roy_thesis on im control (final

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Introduction:

Now a day’s every organization focusing on reducing cost in every steps of its

product making. From all relevant cost parameter, inventory can play a vital role in

reducing production cost as well as can able to make efficient operation flow.

Inventory of raw materials, spare parts, packaging goods & finished goods leads the

business process from end to end to meet the desire of the manufacturer as well as

of end customer. any e!perts worked well & still working for inventory management

all over the world. "hey have invented & developed different planning tools as well

enterprise resource planning solutions for inventory control. "hat’s why here the

analysis structured as the business part of inventory management for which

organization can be beneficial by means of cost reduction. "here many tools &

philosophy like economic order #uantity $%'(, )ust in time method $*I"( which is

related to short lead time and supplier development, aterial re#uirement planning

$+(, defining re-order point, distribution re#uirement planning $+( etc which are

used for inventory management. "hrough this research a pinpoint directed in

reducing inventory cost for packaging material& raw materials which affect ma)or

portion of total procurement cost for cement production.

"here about /000 stock keeping unit, among them by 123 analysis $based on

costing value( the raw material namely clinker, fly ash, gypsum slag in back end &

cement empty bag in front end of the product $ packaged cement( making process

taken in consideration for analyzing & optimizing in this thesis. "he economic order

#uantity model refers with how much to order & how will be replenishment #uantity

during lead time of ne!t order, concerns with cost effectiveness & discount pricing

while purchasing. 1nd *ust in "ime philosophy, widely used as namely "oyota

production theory where considers zero inventory. For 3ement manufacturing

industry it not feasible to make zero inventory at all but this philosophy can draw a

ma)or impact on reducing packaging material of cement $empty cement bag-/0kg(

which is dependable on relationship between supplier & manufacturer with better

information flow & strong logistic network.

Keywords: %', *I", Inventory control, 4upply chain management, +- +,

3ost-%fficiency.

1



1.01 Background:

Inventory management deals with decisions regarding supply levels5 the correct

amount of material and the correct time to reorder. "here are many reasons for acompany to hold e!cess inventory6 variation in demand and production6 poor #uality

and unreliable suppliers and shippers. 7owever, there are also good reasons to cut

down the amount held in inventory carrying cost, holding cost, storage space and

material handling. "hus an e!change has to be considered between the two

situations Inventories perform a number of vital a function in the operations of a

system, which in turn makes them critical to the cement production. n the other

hand without inventories, organizations could not hope to achieve smooth productionflow.

"here are a number of cost elements associated with producing packed cement

which are taken into consideration during cement manufacturing up to packaging of

each /0 89 cement bag.

Four ma)or costs are associated with the production of cement $packaged cement(

and their average impact on production cost is as follows5

Cost Element % of cost in Production

ower & Fuel cost :0

+aw aterial cost ;0

%mpty 3ement 2ag cost :/

"ransport 3ost /

thers +elevant %!pense :0

<4ource 5 1uthor study analysis

From the above figure it has been observed that the cement manufacturer should

focus on optimizing the cost on raw-material & empty cement bag. 7ere the carrying

cost refers the cost of sales $i.e distribution cost(. "his background guides the

research to be focus on working for raw-material & empty bag. 1nd the inventory

associated with these two categories of items can lead the production cost.

2eside from the 123 analysis $123 analysis is an inventory categorization methodwhich consists in dividing items into three categories $1, 2, 3(5 1 being the most

2



valuable items, 3 being the least valuable ones( every organization can identify the

high value item & low value item in perception of manufacturing cost. 1nd the 123

analysis also indicates the raw-material & packaging item has a big portion of cost

engagement with the total cost of production.

3onsidering above scenario of cement production the research focused on

controlling the inventory cost of raw-material by determining how much to order how

fre#uency to place order with %' model & ensuring better logistic & information

sharing short lead time of supply can reduce holding cost of empty cement 2ag

inventory $i.e. stock in store(.

1.02 !"ecti#e $ oal:

3



I. "o identify and analyze the e!isting inventory control system in terms of cost

variables which are controllable.

II. "o investigate $for those industry who are already in practice( & show $for

those who are not in practice( the advantages of %' model for raw-material

inventory control & *I" philosophy for cement empty bag inventory control

respectively.

1.0& 'esearc( )uestions:

"he following research #uestion will guide the study and analysis5

':-=hat is the nature of relationship between inventory management and holding

cost>

'?- 7ow the carrying cost affects the total ordering cost of raw-material of cement>

'@-7ow much impact on inventory cost for raw material & packaging goods on the

production cost. 3an the %' model & *I" philosophy able to minimize cost of

inventory for the achievement of operational cost cut by reducing or optimizing

inventory of raw material & packaging material $empty cement bag(.

1.0* Pro!lem +efinition:

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"he inventory cost is not only interest on stocks but also cost building warehouse for

storage, carrying cost, insurance and obsolesce and movement of inputs from place

of storage to the factory where the materials have to be finally used to convert them

into finished goods. =ith the view of cost optimization inventory control is a concern

to the cement manufacturer to keep the stock in the desired level which will satisfy

the demand of production as well as the purchasing cost & safety inventory cost. For

cement industry inventory of raw materials and packaging materials i.e. cement bag

which is highly value added item for the production of finished goods i.e. cement bag

of /0 kg each. "his thesis states the prime problem on inventory planning during

procuring of raw material $lacking in the implication of procuring economic #uantity to

order( and empty cement bags $packaging materials( and managing the optimal

stock level. 2eside decisions about how many of which products are to be stored in

the warehouse, when to place the ne!t order, the #uantities to be ordered for

optimizing cost etc are some of the problems encountered every day

1.0, -et(odology:

5



Both quantitative and qualitative methods are used to conduct this thesis.

