SCM Opt

Summerr Project Reeport
On
S
Supply
Chain Optiimization
n:
Integgration off Sales & Operations
O
s Planning
g with Suppply Chainn Managem
ment
throough Deveelopment of Inventoory Strateg
gy & Desiign of Invventory Po
olicy
u
undertaken
at
a
Sterlite Technologie
T
es Limited
In The Partial Fulffillment of Summer
S
Intternship
of
P Graduaate Diplomaa in Industrial Engineerring (PGDIE
Post
E)
By
Aaakash Kumar Varma (Roll No. - 01)
3
PGDIE- 43
Undeer the guidan
nce of
Prof. Ruchita
R
Gup
pta
Assistannt Professorr
Operatiions Management
NITIE, Mumbai
urabh
Mrr. Rohit Sou
Heaad, Supply C
Chain Manaagement
Telecom Cablees
Sterrlite Technoologies Limiited
Nationall Institute of
o Industriaal Engineerring (NITIE
E), Mumbaai-400087
(April 2014 Jun
ne 2014)
Contents
LIST OF FIGURES
iv
LIST OF TABLES
LIST OF ABBREVIATIONS
vi
CERTIFICATE OF PROJECT COMPLETION
vii
CERTIFICATE OF ORIGINALITY
viii
ACKNOWLEDGEMENT
ix
EXECUTIVE SUMMARY
CHAPTER 1: INTRODUCTION
1.1 Importance of Supply Chain Management and Inventory Management
1.2 Introduction to the topic
1.3 About the company
1.3.1 Introduction
1.3.2 Key Products
1.3.3 Infrastructure
1.3.4 Expansion Plans
1.3.5 Impacts
1.4 Problems and Objectives
1.5 Scope of the Project
CHAPTER 2: LITERATURE REVIEW

CHAPTER 3: METHODOLOGY
9
12
3.1 Objectives
12
3.2 Methodology followed to meet the objectives
12
3.3 Quantitative Approach
14
3.4 Qualitative Approach
15
CHAPTER 4: DATA COLLECTION AND ANALYSIS

4.1 Assumptions
4.2 Sources of Data
Summer Project Report, NITIE Mumbai
17
17
17
Page ii
4.3 Re-Organization of data to meet the objectives
18
4.4 Analysis
18
4.4.1 Forecast Accuracy
18
4.4.2 ABC-XYZ Classification
19
4.4.3 Safety Stock
23
4.4.3.1 Method 1: Statistical Method
23
4.4.3.2 Method 2: Using Forecast Accuracy: MAD for Lag 0
24
4.4.3.3 Method 3: Using Forecast Accuracy: MAD for Lag 0
24
4.4.3.4 Method 4: Accountancy Method
25
4.4.3.5 Method 5: Theory of Constraint Method called as
25
Dynamic Buffer Management (DBM)

4.5 Simulation
CHAPTER 5: RESULTS AND FINDINGS
26
28
5.1 Discussions
28
5.2 Findings
28
5.3 Results
29
5.4 Recommendations
35
CHAPTER 6: CONCLUSIONS
37
6.1 Benefits
37
6.2 Academic Contributions
38
6.3 Future Scope
39
REFERENCES
40
Page iii
List of Figures
Fig. 1.1: Business Overview of Sterlite Technologies Ltd.
Fig. 1.2: Sterlite Technologies at a glance
Fig. 1.3: Sterlites Customers
Fig. 1.4: Footmark of Sterlite Technologies Ltd. across the world
Fig. 2.1: Optimization process of Inventory Management
Fig. 2.2: Derivation of classification and strategies by means of an ABC-XYZ
11
analysis
Fig. 3.1: Approach followed for meeting the objectives
13
Fig. 4.1: Pareto Analysis for ABC Classification
22
Fig. 4.2: Chart showing number of classification in each classification
23
Fig. 4.3: Snapshot of Designed MS-Excel Simulation
26
Fig. 5.1: Snapshot of forecast accuracy dashboard
30
Fig. 5.2: Pie chart showing percentage of items in each category
31
Fig. 5.3: Designed Process flow chart for procurement process
31
Fig. 5.4: Snapshot of Simulation Screen
35
Page iv
List of Tables
Table 1.1: List of Plant Locations and respective products of Sterlite
Technologies Ltd.
Table 5.1: List of Re-Order Level and Safety Stocks calculated for major
29
materials
Table 5.2: Number of elements in ABC-XYZ classification
30
Table 5.3: Complete Matrix showing the tasks vs. responsibility for complete
32
procurement process
Table 5.4: Designed Raw Material Inventory Strategy
33
Page v
List of Abbreviations
S&OP
Sales and Operations Planning
SCM
Supply Chain Management
ROL
Re-Order Level
OFC
Optical Fiber Cable
FY
Financial Year
CoV
Coefficient of Variation
STL
Sterlite Technologies Ltd.
APICS
American Production and Inventory Control Society
MAPE
Mean Absolute Percentage Error
MAD
Mean Absolute Deviation
GUI
Graphical User Interface
EOQ
Economic Order Quantity
Page vi
Certificate of Project Completion
This is to certify that Aakash Kumar Varma, student of PGDIE, Batch No. 43 has
successfully completed the project titled Supply Chain Optimization: Integration of Sales &
Operations Planning with Supply Chain Management through development of Inventory
strategy & design of Inventory Policy at Sterlite Technologies Ltd., Optical Fiber Cable
Division, Rakholi, Silvassa under guidance of Prof. Ruchita Gupta, Assistant Professor,
Operations Management, NITIE, Mumbai and Mr. Rohit Sourabh, Head, Supply Chain
Management, Telecom Cables, Sterlite Technologies Ltd. from 7th April, 2014 to 6th June,
2014.
Based on the professional work done by him/her, this report is being submitted for the
partial fulfillment of Post-Graduation Diploma in Industrial Engineering (PGDIE) at NITIE,
Mumbai.
I wish him all the best for his future endeavors.

Date: 06th June, 2014
Prof. Ruchita Gupta

Assistant Professor
Operations Management
NITIE, Mumbai
Mr. Rohit Sourabh

Head, Supply Chain Management
Telecom Cables
Sterlite Technologies Limited
Page vii
Certificate of Originality
This is to certify that the project entitled Supply Chain Optimization: Integration of
Sales & Operations Planning with Supply Chain Management through development of
Inventory strategy & design of Inventory Policy has been carried out by me at Sterlite
Technologies Ltd., Optical Fiber Cable Division, Rakholi, Silvassa under guidance of Prof.
Ruchita Gupta, Assistant Professor, Operations Management, NITIE, Mumbai and Mr.
Rohit Sourabh, Head, Supply Chain Management, Telecom Cables, Sterlite Technologies
Ltd. from 7th April, 2014 to 6th June, 2014.
Based on the professional work done by me, I am submitting this report for the partial
fulfillment of Post-Graduation Diploma in Industrial Engineering (PGDIE) at NITIE,
Mumbai. This report has not been published and submitted to any other institute or
university.
Date: 06th June, 2014
Aakash Kumar Varma

