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BKAM3033 SEMINAR IN MANAGEMENT ACCOUNTING

SECOND SEMESTER 2017/2018 (A172)

GROUP: B

GROUP PROJECT

TITLE: INVENTORY MANAGEMENT SYSTEM

PREPARED FOR:
DR. DANILAH BINTI SALLEH

PREPARED BY:
NAME MATRIC NO.
RAJA RAJESWARI A/P JAYAKUMAR 247736
KHOR YEE HOOI 247740
CHEONG JIA HUI 247758
YEOH LUYI 247760

SUBMISSION DATE: 6th MAY 2018

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Acknowledgment

In performing our assignment, we had to take the help and guideline of some
respected persons, who deserve our greatest gratitude. The completion of this
assignment gives us much pleasure. We would like to show our gratitude Dr.Danilah,
lecturer of BKAM 3023 Seminar in Management Accounting for giving us a good an
clear guideline for assignment throughout numerous consultations. We would also like
to expand our deepest gratitude to all those who have directly and indirectly guided us
in writing this assignment.

We respect and thank Mr Ng Aik Rom(Joe) who is the assistant factory


manager of Tastiway Sdn. Bhd for giving us an opportunity for an interview session
and providing us all support and guidance which made us complete the project on time.
We are extremely grateful to him for providing such a nice support and guidance
though he had busy schedule managing the company affairs.

Last but not least, we are really grateful because we managed to complete this
research project within the time given by Dr.Danilah. This assignment could not be
completed without the effort and cooperation from our group members.

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Table of Contents
1.0 Introduction ........................................................................................................................4
2.0 Objective of the study.........................................................................................................5
3.0 Literature Review ...............................................................................................................5
3.1 The Definition of Inventory .....................................................................................5
3.1.1 Inventory control ..............................................................................................6
3.1.2 Types of Inventory System...............................................................................6
3.1.3 Benefit of Good Inventory Control .................................................................7
3.2 Warehouse Management ...............................................................................................7
3.2.1 Function of Warehouse ...........................................................................................8
3.2.2 Process of Warehouse............................................................................................11
3.2.3 Problem Facing in Managing Warehouse ...........................................................12
3.2.4 Suggestion for Improving Efficiency in Warehouse Management ...................14
3.3 Operational Efficiency .................................................................................................15
3.3.1 Theory of EOQ ......................................................................................................16
3.3.2 Seasonal Demand ...................................................................................................18
3.3.3 Safety stock.............................................................................................................18
3.3.4 First in First Out ....................................................................................................18
3.3.5 Just in time (JIT) ...................................................................................................19
3.3.6 Factory effecting inventory operations managements .......................................20
3.4 Inventory Management of Performance ....................................................................20
3.4.1 Factors of Involving in decision making inventory ............................................24
3.4.2 Problems facing in managing inventory ..............................................................27
3.4.3 Suggestions for improving inventory management strategies ...........................29
4.0 Methodology......................................................................................................................33
4.1 Background of Company .............................................................................................33
4.2 Data Collection Method ...............................................................................................33
5.0 Findings .............................................................................................................................34
5.1 The Inventory Management System at Tastiway Sdn. Bhd. ....................................34
5.2 The inventory management system that implemented by Tastiway Sdn. Bhd. ......38
6.0 Limitation ..........................................................................................................................42
7.0 Recommendation ..............................................................................................................42
8.0 Conclusion .........................................................................................................................43
9.0 References .........................................................................................................................44
10. Appendix ...........................................................................................................................49

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1.0 Introduction
Successful inventory management plays a key role for success in retail. This is
because inventory management encompasses many things that affect many different
parts of the retail business from warehouse management and on-shelf availability to
loss prevention and inventory counts. Managing inventory must be at the top of every
retailers list of management priorities because it directly affects the retailers bottom
line (Tsang & Tsang,2018).

An inventory management system is the combination of technology (hardware


and software) and processes and procedures that oversee the monitoring and
maintenance of stocked products, whether those products are company assets, raw
materials and supplies, or finished products ready to be sent to vendors or end
consumers. Without an inventory management system, the goods and products that
flow through an organization will inevitably be in disarray. An inventory management
system enables a company to maintain a centralized record of every asset and item in
the control of the organization, providing single source of truth for the location of every
item, vendor and supplier information, specifications, and the total number of a
particular item currently in stock. It is because of inventory often consists of movable
assets, inventory management systems are critical for keeping tabs on current stock
levels and understanding what items move quickly and which items are more slow-
moving, which in turn enables organizations to determine when it’s time to reorder
with greater accuracy (Pontius 2018).

The area of study of this project is about inventory management system. The
study has been carried out at Tastiway Sdn. Bhd and it is involved Mr. Ng Aik Rom(Joe)
who is the assistant factory manager of Tastiway Sdn. Bhd. This project is first coming
with the interview session. We have a meeting with the assistant factory manager in
which we ask questions such as background of shop and business operation. After we
meet with the owner, we sit among us, and we discuss about the inventory management
system of Tastiway Sdn. Bhd and obstacles faced by company from the business
operation. After the issues are identified, we try to give out some solution and
improvement for the weaknesses in the recommendation part.

From the findings of this project might provide useful information to others
for academic purposes in the area of inventory management. We can conclude this

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project is a learning strategy to help us become active lifelong learners who appreciate
the broad social significant of accounting profession

2.0 Objective of the study


a. To understand the inventory management system of
the company, Tastiway Sdn. Bhd.

b. To identify the inventory management system that implemented by


Tastiway Sdn. Bhd.

c. To recognize the problem or obstacles faced in implementing inventory


planning tools.

3.0 Literature Review


3.1 The Definition of Inventory
According to Plinere and Borisov (2015), inventory is the stock of any item or
resource used in an organisation. There are three types of manufacturing inventories:
raw materials, work in progress and finished goods.

Inventory represents a detailed list of movable items in the form of raw


materials, in- process or finished products, which are needed in the manufacture of
goods or to maintain the machinery and equipment in good working condition. It is an
essential organization. Inventory serves as a cushion, as it absorbs fluctuations in
demand or supply of goods which disturb the schedule of the enterprise. It helps in
maintaining manufacturing activities uninterrupted, which leads to better utilization of
men and machines besides economy. Hence for the smooth working of the organization,
inventory is a must, and an organization cannot survive without it. Inventory incurs
some costs, as it requires valuable space, capital and other overheads to maintain it. In
fact, it constitutes a significance part of the total cost of a product. The invested money
gets blocked as long as the stocks are not getting consumed. Excessive inventory
involves more blockage of money, which can be used elsewhere for other useful
purposes. Hence inventory needs to be managed effectively and efficiently. Managing
inventory is an art; needs careful consideration and thus offers a strategic advantage.
Excellent in-house inventory management reduces the overall production costs
drastically along with maintaining inventory at the most desired level (Singh and Singh,
2013).

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Inventories are work-in-progress goods, finished goods, raw materials that an
organization aim to sale and gain profit. It is the best assets that any company value; if
inventory is controlled and monitored in a good way it can add value to the organization.
The overall profit of an organization is further enhanced by how well and efficiently
an inventory is controlled (Ndlala, Mbohwa and Sobiyi, 2017)

3.1.1 Inventory control


Inventory control is the scientific method of finding the right quantity of
inventory to meet the manufacturing requirements on time and to reduce the overall
cost of production. The purpose of inventory control is to ensure that a proper reserve
of goods is available according to the manufacturing plan based on the sales
requirement. One of the key functions of inventory control is to minimize the amount
of inventory held by the company in terms of materials, work-in-process and finished
goods. Effective inventory control offers many benefits. It ensures smooth flow of
production activities, reduces delivery time and reduces price fluctuations. Losses from
improper inventory control include purchases in excess than what is needed, the cost
of slowed up production resulting from material not being made available at the time
of requirement. Each time, a machine may be required to shut down for lack of
materials or each time, a sale is postponed or cancelled for lack of finished goods. Both
situations are not good for a company, as they adversely affect its functioning (Singh
and Singh, 2013).

Inventory control is a consistent means of running the organization operations


smoothly while ensuring that customers are satisfied, goods are delivered on-time and
loss of goods are minimized (Phindile, Mbohwa and Sobiyi, 2017). While Dowler
(2015) mentioned that inventory control system is a system that integrates all aspects
of administering a company’s inventories including shipping, purchasing, receiving,
warehouse storage, turnover, tracking, and re-ordering. These systems often differ
based on the type of business being run. Inventory control is something that should be
front-of-mind for anyone in the wholesale distribution business. In the simplest of
terms, inventory control involves having greater oversight over one’s stock (Marx,
2018).

3.1.2 Types of Inventory System


According to Dowler (2015), there are two main types of inventory system.

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(i) Perpetual inventory system

The perpetual inventory system is the most supported strategy for tracking
inventory in warehouses. In this system, stock data is entered ceaselessly or
consistently. Once an order is placed or received, the data is upgraded into the system
immediately. Contrasted with the periodic inventory system, a perpetual inventory
system is incomparable because it permits continuous tracking of sales apart from
observing individual inventory levels for everything. Nonetheless, the determined
stock levels acquired from a perpetual inventory system may consistently deviate from
the real inventory levels because of theft or unrecorded transactions. It is then necessary
to periodically contrast the physical inventories with the on-hand amounts of inventory
and modify accordingly.

(ii) Periodic inventory system

In this system, inventory is not monitored to be up-to-date. Instead it is updated


on interval bases usually once in a year. This particular system is not efficient as
compared to the perpetual system. However, many organizations tend to save on their
investment because they do not have to setup technology and software needed to keep
track of data. The set back with this system is that an organization stay out of entry
stock data for the whole year.

3.1.3 Benefit of Good Inventory Control


According to Ogbo (2014), Some of this benefit include optimal use of
resources, cost reduction, improved profitability, improved sales effectiveness,
reduction of waste, transparency and accountability, easy storage and retrieval of stock,
high inventory utilization amongst others. However, in order to achieve all these,
organizations have to maintain flexible inventory service. Thus, there is a significant
relationship between effective inventory control management system and
organizational performance.

3.2 Warehouse Management

The activity to manage the goods stored in the warehouse is called warehousing.
While the warehouse has a lot of different operations, they have some common patterns
in the material flow and warehouse typical operations such as receiving, put-away,

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replenishment internal order picking, gathering and sorting, packing, cross-docking,
and delivery. (Yericho, 2015)

In the past, warehouses were referred to as cost centres and rarely adding value.
But the increasing need for transfer of products across cities, countries and continents
resulting from movement of production to the Far East, the growth in e-commerce and
increasing demands from end users have seen a change about the perception of
warehouses. (Nicholas, 2012). They are vital components within today's supply chain.
(Richards, 2011) They form the integral part of the supply chain in which they operate,
and so trends such as increasing market volatility, product range proliferation and
shortening lead times, all have effect on the roles the warehouse is required to perform.
Warehouses are most likely involved in various stages of sourcing, production and
distribution of goods, from the handling of raw materials, work-in-progress through to
finish products.

It is therefore apparent that different activities take place at a warehouse and


thus, require different nature of facilities, staff as well as equipment to suit each
function. With the vast nature of difference, warehouse operations could easily be the
most costly element of the supply chain. (Nicholas,2012).

According to (Richards,2011), the pressure is on warehouse managers to


increase productivity and accuracy, reduce cost and inventory whilst improving on
customer service. The successful management of the warehouse is critical in terms of
the level of service provided, as well as the cost incurred (Rushton et al,2010).

There are various types of warehouses: they can be classified into production
warehouses and distribution centres (Ghiani G,2004) and by their roles in the supply
chain they can be classified as raw materials warehouses, work-in-process warehouses,
finished good warehouses, distribution warehouses, fulfilment warehouses, local
warehouses direct to customer demand, and value-added service warehouses (Frazelle,
2001).

3.2.1 Function of Warehouse

Warehousing can be defined by three functions: (1) receiving goods from a source, (2)
storing goods until they are needed by a customer (internal or external), and (3)

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retrieving the goods when requested. Storing material for an internal customer implies
the need for work-in-process (WIP) storage, whereas storing goods for an external
customer may imply the need for finished product storage. (Larson,1997)

However, Emmett (2011) says warehouses are designed to meet specific requirements
in the supply chain in which they form a part of. Meanwhile, there are some operations
which are common amongst them. He categorizes such operations into the following
functions;

• Goods in or receiving. This involves the physical activity of unloading incoming


transports, checking deliveries against purchase orders and recording. Depending
on the agreement of both parties, future checks may include quality control. Some
or all the delivered goods are either rejected or accepted at this stage. Rejected
goods are sent back to the supplier.

Richards (2011) discusses pre-receipt, suggesting that the warehouse manager


should be involved in specifying and agreeing on the packaging, items per carton
as well as any specific labeling required, in addition to the means of transport, he
ensure that the delivered products are compatible with the storage facility too.

• Put away into the storage area. Depending on the state of goods in the above stage,
accepted goods are taken into storage. The storage area of the warehouse is often
the largest space, with the spaces divided for the different kinds of goods that come
in.
• Order selection and picking or packing. Goods are stored in the warehouse to be
used later when needed. The needs for goods are made when orders are placed for
them. When orders are placed, the goods are selected and picked according to their
identifiable locations. The goods are then made ready for transportation to the point
of need.
• Goods outward or dispatch. The goods are put together at the dispatch area and
loaded onto the outbound vehicles or picked up for use according to their size and
place of need. The key aspect to be considered in the activities is the conflicting
priority of maximizing the use of the space allocated to each, while minimizing to
undertake the activity (Emmett 2011).

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Frazelle(2012) said warehousing plays important role in the supply chain process.
Supply chains will never be so integrated and well-coordinated without warehousing.
Warehouses are important for a supply chain because they provide raw materials,
components, work-in process, and finished foods; operate as distribution and order
fulfilment centres; and perform localized and value-added warehousing.

Paul and Lestari (2015) think that warehousing has an important role to
integrate and coordinate the supply chain process for the important function of
providing (raw materials, components, work process-in, and finished goods),
operations (distribution and order fulfilment centre), and perform (local and value-
added warehouse). They also list down the list of responsibility warehouse has to the
company related to stock inaccuracy:

❖ Organize stock in the warehouse to minimize the cost of filling orders

It is important to store the material to maximize the efficiency of the order


fulfilment process.

❖ Keeping inventory records accurate

If the quantity in the computer system does not match with the one in the warehouse,
sales people will not know what is available for sale, and buyers cannot replenish
inventory at the right time. This task will probably involve; conducting full physical
inventories or cycle counting certain products each day.

❖ Ensuring that all material movement is properly recorded.

This will ensure that quantities in the warehouse to remain accurate. You can have
an accurate forecast and bring the material in such a way to minimize your total
cost, but if it is not properly recorded in the computer system, there will probably
problems after all, such as:

• Bringing in unnecessary stock because previous stock receipts weren’t correctly


recorded, resulting in having more inventory than the system reports.
• Unexpected stock outs due to unrecorded material disbursements, substitutes,
damaged parts, and other “sloppy” procedures.
❖ Protecting inventory from breakage, spoilage, misplacement, and theft.

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Inventory is valuable, and all employees must realize that their paychecks are from
the sales of those inventories. If inventory is “lost”, it will be taken from the company’s
profits. This means that fewer profit dollars are available to pay employees.

3.2.2 Process of Warehouse

The warehouse processes according to Berg (2007, 60 - 61) are;

Receiving: This is the process of unloading incoming truck, identifying, registering


and sometimes repacking.

Put away: This is when goods are moved from unloading dock to the storage area.

Storage - in bulk or pick: Activities at the warehouse affect goods in storage. For
instance, the amount of stocks has to be counted to verify inventory quantities.

Replenish: If inventory levels of the pick storage drop to certain amounts, it is


replenished with stocks from the bulk storage.

Pick: Upon order for need of an item in storage, either full pallets are picked from the
bulk area of storage, or smaller quantities are picked from the pick area of storage.

Ship: The picked items are packed, consolidated and staged for shipping.

Cross-dock: Some goods do not make their way into storage. Such goods, upon receipt
are transferred to the shipping dock for shipment to point of need.

Value Added Logistics: There also recognition for the value added by some logistics
activities at distribution centers. Such value can be the labelling of goods to the specific
customer or country of destination.

Below is an illustration of warehouse processes as discussed above;

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FIGURE: Warehouse processes (Berg 2007, 60)

3.2.3 Problem Facing in Managing Warehouse


a. Employee turnover

According to the 1999 survey conducted by the Warehousing Education and


Research Council (WERC), nearly half (44.1 percent) of the surveyed respondents
indicated an average annual turnover rate in excess of 20 percent among entry‐level
warehouse positions, whereas median employee turnover in the USA was 8.4 percent
(Wilson, 2000; Bureau of Labor Statistics, 1999). In some cases, it is reported that as
much as 75 percent of all warehouse workers leave their jobs within one year of
employment, costing thousands of dollars for replacing those departed employees
(Christina Merhar, 2013). Another recent survey revealed that the most challenging
problems facing warehousing operations are finding high quality employees and
retaining effective employees (Speh and Maltz, 2002).

b. Warehouse layout problem

Warehouse layout problems are often complicated by large varieties of


products needing storage, varying areas of required storage space, and drastic
fluctuations in product demand. Optimal approaches to warehouse layout problems
often consider a single objective (i.e., maximize floor space utilization) and/or provide
a solution to a static problem. (Larson, 1997)

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In Julia Komarova (2016)’s findings, one of the problems faced in her research
factory is current warehouse layout. There are waste of useful space, products which
not arranged properly, no linked walkways and passages between main operating areas
(e.g. unloading, acceptance of goods by quantity and quality; storage; packing of goods;
picking and picking of customer orders; loading of road transport). There is no proper
division of area, products block passages and access to each other. This results into
addition of extra movement of inventory while picking.

c. Equipment problem

In Julia Komarova(2016) research, there are not enough of machinery,


machinery used for a wrong purpose, lack of maintenance, unlabelled shelves and
inflexible storage equipment in the research factory. The facility has some items of
machinery that are unused and at the same time workers lack another piece of
equipment for handling. This has happened with pallet trucks, they are widely used for
manual loading, unloading and inside movements, but there are only 2 of those. Having
more would allow more operations to be performed at the same time.

d. Labelling or tag system

Julia Komarova(2016) also found out that the existing labelling system of the
research factory does not support needs of the warehouse. There are no barcodes for
shelf to checks its inventories; there are barcode for products only, limited information
capacity of a tag, hard to read the tag and low flexibility. When warehousing workers
receive a request for storage or picking from the logistics or purchasing department of
a company, paper with tag and specification is very hard to read. It contains a lot of
information needed during the way of product, and warehousing number for picking is
not even in bold.

e. Development of KPIs

In Julia Komarova(2015)’s research, some employees are not sure about the tasks they
are doing. There is a huge disadvantage that employees are not willing to achieve better
performance and improve themselves. The workload is not balanced and employees
lack of directions and control. There are tasks that are wasting the time and there are
tasks that are neglected and need to be brought up. Clear directions from management
are only received in urgent cases.

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3.2.4 Suggestion for Improving Efficiency in Warehouse Management
a. To Larson(1997), he discovered that the larger the warehouse (in terms of the number
of full-time warehouse employees and warehouse space), the higher the employee
turnover. This implies that large warehouses often do not allow for the close personal
interaction necessary to develop more intimate working relationships and mutual trust
among employees. This may lead to a lack of emotional attachment and loyalty to the
warehouse and thereby increase employee turnover. Perhaps, the best strategy to cope
with warehouse employee turnover is to increase chances for active employee
involvement and enhance a sense of community among employees by instilling
“bottom-up” management attitudes and placing a greater emphasis on the employee-
management relationship. (Larson,1997)

To Paul & Lestari(2015), for the goods arrangement in the warehouse section, it is
recommended for the PIC to always keep up to date with the sales data because it can
help when the need to rearrange the goods arises.

b. To achieve effective use of floor space and equipment, the layout must maximize
floor space utilization and minimize travel time (and/or distance). The layout must also
be robust to fluctuations in inventory level and demand. Section 3 presents a heuristic
procedure for layout of a warehouse with pallet storage. The class is based storage
approach considers average inventory levels, frequency of single command operations
(i.e., throughput), storage medium (i.e., racks or floor stacking), aisle width, row depth
(for floor stacking), and fluctuations in inventory and throughput.

Julia Komarova (2016) suggest the research company planning and division of
the area, changing aisle-shelf ration, making the place easy to move and navigate,
proper decisions to support arrangement of products and raw materials according to
the current needs. Materials can be stored in а different way to provide better access
and faster response to any order.
c. Julia Komarova has given some ideas on the improvement of the equipment to the
research factory. New plan of equipment gives the facility some advantages, they
include higher efficiency of workers, better reliability and safety. Equipment is planned
according to needed functions and still flexible to perform if some new tasks appear.
Two pallet trucks were added, allowing simultaneous operations inside and outside the
facility, which sometimes require the same equipment. New hydraulic stackers were

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changed, weighing machine was repaired. All the suggestions and improvement of the
warehouse helps in maximizing the space of the warehouse.

d. Julia Komarova(2016) develops the coding system for stored material and places in
the storage facility. More logical and structured codes on material reduce the number
of handling mistake and time for material turnover. With a proper labelling operating
within the facility is more efficient and fast. New labelling system was developed in
order to improve inventory control and warehousing efficiency. Before the
improvement tags were only planned for the material, now, there are two types of tags:
one for the stored item, another for the location.

For Paul & Lestari(2015), before implementing the barcode system, it is recommended
to train the employee on how input the data for barcode label in case of new types of
product, train the employee on how to do scanning with the barcode, and during the
implementation, it also suggested to have technician ready in the warehouse in case of
system error or hardware damage for fast repair or replacement.

e. Julia Komarova has set the responsibilities (job scope) of warehouse workers, who
are basically in charge of inventory excluding work in process pieces. The space of the
warehouse is optimized in advanced and responsibility of employees is to follow 5C
rules keeping everything in its place. A Balanced Score Card is prepared to track the
performance of employees.

Paul & Lestari (2015) suggest that the Supervisor should not to leave their stamp
anywhere or give easily passed it to someone because the stamp is now used for giving
the employee access to the storage and if some random person can have access to the
stamp, meaning they also have direct access to the goods inside the storage.

3.3 Operational Efficiency


According to Varadan (2017), operational efficiency minimizes waste and
maximizes resource capabilities in order to deliver quality products and services to
customers. It identifies wasteful processes and resources that drain the organization’s
profits and can also design new work processes that improve quality and productivity.
Efficient operations include well-managed time, resources and funds (Vogt, 2005). For
example, the just-in-time efficiency model reduces inventory to minimum, allowing
the delivery of stock just when it is needed for a process.

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Operational efficiency is the comparison between the input and output of a
company. Input refers to the cost, people, time and work that go into producing a
product or service. Output is the product or service that is produced. Maximum
operating efficiency occurs when you are receiving the most output for your input
(Kokemuller, 2007). According to Billie Nordmeyer (2007), there are three actions that
can enhance process efficiency: Eliminate activities: This is when certain activities that
are redundant or improper are taken out.

Improve activities: The same activities are performed but with more efficiency.

Combine activities to reduce the number of repeating similar activities.

The problem of how much inventory should be held is that faced by many
inventory managers. Maintaining a huge inventory means a quick response time to
demand. Meanwhile, it is expensive to stock in larger quantities. While the goods
themselves are costly, it also implies that money is tied up in inventory and cannot be
invested elsewhere (DuBrin, 2008)

Efficiency in managing inventories could be a competitive advantage to certain


companies in their quest to ensuring profitability and sustainability. In this regard,
DuBrin (2008) uses Wal-Mart and Dell Computers as examples. Dell only builds
computers after receiving orders for them, while Wal-Mart’s collaboration with its
suppliers ensures that only the right amounts and quantities of merchandise are stocked
on their shelves. Such policies help to minimize the need for keeping large inventories.

3.3.1 Theory of EOQ


EOQ has been a well-known formula to calculate the optimal quantity of order.
He also mentioned the important contribution that has given Ford Harris in the EOQ
formula. He wrote the formula of economic order quantity in 1915, when he was still
an undergraduate student. The formula of economic order quantity is used in the
business field, also in the engineering. Students learned the engineering of the EOQ
formula in economic engineering and industrial engineering courses. On the other hand,
business disciplines studied in courses EOQ as a financial and operational management
of inventory, so in both areas EOQ has practical application (Jose L. Gonzalez and
Daniel Gonzalez, 2010).

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Today’s leading technology, many companies are not taking advantage of the
fundamental inventory models. There are various software packages in aiding
companies with inventory control, but if the data inputted are inaccurate, it may lead
to poor results. (Piasecki, 2001) In order to have suitable results for any inventory
model, accurate product costs, activity costs, forecasts, history, and lead times need to
be in place. (DuBrin, 2008) As a result of bad data, companies have had bad experience
with some inventory models, and that is one of the reasons they do not take advantage
of the EOQ model (Piasecki, 2001).

At times, people in the retail business or in the manufacturing industry do not


know or do not understand what EOQ stands for and how it is used?

According to Cargal, James M (2009), in his article, his explaining each


variable and how it’s used accordingly. The formula is written as illustrated in equation
1and described as the following:

• Q= the EOQ order quantity. This is the variable we want to optimize. All the other
variables are fixed quantities.
• D= the annual demand of product in quantity per unit time. This can also be known
as a rate. S= the product order cost. This is the flat fee charged for making any
order and is independent of Q.
• H= Holding cost per unit as a fraction of product cost.

Figure 1: EOQ Process Graph

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According to Eduina and Orjola (2015), EOQ is based on certain assumptions such as:
• The firm knows with certainty how much items of inventory will be used or
demanded for within a specific time period.
• The use of inventories or sales made by the firm remains constant or unchanged
throughout the period.
• The moment inventories reach to the zero level, the order of the replenishment
of inventory is placed without delay.
The above assumptions are also called as limitations of EOQ model.
3.3.2 Seasonal Demand
It is sometimes unrealistic to assume that a constant demand for an inventory
item is uniform or equal throughout the year. The reality is that demands are seasonal
in some firms. In this case, the standard EOQ model is not applicable. The EOQ
however, provides a point of departure for setting inventory parameters, which are
modified to suit the seasonal patterns. In this case, the EOQ model is applied to each
period or season (Daves, 2007).
3.3.3 Safety stock
Safety stock is as inventory maintained so as to reduce the number of stock
outs resulting from higher than expected demand (Anderson, 2012). A further
explanation (Daves, 2007) regards safety stock as an extra amount added to the EOQ
when ordering. It is also useful to guard against delays in receiving the orders.

3.3.4 First in First Out


First in First out, also known as the FIFO inventory method, is one the ways to
calculate the cost of inventory in a business. Last in last out (LIFO) average cost are
the other common ways to value the inventory. According to Murray (2017) and Bragg
(2017) FIFO inventory method assumes that the oldest purchases are the first goods
sold and assigned to cost of sales. Thus the most recent purchases are place in inventory
at the end of year. Cost of sales are valued by the oldest purchases, and when prices
are changing, cost of sales do not reflect current costs. Inventory is valued by the most
recent costs and accurately reflects current costs (Herzig, 1976).

Commonly the small business or business that deal with perishable products
like foods, fruits, vegetables and goods for export follow FIFO method to value the
inventory. Since all perishable products come with an expiry date, therefore the first

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ones bought are sold out first, to reduce the number of archaic inventories (Katherine,
2015). However, even businesses that don’t fit this description may want to use FIFO
as under this method, the inventory that remains on the shelf at the end of the month or
year is valued at a cost that is closer to what the current price is for those items. This
would yield a strong balance sheet report because your assets would potentially carry
a higher value under this method (Shelton, 2017). FIFO method can be applied in both
the periodic inventory system and the perpetual inventory system. (Katherine, 2015).

There are some advantages of using FIFO inventory method. Firstly, FIFO
results in a lower cost of goods sold number. This is due to the fact that older items
generally tend to carry a lower cost than items purchased more recently, due to
potential price increases. Next, a lower cost of goods sold number will result in a higher
profit (Shelton, 2017). FIFO inventory method is more useful when there are many
transaction and also the prices are steady.

Other than experienced benefits, there are also some disadvantages under FIFO
inventory method for example a higher tax bill as FIFO results in higher profit thus
more taxes have to paid. FIFO method fail to present an accurate depiction of costs
when prices of materials increase rapidly (Herzig, 1976).

There is no guarantee that the oldest items will be sold first, which could result
in product reaching its expiration date before it is sold. This is something many grocery
stores experience due to people like myself that pull their milk from the back and not
the front of the shelf (Shelton, 2017).

3.3.5 Just in time (JIT)


JIT is not the new concept in production sector (Stevenson, 2001). It started
during 1920 and being used by Henry Ford at the automation industrial. JIT is one of
the Lean Manufacturing that had been introduced by Toyota Motor Corporation to
increase the work quality and production. The application of JIT in Lean Production
will give good return in production process. These philosophies would make the
production even faster and to reduce the inventories stock.

Usually, JIT process being implemented in the organisation that reached the
highest application of JIT. This is because organisation and the supplier should have a
good relationship and believe because when there is demand from factory, the suppliers
can supply them on time. The first way to implement JIT is build a good relationship

19
with the suppliers, customers and also sub-contractor to reduce inventory “buffer” to
few hours. JIT aims is to reduce time waiting during production process. Therefore,
the cost of inventories not only can be minimized but also the time for the production
also shortens. JIT concept is not saying about the standardisation or the way of
managing but it really focusing on the zero inventories (Cem Canel, Drew Rosen and
Elizabeth A.Anderson, 2000).

The application of JIT would give a lot of benefits such as to the producer to
increase the quality to fulfil the customer demands and reduce the inventories and built
a good relationship with the supplier (Salaheldin Ismail, 2005). Positive of JIT
application can successfully give benefit to three communities, which is supplier only,
purchased only or both. The benefits are, reducing in inventories and time waiting for
the inventories, increase the quality and technical support, increase productivity,
reduce waste and machine maintenance (Marwan A. Wafa, Mahmoud M. Yasin
and Kerry Swinehart, 1996).JIT actually help to reduce machine maintenance and at
the same time, to make sure the suppliers can produce the inventories on time.
According to Mahmoud M. Yasin, Marwan A. Wafa and Michael H. Small (2001),
the big problem of JIT application is employer issues and the suppliers. Employer issue
is about the objection of JIT concept, less supportive of JIT and less of employees.

3.3.6 Factory effecting inventory operations managements


Operations is that part of a business organization that is responsible for
producing goods and/ or services. Operations management refer to management of
systems or processes that create goods and/ or provide services. Inventory management
refers to the act of managing the material resources of an organization that can help the
organization earn revenue in the future. For example, a retail store that sells multiple
goods (packed food items, groceries, clothes, and electronics goods, etc.) does not
usually store all the goods in the store. In other words, a part of the entire stock of
goods is kept at a warehouse. The sum of the goods in the store and at the warehouse
at any particular point in time is known as the inventory. There are few factors effecting
inventory in operations managements operations that can impact the inventory of the
company.

Firstly, unskilled staff & labour. According to Osmond Vitez (2017), unskilled
labour refers to the workers that does not require to have a special training or skills.

20
The jobs that require unskilled labour are continually shrinking due to technological
and societal advances (Osmond Vitez, 2017). With the unskilled staff & labour, the
productivity of the business operation can slow down because the worker don't know
enough to perform their jobs confidently (Lister, 2017). To save time, workers often
delegate the task of training to employees who have been on the job longer. But many
times, these employees aren't given extra time to do so; they still need to complete their
own work. So they rush through the training, or leave it up to the new employee to ask
questions (Tina Amo, 2018). The effects of low productivity can quickly damage a
company's revenues and make it harder to pay bills and sustain growth (Lister, 2017).
According to Tina Amo (2018), the company will lose their customer as unskilled
worker and staff cannot produce high-quality products because they were lack adequate
knowledge and skills to provide satisfactory customer service. This combination results
in dissatisfied customers. The company will experience declining sales if dissatisfied
customers choose competitors who can provide quality products and appropriate
service (Tina Amo, 2018).

Next, inventory management must take into consideration the different types
of raw materials and products in stock. For example, some raw materials or product
may be perishable and therefore have a shorter shelf life than others. Short shelf life
products must rotate based on expiration date (Linda Ray, 2016). According to Kenneth
Hamlett (2018), although it seems like a first in/first out (FIFO) policy works in this
case, if at any time goods come into the warehouse out of expiration date sequence, a
FIFO policy will fail to manage the inventory properly. Thus inventory must be
managed to ensure that these items are rotated in line with expiration dates.

Lastly, inadequate capacity of warehouse. According to Ruben Anlacan (2012),


items will get lost or become difficult to find if it as the warehouse was too crowded.
Inadequate space of warehouse will also cause the damage to items is more likely in
congested warehouses (Ruben Anlacan, 2012). Disorganised warehouse spaces can
cause unnecessary labour costs and the incorrect use of storage systems and racking
arrangements result in many companies finding their warehouse shelves full, with no
space to receive new inventory. According to Kenneth Hamlett (2018), in an attempt
to store more inventory, products often get lost and not accounted for in the inventory
management system as storage problems can also create obsolete inventory issues. A
company may have one carton of a product left but is unable to find it because of

21
storage problems. The product then becomes obsolete and gets written off the
company’s balance sheet (Kenneth Hamlett, 2018). Thus, it is said that providing an
adequate amount of storage space of a warehouse is vital for the smooth running of a
business. Efficient warehouse operations can ensure that a company ships and receives
vital stock in time for replenishment on store shelves or in manufacturing facilities
(Justin Johnson, 2015).

3.4 Inventory Management of Performance

Inventory management of performance refers improving the performance of


inventory management in the industries require a good indicator to measure and to
support a reduction in wastage (Mahyadin, 2015).While (Ali, 2011) stated that the
efficient and effective management of inventories will lead to higher satisfaction level
in customers. Effective inventory management enables a firm to provide lower costs,
thus, the use of proper practices in inventory management can enhance inventory
management performance in business or manufacturing company. There are some of
the performances are briefly discussed as follows (D. K. Singh, 2013):

a) Operational Performance

(Saraste, 2013) defines operational performance as the strength and swiftness of the
logistic chain. One of the characteristics in the operational performance as mentioned
by (Bowersox, 2002) is speed and the consistency of the supply chain. Handling
inventory such as drug in medical store is very crucial due to drug can save lives of
many if it is used in a good way, right time, right quantities, right quality and at
affordable cost (Kagashe.G. A. B., 2012)

b) Problem Solving Performance

(Basaran B. S., 2013) states that if the inventory problems can faster be detected, the
actions plan for the solution also can quicker be taken. Among the problem-solving
performance indicators of overcoming the problems as stated by (Basaran B. S., 2013)
are faster determination of the problems, acceptance of it, no hidden agenda, and
solving without harm. Thus, the ability to solve problems faster in effective and
efficient ways is recognized as a performance benchmark before the problems get more
and extent all over the whole productions. For example, from the healthcare perspective,

22
due to the hospital pharmacy plays a vital role in patients care, the problem-solving
performance may become a good indicator for hospitals in general and hospitals
pharmacies in reducing operations costs and patient security through inventory
management practices towards inventory management performance.

c) Supply Chain Performance

Inventory management is closely linked to supply chain management. A supply


chain is defined as a network of facilities and distribution options between start and
end points that include the functions of procurement of raw materials, transformation
of these materials into intermediate and finished products, and the distribution of the
finished products to the end users (Kaihara, 2003) Supply chain management (SCM)
effectively integrates the information and materials flow within the supply chain
network starting from product design to delivery (Verwijmeren, 2004). Integration of
related activities of a production system facilitates smooth flow of materials within the
system, thereby cutting the level of in-process inventory drastically. Effective supply
chain management refers right product is made available at right time to the customer,
which is mainly due to reduced cycle times because of simplified and accelerated
operations (O’Brien, 2003).The productivity is found to be increased significantly with
the improvement in the supply chain network. At the same time, supply chain helps in
cutting business costs and increasing profits through reduced level of inventory.

Supply chain is a strategic coordination of business function within a business


organization and through its supply chain for the purpose of integrating supply and
demand management (Instructors, 2007) According to (E.C, 2012), the primary
objective of Supply Chain management is to reduce risks and uncertainties into supply
chain, thereby positively affecting inventory levels, operations and production cycle
times, processes and ultimately end users service levels. The focus is on system
optimization and enhancement of performance effectiveness.

d) Decision Making Performance

Business in the manufacturing industry and most businesses in the service industry
require carrying out inventory. Good management of inventory becomes necessary to
a company when inventory is a significant element of company (Barwa, 2015).
According to (Alfaro, 2009) Poor inventory management can cause sales to fall

23
because of frequent stock outs. For example, when the company will keep running
out of stocks, it won’t be able to supply according to the demand and so their sales
will fall. From financial point of view, if the company manages its inventory poorly,
it will affect the cash flow adversely, also it will be experiencing a lower rate of
return, whereas, if the company over stocks its inventory, the statements will show
larger total assets and hence the overall costs and expenses are likely to increase.

Decision making related to management of inventory either in public or


industries are complicated. Inventory managers are always facing with these
situations in their daily operations. As deciders, there are numerous categories of
mutually involved systems that need link one another before deciding any decisions
and it is behind intuitive power of inventory managers (Basaran B. S., 2013).

Among the indicators under decision making performances are faster, logic,
scientific, and compliant when the inventory related decisions are being made. More
than that, using of computer support, not conflict with other decisions in the
organization and the decisions making have been informed simultaneously to all
departments can more contribute to better decision making. For example, since
medicine represents a critical component of healthcare, been notified as not well
managed in hospitals pharmacies (Basaran B. S., 2013)and inventory management
has an impact on wastage (Stanger, 2012), these study intend to allow better
decisions making to be made in leading to an improved practices of inventory
management towards inventory management performance.
3.4.1 Factors of Involving in decision making inventory
Management involves keeping in focus number of elements when in the process of
decision making. It is a difficult task to balance with the demand of the product and the
supply’s capability of the company to make the best use of its capacity. Inventory
management looks at some certain factors when considering the quantity. These factors
include; order size, number of orders, safety stock, lead time, and planned production,
suppliers of raw material, freight, production budget, purchasing cost and carrying cost.
These are briefly discussed as follows:

a) Order Size

Order size defines the units of products per order (Caro, 2010) We should
consider whether one order itself means a large quantity or whether only receiving a

24
lot of orders means a large quantity is required to be produced. Another thing to be
considered is that how frequently these orders come in.

b) Number of Orders

This tells about how many orders have been received at a given point in time.

c) Safety Stock

This is backup stock which ensures that the company would never run out of
stock and will always have some reserve in times of need.
d) Lead Time

This is the margin between initiation of the order that placing the order and the
arrival of the stock at the company i.e. receiving it. This has been considered to keep
enough stock for the lapse during the order processing.

e) Planned Production

It is related to efficient planning and execution of production plans for the


benefit of the company.

f) Suppliers of Raw Material

A company relies heavily on the suppliers of its raw materials. If they make the
delivery late, the entire company can be affected and the estimated sales can fall
drastically because of late delivery of inventory or failure. It is utmost important for a
company to have some very reliable suppliers and well-planned system to avoid any
lapses during the order processing period.

g) Freight

The cost of inventory per unit might not be too high but its freight charges can
make the overall package a little too pricey. The inventory management shouldn’t just
focus on the price of the inventory, but also its transportation as that can also cause for
a large portion of the inventory expense. This is one of the reasons why companies
usually set up their production units near the raw material productions and suppliers to
cut down the overall cost of inventory and hence the total cost.

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h) Production Budget

A good production budget can be made when the sales forecast is spot on. If
the sales forecast isn’t too dependable or valid, it won’t be possible for the management
to decide on the production process and hence the decision of production budget would
also not be very accurate and might have a lot of loopholes (Caro, 2010). One is to
know the demand to forecast the sales and then decide upon the stock levels, safety
stock requirements, and most importantly the overall production budget. This element
also plays a vital role as it determines what plant capacity is needed. The production
budget at a certain point in time if exceeds the plant capacity during that time, then the
capacity of the plant need to increase.

i) Purchasing Cost

This aspect is somewhat covered in the production budget. The inventory


management must try their best to get inventory at the best rates possible to keep the
cost as low as possible. This in turn would make the profit margin bigger (Yu, 2011).
The company can also lower down the prices of their products because of their low
costs which in turn will attract more customers. Purchasing cost is basically the cost of
placing order which consists of; purchase requisition preparing cost, purchase order
preparing cost, cost of order delivery which includes postage, telephone calls, filing,
etc., cost of inspection, receiving and storing i.e. cost of receiving purchased materials
and voucher costs and accounting costs.

j) Carrying Cost

When a company purchases raw materials or manufactures goods, it needs to


store these goods for the time till they are used or sold. For example, storage space is
required. When the lot of the goods is big, there is a need for a bigger storage space as
well. Another point to be considered is how long a certain batch of goods stay in the
storage spaces (Yu, 2011). If the pace of production is faster than that of sales, the
storage required to be quite big so can accommodate the incoming products. If
inventory purchased isn’t too big at a time, the space required should be reasonable.

Carrying costs that can be incurred either are; interest, where the bigger the size
of the order, more the money will be needed for investment, storage costs, where

26
manufactured goods and raw material both require some storage space which can be in
the form of a building; a big warehouse or others and have depreciation costs, taxes,
where property tax is applied on the inventory, insurance, where in case of any
unforeseen incident like fire and insurance covers up for losses. But these things don’t
always take place and hence mostly these add to the costs of the company, spoilage
and salary of the warehouse/storekeeper and of the help if any.

3.4.2 Problems facing in managing inventory


a) To balance the supply of inventory with demand.

An organization would ideally want to have enough inventories to satisfy the


demands of its customers and reduced cost of customers due to inventory stock-outs.
On the other hand, the organization does not want to have too much inventory staying
on hand because of the cost of carrying inventory. Enough but not too much is the
ultimate objective according to (Coyle.J.J, 2003) Besides, customers’ needs are
changing daily and they are looking to their distributors to allow for flexibility in orders.
With the growing demand of competitors, it becomes more challenging to keep up with
the unique needs of your customers to assure they do not have those needs met by
someone else. It is up to your company to understand your customer needs and assure
those demands are met while still managing your inventory to appropriately keep up
with those needs. (Kegley, 2015)

b) Having too much stock

Retailers never want to miss out on a sale, yet that’s exactly what may happen
if they don’t have any inventory. Unfortunately, this fear often instigates the opposite
problem which caused them to procure too much stock. Storing more products than
necessary is expensive because it means retailers need to buy or rent bigger warehouses,
it can also result in crowding issues. Moreover, if this excess isn’t sold, it turns
into frozen capital that merchants don’t have direct access to. In addition,
merchandisers may even have to sell it at heavy discounts to recapture a part of their
investment.

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c) Incorrect guess of Inventory

Many companies do not know how much product they should be manufacturing
according to the demands of their client. Due to their inaccurate inventory management,
these companies end up producing too much or too less required amount and their
company face the loss.

d) Unqualified Inventory management staff

Many companies have a good production and cost scale but unfortunately, their
staff and workers are not very familiar with inventory management skills. When a
firm’s managers, office workers and other staffs make inventory
management decisions without any specific inventory management training, then it
shows that the company will have wasteful inventory all through its system.

e) Poor Tracking

One of the ways to avoid purchasing too much stock is through deft forecasting,
but that itself can be a major inventory management challenge if retailers aren’t
properly tracking product levels in the first place. Merchants unsure of how much
inventory they have at any given moment will also struggle to place adequate orders
and refill stock on time.