In term of quantitative method, the secondary data ( on sales, stock

quantity, re-order oint, safety stock, lead time to rocure material,

holdin! eriod unit rice, sulier mana!ement, vendor develomentro!ram, lo!istic " information technolo!y imrovement etc# $ould %e

used $hich mean the inventory record statements etc. &nd in term of

qualitative method, %oth rimary data and secondary data should %e

used. 'ere the survey aroached $ith %oth structure and unstructured

intervie$ to collect rimary data, in articular structure intervie$ is

referred to use in order to collect quantia%le data ( on safety stock, lead

time, order quantity, carryin! cost etc# in addition to in deth intervie$

need to carry out to o%tain more secic information. In the ersective of

a formal research desi!n throu!h the denition of the study oulation,

the incororation of suita%le measurin! instrument and relia%le

techniques for data analysis. 'ere the oulation considered as the all

cement industries in the Ban!ladesh $here a ten cement industry

considered as samle of the study. )o conduct the research study there 3*

questions formulated " thro$n to di+erent cement industry to those

ersonnel $ho are involved $ith suly chain rocurement, inventory,

roduction " distri%ution function. )he questionnaire $as desi!ned in

likert scale format as $ell check list and )here also ket free

comment otion for the e/ecutives $ho ans$ered to the survey. 0ei!hted

mean and standard deviation of the varia%les like safety stock quantity,

lead time to rocure, holdin! eriod, interest rate etc $ere used to ans$er

the research questions elationshi %et$een varia%les $as tested usin!

the /cel ro!ram " ro!ram.

6



1.0 /amle /ie and /amling ec(ni3ue:

2angladesh cement industry is the A0th largest market in the world. ore than

seventy cement manufacturer e!ists in this industry over the 2angladesh. 1mong

them 7eidelberg, 7olcim and Bafarge surma cement are the leaders among

multinational cement manufacturers and 4hah and eghna cement are the leading

domestic manufacturers. 4hah cement is the market leader with close to :A.?0C of

the market share, followed by 7eidelberg with about D.@0C of the market share.

uring the ?0:0, many small local manufacturers like remier, 4even 3ircle, 3rown,

Fresh and 8ing cement increased their sales drastically riding on their benefits of

economies of scale, backward linkage and aggressive marketing effort.

Target Population: 1ll cement companies $about E0 nos( situated in 2angladesh are

considered here as the population of this thesis study.

Sample: "en renowned cement companies are considered as sample from the

population for this study.

Sources of Data: rimary data was collected through a structured #uestionnaire

survey and 4econdary data was collected from past sales & purchase date sources

in the form of various financial statements, sales report, and also from research

report, papers and )ournals.

1.04 /amling ec(ni3ue

'uota sampling of non-probability sampling techni#ue was used to collected data

since the techni#ue enables to develop #uota or category of population & sample

elements like respondent, stage, graphical boundaries, time period etc are selected

based on convenience or )udgment.

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2. 5iterature 'e#iew

8

Figure-:5 4ampling flow for this research



2.01 Introduction to theory of Inventory:

4tock in store is called inventory. "o keep stock is not always a cost to the company

since to run the continuous operation keeping inventory of necessary material like

raw-material, empty cement bag to pack the loose cement in /0 kg each, is must for

every cement manufacturer but material planning should be economic & optimizing

since these bear a big portion of production cost. "he basic function of inventories

whether they are raw materials, work-in-progress or finished goods are that of

decoupling the operations involved in converting inputs into outputs. "his allows the

successive stages in the purchasing, manufacturing and distribution process to

operate reliance on the schedule of output, of prior activities in the production

process. Furthermore, the decoupling function allows both time and spatial

separation between production and consumption of products in the operating

system. Inventory was held for the facilitating the organization to achieve economies

of scale, to balance supply and demand, to enable speculation activities, to provide

protection from uncertainties in demand and order cycle & to act as a buffer between

critical and interfaces within the channel of distribution.

Inventories owned by a company can be divided into @ types based on production

stages5

Ra materials: inventories which are used as input to a production process for

consecutive processes to transform into final goods. 1 typical e!ample is the wood

which is used to make furniture. "here are ? kinds of raw materials5 irect materials

which form a product and indirect materials which are consumed during the

production line.

! "or# in process: are materials that has entered but not yet turned into completed

products. It represents all materials that are at production process before finalization,

or can be called partly-finished goodsG. "his stage of production may re#uire a huge

amount of investment in work in process.

H $inished goods: are completed goods which haven’t been sold or distributed to

end-users, or can be referred as the amount of manufactured goods that can be sold

and available for consumers’ demand. "hey can be a piece of inventory that is stored

9



in the warehouse. "hese goods cannot generate profits until being sold to

customers, that’s why they can be considered as an asset of the company.

2.02 Economic rder )uantity 6E)7%conomic order #uantity $%'( model the first was published in :D:@ by Ford

=hitman 7arris- an engineer, inventor, author and patent attorneys. 7arris )udged

that common issues is the most manufacturers find the most appropriate number for

the manufacturer to put through an order management therefore needs a formula,

such as check, mistake cots in place. "his is the basis of forming models %'

inventory management.

etermining the e!act amount that is needed to cover contingencies changes based

on the situation faced by the company. "here is one model that is commonly used to

determine optimal order size. "his is the %conomic rder 'uantity $%'( model.

1lso, %' model was determined by minimizing the total annual cost incurred by the

company by virtue of its ordering cost and carrying cost. "he e!pression for total

annual cost is5

"3 'J? <h K J'< 4

=here

"3 is total annual cost, ' is total order #uantity ,7 is annual carrying cost per unit ,

4- rdering cost and is for annual demand

"he formula is written asillustrated in following e#uation5

=here,

' the %' order #uantity. "his is the variable we want to optimize. 1ll the other

variables are fi!ed #uantities.

the annual demand of product in #uantity per unit time. "his can also be known

as a rate.

4 the product order cost. "his is the flat fee charged for making any order and is

independent of '.

3Lnit cost.

1*



7 7olding cost per unit as a fraction of product cost.

Fig-0?5 %' rocess 9raph

In determining the reorder point the following three factors need to be at hand5

:. emand 8 'uantity of inventory used or sold each day

?. Bead "ime 8 "ime $in days( it takes for an order to arrive when an order is placed

@. 4afety 4tock 8 "he #uantity of inventory kept on hand in case there is a

unpredictable event like delays in lead time or une!pected demand.

If the demand is constant and the lead time is known, then the reorder point is

written as the following5

Reorder Point in days %lead time( aily usage<Bead time Min days

=hen a safety stock is maintained, then the reorder point is written as the following5

Reorder Point Maily usage<Bead time $in days( Ksafety stock Min #uantity

11



Fig-0@5 +e-order point

In this model, the researchers made assumptions and if the company decides to

apply this model must consider the company in accordance with these assumptions

or not. The assumptions in the &'( model include:

:. emand is known in advance and constant over time - the company that apply

%' model will use data from the past and formulate future plans. Lnder such

assumptions, this demand is almost constant each year

?. 4ales at a constant rate - in this model we assume that the goods are sold at a

relatively stable rate throughout the years and are not influenced by e!ternal factors.

If a company has sales level fluctuates seasonally and cyclically it would re#uire a

more comple! model.

@. No shortage is allowed.

A. Bead time that receipted products from the orders is constant $known and constant

lead-time(

/. No #uantity discounts

;. "he orders #uantity is received all at once.

E. 1ll demand must be met #uickly and dealt by instantaneous delivering. "hismeans that when using the %' model, do not consider the purchase #uantity

discounts orders and re O orders or inventory shortage costs.

2.0& 9ust8in8ime 69I7 (iloso(y:

12



*ust-In-"ime $*I"( manufacturing is a *apanese management philosophy applied in

manufacturing which involves having the right items of the right #uality and #uantity

in the right place and the right time. It has been widely reported that the proper use

of *I" manufacturing has resulted in increases in #uality, productivity and efficiency,

improved communication and decreases in costs and wastes.

*ust-in-time systems have become much more important in manufacturing and

logistics operations in recent years also known as the "oyota roduction 4ystems

$"4(, were developed by "oyota otor 3ooperation during the :D/0’s and

:D;0’s.*I" is a philosophy based on the principle of getting the right materials to the

right place at the right time.

anufacturers are moving towards lean manufacturing and *I", so companies are

decreasing the amount of inventory being held. +etail stores are also applying the

philosophy of *I" to reduce inventories and in turn reduce the associated costs at the

store. "he philosophy of *I" is different from the %' model. Instead of balancing

the two conflicting costs of ordering and holding inventories, the ob)ective of *I"

systems is to minimize inventories to an e!tent which is )ust needed by the company.

"his is mainly achieved by continuous improvement such as increasing efficiency

and eliminating waste.

"he above philosophy is able to bring the company to a so-called lean operationG

which has the following benefits5

$:( $inancial )enefits5 inimizing inventory levels reduces carrying costs which at

the same time frees up investment in working capital.

$?( 'perational )enefits: verall operating efficiency is continuously improvedthrough better supply chain management $e.g. developing a long-term relationship

with suppliers and conduct careful supplier evaluation( and better product #uality

$e.g. eliminating waste and reducing defects(.

History and development of JIT approach:

13



*I" is a *apanese management philosophy which has been applied in practice since

the early :DE0s in many *apanese manufacturing organizations. It was first

developed and perfected within the "oyota manufacturing plants by "aiichi hno as a

means of meeting consumer demands with minimum delays $9oddadrd, :DP;(. For

this reason, "aiichi hno is fre#uently referred to as the father of *I". "he "oyota

production plants were the first to introduction *I". It gained e!tended support during

the :DE@ oil embargo and was later adopted by many other organizations.

"oyota was able to meet the increasing challenges for survival through an approach

to management different from what was characteristic of the time. "his approach

focused on people, plants and system. "oyota realized that *I" would only be

successful if every individual within the organization was involved and committed to

it, if the plant and processes were arranged for ma!imum output and efficiency, and if

#uality and production programmes were scheduled to meet demands e!actly. *I"

had its beginnings as a method of reducing inventory levels within *apanese

shipyards. "oday, *I" has evolved into a management philosophy containing a body

of knowledge and encompassing a comprehensive set of manufacturing principles

and techni#ues.

7owever, *I" has the following risks and limitations5

Q It places heavy reliance on suppliers. If suppliers are neither reliable nor willing to

promptly react to customer demand through fre#uent deliveries, *I" systems will fail.

Q "he *I" system is regarded as a pull-demandG system. Inventories are pulled

through the system by present customer demand. "he system works well only when

such demand is predictable with minimum fluctuations.

Q 3ompanies adopting *I" systems are e!posed to high business risks as a single

mistake in the operating environment may easily lead to work stoppages.

2.0& 5iterature 'e#iew from Paers of 9I $ E):

14



4unil 3hopra & eter eindl $?00/( in their te!t book 4upply 3hain anagementG

focuses the *I" hilosophy %', Bead time & effectiveness of integrated supply

chain network in different view for opmization of inventory cost. From the study of

international paper it is observed that many researchers worked on inventory control

system for increasing organization’s overall profit. From the paper of 4hibamay et al.

$?0:@( summarizes the 123 analysis of material that are needed for production in

three classes where they assumed the ?0C of items which are liable for P0C of

production cost.

In the paper of 3hun-*en 3hung * 7ui-ing =ee$?00;( stated that the model of *I"

in connection with inventory control as well as the distribution plant $ selling rate( for

which stock level is dependable. In their research they have developed a

replenishment policy for a single-buyer single-supplier integrated deteriorating model

with the stock dependent selling rate, a single setup and multiple *I" deliveries

$44( strategy. "hey stated & formulated a model for the *I" delivery and the

relevant costs which provided a rigorous analysis using the time-weighted inventory

$"=I( method to analyze the inventory level and to derive the optimal solutions using

an optimization approach.

4cott 9rant %ckert $?00E( includes the customer satisfaction related to the inventory

control. 4cott emphasizes on perfect order so that supplier can meet the demand

using customer survey. riscila & Buiz $?0::( describes in their paper about the

effect of integrated supply chain management for increasing operational

performance. "hey stated supply chain network model by which the whole operation

from sourcing to distribution will be linked up & the overall l supply chain efficiency

will raise up.

artin " :arius; (2*12# aroaches for inventory control $ith maintain

safety stock for smooth oeration " the total inventory controllin! model.

3hung et al. $?00/( stated about safety inventory problems and the service level for

production. "o keep safety stock refers the holding cost & they investigate the cost

affects the production cost. 2eside in this paper the authors suggest for

implementing modern method inventory control to optimize cost of inventory holding.

15



Baith et.al $?00;( focus on supply chain cost specially the inventory cost through

modern planning tool like *I" & +. "hey also induced the simulation information

sharing for inventory control system. In their paper they have comprised the chain

cost between + & *I".

