expresses the rate of change in total cost with respect to changes in quantity. When the first derivative of the total cost function is set equal to zero, the economic order quantity is obtained by solving for Q.
The operation is as follows in three steps:
1. Take the first derivatives of total cost function:
TC = D/Q Co + Q/2 CC
d(TC)/dQ = -DCo/Q2 + Cc/2
2. Set the first derivative equal to zero, and solve for Q:
-DCo/Q2 + Cc/2 = 0
3. Test to determine the solution is a minimum.
d2(TC)/dQ2 = 2DCo/Q3 0
Given the assumption of fixed demand, the equation can be utilized in finding the economic order quantity (Q*), which is equal to the square root of 2 times demand (D) times ordering cost (Co) divided by carrying cost (Cc) For example; assume the following example:
D = 3000 units per annum
Co = N30
CC = N2 per unit per year
To obtain the Economic order quantity, we evaluate the basic equation using the values for demand, ordering cost and carrying cost.
Q = ?(2 × 300 × 30 ÷ 2)
Q = 300 units
The optimum order quantity is 300 units. Observe that a total of ten order will be placed.
D = 3000 = 10
Q* = 300
For a total cost due to ordering of 300. Average inventory will be 150 units.
Q*/2 = 300/2 = 150
an inventory carrying cost will equal N300. Therefore, total inventory cost will be equal to N600.
Just-in-time (JIT) is a positive performance to the company . Inventory should be managed by using JIM to reduce loses and customer`s satisfaction. Invontory management in organizations that kept too much stock in their warehouse were an wasteful supply chain, whereas those that kept very few stock in their warehouse were exceptionally productive (Lai and Cheng, 2009). Thus, it was found out that keeping direct stock is nice and it empowers an organization work minimal costs of holding costs as well as keep setup cost at bare minimum, increase unwanted lead time and produce goods as per clients order. Eventually, this empowers an organization accomplish total quality control (TQC) as efficient and successful supply chain management are employed inside a firm’s value chain (Datta, 2007).
Figure 3 Source: manufacturingtomorrow.com
2.6.4 Activity Based Costing Analysis
Fellows and Rottger (2005) agree that having stock in your store has an advantage for the organization since clients will be satisfied immediately . With stock in your warehouse, an organization has the advantage of timely delivery . Thus, Aref Contractor Company got to guarantee that they have adequate stock for their operations . One way they can accomplish this is thorough the “Pareto Analysis” also known as Activity Based Costing (ABC) analysis. ABC analysis is where stocks are classified into three categories to be specific : A – stock items that are of high value and material to the organization but low volume such as building and engine vehicles; B – stock items which are of medium volume; C – stock items baring minimal value but are of big volume .
2.6.5 Vendor Managed Inventory
Management of inventory decides the way an organization will pushed itself to tall performance efficiency. A few organizations have resulted to vendor managed inventory (VMI) systems which help the provider to monitor customer’s stock usage. Through this VMI system, clients will avoid stock outs since the suppliers will have already recharged their inventory. The key viewpoint here is communication which should be planned well from the starting of business relations between the supplier and the customer (Frahm, 2003). Vendor managed inventory saves an organization immense finance and time since the supplier will be able to monitor its customer’s stock levels and make a point of replenishing them. As the client and supplier connected, the communication channel has to be clear and quick so that they may avoid instances of stock outs. Where the client expects having an irregular order levels, they should notify the supplier so that they can adjust their production to cater
for the demand. Moreover, we presently have Joint Managed Inventory (JMI) which is an progress level of vendor managed inventory (VMI). It looks for to integrate the supplier more firmly into the customer’s organization by using the point of sale (POS) which permits the supplier to see the real time data of its customer’s stock (Frahm, 2003).
2.6.6 The balanced scorecard
The balanced scorecard has been used to evaluate the quality of inventory management performance measure and its improvement. In any case, the balance scorecard complements financial measures of past performance with measures of drivers of future performance. The objectives and measures for organizational inventory management performance come from four perspectives; financial, client, internal process and learning and development (BPP, 2008). Consequently, Aref Contractor Company Balance scorecard in relation to transport management has been molded to upgrade its transport and requirements owing to the fact that it has multi-discipline functionalities in its operations. The performance management of Aref Contractor Company has been improved and progressed to foster smooth running of the institution over Jeddah ,Saudi Arabia by guaranteeing that clients are treated well (Sutherland, David and Alistair, 2002).
2.7 Theoretical Recommendation
It is expected that the application of Economic Order Amount, Marginal Analysis, and Just-in-Time, will improve Aref Contractor Company performance. As the staff gets it the strengths of having these strategies, at that point the unnecessary costs caused will be avoided. Therefore, the strategies will progress performance within the following ways: