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Inventory Management Practice in Case of Arba Minch University

Bachelor Thesis 2014 48 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Table of content

Acknowledgement.

List of table

Abstract

CHAPTER ONE
1. Introduction
1.1. Background of the study
1.2. Statement of the problem
1.3. Objective of the study
1.3.1. Specific objective
1.4. Re-search method
1.4.1. Re-search design
1.4.2. Sampling technique and sample size
1.4.3. Method of data collection
1.4.4. Method of data analysis
1.5. Significant of the study
1.6. Scope of the study
1.7. Limitation of study

CHAPTER TWO
2. Literature review
2.1. Definition of inventory
2.2. Inventory management
2.3. Objective of inventory management
2.4. Need of inventory
2.5. Inventory store/storage
2.5.1. Types of stores
2.6. Function of inventory management
2.7. Aim of inventory management
2.8. Types of inventory
2.9. Cost of inventory
2.10. Alternative inventory system
2.11. Inventory control
2.12. Inventory costing
2.13. Stock taking
2.14. Re-order point
2.15. Inventory decision
2.16. Inventory-management model

CHAPTER THREE
3. Data Analysis and Presentation
3.1. Demographic characteristics of respondents
3.2. Analysis and Interpretation of the data

CHAPTER FOUR
4. Summary of major findings, conclusion and recommendation
4.1. Summary of major findings
4.2. Conclusion
4.3. Recommendation

References

Appendix

List of table

Table 3.1.1 Sex and age

Table 3.1.2 Service years

Table 3.1.3 work assessment

Table 3.1.4 Education level

Table 3.2.1 Inventory protection mechanism

Table 3.2.2 Management commitment

Table 3.2.3 Effective utilization

Table 3.2.4 Inventory reorder level

Table 3.2.5 Problem of inventory management

Table 3.2.6 Proper utilization of inventory

Table 3.2.7 Extent of using material as own property

Table 3.2.8 Cost associated with inventory

Table 3.2.9 Application of inventory evaluation method

Table 3.2.10 Method of education used by the university

Table 3.2.11 About storage

Table 3.2.12 Types of store system

Table 3.2.13 Technique of inventory management

Table 3.2.14 Interval of checking inventory

Table 3.2.15. bulk purchase

Table 3.2.16 inspection activity

Table 3.2.17 about stock verification

Table 3.2.18 about result of stock verification

Abstract

Effective inventory management is a tool to run the organization property. Therefore, assessments of inventory management have a vital role. This is the reason why the study is conducted. To conduct this research, applying descriptive research is believed to be appropriate. In this study census was used, because it increase research quality and the population size is less than 100. To get relevant data both primary and secondary data were collected. After the data collection process ends, itwas analyzed by descriptive statistics like percentage and table. This study was conducted in ArbaMinch University. Based on the findings of the study, the researcher forward feasible recommendation so as to help the organization overcome its inventory management related problems. The major finding of the study indicates that the inventory management practices of the university were poor.

Acknowledgement

First of all I would like to thanks almightily God, Who helped me throughout my works.

Second I would like to express my deepest appreciation and gratitude to my advisor Getahun Kelemework for his constructive advice, suggestions and guidance’s.

And my indebtedness extended to my family for their financial support and in irreplaceable advice.

A also acknowledgement to respondents of the questionnaires for their scarification of the time on responding the questionnaire.

CHAPTER ONE 1. Introduction

1.1 Background of the study

Inventory is store or stock of goods. Firms typically stock hundred or even thousands items of inventory ranging from small thing to large such as machines, trucks, construction equipments and air plan. (Steven 2007; P, 541).Naturally, many of the items a firm carries inventory related to the kind business it engages in. Thus, manufacturing firms carry supplies of raw material; partially finished items finished items, as well as spare parts of machine tools and other supplies. (Steven, 2007; P, 541). Inventory is defined as ideal resources of any kind that has potential economic value a considered as locked up capital. A practical definition from material management angle would be “item of store or material kept in stock to meet future demand of production, repair maintenance etc.” Inventory management refers to the process of managing the stock of finished products, semi finished products and raw materials by firms inventory management, If properly , can bring down costs and increase revenue of an item.(R.S. Saxena:; 2009, p,2). Inventory management is an activity employed in maintaining the optimum number or an amount of each inventory item. The objective of inventory management is to provide uninterrupted production, sale and customer service at a minimum cost since for many companies inventory is the largest item in the current asset category, Inventory management problem can and do contribute to loses or even business failures. (R.S, Saxena, 2009, P.4). Like other organization Arba Minch University have different inventories. Arbaminch University was established in 1981 E.C. The established objective of the university is to create skilled and qualified man power. In this university, there is inventory management problem, so that, the researcher will investigate it.