"imothy et al. $?0:@( states in their paper of impact inventory management practices

in manufacturingG about the various inventory control techni#ue like %' & *I" to

investigate the impact on return on investment, return on e#uity, profitability &

volume of sales.

1nother research of usara azanai $?0:?( indicates some hypothesis to control

the inventory for small & medium enterprises of 4outh 1frica. 7ere the author

investigates the impact of application of *ust-In-"ime $*I"( inventory management

system in the manufacturing sector of 4%. "he author statistically found significant

positive correlations between the application of *I" inventory management principles

and cost efficiency, #uality and fle!ibility and also draws some challenges in the

implication of *I" approach.

&.00 +ata Collection $ in#estigation:

3.01 Introduction of Sample Manufacturers:

"o conduct the research the past data & the data of the current year has been

collected from national & multinational cement manufacturer of 2angladesh. From

them 7olcim 3ement, Bafarge 4urma 3ement, eghna 3ement $2ashundhora(,

ongla 3ement $%lephant 2rand(, 4even 3ircle 3ement, ubai 2angladesh 3ement

$Five +ing(, 1ki) 3ement, 4hah 3ement, remier 3ement were the sample from the

population of all cement manufacturer in 2angladesh. "he personnel of these

companies who are involved with supply chain function, production function &

distributionJ sales were the respondent of the survey.

&.02 )uantitati#e +ata ;nalysis:

16



7ere analyzed some past data of purchasing cost and holding of packaging material

$empty cement bag( of some local & multinational 3ement anufacturer in

2angladesh relevant to +IT Philosophy . "o show the details calculation here taken A

numbers of cement industries where two multinational cement companies & two

domestic companies taken under focus & rest are in the summary view.

"able-:5 7olding cost calculated for empty bag reference to Lafare Surma

!ement . $ata considering interest rate fi!ed :/C annually.(

Rear emand in"N

+e#uired2ag 'ty$cs(

Lnitriceof 219

"otal 2agcosting$2"(

1verageBead"ime "orocurefor eachorder

7oldingeriod$7(for 2ag

Interest+ate

%ffectiveInterestrate on7

Interest3ost$2"(

1vg Cof 7costfromtotalcost

$000( $illion( $2"( $illion(

ays

in days

$illio

n(

?0:/ :,@?0 ?;.A0 ?0 /?P.00

@

:?0 0.:/ 0.0/

2.0&

?0:A :,A@/, ?P.E0 ?0 /EA.00

A

:/0 0.:/ 0.0;

&,.&<

?0:@ :,?D/ ?/.D0 ?0 /:P.00

@

:@0 0.:/ 0.0/

24.4

?0:? :,?;0 ?/.?0 ?0 /0A.00

/

:A0 0.:/ 0.0;

2=.00

?0:: :,??0 ?A.A0 ?0 APP.00

@

:@/ 0.:/ 0.0;

24.04

otal ?;:?.00 1*,.1,

,.,

17

<4ource5 1uthor calculation from the surve



94<

6<

Total Bag Purchase cost Vs Holding cost

)otal Ba! ost 'oldin! costost

Figure-0A5 urchase cost Ss 7olding cost for Bafarge 4urma 3ement

18



"able -0?5 7olding cost calculated for empty bag holding reference to Holcim

cement ata

Rear emandin "N

+e#uired2ag 'ty$cs(

Lnitriceof219

"otal2agcosting$2"(

1verage

Beadtime torocure2ag per rder

Rearly

7oldingperiodforsafetystock

Interestrate

1ctual

effectiveInterestforholdingmaterial

7oldingcost 1mount$2"(

1vg C

of 7costfromtotalcost

+ecent $000( $illion( $2"( illion

ays $illion(

?0:/ :0?P ?0./E ?0

A::.A/

/

:P0

0.:/ 0.0E &0.*

?0:A :0;E ?:.@A ?0

A?;.PD

E

:D/

0.:/ 0.0P &*.21

?0:@ :00D ?0.:P ?0

[email protected]?

E

:D0

0.:/ 0.0D &1.,&

?0:? :00: ?0.0? ?0

A00.AD

E

:D?

0.:/ 0.0P &1.1

?0:: :0@; ?0.EA ?0

A:A.E;

E

:P/

0.:/ 0.0D &1.,*

"otal 20,4.& 1,=.&, 4.4,%

19

<4ource5 1uthor calculation from the surve data



)otal Ba! ost 92<

'oldin! costost 8<

otal Bag Purc(ase cost >s ?olding cost

Figure-0/5 urchase cost Ss 7olding cost for 7olcim 3ement

"able-@ 7olding cost calculated for Shah !ement who has own bag manufacturingplant as follows5

2*



@ear +emandin A

'e3uiredBag )ty6Pcs7

nitPrice of B;

otal;mount

of !agcost

6B+7

;#erage5eadime toProcure

?olding

ime forBag indays

Interest'ate

Effecti#erate on?P

?oldingCost6B+7

;#g% of?Pcost

fromtotalcost

$000( $ illion( $2"( $million( ays $illion(

?0:/ ?,P@? /;.;A ?0 :,:@? A :E/ 0.:/ 0.0E 4.,0

?0:A @,0:0 ;0.?0 ?0 :,?0A / :P0 0.:/ 0.0E 4*.21

?0:@ ?,D?/ /P./0 ?0 :,:E0 @ :/0 0.:/ 0.0; 4.=&

?0:? ?,PE/ /E./0 ?0 :,:/0 @ :;0 0.:/ 0.0E 44.=4

?0:: ?,E// //.:0 ?0 :,:0? ; :P/ 0.:/ 0.0P 4.=<

"otal ,4,< &4&.,= .*<

21




94<

6<



igure80: urchase cost Ss 7olding cost for 4hah 3ement

"able-A5 ata 3ollected from "ashundhora !ement $eghna 3ement-8ing 2rand(

for calculating 7olding cost

22



Rear emandin "N

2agre#uired'ty$cs(

Lnitriceof 2ag

"otal2ag

3osting$2"(

1verageBead"ime torocure

7olding"imefor 2agin days

Interest+ate

%ffectiveInterest+ate

7olding3ost$2"(

;#g. % of?P costfrom totalcost

$000( illion $2"( $illion( $illion(

?0:/ :D?0 @P.A0 ?0 E;P/ days

:/0 0.:/ 0.0; *4.&*

?0:A :PE/ @E./0 ?0 E/0 A days :@0 0.:/ 0.0/ *0.0

?0:@ :P/0 @E.00 ?0 EA0 @ days :00 0.:/ 0.0A &0.*1

?0:? :P:0 @;.?0 ?0 E?A A days :A0 0.:/ 0.0; *1.,

?0:: :ED0 @/.P0 ?0 E:; / days :// 0.:/ 0.0; *,.0

"otal @;DP 20,.0 ,.,%

23




94<

6<



igure804: urchase cost Ss 7olding cost for eghna 3ement

24



To summari#e the 7olding cost vs re#uired bag inventory of all selected cement

industries the following graphs has been formulated from the respondent’s answer &

