Pensyarah, -...

UTeM Library (Pind.1/2007)

UNIVERSITI TEKNIKAL MALAYSIA MELAKA

BORANG PENGESAHAN STATUS TESIS*

JUDUL:

Application of Inventory Models in Industry

SESI PENGAJIAN: Semester 2 2007/2008

Saya Foong Weng Kang mengaku membenarkan laporan PSM (Sarjana/Doktor Falsafah) ini disimpan di

Perpustakaan Universiti Teknikal Malaysia Melaka (UTeM) dengan syarat-syarat

kegunaan seperti berikut:

1. Laporan PSM adalah hak milik Universiti Teknikal Malaysia Melaka dan

penulis.

2. Perpustakaan Universiti Teknikal Malaysia Melaka dibenarkan membuat

salinan untuk tujuan pengajian sahaja dengan izin penulis.

3. Perpustakaan dibenarkan membuat salinan laporan PSM ini sebagai bahan

pertukaran antara institusi pengajian tinggi.

4. *Sila tandakan (√)

SULIT

TERHAD

TIDAK TERHAD

(Mengandungi maklumat yang berdarjah keselamatan atau

kepentingan Malaysia yang termaktub di dalam AKTA RAHSIA

RASMI 1972)

(Mengandungi maklumat TERHAD yang telah ditentukan oleh

organisasi/badan di mana penyelidikan dijalankan)

(FOONG WENG KANG)

Alamat Tetap:

No, 43 Rumah Murah,

26300 Gambang, Kuantan,

Pahang.

Tarikh: 20 May 2008

(CIK. MUZALNA BT MOHD JUSOH)

Cop Rasmi:

Tarikh: _______________________

* Jika laporan PSM ini SULIT atau TERHAD, sila lampirkan surat daripada pihak organisasi berkenaan

dengan menyatakan sekali sebab dan tempoh laporan ini perlu dikelaskan sebagai SULIT atau

TERHAD.

ii

FAKULTI KEJURUTERAAN PEMBUATAN

Rujukan Kami (Our Ref) : 15 Mei 2008 Rujukan Tuan (Your Ref):

Pustakawan

Perpustakaan Universiti Teknikal Malaysia Melaka (UTeM)

Taman Tasik Utama, Hang Tuah Jaya,

Ayer Keroh, 75450, Melaka

Saudara,

PENGKELASAN LAPORAN PSM SEBAGAI SULIT/TERHAD

- LAPORAN PSM SARJANA MUDA KEJURUTERAAN PEMBUATAN

(MANAGEMENT): Foong Weng Kang

TAJUK: Application of Inventory model in Industry

Sukacita dimaklumkan bahawa laporan yang tersebut di atas bertajuk

�Application of Inventory model in Industry� mohon dikelaskan sebagai

terhad untuk tempoh lima (5) tahun dari tarikh surat ini memandangkan ia

mempunyai nilai dan potensi untuk dikomersialkan di masa hadapan.

Sekian dimaklumkan. Terima kasih.

�BERKHIDMAT UNTUK NEGARA KERANA ALLAH�

Yang benar,

��..

CIK. MUZALNA BT MOHD JUSOH

Pensyarah,

Fakulti Kejuruteraan Pembuatan

UNIVERSITI TEKNIKAL MALAYSIA MELAKA

Karung Berkunci 1200, Ayer Keroh, 75450 Melaka

Tel : 06-233 2421, Faks : 06 233 2414 Email : [email protected]

iii

APPROVAL

This report is submitted to the Faculty of Manufacturing Engineering of UTeM as a

partial fulfillment of the requirements for the degree of Bachelor of Manufacturing

Engineering (Management). The members of the supervisory committee are as

follow:

Muzalna Bt Mohd Jusoh (PSM Supervisor)

iv

DECLARATION

I hereby, declared this thesis entitled

�Application of Inventory Model in Industry�

is the results of my own research except as cited in references.