To make matters more difficult, the rise of omni channel shopping has made
accurate inventory tracking across channels a huge obstacle. In years past, retailers able
to isolate their various retail channels, which made inventory tracking much easier.
However, with many merchants offering features such as buy online and pickup in-
store, the pressure is on to keep accurate inventory records at every interaction point to
avoid costly outages or excess purchases.

f) Standardizing data

Some companies have been tripped up by having too many definitions for the
same data, such as purchase orders and product categories. Standardizing data
definitions is a necessary step in building an architecture that works across departments
and locations. You might also need to clean up the sales and inventory data coming

28
into the system, perhaps by reformatting legacy data or writing an application that
collects the information you need. (Essex, 2009)

g) Choosing just the demand planning and inventory management modules that
suit your business

The unique nature of your demand will determine which components you need.
Goods can be expensive to ship overseas and delays can squash revenue gains, so a
well-honed demand planning tool updated with real-time sales numbers is essential.
But if your sales typically come from large deals, inventory management software
merits more attention. (Essex, 2009)

h) Change management: Dumping those old spreadsheets and paper

Inventory managers can be reluctant to give up their familiar ways. You might
have to forbid the use of spreadsheets, for example, to get people to switch to new
inventory management software. To ease the transition and build trust, sit down with
users and demonstrate the benefits. Ironically, it might help to simulate the software in
Microsoft Excel for those who have never made the transition from paper. (Essex, 2009)

3.4.3 Suggestions for improving inventory management strategies


There are some suggestions (Clarke, 2015) for improving inventory
management strategies which briefly discussed as follows:

a) Reduction of inventory levels

A proposed means of operating efficiently and in a cost-effective way is the


reduction of inventory levels. There are two action plans to reduce the inventory levels
which are:-

i) Reduction in lead-time

(Addy-Tayie, 2012)The long lead-time of six month, the privilege of being a


buyer can be an advantage to a company in its ability to reduce this lead time. The
customer is always right, as they say, so it has to be the suppliers’ responsibility to
forecast or prepare to deliver orders within a shorter time than six months. Even more,

29
taking into consideration the short traveling distance from the suppliers, which is about
300kilometers, the lead-time could be made shorter than six months.

ii) Seasonal ordering policy

(Addy-Tayie, 2012)With the reasonable reduction in lead-time to suit your


plans as a buyer, and the transport cost being independent on the quantity transported,
an avenue is created for the change of ordering policy. Therefore, there will be the
possibility to place order on seasonal terms. Order quantities can be obtained by
calculating the seasonal demand with the help of past records plus safety stock. The
orders can be placed, and deliveries made before the start of each season.

b) Pick an inventory management platform

With so many inventory management software options available, it’s important


to pick the one that provides the best solutions for your business. The easiest way to
accurate and streamlined inventory management is through a platform that integrates
with an apps ecosystem. The more your systems work in sync with each other, the
better your overall control and ability to forecast. Look for software that offers
integration with accounting, eCommerce and point-of-sale systems.

c) Real-time analytics

Access to real-time inventory data and analytics helps put you on course to have
accurate product and sales forecasting at your fingertips. The ability to see the big
picture of your inventory, as well as can make adjustment to the finer details, is now
an essential characteristic of industry leaders. The benefits of this can be seen in the
efficiency and overall profitability of your business. Businesses now realize the more
access to data they have, the more success they can achieve. (Gilliam, 2015)

d) Make use of mobile technology

Mobile technology has provided a whole new level of flexibility to inventory


management in recent years. As the technology and management platforms have
advanced, more and more intuitive control is enabled. Again, the use of a SaaS platform

30
is usually best. Mobile devices can help both cut down on human error and labour, as
well as ensure that inventory data is accurate. For a complete solution, look for software
that links and syncs to your business management solutions.

For instance, train staff on using mobile devices, such as iPads or barcode
scanners, so stock movements can be tracked and, in turn, financial records updated in
real time. This avoids the drudgery of updating paper stock reports, minimising
mistakes and wasted admin time. It’s also good practice to ensure mobile devices are
adequate for the task at hand, charging stations are available, and security measures in
place to avoid theft of the devices. (Gilliam, 2015)

e) Use a perpetual inventory management system with lean inventory practices

According to (Gilliam, 2015),lean inventory management techniques


ultimately enable you to reduce the waste involved with using, storing and holding
inventory. It is a set of principles or systems that help diminish the negative effects of
aging, spoilage, over or under-stocking, inefficient transport management, and
untimely ordering, to name a few. As there are a variety of techniques available, it is
helpful to research which lean practices will most help your business.

Because it is an area that can yield fantastic rewards when done well, some
companies hire a specialized contractor to assess their inventory operations and
instigate lean techniques that best suit that business. Smaller businesses can make use
of the tools available by utilizing management platforms that offer ongoing support
with best practice solutions. In most cases, the use of a perpetual inventory system will
offer the best features for lean inventory management. We can see that perpetual
inventory management systems are becoming better, more accessible and more user-
friendly. They make the job of tracking your inventory, even across multiple locations,
easy and efficient. Making use of one goes a long way towards providing an overall
solution to all your inventory management needs. (Tracey Newman, 2015)

f) Deal with slow-moving items to ensure they don’t become technologically


obsolete, pass their use-by date, or carry a value that’s greater than what they can be
sold for.

Inflation or changes in currency value can affect the perceived sales value of
the product, in both directions. Considering the age of company’s inventories and try

31
to think of inventive ways to sell older inventory, such as heavily discounting. The cost
value of your inventory may not be recoverable, particularly when the items have been
held for a long period of time, so it is crucial to keep the inventory age as young as
possible. (Tracey Newman, 2015)

g) Cultivate open lines of communication internally.

For instance, if a big or unusual sales order is in the pipeline, ensure the sales
team have processes in place to notify the purchasing officer and others involved in
inventory management. The purchasing department may need to proactively talk with
suppliers, for example, or train additional staff and free up space in the warehouse, in
anticipation of the order.

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4.0 Methodology
4.1 Background of Company
We have chosen Tastiway Sdn. Bhd. which is located at Jitra in Kedah as our
company to understand the inventory management system and recognize the problem
or obstacles faced in implementing inventory planning tools in the company. Tastiway
Sdn. Bhd. was incorporated in Malaysia in July 2000 as a Private Limited Company. It
has been certified to MeSTI and HACCP by the Ministry of Health, Halal certification
by JAKIM, and ISO22000:2005. Tastiway Sdn. Bhd. also help food and beverage
manufacturers drive growth through their new product innovation, increasing supply
chain efficiency and optimising product formulation.
Tastiway manufactures products under its own brands which are “ALOR”
(Freeze-dried fruit, Pre-packed beverages), "TASTIMINT" (Sugar Free Lozenges) and
“DKE” (Goat’s milk powder, Vinegars and honeys). Tastiway is also the manufacturer
of choice for number of Original Equipment Manufacturer (OEM) brands in the
marketplace.Along with the Tastiway brands, the company has grown to become one
of the largest and most technologically advanced manufacturers and trading company
of beverage ingredients and flavours in Malaysia. Their customers incorporate their
value-add ingredients into their own products so to leverage on their core technologies
and global resources.
Tastiway’s ingredient and product range covers freeze-dried fruit, instant coffee
powder, non-dairy creamer, foaming creamer, instant black tea powder, Tongkat Ali
powder, Ginseng powder, Ling Zhi powder. There are many type of products that
produced by Tastiway. Tastiway’s products are available both domestically and
globally. Tastiway Sdn. Bhd. has built its reputation in the food ingredient and ready-
made food industry through its focus on quality, innovation, and taste. Tastiway Sdn.
Bhd. is the centre of excellence for Research & Development, Ingredient Manufacture,
and Product Packing.

4.2 Data Collection Method


Data collection is a term used to describe a process of preparing and collecting
data. Essentially data is categorized into primary data and secondary data. Primary data
collection techniques are obtained directly by the researcher from the respondent while
a secondary data consist of pre-existing data that has already been processed. Our
project has utilized the face to face interview method to get information about

33
Tastiway Sdn. Bhd. (Food and beverages manufacturers). We interviewed Mr Joe who
is assistant manager in Tastiway Sdn. Bhd. to know the background and understand the
inventory management system of the company. We also interviewed to recognize the
problem or obstacles faced in implementing inventory planning tools.