data interpretation5

*

1*******

2*******

3*******

4*******

5*******

6*******

7*******

2*15 required Ba! ty





Figure-0P5 +e#uired 2ag #uantity to meet annual sales demand

=ith the statistical data & #uantitative research the following graph shows the annual

7olding cost on bag to hold as for safety stock to avoid production risk.

25



*1*2*3*4*5*6*7*8*9*

1**

2*15

2*14

2*13

2*12

2*11

Cement Company names

Holding cost (Million BDT)

9raph-0D5 3ost of 2ag 7olding as inventory

26



"able-/5 ata interpretation of different cement manufacturer in 2angladesh in term

of holding cost for holding material $cement empty bags( as inventory cost6

?olding cost for ?olding emty !ag round t(e year 6 ;ll figures are in -illion B+7

Rear

7olcimcement $.2"(

Bafargesurmacement$.2"(

2ashundhor a cement $.2"(

4hah3ement$.2"(

1ki)cement $.2"(

remier cement$.2"(

4even3irclecement $.2"(

Five+ingcement $.2"(

%lephant2randcement $.2"(

?0:/ @0.A@ ?;.0@ /;.P: P:.A; ?D.AD :;.:0 ?P.:0 P;.;@ :/.@P

?0:A @/.0P @/.@P ;:.;A PD.0; @/./0 ?0.:? ?E.:0 :0./0 :D.@@

?0:@ @A.PA ?E.;E /E.EP E?.:? ?E.0? :;.P: ?;.P/ D@.;: [email protected]

?0:? @:.?E ?P.DD /?.0; E/.;: @E.?P ?;.AP AA.0P P0.PE :;.;@

?0:: @D.?0 ?E.0E AP.// [email protected] @A./? ?P.?E /E.D? ;E.PD :P.0P

27

<4ource5 1uthor 3alculation from 4urvey ata



&.0& indings $ 'esult on 9I aroac(:

1fter the #uantitative study of interest cost on holding period due to different lead

time of procuring cement empty bag almost every company has to bear about /-P C

of the total bag purchasing cost.

Now the concern is how the manufacturer can reduce the holding cost & to make

plan on keeping inventory of safety stock. It is not only the interest cost rather

sometimes re#uiring e!tra warehouse to rent or to make new one $fi!ed cost( for

keeping safety stock of 2ag.

"o mitigate this inventory cost control *I" approach may play vital role on improving

supplier’s performance, reducing lead time & keeping very small #uantity as safety

stock.

7ere the mathematical scenario that *I" approach can reduce inventory cost5

EDisting 5ead

time on

;#erage

-ode of

ransortation

Proosed 5ead

ime

ould !e

Effecti#e

Interest

'ate

'esult

@ to ; days 2y +oad- "ruck ?-@ days ?C to ?

AC

%ffective

interest rate

will reduce

since total

holding periodreducing from

the e!isting

time.

28



<4ource 5$ 1uthor supposition from the study(

1lthough *I" approach is a philosophy of zero inventory but in the perspective of

2angladesh cement industry it is #uite difficult without all own source $integrated bag

manufacturing plant with cement manufacturing plant which is costly & incur capital

e!penditure which may affect company financial balance of cash inflow & outflow(

keeping zero stock is infeasible. Form 2angladesh perspective following approach

may take in the connection of *I" philosophy performance.

"o show the recommended *I" approach a sample calculation of cost saving in bag

inventory is given below. "he data interpreted for 7olcim 3ement $2angladesh( Btd.

"able-0;5 %!isting 7olding cost & recommended approach

%!isting2ag3ost$ million

2"(

Bead"ime$ ay

s(

Rearly7oldingperiod forsafetystock

$ ays(

1ctualeffectiveInterestforholding

material

7olding

3ost

+ecommendedBead"ime

$days(

+ecommended7olding eriodper year

$ ays

=ould2eeffectiveinterest

rate

+ecommended7olding3ost$ illion

2"

3ast4aving 1mount$ illion

2"(

A::.A/ / :P0 0.0E &0.* ? D; 0.0A 1.2& 1*.2&

29

<4ource5 1uthor 3alculation from survey

Total Savings (Million,BDT) !"#$Saving Percentage (%)on Holding cost &$"#'



=ead )ime ( :ays# 'oldin! ost

*

5

1*

15

2*

25

3*

35

ead Time Vs Holding Cost

Figure-:05 %!isting 4ystem of lead time Ss 7olding cost $ill. 2"(

*24681*12141618

)ecommended Method

Figure-::5 +ecommended 4ystem on Bead Ss 7olding cost

3*



*1

2

3

4

5

6

/istin!

roosed

9raph -:?5 %ffect of Bead time & holding cost $inventory cost(

<<4ource5 1uthor 3alculation from survey

"he above graph shows the relationship between lead & holding cost of inventory for

empty cement bag.

&.0* +ata Collection for 'aw8material In#entory ;nalysis:

1nother data collected from those cement manufacturer regarding the raw-material

which are bulk item $namely clinker, gypsum, Flay-ash and 4lag( & mostly procured

from abroad. 7ere the study focused on how much to order how fre#uency to order

placed & the correlation of %' with their e!isting process of material planning. 1lso

the main focus given to carrying cost for the raw-material purchasing decision since

the cost is fi!ed for in a lot. 3arrying cost $fi!ed cost( can make up to @EC of the

logistics costs of a cement manufacturing company.