Signature :

Author�s Name : FOONG WENG KANG

Date : 25 MARCH 2008

v

ABSTRACT

This study discusses the inventory models used at Ngee Ming Shoe Manufacturer

Sdn. Bhd, Selangor. The objective of the study is to identify and analyze the most

appropriate inventory models to be used in the company in term to decide the

ordering quantity and ordering time interval. The data gathered from interviews,

observations, journals, books, internet and company inventory record. The result was

analyzed, there are three inventory models used to determine the ordering quantity

and ordering interval time; Economic Order Quantity (EOQ), Economic Production

Quantity (EPQ) and Quantity Discount (QD). Each model has different

characteristic, where EOQ is focus on inventory cost, EPQ is focus on the production

and demand rate and QD is focus on the available of the discount benefit. After

overall the data analysis, Economic Order Quantity (EOQ) is the most suitable model

to apply into the company. This model provides minimum total cost, and continuous

review system with track on-hand inventory. If this model is used properly, it can be

consider as a company competitive advantages and order winner. Thus, the company

will gain a satisfactory from the customers and achieve a major success in providing

products with minimal defect in time delivery and insufficient stock.

vi

ABSTRAK

Kajian ini membincangkan tentang penggunaan model inventori di Syarikat Ngee

Ming Sdn. Bhd, Selangor. Objektif utama kajian ini adalah untuk menentukan dan

menganalisis model inventori yang paling sesuai dilaksanakan dalam syarikat

tersebut untuk menentukan kuantiti dan kekerapan pesanan. Data diperolehi daripada

temuduga, permerhatian, buku, jurnal, laman web dan data inventori syarikat.

Selepas data dianalisis, tiga model inventori digunakan bagi menentukan kuantiti dan

kekerapan pesanan iaitu kuantiti pesanan ekonomi, pengeluaran kuantiti ekonomi

dan kuantiti diskaun. Setiap model inventori mempunyai kriteria yang berbeza,

dimana kuantiti pesanan ekonomi menfokus kepada kos-kos penyimpanan,

pengeluaran kuantiti pesanan menfokus kepada kadar pengeluaran dan penggunaan

manakala kuantiti diskaun menfokus kepada kesediaan diskaun semasa pesanan

dibuat. Selepas menganalisis semua data, model kuantiti pesanan ekonomi adalah

model paling sesuai diaplikasikan di syarikat tersebut. Model ini memberikan jumlah

kos yang rendah dan boleh menunjukkan bilangan simpanan yang masih ada secara

berterusan. Jika model inventori ini digunakan dengan sepenuhnya, ia akan menjadi

kelebihan persaingan dengan syarikat lain. Oleh itu, syarikat akan dapat memenuhi

keperluan perlanggan dengan kemampuan menyediakan barangan pada kelemahan

yang minima.

vii

DEDICATION

For my parents Foong Chan Meng and Lee Yong

and my siblings

viii

ACKNOWLEDGEMENTS

First and foremost, thank God for giving me a chance to complete my PSM. I would

also like to thank my parents Foong Chan Meng and Lee Yong, my siblings and my

friends for giving me their support and motivation during my good and hard times.

Thank you to all UTeM lecturers and staffs involved in this study especially my

supervisor, Ms Muzalna Bt Mohd Jusoh. She was helping me a lot in providing a

guideline and ideas along the study. Not forgetting all Ngee Ming General Manager

Mrs Fong and all staffs that had been helpful in providing information needed to

make this study a success. Without all of you, I could not have achieved what I have

tday.

Thank you again.