5.0 Findings
5.1 The Inventory Management System at Tastiway Sdn. Bhd.
Tastiway Sdn Bhd has its own inventory ordering process. From the starting
point, purchase requisition issued to supplier from purchasing department. There will
be lead time for one or two weeks. Purchasing department will rise with supplier, once
the materials arrived, all materials will go into warehouse. The storekeeper will check
and do the record. After receiving the raw materials, it will transfer to production
department for producing finished good. Production department will update the
production requirement to planner. The planner takes care of production schedule and
checking the availability of stock in the stores to know when it is time to order. The
planner then knows what to order and it communicate with purchasing department and
that when suppliers are told of the requirement and final step is receiving of raw
materials that was order. Figure 1 shows the simple model inventory ordering process
in Tastiway Sdn.Bhd.
Purchase Good
requisition delivered
Puchasing Supplier Stores
department

Current Inventory Levels


Production
planning and
control Production
Production requirement Schedule
Inventory to
be ordered

34
Tastiway Sdn. Bhd’s inventories included raw material, packaging good and
finished product.The work in progress(W-I-P) only in production.There are few type
of raw materials in the company. Company’s extensive range of ingredients are
available for both OEM and Raw Supply to satisfy diverse tastes and specifications.
Table 1 shows the company’s type of materials in kg/bag or cartons.

Type of raw materials in kg/bag or cartons

Instant coffee powder Non-dairy creamer Foaming creamer


Instant black tea powder Freeze dried-coffee Freeze dried-fruit

Based on research findings, there is some briefly illustration for each type of raw
materials.

a) Instant coffee powder


100% pure spray-dried instant coffee powder. This granulated powder is
soluble in hot water. It is used as an ingredient in pre-mixed coffee, 3-in-1 and
cappuccino beverages, and confectionery. One package contains 3kg/carton.

b) Non-dairy creamer
It is based on palm vegetable fat, glucose and sodium caseinate. It is used as a
whitener and creamer for pre-mixed coffee, tea and chocolate beverages. One package
contains 25kg/bag.

c) Foaming creamer
It is a powdered foaming agent based on dairy ingredients, vegetable fat and
carbohydrate. It is used in instant beverages such as whitener and creamer foaming
agent for drinks like cappuccino and chocolate drinks. One package always contains
12.5 kg or 10 kg/bag.

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d) Instant black tea powder
It is a spray-dried instant powder of black tea extract. This instant tea powder
is soluble in hot water. It is used as an ingredient in tea beverages and pre-mixed 3-in-
1 teas. One package always contains 25kg/cartons.

e) Freeze dried-coffee
In freeze-drying, the coffee extract is frozen to about – 40°C and cut into
granules. The frozen granules are then dried at low temperature and under vacuum.
The aroma and authentic flavor are protected by the very low temperature and gentle
drying conditions. One package always contains 25kg/cartons.

f) Freeze dried-fruit
The creation of freeze dried fruits involves a process where water is removed
from the fresh fruit under low temperatures while it remains in a frozen stage. This
drying technique is used to preserve the fruit's characteristics, freshness, colour, texture,
flavor, taste, fibers, and nutrients content. No sugar, colour or preservative added. Good
for your health. One package always contain 20kg/cartons.

From the research finding, Tastiway manufactures products under its own
brands. For example, freeze-dried fruit is produced under ‘ALOR’ brand while Mint
Lozenges is produced under ‘TASTIMINT’ and honey is produced under brand ‘DKE’.
Table 2 shows category product which produced by Tastiway under its brand.

Brand ALOR DKE TASTIMINT


Category -Creamy Filled Wafer -Honey -Sugar Free
of product Lozenges
-Freeze Dried-Fruits -Vinegar
-Pre-Packaged -Goat’s
Beverages Milk
-Ready to Drink Juice/
Coffee

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Based on Table 2,’ALOR’ brand has 5 category product which include creamy
filled wafer, freeze dried fruits, Ready to Drink juice or coffee(R-T-D) and pre-
packaged beverages. For each categories of product will have many flavors. Under pre-
packaged beverages, the product that produced has include fruit instant drink such as
Mango instant drink, instant coffee beverages such as goat’s milk coffee and instant
oat plus. Besides that, product that produced under brand ‘DKE’ which are honey,
vinegar, goat’s milk while sugar free lozenges are produced under brand
‘TASTIMINT’. There has many taste for sugar free lozenges, such as mint lozenges.
lemon lozenges and others taste.

The most commonly used inventory valuation methods under a perpetual


system are: first-in first-out (FIFO) last-in first-out (LIFO). Tastiway Sdn. Bhd.
calculates the value of its company’s inventory by using first-in first-out (FIFO) where
the company assume that the first items to enter the inventory are the first ones to be
used.

Tastiway Sdn.Bhd has limited warehouse which the company has only one
warehouse. The warehouse operates in normal working hours. So, for any issuing only
happen in the working hour. The company has hired four or five staffs for manage the
warehouse. The staffs who manage the storeroom will key-in or update the stock record
at least twice per year which at the end of month and in the middle of month. They will
also check and compare between physical quantity and quality of stock which recorded
in the system.

By using the Master Software, Tastiway Sdn. Bhd can easily to do their
bookkeeping record. This software enables the staffs in company to handle and speed
up all accounting functions in the business. It also can help to handle multiple company
transactions. Besides, Tastiway also has implemented a software for stock keeping
which is UBS Stock. It was a real-time system that updates the stock immediately after
entries. By using this kind of software, the storekeepers will have superior control over
the inventory since the software can control and track all the movement of inventory
in the company. Besides the software has ability to handle multiple company
transactions therefore the manager can control the inventory of each arm of business
separately.

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5.2 The inventory management system that implemented by Tastiway Sdn. Bhd.
Tastiway Sdn. Bhd. has adopted an inventory planning tool which is Material
Requirement Planning (MRP). MRP has greatly improved the production efficiency of
Tastiway Sdn. Bhd. Besides, this company implement Minimum Order Quantity
(MOQ) to control and plan the production schedule. MOQ is used in ordering raw
materials from suppliers, where following the MOQ set by suppliers may reduce the
cost of raw materials. In other words, if Tastiway Sdn. Bhd. order quantity less than
the supplier’s MOQ, the price per raw material will be higher compared to price after
reaching MOQ. On the other hand, there’s an internal MOQ set within the production
line where the production will only function once the customer order reached the MOQ.
For example, the MOQ is 100kg, if the order quantity by customers is lesser than that,
Tastiway Sdn. Bhd. will choose to reject the customer’s order. In our opinion, the MOQ
might represent the minimum cost to operate the machine and worker’s paid.

Hence, the indications for reordering raw materials are Minimum Order
Quantity (MOQ) and customer order. For Tastiway Sdn. Bhd., 70% of production is
exported to China, as the market in China is expanding, the key to satisfy China’s
customers is fast production. Tastiway Sdn. Bhd. usually produce two (2) to three (3)
containers of finished goods weekly, their production operation run 24 hours every day.

Tastiway Sdn. Bhd. has several main suppliers that support the constant supply
of raw materials. Some supplier only focused on one product, for instance coffee
powder is supplied by Dan Kaffe(M) Sdn. Bhd. from Johor state. Besides, there are
suppliers that supply more than one raw material, such as various types of fruits.
However, Tastiway Sdn. Bhd. also has standby suppliers of each raw material for
emergency case. This company had experienced insufficient supply of raw materials
due to spoiled inventory of supplier in previous case, the company then contact the
sub-supplier for help.

The company didn’t implement JIT (just-in-time), where holding cost is


reduced to its minimum meanwhile maintaining the operation of the production.
Instead, Tastiway Sdn. Bhd. keep all the inventories in a warehouse. As we know,
holding cost consists of cost maintaining the function of warehouse. To maintain the
operation of warehouse, Tastiway Sdn. Bhd. has hired seven (7) to eight (8) workers
in warehouse. There is only one manager and a few subordinates (clerks and workers).
Their job scopes include key-in the quantity of receiving and delivering of inventory

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into computerized software like Master and UBS Stock. The warehouse clerks will
conduct stock take in every mid and the end of each month. The warehouse only
operates in normal working hours, which is 9 a.m. to 6 p.m. whereas the production
site operates for whole day (2 shifts, 9 a.m. to 9 p.m. and 9 p.m. to 9 a.m.). Although
the salary paid to each worker is according to the minimum salary paid fixed by the
labor act, the salary paid in total is still significant.

Moreover, the other significant cost that incurred to keep inventory in hand
included electricity, maintenance fees and software subscription fees. One of the
products produced by Tastiway Sdn. Bhd. is Freeze Dried Fruit, which the fruits need
to be stored in cool room for 24 hours. The electricity needed to be switch on for 24
hours to maintain the temperature of the cool room, besides, since the production
operates for 24 hours, the electricity to support the function of machine and the lights
need to be switched on. Tastiway Sdn. Bhd. used advanced and modern technology in
the production process, so the maintenance fee for the machine incurred following the
schedule to ensure the useful life of the machine. It’s also a safety precaution within
the factory. Tastiway Sdn. Bhd. has hired their own technician, however if the problem
can’t be solved internally, they will outsource expertise of this area for assistance.
Luckily, the factory is owned by the director, Mr. Lim, hence no rental fee is incurred.