31



:ama!e ost

)heft

Insurance cost

Figure :@ gives a detailed breakdown of the components of carrying cost. 1 detailed

interpretation of the various components of carrying cost will follow.

Figure-:@5 3omponents of carrying cost

32

3apital 3ost

Interest

Inventory

Investment

wn =are 7ouse

3ost

3arryingcost

4torage 3ost roperty ta!

+ented =arehouse

3ost

bsolesce 3ost

+isk 3ost



"o investigate carrying cost from different cement industry this is on average is about

1814% of the material cost. 7ere the data of raw material cost & it’s carrying cost5

"able-0E5 3ement +aw material unit price & carrying cost

Rear

Lnit price & carrying charges of +aw aterial $ Per A ( in 2"

$+ecent

( 3linker

carryingcost for

clinker

9ypsu

m

3arrying costfor

9ypsum

Flyas

h

carryingcost for

Flyash 4lag

3arrying cost

for 4lag

?0:/ A000 00 :E0D 20 ?:00 &*?A0

0 ,&,

?0:A @P00 00 :;/0 20 ?000 &*?@0

0 ,&,

?0:@ @;/0 00 :;00 20 :P00 &*??0

0 ,&,

?0:? @E00 00 :/E/ 20 :D00 &*?@/

0 ,&,

?0:: @/00 00 :;00 20 :P/0 &*??/

0 ,&,

33

<4ource5 1uthor calculation from survey data $secondary data(



It has been observed unit price of the raw material may slightly vary where as the

carrying cost always constant round the year. 2ased on the production &

consumption rate of raw material a cement manufacturing company can fi! their

economic order #uantity per consignment to minimize the cost of carrying & other

govt. charges.

9raph-:A5 onthly consumption of raw-materials $industry wise(

"able-0P5 +aw-material re#uired meeting monthly production demand

Monthlyconsumption

Holcim(MT)

Bashundhora(MT)

Du*aiBangla(MT)

SevenCircle(MT)

ShahCement(MT)

+i-(MT)

Premier(MT)

.lephantBrand(MT)

eadTime

Cliner5743

2 87*48 384516*14

5 95*415*43

4 65*54 45871 45

/ypsum 3429 3987 1578 4251 7*89 3514 6221 3*51 45

0ly1ash2143

* 37**8 45122845

1 45891 * 35*24 25*54 15

Slag 345* 5*46 12** 41** 12412 3315 3584 25** 45

34

4ource5 1uthor calculation from survey data



&.0, indings $ +ata Interretation for E) model:

4ince all the raw materials are having a lead time to procure from the source is about

A/ days e!cept fly ash so that management should follow the %' model &

determine the fre#uency of ordering to reduce carrying cost & ordering cost. In ne!t

point there discussed the management e!isting practice & approaches for inventory

control.

2ased on statistical primary data & marketing sales forecast production consumption

rate can determine the order fre#uency & economic order #uantity as well re-order

point of raw-material from abroad based on lead time to procure & carrying cost. For

the cost benefit of controlling raw-material inventory a sample calculation given for

2oshundhora 3ement ills limited5

"able -0D5 3urrent ethod of +awTmaterial inventory system of 2ashundhora

Current Method o2 a31material 4nventory Control

Cliner/ypsum 0ly1ash Slag

Times 5rdered (6tr) 26 12 18 6+vg" Demand (7tr) ( 8"MT) 261.15 11.97 111.*3 15.15

9nit Price ( per MT) 4*** 17*9 21** 24**Holding Cost *.3 *.3 *.3 *.30i: 5rder Cost(carrying)BDT 6** 26* 364 535

ead Time (days) 45 45 15 45

7uantity ( 8" MT) 1*.*4 1.** 6.17 2.53

7tr Holding Cost ( BDT) 6,*26.54 255.71 1,943.*3 9*9.**

7tr 5rder Cost (ThousandBDT) 156** 312* 6552 321*

Total 7tr Cost (ThousandBDT) #!#!"&; $$<&"< ';=&">$ ;=">>

35



"able-:05 4imulation %' model & Inventory control over the e!isting system

ecommended Method o2 a31material 4nventory Control

Cliner/ypsum 0ly1ash Slag

+vg" Demand (7tr) ( 8" MT) 261.15 11.97 111.*3 15.15

9nit Price ( per MT) 4*** 17*9 21** 24**

Holding Cost *.3 *.3 *.3 *.3

0i: 5rder Cost(carrying) BDT 6** 26* 364 535

ead Time (days) 45 45 15 45

7uantity?.57 ( 8" MT) 13.13 3.22 8.62 3.925P ( 8" MT) 13*.58 5.99 18.51 7.58

5ptimal 5rders (n@) ( times) 2* 4 13 4

7tr Holding Cost ( BDT) 7878.** 825.45 2715.3* 1411.2*7tr 5rder Cost (ThousandBDT) 11933.74 966.52 4688.51 2*67.67Total 7tr Cost (ThousandBDT) ='"<; <="=< <;>$"'

$;<'"'<

36



&.0 'esults on E) -odel ;roac(:

"able-::5 4ummary Siew of old system & new recommended system of inventory

control is given below to compare the cost5

Cost .stimate A Total Cost +nalysis ( all fgures are in 000, BDT)

5ld Method ecommended Mehtod

a31materialame

Holding cost

5rderCost

TotalCost

Holding cost

5rderCost

TotalCost

Cliner 6*27 156** 21627 7878 11934 19812

/ypsum 256 312* 3376 825 967 1792

0ly1ash 1943 6552 8495 2715 4689 74*4

Slag 9*9 321* 4119 1411 2*68 3479

5verall Cost $<!! 5verall Cost $#;'!Total Savings (>>>,

BDT) &$>

Saving Percentage (%) ;

<4ource5 1uthor calculation

37



&.04 Imlication of 9I for Emty cement Bag In#entory Control:

1s it is studied that *I" approach deal with vendor responsiveness & reducing of

lead time thus manufacturer has to keep very low inventory of their process materials

like empty bag $work in process inventory(.

-anagement ;ccetance: *I" approach can be only applicable if "op management

agrees adopt it within the industry. For this every employee have to understand that

proper cooperation & tight information flow from the input level to output level that is

throughout the supply chain. 4tock level will be updated in live data with the vendor

who supply empty bag so that can be prepared for ne!t consignment.