Foong Weng Kang

ix

TABLE OF CONTENTS

Abstract��....v

Abstrak��.vi

Dedication��...vii

Acknowledgements��..viii

Table of Contents��....ix

List Of Figures��xiii

List Of Tables��..��.xiv

List Of Abbreviations, Symbols, Specialized Nomenclature��.xv

1. INTRODUCTION��..............1

1.1 Company Background��1

1.2 Statement of the Problem��.��.2

1.3 Objectives��....�...3

1.4 Scopes��...�..��3

1.5 Important of The Project��...�.4

1.6 Summary��..�...4

2. LITERATURE REVIEW��...��...5

2.1 Definition of Inventory��....�...5

2.2 Inventory Management��..��...6

2.2.1 Inventory Management Gurus��.�...7

2.2.2 Inventory Management Techniques��....9

2.2.2.1 Demand Forecasting��...9

2.2.2.2 Material Requirement Planning��..10

2.3 Inventory Counting System��.�...��11

2.3.1 Periodic System��.�.......11

2.3.2 Perpetual Inventory System��......11

2.4 Inventory Costs��.....��12

2.4.1 Holding Costs��..��..��..12

2.4.1.1 Capital Cost��..��.....12

x

2.4.1.2 Taxes��...��13

2.4.1.3 Insurance��...��..13

2.4.1.4 Obsolescence��....��..13

2.4.1.5 Storage��13

2.4.2 Ordering Costs��..�...14

2.4.3 Shortage Costs��.��...14

2.5 Inventory Models��..�.�...14

2.5.1 Ordering Quantity��..��....�...14

2.5.1.1 Economic Order Quantity��...��14

2.5.1.2 Economic Production Quantity��..��.17

2.5.1.3 Quantity Discount��....�...19

2.5.2 Ordering Time Interval��..��...20

3. METHODOLOGY��.�..23

3.1 Introduction��.�.23

3.2 Planning of Study��...�..�23

3.2.1 Flow Chart��...�.24

3.2.2 Gantt Chart��.��.�25

3.3 Method��.��....27

3.3.1 Field Observation��....�27

3.3.2 Interview��...27

3.3.3 Books, Journals and Internet ��..�...28

3.4 Discussion Method��..29

3.4.1 Inventory Cycle��...29

4. RESULT��.��...30

4.1 Introduction��...��...30

4.2 Inventory Level��..��..30

4.3 Sales Demand��...33

5. DISCUSSION��........39

5.1 Introduction��..��39

xi

5.2 Current Inventory Problem��......39

5.3 Inventory Costs��40

5.3.1 Inventory Assumption Costs��.40

5.3.1.1 Average Sales��.��40

5.3.1.2 Average Inventory Quantity��...41

5.3.1.3 Average Inventory Value��...41

5.3.1.4 Bank Interest��...41

5.3.1.5 Obsolescence Percentage��41

5.3.1.6 Electricity and Water Bill��...41

5.3.1.7 Transportation Fee��......42

5.3.1.8 Ordering Time��........42

5.3.2 Main Inventory Costs��...42

5.3.2.1 Holding Costs��.....42

a) Capital Cost��......42

b) Obsolescence Cost��43

c) Storage Cost��..43

5.3.2.2 Ordering Costs��44

5.4 Total Cost of Inventory Models��...44

5.4.1 Economic Order Quantity��.....45

5.4.2 Economic Production Quantity��45

5.5 Application of The Economic Order Quantity��.46

5.5.1 Ordering Quantity��.48

5.5.1.1 Safety Shoes Outsole Size Four��.....48

5.5.1.2 Safety Shoes Outsole Size Five��......49

5.5.1.3 Safety Shoes Outsole Size Six��........51

5.5.1.4 Safety Shoes Outsole Size Seven��...53

5.5.1.5 Safety Shoes Outsole Size Eight��55

5.5.1.6 Safety Shoes Outsole Size Nine��.....57

5.5.1.7 Safety Shoes Outsole Size Ten��...59

5.5.1.8 Safety Shoes Outsole Size Eleven��..61

5.5.1.9 Safety Shoes Outsole Size Twelve��.....63

5.5.2 Total Inventory Cost��.65

xii

5.5.2.1 Safety Shoes Outsole Size Four��.....65

5.5.2.2 Safety Shoes Outsole Size Five��......66

5.5.2.3 Safety Shoes Outsole Size Six��........67

5.5.2.4 Safety Shoes Outsole Size Seven��...68

5.5.2.5 Safety Shoes Outsole Size Eight��69

5.5.2.6 Safety Shoes Outsole Size Nine��.....70

5.5.2.7 Safety Shoes Outsole Size Ten��...71

5.5.2.8 Safety Shoes Outsole Size Eleven��..72

5.5.2.9 Safety Shoes Outsole Size Twelve��.....73

6. CONCLUSION��.....79

6.1 Introduction��..79