The company usually wouldn’t produce more than the quantities order by the
customer. However, they will plus or minus the quantity of cartons in a same container
when deliver to the customers. Comparing the risk of sudden increase of demand,
Tastiway Sdn. Bhd. is more concerned on the expiry date of products that might affect
the quality of products. On the other hand, when ordering raw materials from suppliers,
Tastiway Sdn. Bhd. will order a fixed percentage (2%-3%) higher than the required
quantity of raw materials to complete a customer order. The extra quantity of raw
materials is ordered to cover any deficiency or waste during the production process.

5.3 The problem or obstacles faced in implementing inventory management


system.
There are several obstacles that faced by Tastiway Sdn Bhd in implementing
the inventory systems. Firstly, the space for trading. Although Tastiway has a landscape
of approximately 6.9 hectares, but currently the built-up area is about seven thousand
square metres and the remaining land is allocated for industrial and future expansion.

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Thus, the company was facing problem of the inadequate capacity of warehouse to
support the large quantity of inventories. The next facing problem which is lack of
employees are employed in Tastiway. Tastiway employs both local and a foreign
employee, but the company does not provided accommodation for those employees
who are working in Tastiway. Mostly Tastiway worker was from Alor Setar, Kuala
Nerang and other state. For those who are interested to work in Tastiway has to go
through the interview session. Even though there have interview session in acquired the
employee but Tastiway still faced one of obstacles which is lack of man power. The
employee was not that quality.

Tastiway Sdn Bhd have faced some challenge when manage with supplier, the
first one was transportation problem. Maybe the suppliers deal with many organization
at once so lack of transport to deliver product. Moreover, the order is delivered late by
the supplier because of the unavailability of the product. Machine break down also will
lead to the late delivery by supplier as the machine cannot run and there will be no
production to provide to us. Next, at times the delivered product turns out to be damaged
or flawed. Normally Tastiway will not receive that kinds of product and the person in
charge of Tastiway will notify the supplier respectfully and ask him to replace it.

Normally, Tastiway Sdn Bhd will produce according to the quantity request by
their customer only as thier products come with an expiry date. For example, normally
one container will got total finish goods around 1997 cartoon be produced, maybe some
plus or minus extra cartoon will be produced since the company also afraid that for the
next order may take quite some time so it might influence the expiry date of the product.
The manager also mentioned that there are situation where their customer make sudden
cancellations for their order or sometimes make change in order when the company is
about to send the order to them. In order not to disappoint their customers, Tastiway
tries their best to satisfy the request by their customers as the customer was their main
sources of income.

For example, customer order for item A, B, C and D. Until to the day when the
company is going to send the container produced to the customer, the customer will
suddenly change their order to item C, D, E and F. Tastiway will follow the order that
change in last minutes and request for more time to complete that order. Sales
department of company is in-charged to deal with the customer about the date of

40
delivering the products. This kind of situation happened was quite low in the percentage
which around 2-3%, but this situation had happened before. Due to the price already
fixed, Tastiway will not simply increase the price even if the customer made a sudden
charge in their order last minutes. It was hard for Tastiway to charge their customer
with the higher price due to the last minutes request since their customer have the
volume to order with them. Another reason was to maintain the relationship between
the customers with Tastiway.

Tastiway Sdn Bhd will have forecasted or planned stock replenishment properly,
so percentage for the situation where the stock was expired was quite low which 2-3%
is around. The manager also explained there are some situation where the finished
goods were spoiled in few cartons when their customer received it. For this kind of
situation normally the company will replace the new goods to the customer and bear
the all the cost such as transportation cost that incurred. Since they finished goods
already shipping out from to overseas like China, so the customer will handle for those
spoiled goods. However, sometimes there also got situation where Tastiway received
spoiled raw material from their supplier. For instance, a whole container of creamer,
Tastiway found that there has leakage, they would not receive it and will ask the
container to send back as return the whole container of creamer to the suppliers.
Tastiway will inform the supplier politely and ask him to replace it and for sure that the
supplier will bear for the cost as now Tastiway was their customer.

The situation of missing or stolen of inventory have been happen in previously


at the previous plant, which was smaller locate at Taman Crystal. Due to the smaller
plant was a shop lot, thus it is more difficult for Tastiway to control at there. There are
no security and also CCTV provide at there. Nowadays, Tastiway’s purpose-built
70,000ft2 factory located in Jitra, Kedah and is the centre of excellence for Research &
Development, Ingredient Manufacture, and Product Packing. At here Tastiway
acquired the strict security where whoever enters or exits the plant must be check by
the security guard. There only have one got one main door for entrance and exist. Also,
Tastiway have install CCTV in this factory to control every employee behavior.

41
6.0 Limitation

Although the project has reached its aims, there were some unavoidable
limitations.

There are a lot of companies that we approached using phone call and e-mail.
We tracked each and every potential company available on relevant websites. Most of
them are not available with reasons of not engaging on the strategy we proposed. The
companies were unable fulfil our objective and they were lack of information that they
can give to us. Some of the companies tend to cancel the interview session at last
minute as most of the companies are quite busy with their works. Finally, we managed
to contact Tastiway Sdn. Bhd situated at Jitra one week before we went to interview
the Mr. Ng Aik Rom(Joe) who is the assistant factory manager of Tastiway Sdn. Bhd.

Time is something that limits us and limits the assistant factory manager of
Tastiway Sdn. Bhd that we interviewed. Finding company to be interviewed is hard,
we could not start our project because we were not sure if the company that we
approach is using the method that related to our proposed topic or not. Therefore, we
have not started anything before the interview session. But right after we were invited
by the assistant factory manager of Tastiway Sdn. Bhd, we act super-fast to delegate
and segregate the job between us and make sure that it can be finished on time. The
company that we interviewed has limited time as they also need to focus on their daily
job. Mr. Ng Aik Rom(Joe), assistant factory manager of Tastiway Sdn. Bhd, can only
be interviewed at certain time only because after that, he was needed to catch up with
his job to manage the factory but he was willing to make time for us to complete our
task.

7.0 Recommendation
Tastiway Sdn. Bhd must adopt a proactive attitude in order to manage inventory
of the company more efficient compared to previously. To become proactive, it
requires maintenance of right level of inventory at any time. Tastiway should avoid the
dangers that are inherent in keeping too little or too much of stock.

To achieve this above, it is recommended that Tastiway Sdn. Bhd adopt the
inventory keeping method that best suits their operation. In this case, Just-In-Time
method could be considered as an option as it has been proven to be effective in

42
maintaining the right level of inventory and also prevent stock-outs. There is also the
need for organizations to train their personnel in the area of inventory control
management. This implies only trained professionals with the requisite skills should be
in-charged of inventory management. The reason is obvious as most organizations
inventory control programmers failed to achieve the intended objectives due to lack of
skilled and trained professionals to manage it. When there is lack of skilled workers,
the business operation of a company will not efficient. This results the organization
could not achieve organization’s objectives and goals.

8.0 Conclusion
Effective inventory control management is recognized as one of the areas
management of any organization should acquire capability. Tastiway Sdn. Bhd must
maintain flexible inventory service to attain some of these benefits include optimal use
of resources, cost reduction, improved profitability, improved sales effectiveness,
reduction of waste, transparency and accountability, easy storage and so on. Next,
implementing the suggested recommendation will eliminate of wastes, reduction in
defects, increase in machine’s utility, improvement in man-power efficiency and
reduction in other non-productive works. The difficulty at first cannot be overlooked,
but the benefits will suffice over a long term and would be worth the while.

The result of this finding will help Tastiway Sdn. Bhd in assessing their level
of inventory control and also will be a guideline what they need to do in order to
outperform their organizational performance by using a proper inventory management
practices as a tool. Hopefully this study will able to fill in the knowledge gap in the
area of inventory management especially the proper technique of inventory control in
assisting the organizations to outperform their performance and make them closer to
achieve business excellence. In short, thus, from this study found that effective
inventory control management system requires efficient organizational performance.

Through this project, we had enhanced our understanding of material


learned in accounting profession and help in developing a broader appreciation of the
accounting profession. We have a great understanding on how business use
management accounting information in planning, control and decision making.
Business is managing inventory control system to help the owner and the company to
run the business effectively and efficiently. The proper inventory management system

43
gives the organization some information for planning and decision making. It is a
standard for performance evaluation and improved communication and coordination.

This project had enhanced the understanding of material learned in accounting


profession and help in developing a broader appreciation of the accounting profession.
This project also helps in promoting a sense of civic responsibility and helps to develop
communication, teamwork and interpersonal skills.

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10. Appendix

Photo session with Assistant Factory Manager

Interview Session with Assisstant Factory Manager

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