/ingle /ulier: eveloping single supplier for supplying bag can boost the *I"

approach. In this way a single supplier will be completely liable for supplying the

entire demanded materials so that the manufacturer can share & manipulate supply

decision within short time & ensure small lead time.

5ong erm 'elations(i wit( /uliers: "o keep long term relationship with every

term like order volume, price, lead time may assist the manufacturer to adopt *I"

approach for inventory control. "his business relation will boost the inventory of work

in progress to be less than the e!isting system. Sendor will be responsive to supply

in-time & no need to keep stock of / days or E days or etc.

/uly Contract 6annual7: 1 supply contract can be a part of *I" approach since

annual contract defined with terms like lead time, order fre#uency, volume etc with

mutually agreed paper for a defined period of time.

&.0< 5imitation of 9I imlication:

1lthough *I" approach can control the inventory system of a cement manufacturer

especially for empty bag but It has been observed that there e!ists some barriers in

implementing *I".

Firstly the mode of transport which is presently by road only by "ruck or covered

van. 4ince there e!ists political unrest even not all the districts of 2angladesh are

38



not well connected by highway so the logistic support may hamper and

conse#uently bag may not reach in the cement manufacturing plant in-time.

"he distance between supplier & cement plant is another ma)or barrier inimplementing *I" approach of 2ag inventory control. 4hort distance may deliver in-

time but long distanced supplier may not even their vehicle movement fre#uency will

be high in numbers thus they may not appeal to be align with manufacturer’s

strategy.

1nother thing that vendor may have the chance to dominate the manufacturer since

through *I" approach manufacturer developed fi!ed vendor with their desired

material sometime it become tough to change within shortest possible time with

another new one.

Lnit rice is another vital parameter which has potential chance to change as the

competitor of suppliers increasing day by day. "o be fi!ing with a single or limited

vendor may affect to the manufacturer with unplanned purchasing of their current

packaging material.

&.0= Imlication of E):

From the above data analysis & result it is obvious that cement manufacturer can be

benefited by applying %' model to control their raw-material inventory cost. "he

process of implication should be adopted from the while the purchasing decision

been taken from the strategic level management. urchasing economic order

#uantity lessening the ordering cost, although there a chance of increasing holding

cost but the overall cost will be decreased which result a optimization in inventory

cost of raw-material inventory.

39



*.01 +iscussion $ 'ecommendation:

From above analysis & study to the selected cement manufacturing companies it is

obvious that *I" play vital role in inventory cost control with providing live information

to the supplier so that lead time can be reduced & the holding period of keeping bag

in store will be minimized. 1nd ultimately the interest cost that is holding cost will be

reduced. 1nd through *I" approach if the management develop supplier as well the

logistics pattern which can easily reduce the lead time to procure from local supplier,

conse#uently reduce inventory cost.

n the other hand %' model define the #uantity & the fre#uency of order. 4ince

the cost needed for ordering is associated with fi!ed cost thus the cement

manufacturer will realize the benefit by implementing %' for raw-material inventory

control. From the outcome of this analysis of the mathematical optimal policy, the

carrying cost and holding cost has almost e#ual impact in inventory of raw material

as well packaging material. 7owever, this could occur for every A/ days of ordering

for raw material, which practically could mean : or :./ months. In terms of periodical

pattern, : month is practically appealing because of the shipping pattern of the

manufacturer and could disrupt or defy normal shipping schedule.

1part from the %' strategy if there any negotiation with supplier of raw-material &

the manufacturer about ,uantity discount then for economic order #uantity the order

volume should be fi!ed lot in every time of ordering so that buyer will have the

discount in every order & maintain a fi!ed stock as inventory cost.

"hus it can be concluded that both *I" philosophy & %' model can play vital role to

the strategic management approach for material purchase planning & keeping the

stock in store $Inventory(.

4*



*.02 /tudy 5imitation:

=hile conducting this research carefully, it is realized that there are limitations and

boundaries on implementing *I" & %' model. uring the research, I tried to

investigate the nature of the inventory control and there are several respondents of

cement manufacturing company have been interviewed for opinions and past data

on inventory control through the parameters of lead time, holding cost, consumption

rate, demand & sales etc. "herefore, sub)ective matter is unavoidable due to

personal perceptions and views. 1nother issue is that the research depends a lot on

#uantitative secondary data from the company. 9iven the limited time and resources,

it is a tough task to completely ensure the reliability and validity of these data

ourselves. oreover, I have only investigated several segments which make up a

high proportion of revenue and it does not represent the overall picture of inventory

management of the whole company. Bast but not least, due to limited resources, I

cannot gain access to more specific data from other sources inside and outside the

company to make a deeper and more comprehensive analysis.

41



,. Conclusion:

Inventory control is very vital to the success and growth of heavy manufacturing

industry like cement manufacturing industries. "he entire profitability of an

organization is tied to the volume of products sold which has a direct relationship

with the #uality of the product in every aspect like raw-material, packaging etc. "his

study demonstrates how the %'-*I" cost indifference point function may affect the

purchasing approach of a material& finally control the inventory cost. It was found

that for a certain re#uired service level, the ratio of the ordering cost to holding cost,

lead time are the main driver that could be utilized as a decision variable, while the

average demand level is the other main variable for identifying the inventory level.

%' model approach can provide the #uantity to order for the cement manufacturer

in which fre#uency focusing on fi!ed costs like carrying cost & others. "he target on

reducing holding period for packing material & the carrying cost of raw-material can

boost up the inventory cost to minimize & this theme carried on by both %' & *I"

philosophy which has been discussed in this thesis study.

42



.01 'eferences F Bi!liogra(y:

:. 4unil 3hopra & eter eindl $?00;( G 4upply 3hain anagementG ublished

by orling 8inderseley $ India( pvt, a licensee of earson %ducation in 4outh

1sia.

?. 4hibamay mitra, su)itkumar pattanayak & papaya bhowmik $?0:@(. Inventory

control using 123 and hml analysis O a case study on a manufacturing

industry. I44N No. ??@:-;AEE, Sol-@, Iss-:.