Roll No.: 1
PGDIE-43 (Batch of 2013-15)
NITIE, Mumbai
Page viii
Acknowledgement
As we express our gratitude,

we must never forget that the highest appreciation is not to utter words but to mean it"
I take this opportunity to extend my sincere thanks to Sterlite Technologies Ltd. for
providing a unique platform to earn exposure and garner knowledge in the field of Inventory
management of supply chain.
.
I am highly indebted to my mentor Mr. Pankaj Priyadarshi, Chief Commercial
Officer (CCO), Sterlite Technologies Ltd. for offering me a unique platform to gain
exposure and utilize my knowledge through this project.
During the entire project duration, I have received endless help and guidance from my
guide Mr. Rohit Sourabh, Head, Supply Chain Management, Telecom Cables. I also thank
Mr. Srikanth Ankhala, Manager Supply Chain Management, for their co-operation and
valuable advice throughout the course of my project.
I also take immense pleasure in extending my thanks to my Summer Project Internal
Guide Prof. Ruchita Gupta (Ph.D.), Assistant Professor, NITIE, Mumbai for providing
valuable insights during the project
I wish to express my deep gratitude to all those at the Rakholi plant, Silvassa who
extended their helping hands towards me in various ways during my project work.
I would like to express my sincere thanks to Mr. Venkatesh Murthy (Plant Head), Mr.
Gunjan Sharma (Manager- S&OP), Mr. Ashish Jehurkar (Head- HR) and Mr. Ankit
Mujumdar (Officer- HR) who have helped me at all stages during this project and whose
suggestions were indispensable throughout & played a great role in making this a useful
project. I am thankful to the NITIE Communication Centre for providing guidelines for report
making.
There are many who I may have left out in the acknowledgement, but whose
cooperation was indispensable in the fulfillment of the project.
Aakash Kumar Varma

Roll No. - 1
PGDIE-43
Page ix
Executive Summary
Sterlite Technologies Ltd. is one of the Leading suppliers of Optical Fibers,
Telecommunication Cables and Power Transmission Conductors. It is partially owned by
Sterlite Industries (India) Limited, which is in turn 77%-owned by Vedanta Resources. The
vision of the company is To connect every home on the planet.
The company faces the problem of unavailability of materials at right time and
absence of a defined inventory model and policy at OFC, Rakholi plant. There is no defined
method for inventory management. Therefore, this project work is done to solve this very
crucial and live problem of inventory management. Currently, the plant is working with
presumed and gut-feeling values of the people involved in procurement. Therefore, this
project was to replace the method with more robust and reliable method through the use of
various literature and analysis.
The major objective of the project is to increase the availability of raw materials while
reducing the problem of stock-outs and high inventory. Therefore, the levels suggested are
the optimum and do not face this problem subjected to similar demand pattern. Secondly, the
forecast available from Sales and Operations Planning (S&OP) is not aligned with
procurement process and this forecast is not much accurate; so some process has to be
defined to link both of them to streamline the process. So, a process map and strategy was
defined to align both. Project also involved deciding the inventory policy for all the materials.
The methodology followed to achieve the goal includes thorough and careful study of
the current process of inventory management and its drawbacks. To achieve the desired
objective, firstly various analyses was done and then the strategy was defined based on it. It
involved analysis of forecast accuracy testing, classifying the materials on ABC-XYZ
classification and re-order level & safety stock calculations using various methods.
The major outcome of the project was a well-defined raw material inventory model
and an inventory policy. This project was presented to the management who gave some
suggestions (which were incorporated) and want such analysis to be done for each plant of
Sterlite Technologies Ltd. Also the designed version 1.0 of inventory policy is submitted to
management for review, so that it can be published. All the objectives defined in the starting
were completely met.
Page x
Chapter-1
Introduction
1.1
Importance of Supply Chain Management and Inventory Management

Supply chain management is the active management of supply chain activities to
maximize customer value and achieve a sustainable competitive advantage. It represents a

conscious effort by the supply chain firms to develop and run supply chains in the most
effective & efficient ways possible. Supply chain activities cover everything from product
development, sourcing, production, and logistics, as well as the information systems needed
to coordinate these activities.
The organizations that make up the supply chain are linked together through
physical flows and information flows. Physical flows involve the transformation, movement,
and storage of goods and materials. They are the most visible piece of the supply chain. But
just as important are information flows. Information flows allow the various supply chain
partners to coordinate their long-term plans, and to control the day-to-day flow of goods and
material up and down the supply chain.
Sales and operations planning (S&OP) is an integrated business management process
developed in the 1980s by Oliver Wight through which the executive/leadership team
continually achieves focus, alignment and synchronization among all functions of the
organization. The S&OP planning includes an updated forecast that leads to a sales plan,
production plan, inventory plan, customer lead time (backlog) plan, new product
development plan, strategic initiative plan and resulting financial plan. Plan frequency and
planning horizon depend on the specifics of the industry. Short product life cycles and high
demand volatility require a tighter S&OP planning than steadily consumed products. Done
well, the S&OP process also enables effective supply chain management.
APICS defines S&OP as the "function of setting the overall level of manufacturing
output (production plan) and other activities to best satisfy the current planned levels of sales
(sales plan and/or forecasts), while meeting general business objectives of profitability,
productivity, competitive customer lead times, etc., as expressed in the overall business plan.
One of its primary purposes is to establish production rates that will achieve managements
Page 1
objective of maintaining, raising, or lowering inventories or backlogs, while usually

attempting to keep the workforce relatively stable. It must extend through a planning horizon
sufficient to plan the labor, equipment, facilities, material, and finances required to
accomplish the production plan. As this plan affects many company functions, it is normally
prepared with information from marketing, manufacturing, engineering, finance, materials,
etc.
Sales and operations planning has also been described as "a set of decision-making
processes to balance demand and supply, to integrate financial planning and operational
planning, and to link high-level strategic plans with day-to-day operations."
The project revolves around inventory management and inventory control. According
to Investopedia, inventory management involves creating a purchasing plan that will ensure
that items are available when they are needed (but that neither too much nor too little is
purchased) and keeping track of existing inventory and its use. Two common inventorymanagement strategies are the just-in-time method, where companies plan to receive items as
they are needed rather than maintaining high inventory levels, and materials requirement
planning, which schedules material deliveries based on sales forecasts.
Inventory management is important to ensure quality control in businesses that handle
transactions revolving around output products. Without proper inventory control, a large
organization may run out of stock on an important item. A good inventory control system will
alert the manufacturer when it is time to reorder. Inventory control is also an important means
of automatically tracking large shipments.
1.2
Introduction to the topic

The topic of the project is, Supply Chain Optimization: Integration of Sales &
Operations Planning with Supply Chain Management through development of Inventory

strategy & design of Inventory Policy
The topic includes two aspects viz. Supply Chain Management and Sales and
Operations Planning. It includes integration of both the processes and design of inventory
strategy while considering forecasting data also.
Page 2
The opttical fiber demand

d
of Sterlite
S
Techhnologies iss highly varrying and deepends on customer
c
orders. In such a scenario maintaining raaw material availabilityy with low lead times and
a also
having lower cost is
i challengiing task. Thhis project iss thus to bridge the gapp between th
hese two
i.e. cusstomer dem
mands and raw
r
materiial inventorry managem
ment. It inccludes desiigning a
strategyy for maintaaining minimum invenntory and maximum
m
avvailability. A
Also a mod
del-cumdashboaard has to be
b designedd for the deffined strateg
gy. Its a way
w to impleement the motto
m
on
which company
c
waants to movve i.e. Less inventory, more availaability.
1.3
About the Company
1.3.1
Introductioon
Sterlite
T
Technologie
s
Ltd.
iss
an
Ind
dian
manuufacturer
oof
optical
fibers,
telecom
mmunicationn cables annd power trransmission conductorss and expoorts optical fiber to
overseaas markets in
i China, Euurope and South
S
East Asia.
A
The company
c
waas founded in 2000
and is listed
l
on thee Bombay Stock
S
Exchaange and th
he National Stock Exchhange of India. The
companny changed its name to
t 'Sterlite Technologiies Limitedd' from Decc.2006. It iss India's
only fullly integrateed Optical Fiber
F
produucer and onee of the larggest supplierrs of Opticaal Fibers
to oversseas marketts in China, Europe andd South East Asia.
Sterlite Tecchnologies is partially owned by Sterlite Inddustries (Inddia) Limited
d, which
is in turrn 77%-ownned by Vedaanta Resourrces.
The Compaany has an optical fibeer manufactturing plantt located at Aurangabaad, India
and Tellecom Cablle & Powerr Transmisssion Conducctor plants at Silvassa,, Pune & Haridwar
H
India. It has a reveenue of 244545 millioon (US$410 million) annd an Operaating incom
me 2461
million (US$41 miillion).
1.3.2
Key Produ
ucts
The Key products
p
of the compaany are Opttical Fiberss, Fiber Optic Cables, Copper
Telecom
m Cables, Structured Data Cabbles, ADSL
L2+ Modem
ms and maany other telecom
productts
Summer Project Reeport, NITIE Mumbai
Page 3
The business overview of Sterlite Technologies Ltd. is as follows:

Sterlite
Technologies
Telecom
Product &
Solution
Power
Neutral Network
Product
Power Grid
Optical Fibers
Home
Power
Conductors
Power Optic
Cables
Towers
Power Cables
Data Cables
FMBE
OPGW
System
Integration
Rod and
Accessories
Fiber
Fig. 1.1: Business Overview of Sterlite Technologies Ltd.
Source: www.sterlitetechnologies.com
1.3.3
Infrastructure
STL is India's only fully integrated Optical Fiber producer and one of the largest
suppliers of Optical Fibers to overseas markets in China, Europe and South East Asia.
Page 4
With the aim to continuously surpass the expectation of its customers, Sterlite has
built state of art facilities. With Pune as headquarter, manufacturing plants are located at
Aurangabad, Silvassa, Jharsuguda and Haridwar.
Equipped with a product portfolio that includes power conductors, optical power
ground wire, EHV/HV power cables, optical fibers, telecommunication cables and a
comprehensive telecom systems / solutions portfolio, STL always strive to fulfill the everincreasing communication need of its customers. Currently, Sterlite is also executing multimillion dollar power transmission system projects, pan-India.
Location
Product
Aurangabad
Optical Fiber
Silvassa
Haridwar
Telecom Cable & Power Transmission

Conductor plants
Telecom Cable & Power Transmission
Conductor plants
Jharsuguda
Power Transmission Conductors
Table 1.1: List of Plant Locations and respective products of Sterlite Technologies Ltd.
Source: www.sterlitetechnologies.com
1.3.4
Expansion Plans
Sterlite's expansion portfolio of three projects aggregate to a total value of about Rs.
40 Billion. These transmission systems would evacuate and transmit power through a
network of about 2200 km of transmission lines and 2 substations; in the states of
Maharashtra, Gujarat, Madhya Pradesh, Chhattisgarh, West Bengal, Bihar and Assam.
1.3.5
Impacts
30%
of Sterlite revenues are from international market
75+
Countries are connected by Sterlite
of the global telecom companies rely on Sterlite for innovative solutions
25%
of Indias national power grid runs on Sterlite conductors
Page 5
Fig. 1.2: Sterlitte Technolo

ogies at a gllance
Source: www.sterliitetechnolog
gies.com
Fig. 1.3: Sterlites

S
Customers
C
gies.com
Page 6
Fig. 1.4: Footmaark of Sterllite Technologies Ltd. across the world

gies.com
1.4
Problem and Objectiives

gies are verry diverse aand custom
mized for
The produccts offered by Sterlite Technolog
y of raw
each cuustomer. These diverse products reequire diverrse raw materials and thhis diversity
materiaals for differrent productts creates prroblem of availability
a
o materialss at right tim
of
me. Also
the foreecast of raw
w material derived frrom forecasst of produucts is not much accu
urate, so
makingg the raw maaterial availlable is the major problem the com
mpany is facing. So in order to
solve thhe stated prooject my maajor objectivves:
1) To study the forecast
fo
accuuracy for thhe raw mateerials and design
d
a forrmat to mon
nitor the
me
sam
2) To develop
d
a ABC-XYZ
A
c
classificatio
on for raw materials
m
bassed on histoorical data
3) To standardize
s
the safety stock levelss for the raw
w materials and evaluaate its reliab
bility for
variious methodds
Page 7
4) To implement inventory strategy that should be followed based on ABC-XYZ

classification
5) To design a dynamic dashboard for inventory model based on the strategy

Apart from this, there exists another problem of integration of Sales & Operations
Planning (S&OP) with Supply Chain (Procurement and Production). Here the variation in
different forecast of Lag 0, Lag 1 and Lag 2 leads to either delay in products to customers or
high inventory levels. So my second part of the project is to study the impact of this variation
in different forecasts and suggests some steps or method to reduce the effect of this
inaccuracy.
The second part of this project involved designing the complete inventory policy for
all the type of materials viz. raw materials, finished goods, work-in-progress, scrap, spares,
fibers and overage inventory. It involved designing the rules and integrating S&OP into these
policies.
1.5
Scope of the Project
The Scope of the project is Optical Fiber cable (OFC), Rakholi Plant, Silvassa. All the
analysis done is applicable to this business only but similar analysis may be extended to other
businesses also, as and if required.
Page 8
Chapter-2
Literature Review
The complete project revolves around inventory management. It requires in-depth
research of all the parameters requires for defining inventory strategy and model. These
include safety stocks, inventory classifications, forecasting accuracy, re-ordering of
inventory, simulations and few more. Most of the things are referenced from some article or
research paper.
The objective of the project is to obtain some useful solution for the
company on these backgrounds. The project involves the various literature and its inferences
for working upon.
The supply chain encompasses all activities associated with the flow and
transformation of goods from the raw materials stage (extraction), through to the end user as
well as the associated information flows. Materials and information flow both up and down
the supply chain. Supply chain management (SCM) is the integration of these activities,
through improved supply chain relationships, to achieve a sustainable competitive advantage
(Ballou, 2004).
Inventory optimization is a very niche technique which required a detailed analysis to
be followed. The process of optimization process of Inventory Management is depicted
below in Fig 2.1
Actual
Analysis of
Inventory
Situation
ABC-XYZ
Analysis
Strategy
Definition
Implementati
-on and
Controlling
Fig. 2.1: Optimization process of Inventory Management

Source: Hofmann, Maucher, Piesker & Richter, 2011
Firstly, incorporating the forecast accuracy model to monitor it; thereby help in taking
decision whether to consider forecasting in inventory model or not. There are various
methods of depicting forecast accuracy, but in the project Mean Absolute Percentage Error
Page 9
(MAPE) is considered most appropriate. It is calculated as ratio of mean error and actual
consumption, but according to an article while calculating forecast accuracy (FA) maximum
of forecast and actual should be used in the denominator (Gilliland, 2010). This is because
when you use the maximum of forecast or actual as the denominator, the forecast accuracy
metric is constrained between 0 and 100%, making it conceptually easier for a wider
audience, including the executive team, to understand.
Secondly, about classification of inventory into ABC and XYZ categories; used in
clubbing of items. There are a lot of resources available which describe about these
classifications. The method of inventory classification of materials into ABC and XYZ is
described on the basis of Pareto analysis and analysis of variability (Besta, Janovskam,
Vilamova, Voznakova & Kutac, 2012). It states that ABC classification is done on the basis
of consumption value with top 70% value in A-class items, next 20% in B-class and
remaining 10% in C-class. Similarly XYZ classification is done on the basis of analysis of
variation i.e. Coefficient of Variation. For elements CoV below 0.5 fall in X-class, between
0.5 and 0.9 fall in Y-class and remaining in Z-class.
Lastly discussing about safety stocks and re-order point calculations, there are large
number of techniques to calculate it. All the major techniques are discussed further in the
analysis part of the report. The simple statistical method states that safety stock is the product
of lead time, service level factor and standard deviation of demand (Thomopoulos, 2006).
Similarly it has been derived from Mean Absolute Deviation Method. Next is the
accountancy method (Obaidullah Jan, 2012) which considers the maximum consumption as a
parameter for calculation.
The major part of project was defining the strategy for the materials. In defining the
strategy knowing the features of each classification is an important step. The process of
strategy based on ABC-XYZ classification is depicted below in Fig 2.2.
Page 10
Value Share
High
High
Order-Synchronous
Order-Synchronous
procurement (e.g. just in
time)
time)
Order-Synchronous
Low
Forecasting Precision
Near Order Procurement
Z
Procurement according to
demand
Procurement according to
Low
time)
Inventory Procurement
demand
Fig. 2.2: Derivation of classification and strategies by means of an ABC-XYZ

analysis
Source: Hofmann, Maucher, Piesker & Richter, 2011
Detailed analysis and discussion is carried on in the further chapters.
Page 11
Chapter-3
Methodology
3.1
Objectives
The project revolves around optimizing the raw material inventory levels for the
organization. While achieving this final objective of an inventory policy and strategy for the
organization, few other objectives were required to be met. These were required to meet the
final objective of designing a complete inventory strategy. The first level of analysis was
studying the forecast accuracy for raw materials. This analysis helped to check for the
materials where forecast can be used for planning. A dashboard was also designed to monitor
this accuracy in future by just changing consumption data and forecasted values.
Next step was to obtain ABC-XYZ classification to strengthen the attention on some
major items and saving much cost. Here both the analysis for ABC classification was done
separately on consumption data for last financial year while XYZ classification was done on
demand pattern for the same period. Then both the classifications were combined together to
obtain ABC-XYZ Classification.
After these two analyses, safety stocks were calculated and their values were
simulated for the various re-order level and re-order quantity. These simulations brought a
more in-depth outlook into safety stock values and helped in better method for the same. So
after achieving these objectives, the final objective was to design a strategy for inventory and
suggest a complete policy for the same.
3.2
Methodology followed to meet objectives

After complete analysis of the current scenario and its drawbacks, an approach was
decided to fulfill all the objectives and develop a well-defined strategy. The approach
followed to meet the objective of a defined inventory policy and strategy for the organization
is depicted in the figure on next page.
Page 12
Inventory
Strategy and
Model
Detailed Raw Material

Analysis
Forecast
Detailed Inventory Strategy based

on ABC-XYZ Classification
Safety Stock Analysis and its

simulation
Defining
various
inventory
parameters for the various classes
of materials
ABC-XYZ Classification
Raw
Material
Accuracy
Fig. 3.1: Approach followed for meeting the objective

As depicted in the figure above, all the analyses are performed on the raw materials
and the inferences from these analyses are utilized in obtaining inventory strategy and policy.
The complete methodology adopted for the project can be summarized in the following steps:
1.
Identified the problem statement and the major objectives to be achieved
2.
Worked out the timeline and plan of the project
3.
All the major data required for the analysis was collected
4.
Primary research was done on how these objectives can be achieved for project
objective
5.
Discussed with people responsible for better outlook to the problem
6.
Performed the various analysis and discussed about the outcomes with the guide for
its authenticity with respect to real scenarios
7.
On the basis of all the analysis and their outcome, suggested an inventory strategy to
be followed
Page 13
The complete approach can be divided into two categories: qualitative and quantitative which
are discussed below.
3.3
Quantitative Approach
Quantitative research refers to the systematic empirical investigation of social
phenomena via statistical, mathematical or numerical data or computational techniques. The

objective of quantitative research is to develop and employ mathematical models, theories
and/or hypotheses pertaining to phenomena. The process of measurement is central to
quantitative
research
because
it
provides
the
fundamental
connection
between empirical observation and mathematical expression of quantitative relationships.

The project involves many tools which help in quantitatively analyzing all the
dimensions of the objective; starting with the ABC-XYZ classification to safety stock, to
forecast accuracy and simulations. All the tools were instrumental in coming to the final
results of a sustainable strategy for inventory.
In the testing of forecast accuracy, the following steps were followed (in Excel):
1. Obtained the forecast and consumption data for FY 13-14
2. Calculated month-on-month forecast error and accuracy for all the materials
Forecast Error = Absolute Error/Maximum (Forecast, Actual)
3. Designed a dashboard for the same to depict the graphs for the same
4. Obtained the maximum and minimum accuracy so that range is known for better
approach
Next step in the analysis was classifying the elements based on ABC-XYZ. Firstly, ABC
classification was done based on consumption value (turnover) and then XYZ classification
based on consumption pattern (turnaround). The steps for defining ABC classification (in
Excel):
1. Obtain the rate and total consumption for FY 13-14
2. Obtain the annual usage value (= rate * total consumption)
3. Calculated percentage usage value (= annual usage value/total usage value *100)
4. Sort the materials on the basis of percentage usage value from highest to lowest value
Page 14
5. Calculate the cumulative percentage usage value for descending order values
6. Assign the top 70% cumulative value to A class, next from 70% to 90% to B-class
and remaining to C-class
Similarly the steps for defining XYZ classification (in Excel):
1. Obtain the monthly consumption for the raw materials for FY 13-14
2. Calculate the standard deviation and average of consumption pattern
3. Calculate Coefficient of Variance (CoV)
CoV=Standard Deviation/Average
4. Now classify as follows:
a. X Class- CoV < 0.5 or consumption more than 10 months
b. Y Class- CoV < 0.9 or consumption more than 6 months
c. Z Class- CoV > 0.9 or consumption less than 6 months
Combining both ABC and XYZ classifications we get ABC-XYZ Classification
Next are the safety stocks and their calculations. There are total of five methods for
safety stock and Re-Order Level calculations. All the methods are described in next chapter
with required formulas.
After all the calculations, these values were simulated for maximum consumption for
the last financial year for each material and the most suitable method was selected based on
them. This simulation has the advantage of giving the reliability that if past consumption
pattern is continued then the calculated values will sustain and consumption.
3.4
Qualitative Approach
Qualitative research is a method of inquiry employed in many different academic
disciplines, traditionally in the social sciences, but also in market research and further
contexts. Qualitative researchers aim to gather an in-depth understanding of human
behavior and the reasons that govern such behavior. The qualitative method investigates
the why and how of decision making, not just what, where, when. Hence, smaller but
focused samples are more often used than large samples.
Page 15
Although most of the analysis was quantitative, qualitative analysis was done in
defining the method by interpreting the simulations. Firstly, there were total of 4-5 methods
for all the 100 items, but in order to improve simplicity these were reduced to maximum of 2
methods. This made the task of modifying it again easy. But this required few
compensations in terms of inventory value rise in some cases while reduction in inventory
for others. This decision was based on experience and numbers.
This analysis was majorly utilized in later part of the project i.e. defining the
inventory policy for all the materials. For each type of material, the person handling was
interviewed and complete process was identified. These methods were analyzed in the light
of experience of senior people from the company. On the basis of numerous discussions and
debates the first version of inventory policy was formulated and sent to management for
approval on 31st May, 2014.
Page 16
Chapter- 4
Data Collection and Analysis
4.1
Assumptions
The following assumptions have been for the analysis of the project:
All months have equal number of days i.e. 30
Consumption within a month is constant on day to day basis (can be modified in

model, if required)
All the analysis is done on the consumption and forecast data received for FY 201314
All the rates and lead times taken in the analysis are latest for the month of April14,
but may vary from time to time
Analysis is done for combination of items assuming no extra cost for making them
into specific requirements
4.2
Sources of data
The complete analysis is basically performed on the historical data for financial year 201314. The major data obtained for the complete project were:
Consumption data for the raw materials for FY 13-14
Forecasted data (both Lag 1 and Lag 0) for raw materials
Rates and lead times for all the materials
Container/Lot Size for the materials available from supplier size
Service Level that the company wants for raw materials in the plant
Page 17
4.3
Re-Organization of data to meet the objectives

The data obtained from various sources was modified in the format required for
analysis. All the data available in different formats was converted to one format so that
similarity between models and values is maintained. All the various files were combined
together to obtain one files from which data can be fetched for analysis, thereby reducing the
task every time.
4.4
Analysis
All the analysis is performed on the raw material data including consumption pattern,
forecasts, rates, lead time, etc. The complete analysis performed for the project can be
divided into further categories as defined below:
4.4.1
Forecast Accuracy
Forecast accuracy is the process of determining the accuracy of forecasts made
regarding raw material demand. The forecast error needs to be calculated using consumption
as a base. There are several forms of forecast error calculation methods used, namely Mean
Percent Error, Root Mean Squared Error, Tracking Signal and Forecast Bias. In this project,
we have considered Mean Percent Error for analysis. Also weighted forecast accuracy is also
calculated for more visibility.
|
|
,
A complete dynamic dashboard has been designed for monitoring the forecast
accuracy and proper decisions can be taken.
Use of the accuracy estimates
The accuracy, when computed, provides a quantitative estimate of the expected
quality of the forecasts. For inventory optimization, the estimation of the forecasts accuracy
can serve several purposes:
Page 18
) To choose among several forecasting models that serve to estimate the lead demand
which model should be favored.

) To compute the safety stock typically assuming that the forecast errors follow a normal
distribution.
) To prioritize the items that need the most dedicated attention because raw statistical
forecasts are not reliable enough.

4.4.2
ABC-XYZ Classification
A stock of items held to meet future demand. Inventory is a list for goods and
materials, or those goods and materials themselves, held available in stock by a business.
Manufacturing companies produce goods and sell them to customers or merchandising
companies. Manufacturing companies normally maintain three inventory accounts. These are:
raw materials inventory, work in process inventory and finished goods inventory. For
effective management of this inventory it should be classified into different classifications,
based on which is applicable. The various methods of inventory classification are:
ABC Classification
o
In most of the cases 10 to 20 % of the inventory account for 70 to 80% of

the annual activity.
A typical manufacturing operation shows that the top 15% of the line
items, in terms of annual rupees usage, represent 80% of total annual
rupees usage.
Next 15% of items reflect 15% of annual rupees
Next 70% accounts only for 5% usage
HML Classification
o
On the basis of unit value of item
Aimed to control the purchase of raw materials
H High, M- Medium, L - Low
Page 19
XYZ Classification
o
On the basis of consumption pattern
X Continuous Demand throughout the period
Y Seasonal Demand
Z Intermittent Demand
VED Classification
o
Mainly for spare parts because their consumption pattern is different from
raw materials.
Raw materials on market demand
Spare parts on performance of plant and machinery
V Vital, E Essential, D Desirable
Therefore V items has to be stocked more and D Items has to be less

stocked
FSN Classification
o
According to the consumption pattern
To combat obsolete items
F Fast moving
S Slow moving
N Non Moving
SDF Classification
Based on source of procurement
S Scarce, D- Difficult, E- Easy
GOLF Classification
o
G Government, O Ordinary, L Local, F Foreign
SOS Classification
o
Raw materials especially for agriculture units
Page 20
S Seasonal
OS Off seasonal
On the basis of our requirements, ABC and XYZ are the most relevant in our
case and should be applied together. This is because our demand has some materials with
very high value and other with small value and demand is also highly variable. So deciding
any strategy based on this classification will give better outlook and accuracy to the analysis.
These methods include Pareto analysis and analysis of variability as the basis of
classification. The principle of both the methods is based on the classification of the
monitored phenomena into three or more groups, while different attention should be paid to
each of the groups.
ABC method is also referred to as Pareto Analysis, according to the number of groups
and names of groups which the items are classified into. Its principle rests on the assumption
that approximately 70% of the consequences are evoked by only 30% of all possible causes.
For example: most of low quality products are produced in a limited number of
manufacturing operations. ABC analysis is a versatile tool used for solving inventory
problems. This method is popular and frequently used in logistic practice. It is timeconsuming and demanding in terms of its calculation and its results are clear and transparent.
The procedure of preparation of Pareto analysis can be summarized in the following points:
exact determination of the values of all inventory items and their total value, determination of
the percentage share of each item of the total, sorting items according to the percentage of
content, determination of cumulative sums, and a classification of items into groups A, B, C
or others. Group A should contain the items having approximately 80% share of the overall
consumption, Group B - 15% C - 5% (Besta, Janovska, Vilamova, Voznakova & Kutac,
2012). The figure 4.1 on the next page depicts the pareto chart for the materials, based on
which ABC classification was performed.
Page 21
100.00%
80.00%
60.00%
40.00%
20.00%
WSY725D
BARECOPPER0.8MM
ULTRACOATRC830801
EXPOCOM
POLYFILM30MM
BBPLYE
POLYFILM47MM
POLYFILM18MM
MBPKPBT
SS304TAPE45MM
MBRDPE
MBYLPBT
SUSTUBE4F
ULTRACOATRC831-814
MBRDPBT
WSY250DN
MBGRPBT
INK
POLYFILM23MM
FRPROD2.8MM
STEELWIRE1.5MM-PC
POLYBNDN-128MMCOP
FLOODINGJELLYCM
FRPROD3.0MM
ULTRACOATRC827F
PEBK
0.00%
Fig. 4.1: Pareto Analysis for ABC Classification

XYZ analysis is also referred to as Analysis of Variability and it belongs to basic
statistical tools used in inventory management. Unlike ABC analysis, this method evaluates
the regularity of consumption. It is logical that a different approach will be selected for
materials whose consumption is regular and for inventory that is used irregularly. The items
are again classified into three or more groups. Group X includes the items with highly regular
consumption, which dont have significant fluctuations in consumption. Group Y contains
items that show strong seasonal fluctuations or trends. Group Z contains items whose
consumption is the most irregular and forecasts of consumption are limited. The items are
classified in groups X, Y, Z according to the value of the variation coefficient: X coefficient
of variation - up to 50% Y - coefficient of variation of 50-90%, Z - coefficient of variation
above 90%. The coefficient of variation in essence determines the disparity of the statistical
set. Greater dispersion and remoteness of the individual values from the central position
means greater degree of variability in consumption. The coefficient of variation is calculated
as the proportion of the standard deviation and the simple arithmetic average. The procedure
Page 22
of the XYZ
X
analyssis preparattion can be summarizeed in the foollowing poiints: preparration of
the recoords of inveentory conssumption inn given periiod of time,, determinaation of the average
and staandard deviation, the determinati
d
on of the coefficient
c
of variation, classification of
items innto the indivvidual grouups. To measure the varriability of consumptio
c
on, it is adviisable to
use the data for a longer periiod of timee (Besta, Jaanovska, Vilamova, Vooznakova & Kutac,
2012). The
T combinnation classiification forr ABC-XYZ
Z is depicted below in tthe figure 4.2.
4
ABC--XYZ Claassificattion of Items

6
63
70
60
44
50
40
30
20
16
1
11
5
10
AY
AZ
BY
BZ
0
AX
B
BX
CX
CY
CZ
Fig. 4.2: Chartt showing number

n
of items
i
in eacch classification
4.4.3 Safety Stocck
Safety stock (also called buffer sttock) is a teerm used to describe a level of exttra stock
that is maintained
m
t mitigate risk of stock outs (shorrtfall in raw
to
w material or packaging
g) due to
uncertainties in suppply and deemand. Adeequate safetty stock levvels permit bbusiness op
perations
to procceed accordding to their plans. Saffety stock is
i held wheen there is uncertainty
y in the
demandd level or lead time for the productt; it serves as
a an insuraance againstt stock outs.
4.4.3.1
Method
d 1: Statistiical Method
This is the most comm
mon methodd to calculaate safety sttock. It takkes into acco
ount the
ock level.
standardd deviation of the demaand to decidde safety sto
Page 23
Where = Standard Deviation of monthly demand

Lead Time Factor = Lead Time in Months
Safety Factor = z- factor of Service Level = NORMSINV (Service Level)
In the analysis Service Level considered is 95%
4.4.3.2
Method 2: Using Forecast Accuracy i.e. MAD for Lag 0

This takes care of forecast errors in the analysis for calculating safety stock. It takes
care of the forecast period also in the analysis. This is called MAD for Lag 0 because this is
the forecast for next month i.e. Lag 0.
Where MAD = Mean Absolute Deviation of monthly forecast and consumption for Lag 0
Lead Time Factor =
=
L
F
L
L
(if Lead Time > Forecast Period)

(if Lead Time < Forecast Period)
Safety Factor = z- factor of Service Level

In the analysis Service Level considered is 95%
4.4.3.3
Method 3: Using Forecast Accuracy i.e. MAD for Lag 1

Similar to above method, this too takes care of forecast errors in the analysis for
calculating safety stock. It takes care of the forecast period also in the analysis. This is called
MAD for Lag 0 because this is the forecast for next to next month i.e. Lag 1.
Where MAD = Mean Absolute Deviation of monthly forecast and consumption for Lag 1
Page 24
Lead Time Factor =
L
F
(if Lead Time > Forecast
Period)
=
L
F
(if Lead Time < Forecast Period)
Safety Factor = z- factor of Service Level

In the analysis also Service Level considered is 95%.
4.4.3.4
Method 4: Accountancy Method

Safety Stock is also defined as a factor of Maximum Usage and Average usage
(Obaidullah Jan, 2012). This method describes the calculation of safety stock as described
below:
Safety Stock = (Maximum Monthly Usage Average Monthly Usage) Lead Time in
months
4.4.3.5
Method 5: Theory of Constraint Method called as Dynamic Buffer
Management (DBM)
DBM method of inventory takes care of average inventory and colors to describe the
inventory levels. This is an approximate method of inventory control. This is called as Theory
of Constraint Method because it considers unavailability of inventory as a constraint for
which a buffer is required in the form of higher inventory. The Rope (i.e. Communication) is
the color indications which system shows back to alter the target level of inventory.
Here,
Target Level = Average Demand in weeks * Lead Time in weeks * Safety Factor
Where Safety Factor = 1.25 to 2 depending upon requirement
Now this target level is compared with current inventory level
) If Current level > Target level Indicate with BLUE color
Page 25
) If 67% of Target level < Current level < Target level Indicate with GREEN color
) If 33% of Target level < Current level < 67% of Target level Indicate with
YELLOW color
) If 0 < Current level < 33% of Target level Indicate with RED color
) If Current level = 0 Indicate with BLACK color
Based on these color levels, variation in target level is decided. This current inventory level is
tried to be maintained between green and yellow.
4.5
Simulation
Simulation is the imitation of the operation of a real-world process or system over
time. The act of simulating something first requires that a model be developed; this model
represents the key characteristics or behaviors/functions of the selected physical or abstract
system or process. The model represents the system itself, whereas the simulation represents
the operation of the system over time.
The various Re-Order levels and safety stocks calculated before are simulated while
considering some daily consumption, receipts, re-order quantity, closing stock level, pending
purchases and opening stock.
Fig. 4.3: Snapshot of designed MS-Excel simulation

Page 26
The simulations are done for the calculated values of safety stock and re-order level.
The values are simulated for a particular re-order quantity while considering some daily
demand based on maximum monthly demand.
The various advantages of simulating the pattern for each material are as follows:
1. A future view of scenario in case of similar demand can be predicted, so that proper
action can be taken
2. It gives an imitation of real-world process without implementing, so reducing much
cost of experimenting the project
3. It helps in planning for the future as re-order points can be previously defined
4. The system uses real data to inform simulations in the future
5. Using the system can change the mindset of those using it
This complete analysis gave the various findings and results described in next chapter.
Page 27
Chapter-5
Results and Findings
5.1
Discussions
The project was successful in achieving the objective for which it was done. All the
objectives were achieved with fully implementable results. The demand pattern was studied
thoroughly and suitable suggestions were provided for the various problems faced by the
company. Firstly the problem of tracking forecast accuracy was cleared by design of a
dashboard to do the same. It takes care of Lag 0 and Lag 1 forecast for each month and the
consumption for FY 13-14. Secondly the problem of inventory strategy was solved by
analyzing the various models and then suggesting a mix of all. It involved lot of decision
making of choosing the most preferable among a couple of methods.
5.2
Findings
The demand pattern for the organization is very random and highly variable. This is
because most of the products are customized according to customer demands and require
different class of raw materials. This results in maintaining the availability of raw materials
more difficult. Thus in order to achieve the objective, the various findings obtained is as
follows:
All the materials are not different for different finished products. There are some
material which are common and used in mostly all the products. So such material can
be ordered on regular basis while keeping fewer inventories. While for other nonregular items, another strategy can be applied.
Some materials have high forecast accuracy (more than 70%) throughout the year. So,
we can rely on forecast for these materials. Also the forecast should be tried to
improve further so that much fewer stocks have to be kept.
Few items suspected to be in A or B class after the analysis came out in C class, thus
lesser focus should be on such items, instead top class items should be focused more.
Page 28
All the materials require different methods for re-order level and safety stock
calculations. This is due to the fact that all materials have different demand patters
and therefore the method applicable is also different for them.
There is no alignment between the Sales & Operations Planning and Supply Chain
Management. Thus proper process has to be defined to make them align so that
responsibility can be shared and greater reliability can be achieved leading to higher
profits.
5.3
Results
The project involved managing the inventory and suggesting techniques and methods
to involve fewer inventories and more availability. At the end of the project the following
results are obtained which when simulated for real situations gave fabulous results. The
complete analysis was a successful effort in obtaining the desired results. The various results
are summarized below with interpretations:
Defined the new Re-Order and safety stock levels for the raw materials which gave
availability as high as 40-50% above the normal consumption and with just
reasonable incremental cost of around 10%. The following table 5.1 shows these
levels for major six items.
Material
Re-Order Level
Safety Stock
ECCSTAPE
293000
73188
EGRNWB
201000
50083
FILLINGJELLYOFC
246000
61371
HDPENATURAL
261000
65126
PBT
259000
79945
PEBK
586000
146271
Table 5.1: List of Re-Order level and Safety Stocks calculated for major materials
Page 29
A system to monitor the forecast accuracy of the raw materials has been designed.
This dashboard just need to enter the values of consumption and forecast and the
accuracy is received. The designed dashboard is depicted in the following snapshot.
Fig. 5.1: Snapshot of forecast accuracy dashboard
Classification of materials based on ABC-XYZ classification of material. This takes

cares of both the variation in demand as well as consumption value.
Classification
12
163
60
11
44
17
16
63
63
Table 5.2: Number of Elements in each ABC-XYZ classification
Page 30
ABC--XYZ Claassificattion of Items