6.2 Conclusion��79

6.3 Recommendation��......80

6.3.1 Company Suggestion��80

6.3.2 Further Study��81

REFERENCES��...82

APPENDICES��.84

Appendix A��..84

Appendix B��.........86

Appendix C��.........90

Appendix D��........93

Appendix E��.........94

Appendix F��.��95

Appendix G��...��.96

xiii

LIST OF FIGURES

1.1 Ngee Ming Building 1

2.1 The Inventory Cycle: Profile of Inventory Level Over Time 15

2.2 Total Cost Curve 16

2.3 Safety Stock Reduces Risk of Stockout During Lead Time 20

2.4 The ROP Based On A Normal Distribution of Lead Time Demand 21

3.1 Flow Chart for Planning of Study 24

3.2 Inventory Cycle 29

4.1 Total Demand Outsole Year 2007 38

5.1 Economic Order Quantity Inventory Cycle 47

5.2 The Inventory Cycle for Safety Shoes Outsole Size Four 48

5.3 The Inventory Cycle for Safety Shoes Outsole Size Five 50

5.4 The Inventory Cycle for Safety Shoes Outsole Size Six 52

5.5 The Inventory Cycle for Safety Shoes Outsole Size Seven 54

5.6 The Inventory Cycle for Safety Shoes Outsole Size Eight 56

5.7 The Inventory Cycle for Safety Shoes Outsole Size Nine 58

5.8 The Inventory Cycle for Safety Shoes Outsole Size Ten 60

5.9 The Inventory Cycle for Safety Shoes Outsole Size Eleven 62

5.10 The Inventory Cycle for Safety Shoes Outsole Size Twelve 64

5.11 Holding Cost, Ordering Cost and Total Cost for Safety Shoes

Outsole Size Four 75

5.12 Order Quantity, Reorder Point and Safety Level for Each Size of

Safety Shoes Outsole 78

xiv

LIST OF TABLES

2.1 Forecasting Techniques and Formulation 9

2.2 Comparison between Periodic and Perpetual Inventory Counting System 12

3.1 Gantt Chart 26

4.1 Outsole Inventory Level for July 2007 31

4.2 Total Sales Order Year 2007 34

4.3 Total Outsole Order for Each Size of Safety Shoes 38

xv

LIST OF ABBREVIATIONS, SYMBOLS, SPECIALIZED

NOMENCLATURE

EOQ - Economic Order Quantity

EPQ - Economic Production Quantity

QD - Quantity Discount

ROP - Reorder Point

ROI - Return-On-Invest

UTeM - Universiti Teknikal Malaysia Melaka

UPC - Universal Product Code

1

CHAPTER 1

INTRODUCTION

1.1 Company Background

Ngee Ming Shoe Manufacturers Sdn. Bhd. has successfully developed a complete

range of industrial safety shoe suitable for various working conditions. The company

has been specialized in providing steel toe, safety footwear for thousands of

hardworking people throughout Malaysia. They produce a wide range of products

named Oscar Safety Shoes and they manufactured by ISO 9001:2000 accredited

facilities and adhere to international quality standards.

Ngee Ming Shoes Manufacturers Sdn. Bhd. is located in Serdang, Selangor. Ngee

Ming main building is shown in Figure 1.1.

Figure 1.1: Ngee Ming building

pdfMachine A pdf writer that produces quality PDF files with ease!

Produce quality PDF files in seconds and preserve the integrity of your original documents. Compatible across nearly all Windows platforms, if you can print from a windows application you can use pdfMachine.

Get yours now!

http://www.pdfmachine.com?cl

2

The facilities, especially designed for advanced safety shoes manufacturing, consist

of high technology machine includes clicking machines, skiving machines, sewing

machines, back-part mount machines, eyeleting machines, PU injection machines

and lasting machines. Most of the machines are imported from Germany.

The company has produced a lot of product, such as tough industrial boots and shoes,

rugged work boots and shoes, work casual boots and shoes, government contract

shoes, tender shoes, men fashions shoes and ladies safety shoes.