@. 3hun-*en 3hung * 7ui-ing =ee $?00;(. 4cheduling and replenishment plan

for an integrated deteriorating inventory model with stock-dependent sellingrate. Sol-/, -@/-AD.

A. 4cott 9rant %ckert $?00E(. Inventory anagement and Its %ffects on

3ustomer 4atisfaction. (I>? 1936-9794# @olume 1, >um%er 3-11.

/. riscila Baczynski de 4ouza iguel &Buiz 1rtur Bedur 2rito $?0:: 7. 4upply

3hain anagement measurement and its influence on perational

erformance. +ournal of 'perations and Supply -hain anagement .No A $?(,

pp /; O E0.;. artin Aracovic " :arius; linta (2*12#. omprehensive approach to

the inventory control system improvement. Solume @,Number @ ,4eptember

?0:? pp @AOAA

E. 4hu-7sing 3hung, 7eRau 8ang, =.B. earn $?00/(. 1 service level model for

the control wafers safety inventory problem. International /ournal in advance

technology . No- ?;, pp /D:O/DE.

'" Baith 1buhilal, 9haith+abadi & 1ndres 4ousa-oza $?00;(. 4upply

3hain Inventory 3ontrol5 1 3omparison among *I", +, and + with

Information 4haring Lsing 4imulation. Sol. :P, No. ?.

=" )imothy =$iki, atrick Boniface Cera, >e%at Dalo u!enda

and @ir!inia Airi!o 0achira (2*13#."he Impact of Inventory

anagement ractices on Financial erformance of 4ugar

anufacturing Firms in 8enya.Sol.@ No./ ,$age E/-PA(.

43



>" usara azanai. $?0:?(. Impact of )ust-in-time $*I"( inventory system

on efficiency, #uality and fle!ibility among manufacturing sector, small and

medium enterprise $4%s( in 4outh1frica. Sol. ;$:E(, pp. /EP;-/ED:.

::. *ose B. 9onzalez, aniel 9onzUlez $?0:0(, 1nalysis of an %conomic rder

'uantity and +eorder oint Inventory 3ontrol odel for 3ompany VRWG,

3alifornia olytechnic 4tate Lniversity, 4an Buis bispo, arch :0, ?0:0.

:?.orne %loff $?0:?(, ptimizing maintenance inventory of a 3ement

manufacturerG, Lniversity of *ohannesburg, ctober ?0:?.

44



;endiD8 ;G

.02 /ur#ey )uestionnaires:

1. emographic Information

: esignation5 XXXXXXXXXXXXX

? epartment you work in5 X XXXXXXXX

@ Bength of service in this company $years(5

$ ( Bess than ? $ ( ? O / $ ( / O :0 $ ( ore than :0

2. 9eneral Information +egarding Rour 3ompany

3. lease tick the correct answer.

A. oes your organization thinks for long term relationship with suppliers>a( Res b( No

/. oes your organization think for developing single suppliers to reduce lead time>a( Res b( No

' 0;. lease tick mark on the estimated range you know

:0-:/ days /00,000-:000,000 pcs

4afety stock for packagingmaterial per month $ holdingperiod & #uantity(

:/-:Edays A00,000-/00,000 pcs

:E-?0 days @00,000-/00,000 pc s

?0-?/ days :00,000-@00,000 pcs

' 0E.

:/-@0 days

Bead time to procure packaging 2ag :0-:/ days

E-:0 days

@-/ days

'0P.lease tick mark on the estimated range you know

:000,000-:/00,000 "NRearly emand in "N ?000,000-?/00,000 "N

45



?/00,000-@000,000 "N

@000,000-A000,000 "N

' 0D.

?000,0000-?/00,0000 cs

Rearly 219 +e#uired ?/00,0000-@000,0000 cs@000,0000-@/00,0000 cs

@/00,0000-A000,0000 cs

' :0.

:000,000-:/00,000 "N

Rearly raw material $ 3linker( +e#uired ?000,000-?/00,000 "N

?/00,000-@000,000 "N

@000,000-A000,000 "N

' ::. :000,000-:/00,000 "N

Rearly raw material $ Fly 1sh( +e#uired ?000,000-?/00,000 "N

?/00,000-@000,000 "N

@000,000-A000,000 "N

' :?.

:000,000-:/00,000 "N

Rearly raw material $ 4lag( +e#uired ?000,000-?/00,000 "N

?/00,000-@000,000 "N

@000,000-A000,000 "N

' :@.

:/-@0 days

Bead time to procure above raw material @0-A/ days

A/-;0 days

;0-D0 days

' :A.

:/-?/ days /00,000-:000,000 "N4afety stock for raw materialof $ holding period &#uantity(

:0-:E days A00,000-/00,000 "N

:0-:/ days @00,000-/00,000 "N

:0-:? days :00,000-@00,000 "N

.3'5 Please tic# mar# only ':; 7ow many times ordered per #uarter for procuring clinker

46



a( A times b( P times c( :? times d( :; times

':E 7ow many times ordered per #uarter for procuring 9ypsum


':P 7ow many times ordered per #uarter for procuring Fly-ash


' :D7ow many times ordered per #uarter for procuring 4lag


'?0. =hat is the Inventory control process of packing material & raw

material>a(2ased on previous record b( Forecasting from eliveryJ4ales c( 2ased on

production consumption d( %' & *I" Implicatione( thers 5 lease mention here-

'?;. 7ow does your organization procure packing material & raw-material>

a( 2y pen 2idding b( From 4ingle Sendor c( From ual Sendor c( 1nalyzing %'

d( thers 5 lease mention here-

'?E. oes your organization follow + for material

segmentation>

a( R%4 b( N c(thers-

'?P. 7ow is the minimum stock of packing 2ags & raw materials settled>

a( 2ased on sales delivery b( 2ased on roduction consumption c( thers-

'?D. =hat are the hilosophy or basis does your org follow for + $ re-order point(

a( + b( 3ycle counting c( anual wayJ previous e!perience d( thers------------

'@0. Is there any practice of *I" or

%' in your org>

a( R%4 b( N c( thers-

INS%N"+R %+F+1N3%5

lease indicate your company’s inventory system performance on the following

statements over the last / years $Interest paid due to inventory, new warehouse cost,

employment cost etc(5

47



3omments

If you have any additional comments, please share them below5

roy_thesis on im control (final

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