AX AY
4% 0%
AZ
0%
BX
8%
BY
1%
BZ
0%
AX
X
AYY
AZZ
CZ
45%
BX
X
CX
%
31%
BYY
BZZ
CX
X
CYY
CY
11%
CZZ
Fig. 5.2:
5 Pie chaart showingg percentag
ge of items in each cattegory
Defined a process
p
to align
a
S&OP
P and SCM in procurem
ment processs (shown below
b
in
figure 5.3)
Raw Material Foorecast receeived from S&OP:

S
1st of
o every month
Mastter Raw M
Material Sch
heduling foor Month M,
M M+1, M+2
M
basedd on Lag 0,11,2 forecastts
Moniitor actual consumptiion versus forecastedd data for the

materrials , and aany change should
s
be considered
Monitor monthh-on-month variation in the availability

a
of
mateerials basedd on all thee forecasts (if any diffference hass to
takenn care in nexxt month reevised procuurement plann)
5 Designeed Process Flow Charrt for Procu
urement Prrocess
Fig. 5.3:
Page 31
S.No.
Process
Timeline
Action Required
Responsibility
Release of forecast for

all the orders combined
1 of every
month
Should be released in
prescribed format only
S&OP
Publish of Scheduling &

procurement plan for 2
months
7 of every
month
Should be released in
prescribed format only
SCM
Any delay or change in

procurement plan
At the earliest
Should be
communicated to S&OP
SCM
Difference in the
forecast between lag 2
and lag 1 for a material
7 of next month
w.r.t. month of
difference
Should be covered in
next procurement plan
SCM and
S&OP
Monitoring for
variations of inventory
levels w.r.t. forecast
Before 7 every
month
Covered up in months
procurement plan
SCM
Sudden variation in
demand is foreseen
At the earliest
Proper arrangements
should be made for its
procurement
SCM and
S&OP
Revised Safety Stock

and Re-Order levels
Every Quarter
Publish
SCM
st
th
th
th
Table 5.3: Complete matrix showing the tasks vs. responsibility for complete
Procurement process
An inventory strategy for the raw materials which should be followed in all cases.
This strategy includes the method to be followed for Re-Order Level and safety
stocks. It also tells about when the various revisions in values should be done. The
following table 5.4 shows the complete strategy designed. It is based on ABC-XYZ
classification discussed before.
Page 32
Strategy
A
Strategy:
Forecast
+ Replenishment (If
forecast accuracy is
maintained and forecast
is greater than maximum
of analysis use forecast
data; else go ahead with
replenishment model on
historical data)
Review
Period:
Regularly (Automatic)
and manually every 15
days (for any excess
inventory or any problem
in automatic process)
Ordering
Quantity:
Equivalent to maximum
of 1 week demand for
last 12 months (in
nearest
multiple
of
container sizes)
Strategy:
Forecast
+ Replenishment (If
forecast accuracy is
maintained and forecast
is greater than maximum
of analysis use forecast
data; else go ahead with
replenishment model)
Strategy: Replenishment (Order

as soon as stock level reaches
ROL level)
Review
Period:
Review
Period:
(Manually)
Ordering
Quantity:
Equivalent to maximum
of 1 week demand for
last 12 months (in nearest
multiple of container
sizes)
Ordering Quantity: Fixed
Fortnight
Automation: Partial
Automation: Fully
Automation: Partial
Strategy:
Replenishment (Order as
soon as stock level
reaches ROL level)
Review
Period:
and manually every 30
days (just to verify
automatic
process
manually that process is
working fine)
Ordering
Fixed
Quantity:
Strategy: Replenishment
(Order as soon as stock
level reaches ROL level)
Review Period: Monthly
Automation: Partial
Ordering
Fixed
Quantity:
Strategy: Replenishment (Order

as soon as stock level reaches
ROL level)
Review Period: Quarterly
Ordering Quantity: Fixed
Automation: Partial
Automation: Partial
Page 33
CZ1: Lead Time < 30 days

Strategy:
Customer
Order
(Order only if customer order is
there)
Strategy:
Customer
Order (Order only if
customer order is there)
Review Period:
Required
Not
Automation: Manual
Ordering
Based on
Order
Quantity:
Customer
Strategy:
Order
Customer
Review Period: Not Required

Automation: Manual
Review Period:
Required
Not
Ordering Frequency: Based on

Customer Order
Automation: Manual
Ordering
Based
on
Order
Quantity:
Customer
CZ2: Lead Time > 30 days

Strategy: Safety
Customer Order
Stock
Review Period:
Customer Order
Based
on
Automation: Partial
Ordering Frequency: Based on
Customer Order
Table 5.4: Designed Inventory Strategy
Formulated the required inventory policy which involved general rules to be followed
and the responsible authorities in each case. For each case targets, process map,
exceptions, approval matrix were defined. If approved this policy will define all the
future decisions throughout the company.
Designed a dashboard for simulation of ROL and inventory level for a particular raw
material and method of calculation. This helps in choosing an appropriate method for
defining ROL level. This dashboard just needs to visually look for the pattern for any
consumption value and check its pattern. This helps in planning for future
procurement.
Page 34
Fig. 5.4: Snapshot of Simulation Screen
5.4
Recommendations
) Implement the recommended solutions: All the analysis performed and suggestions
given should be implemented in day-to-day practice with immediate effect.
) Work as a team: All the departments should be aligned to each other and should work
as a team. Measurement criterias for the departments should be on the complete
efforts of all the departments and not any one department.
) Regular Analysis and Revision of data: All the analysis done should be monitored
regularly at frequent intervals and updated for better outlook.
) Improve Forecast Accuracy: Try to improve the forecast accuracy by incorporating
better techniques. Also go for raw material forecasting keeping in view supplier side.
Page 35
) Reduce Lead Times: There is an urgent need to reduce the lead times. This can be
done by tracking & measuring lead time (use SAP) and try to negotiate for shorter
lead times
) Consignment Stocking: Implement consignment stocking strategy for materials with
very high lead times and high value items
) Use technique for calculating ordering quantity: Ordering quantity should also be
optimized, this can be done by calculating ordering and carrying cost
) Reduce Raw Material Lot Sizes: Try to reduce lot sizes of raw materials from
suppliers; this will help in frequent orders and low excess inventory because the base
problem for any problem is the higher lot sizes.
Page 36
Chapter- 6
Conclusions
In a nutshell, the project involved all the dimensions in an organization; starting from
the Supply Chain and Procurement to Finance, Sales & Operations and Production. The
project involved meeting the objectives of all of them. On one side it was increasing
availability and easing the procurement process, other side it was reducing the inventory cost.
It also involved aligning this procurement process and supply chain with forecast and sales
planning. Overall it was a cross-functional project which involved some part of each function
and working with all of them.
6.1
Benefits
The project was able to provide benefit to the company by suggesting a new model.
The benefits achieved from the project are enlisted below:

Ease of Operation: The model is very easy to use. It is completely GUI based with
help at each point, so not much background knowledge is required for using the
designed tools. Only required data has to be edited into Master Data File and other
analysis will be automatic. Only interpretation is required.
Level of Automation: Its a completely automated system with very less task to be
done manually. The model is highly time-efficient as compared to current method of
inventory policy calculation. It requires just one file to be fed with data and view
analysis in all other files
Reliability: Model can be completely trusted for its reliability until and unless some
external modifications has made. While designing the model complete care was taken
for security.
Availability of Raw Material: If the model is implemented, availability of raw
material is ensured to a much larger extent with the level of safety stock and re-order
level subjected to demand pattern is similar to last year.
Inventory Level: The volume of inventory (value of Rs. 18.7 crore) suggested is
optimum for each material thereby reducing the risk of stock-outs and extra high
inventory.
Page 37
6.2
Academic Contributions
The project helped me to gain practical exposure and a chance to implement

my theoretical knowledge in real scenario. The various learnings which were taught in the
classroom whether managerial or technical were implemented. Many things while are
discussed in isolation in the classrooms were clubbed together for better results and in-depth
understanding.
The first and foremost thing industry experience teaches is to manage people maybe
superiors or inferiors. It is well-known fact that this human management is art and while
implementing this art various topics taught in class become helpful. Here in the project, I
tried to design strategies and policies for the company. The lessons of defining strategies and
its process were very helpful. During the course of the project, a new inventory policy and
strategy was defined based on ABC-XYZ classification. All the teachings of dealing with
people in a professional way were also very useful while working in an environment which
required all these thoughts to be taken care off. These strategies are really very useful for the
company as it defines its way forward for raw material inventory.
The project also involved much technical knowledge to be implemented in real
scenario. The first and foremost was the inventory classifications i.e. ABC and XYZ. A
complete model was developed to classify items on this basis. Many established models to
calculate safety stocks and re-order point were used. All these models were used in
combination to obtain a resultant strategy and model. While working on the project, a
simulation model was developed. This model has the advantage that it lets you see the
inventory consumption and refill. It requires only the opening stock, lead time, re-order level
and re-ordering quantity. Based on these values and expected consumption an ordering plan
is the output. This plan is of the form of saw tooth curve which helps to see the pattern if
such consumption pattern continues. This plan gives the approximate ordering plan for the
raw materials and is quite helpful in decision making process.
Page 38
6.3
Future Scope
There is a vast area where study can be done in future to improve the complete
process. Some of the areas where some scope of future work is present are as follows:
Deciding of the economic order quantity: Currently, ordering quantities are just based
on requirement and no cost optimization is done in that. So in future, work can be
done on calculating the EOQ based on carrying cost and ordering cost. This will help
is reducing some costs for the company.
Improvement of forecast accuracy: Forecast accuracy is a serious concern, so special
attention should be given to improve it, so that stock levels can be reduced. This
should be done at least for top items which carry maximum value.
Incorporate some forecasting technique for raw material from supplier side: Raw
Materials should be forecasted separately also based on supplier marketing
intelligence. Special attention should be given to checking for the pattern in the raw
materials and suppliers (about the periods of low cost, etc.).
Reduce Lead times: Special focus should be on reducing the lead times of the raw
materials. Track of all the shipments should be done and any deviation from said time
should be penalized.
These are some of the fields where the company should work in order to improve the
efficiency of Supply Chain from procurement and Sales side.
Page 39
References
) Petr BESTA, Kamila JANOVSK, rka VILAMOV, Iveta VOZKOV, Josef
KUT (2012), The utilization of statistical methods in the area of inventory
management, VSB Technical University of Ostrava, Ostrava, Czech Republic, EU
) Dinesh Kumar Dhoka, Dr. Y. Lokeswara Choudary (2013), XYZ Inventory
Classification & Challenges, IOSR Journal of Economics and Finance (IOSR-JEF)
e-ISSN: 2321-5933, p-ISSN: 2321-5925. Volume 2, Issue 2 (Nov. Dec. 2013), Page
23-26
) Erik Hofmann, Daniel Maucher, Sabrina Piesker, Philipp Richter (2011). Ways Out of
the Working Capital Trap: Empowering Self-Financing Growth. Springer Heidelberg
Dordrecht London New York, Page 35-39
) Michael Gilliland (2010). What Management Must Know about Forecasting,
Retrieved
from
Institute
of
Business
Forecasting
and
Planning
website:
http://demand-planning.com/2010/01/17/ibf-webinar-qa-what-management-mustknow-about-forecasting/
) R. Panneerselvam (2006). Production and Operations Management, PHI Learning
Pvt. Ltd.
) P Narayan, Jaya Subramanian (2009). Inventory Management-principles and
Practices. Excel Books India
) Sunil Chopra, Peter Meindl (2012). Supply Chain Management, 5th edition. Pearson
Higher Education
) http://www.sterlitetechnologies.com/
) http://sctw.com/effective-trapped-capacity/ (Retrieved on 9th April, 2014)
) http://www.resourcesystemsconsulting.com/safety-stock-calculations/ (Retrieved on
9th April, 2014)
) http://demandplanning.net/safety_stock_article.htm (Retrieved on 10th April, 2014)
) http://www.inventorymanagementreview.org/2005/06/safety_stock.html
(Retrieved
th
on 15 April, 2014)
) http://www.accountingtools.com/average-inventory-calculation (Retrieved on 15th
April, 2014)
) http://wps.prenhall.com/bp_balakrishnan_mdms_3/219/56163/14377944.cw//14377947/index.html (Retrieved on 19th April, 2014)
Page 40

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Summerr Project Reeport

CERTIFICATE OF PROJECT COMPLETION

1.1 Importance of Supply Chain Management and Inventory Management

1.2 Introduction to the topic

1.3 About the company

1.3.2 Key Products

1.3.4 Expansion Plans

1.4 Problems and Objectives

1.5 Scope of the Project

CHAPTER 2: LITERATURE REVIEW

3.2 Methodology followed to meet the objectives

3.3 Quantitative Approach

3.4 Qualitative Approach

CHAPTER 4: DATA COLLECTION AND ANALYSIS

Summer Project Report, NITIE Mumbai

4.3 Re-Organization of data to meet the objectives

4.4.1 Forecast Accuracy

4.4.2 ABC-XYZ Classification

4.4.3 Safety Stock

4.4.3.1 Method 1: Statistical Method

4.4.3.2 Method 2: Using Forecast Accuracy: MAD for Lag 0

4.4.3.3 Method 3: Using Forecast Accuracy: MAD for Lag 0

4.4.3.4 Method 4: Accountancy Method

4.4.3.5 Method 5: Theory of Constraint Method called as

Dynamic Buffer Management (DBM)

6.2 Academic Contributions

6.3 Future Scope

Summer Project Report, NITIE Mumbai

Fig. 1.1: Business Overview of Sterlite Technologies Ltd.

Fig. 1.2: Sterlite Technologies at a glance

Fig. 1.3: Sterlites Customers

Fig. 1.4: Footmark of Sterlite Technologies Ltd. across the world

Fig. 2.1: Optimization process of Inventory Management

Fig. 2.2: Derivation of classification and strategies by means of an ABC-XYZ

Fig. 4.1: Pareto Analysis for ABC Classification

Fig. 4.2: Chart showing number of classification in each classification

Fig. 4.3: Snapshot of Designed MS-Excel Simulation

Fig. 5.1: Snapshot of forecast accuracy dashboard

Fig. 5.2: Pie chart showing percentage of items in each category

Fig. 5.3: Designed Process flow chart for procurement process

Fig. 5.4: Snapshot of Simulation Screen

Summer Project Report, NITIE Mumbai

Table 1.1: List of Plant Locations and respective products of Sterlite

Summer Project Report, NITIE Mumbai

Sales and Operations Planning

Supply Chain Management

Optical Fiber Cable

Sterlite Technologies Ltd.

American Production and Inventory Control Society

Mean Absolute Percentage Error

Mean Absolute Deviation

Graphical User Interface

Economic Order Quantity

Summer Project Report, NITIE Mumbai

Certificate of Project Completion

I wish him all the best for his future endeavors.

Prof. Ruchita Gupta

Summer Project Report, NITIE Mumbai

Mr. Rohit Sourabh

Aakash Kumar Varma

Summer Project Report, NITIE Mumbai

As we express our gratitude,

I am highly indebted to my mentor Mr. Pankaj Priyadarshi, Chief Commercial