1.2 Problem Statement

The Ngee Ming Shoe Manufacturers have a systematic in marketing, production,

sales, and human resource department operation system. However, the inventory

management had potential to be improved. There were few problems that occurred in

inventory management, such as the warehouse arrangement was not systematic,

some frequent used items were placed at higher rack where they were hard to be

found by the workers; there were also obsolesce items placed at the warehouse

entrance.

Besides that, inventory counting system was also having a problem with the accuracy

of inventory record. The company had periodic inventory counting system where the

inventory amount will be count interval in a month. There was always a deviation

with the record in finished good inventory; this problem was occurred when the

transfer of finished good products from production department to the warehouse was

not recorded.

The worst problem was insufficiency of raw material such as outsole to supply to the

production line, thus it delayed and cease the production. The raw material was

ordering at inappropriate time and quantity. Therefore, sometimes it happened to be

exceeding inventory. This may increase the carrying cost, inventory cost and capital

cost. As the result, the return on invest was not satisfy.



Get yours now!


3

1.3 Objectives

There are several study objectives;

a) To identify the most appropriate inventory model to apply into the

company.

b) To protect against uncertainties such as supply, demand and lead time, so

safety stocks are required.

c) To allow economic production and purchase, it is more economic to

produce materials in a lot size because it can reduce the ordering costs,

quantity costs and transportation costs.

d) To ensure the company has gain customers satisfactory and competitive

advantages.

e) To ensure the products have delivered before due date and avoid loss

sales due to stock out.

1.4 Scope

This project has mainly focus on two subjects; one is the ordering quantity and

another is the time interval to make an order for the outsole. There are some

inventory management technique and models is discussed in the report on how to

apply these models and which model and technique is more suitable for the company.

The result is more concentrated in mathematically and statistically. Besides that,

there is little touch on the total cost inventory because the profit is the most important

consideration for company.

In the other hand, this project will not include other department field, and also the

design of the warehouse layout, inventory classification and many other departments

which is not related with the main goal for the project. Beside that, the calculations

of the study is more on assumption, the value is not precise as actual value.



Get yours now!


4

1.5 Important of The Project

The project is to determine the ordering quantity and timing in a minimum cost. This

project is important because with a suitable inventory model applied can succeed the

business operation and supply chain. A good inventory model can also reduce the

capital cost where the company can manage the buying amount without the problem

of exceed inventory. The capital can be invested in other investment to gain higher

turnover. Therefore, the turnover ratio is increased. Besides that, it can give more

empty spaces in the warehouse for other purposes. The capital can be invested in

other investment where have higher turnover.

The appropriate ordering time and quantity is important to ensure the company have

sufficient shoes supply to the customer during the production lead time. This is to

avoid the problems of delaying in products delivery time to customer where it may

caused the customer to switch to another supplier. Therefore, the company has loss in

sales and customer satisfactory. The company reputation will also drop and it is hard

to gain the customer loyalty for a period of time.

1.6 Summary

As a conclusion, the Ngee Ming Shoe Manufacturers have many potential to be

improved on inventory management. There are some inventory models that can be

applied in the company inventory management to determine the most appropriate

ordering time and quantity. A good inventory model is important because it

determine the development of the company to bring it into a success.



Get yours now!


5

CHAPTER 2

LITERATURE REVIEW

2.1 Definition of Inventory

Inventory is stock or store of goods (Stevenson, 2007). In manufacturing, inventory

consists of raw materials, work-in-process, and finished goods. In wholesaling and

retailing, inventory is the stock of merchandise on hand. In direct marketing,

inventory may refer to direct-mail package components that are available for mailing

when needed. In the broadcast and print media industry, inventory is the time or

space available for sale to advertisers. In magazine publishing, inventory is the

number of copies of each issue available for distribution.

An ample inventory ensures that sales will not be lost or deadlines missed but can

require a substantial cash investment in both material and storage space. There are

also risks associated with excessive inventory, such as a change in circumstances that

reduces or eliminates demand for an item in inventory or that renders the item

obsolete or illegal, or the risk of loss due to theft, fire, aging, and so forth. The costs

and risks must be weighed against the cost of lost sales and missed deadlines to

determine the optimal inventory level. Inventory control is to achieve desired

customer service with minimum inventory commitment. Excessive inventories may

compensate for deficiencies in basic design of a logistics system but will ultimately

result in higher than necessary total logistic cost.



Get yours now!


6

A firm can typically stock many of items in inventory. Thus, manufacturing firm

carry supplies of raw materials, purchased parts, partially finished item and finished

goods. Inventories may represent a significant portion of total assets, a reduction of

inventories can result in a significant increase in return on investment (ROI).

However, many of items have a limited life time, so carrying large quantities would

mean having to dispose of unused, costly supplies.

Another consideration has been take is the space requirements of inventory. Space

limitation may pose restrictions on inventory storage capability, more space can

increase the storage capability thus more item can stored but also increase the

inventory holding costs. So it is depend on the functions of inventory. The most

important functions are to meet anticipated customer demand, to smooth production

requirement, to decouple operations, to protect against stock outs, to take advantage

of order cycles, to hedge against price increases, to permit operations and take

advantage of quantity discounts.

2.2 Inventory Management

Inventory management is the process that implements inventory policy or model.

The reactive or pull inventory approach uses customer demand to pull product

through the distribution channel. An alternative philosophy is a planning approach

that proactively allocates inventory based on forecasted demand and product

availability. A third, or hybrid, logic uses a combination of push and pull (Donald

J.bowersox, 2002).

A good inventory management is important for successful operation of most

businesses and their supply chains, nevertheless, it will hampers operations,

diminishes customer satisfaction, and increase operating costs and reduce

profitability as a result of added warehousing, working capital, insurance, taxes, and

obsolescence.



Get yours now!


7

Inventory control is the managerial procedure for implementing an inventory model.

The accountability aspect of control measures units on hand at a specific location and

tracks additions and deletions. Accountability and tracking can be performed on a

manual or computerized basis.

Inventory control has two main concerns; one is the level of customer service, which

is to have the right goods, in sufficient quantities, in right place, at right time. The

other is the costs of ordering and carrying inventories.

The overall objective of inventory control is to achieve satisfactory levels of

customer service while keeping inventory cost within reasonable bounds. Other

objectives are like the following;

f) To protect against uncertainties such as supply, demand and lead time, so

safety stocks are required.

g) To allow economic production and purchase, it is more economic to

produce materials in a lots size because it will reduce the ordering costs,

quantity and transportation costs.

h) To cover anticipated changes in demand or supply because the price of

the material is changeable and the demand required also enable to forecast

accurately, so inventory can make sure the sales is maintain in averages

costs.

2.2.1 Inventory Management Gurus

The management practices in modern inventory management solutions began to

develop during the industrial revolution in the late 1800s. Soon after inventory

management training consultants developed programs to educate distribution

managers. There are many gurus that have a high contribution in development of the

inventory management, the famous gurus are such as Gordon Graham, Charles

Bodenstab and Jon Schreibfeder.



Get yours now!


8

In the software era Gordon Graham paved the road for today's inventory

management consultants. Gordon managed a consulting and training company for

over 25 years. Gordon spent many years consulting with distributors on how to

implement quality inventory management practices. Business practices that are easily

understood and which provide proven results on the distributors bottom line profits

(Gordon Graham, 1990).

Charles Bodenstab views order history as an inventory management database and

brings to it the power of statistical analysis. Charles Bodenstab's involvement during

the 1950's and 1960's with developing some of the earliest qualitative automated

approaches to inventory management. Charles has said �much of the statistical

theory built into automated inventory control systems completely ignored the day-to-

day business realities of the typical distributor�.

Jon Schreibfeder studied inventory management with industry "gurus" such as Alan

"Buddy" Silver and Gordon Graham and he has designed several inventory

management computer systems and has also served as a distribution industry

"troubleshooter" for two major computer companies. Over the past eighteen years,

Jon has helped hundreds of hard-goods distributors improve their productivity and

profitability by leading them through the implementation of effective inventory

management systems. Jon Schreibfeder has introduced the techniques managers will

find in their inventory management software and these three resources for further

learning.



Get yours now!


Pensyarah, -...

Documents

Transcript of Pensyarah, -...