1.2 Statement of the problem

In most organization, it is increasingly difficult to manage inventories effectively. Many scholars have found that lack of good inventory management had adversely affected the enterprise. Poor inventory management had resulted over or under stock of inventory and this leads to interruption of operation and increasing cost. As the researcher communicates with employees work on the inventory area, there is inventory management problem in the university.

Therefore, the researcher was assessing the inventory management practice of the university from different direction by raising the following research question.

- Who is responsible for inventory management in the organization?
- What technique does the university isuseto manage inventory?
- What is the lead time during a specific period that average inventory is purchased?
- Is their sufficient warehouse in the university?
- What is the type of storage system used by the organization?

1.3 Objective of the study

The main objective of the study was to assess the inventory management practice of Arbaminch University.

1.3.1 Specific objective

The specific objectives of the study were:

- To know and evaluate cause and effect of under or over stocking of inventory in the university.
- To identify the responsible body tomanageinventory.
- To identify the universityinventory management technique.
- To know the storage system of the university.
- To know cost associated with inventory.
- To know the existence of sufficient warehouse in the university.

1.4 Research method

1.4.1 Research design

To conduct this study, the researcher used descriptive research design. Because the title of the research needs to describe in different direction. Descriptive research is aimed at describing the nature of situation about something or describing the characteristics of population or phenomenon as it exists of present.

1.4.2 Sampling technique and sample size

To conduct this study, the researcher used census. Because the entire population of the study was less than 100. Census is a process of collecting data by distributing questionnaire to all population in the study area. There are 40 employees working in the inventory area of the university. So that the researcher would be used all population since they are less than 100 (Knife A. Basic Statistics, 2002, p, 6).

1.4.3 Method of data collection

The researcher used two types of data, that is primary data and secondary data. Primary data was collected by questionnaire and interview. And also secondary data was obtained from published documents.

1.4.4 Method of data analysis

After obtaining of the necessary data or information from different source, the researcher was analyzed the data by using descriptive statistics. Descriptive statistics is the method of collection, organization, presentation, analysis and interpretation of a group of data either sample data or complete information, without an attempt to make prediction based on the data. Descriptive statistics is used to analysis the data by percentage and tabulation. Therefore the collected information from different source would be analyzed by descriptive statistics.

1.5 Significant of the study

Inventory management helps organization to run their business effectively. Therefore, after the end of the study, the researcher would be forwarded recommendation to organization in which the study is conducted. Secondly the student researcher would be beneficiary because the study adds some knowledge to the existing knowledge. Finally the study would be used as a guideline for other researcher.

1.6 Scope of the study

This study was not target to study all organizations that offer inventory, but it was conducted only on Arbaminch University. In the university the selective area would be on managing the existing inventory. Because to conduct study for all organization there is a limitation of both finance and time.

1.7 limitation of study

In this study the researcher encountered the following major problems;

- Lack of good habit of employees to filled questionnaire
- Lack of published documents.
- Financial deficiency
- Transportation problem and power break down.

CHAPTER TWO 2. LITERATURE REVIEW

2.1 Definition of inventory

Inventories are materials and supplies that business or institutions carries for sale or provide input or supplies to the production process. All a business and institutions requires inventories, often they are substantial part of total assets. Financially, inventories are very important to manufacturing companies, on balance sheet they usually represent from 20% to 60% of total asset. As inventories are used their value is converted in to cash which improve cash flow and return on investment. There is a cost for carrying inventories, which increase operating const and decreasing profit. Good inventory management is essential. (tony around 1998).

2.2 Inventory management

Inventory management is the process of efficiently overseeing the constant flow of units into and out of an existing inventory. This process usually involves controlling the transfer of units in order to prevent the inventory from becoming too high, or dwindling to level that could put operations of the company in to jeopardy. Competent inventory management also seeks to control cost associated with inventory. Both from perspective of the total value of the goods included and the tax burden. Generally by the cumulative value of the inventory. (http://www.barcodesinc.com/articles/what-is-inventory-managment.html)

2.3 Objective of inventory management

The objective of inventory management is to meet customer needs while keeping inventory cost at a reasonable level to produce a profit for the firm. The objective is not simply to reduce cost of ordering and holding inventory, nor is it just meeting customer demand. These two objectives are clearly opposed to each other when considered by them. To reduce inventory cost, we may simply hold no stock and reorder only when customer place order. This will result in low inventory cost. However, this can result in dissatisfaction of customer; on the other keep high level of inventory in anticipation of customer need. We could be incurring huge cost that may eventually put the company out of business. Actually, keeping a high level of inventory does not guarantee that we will be able to meet all customer needs. It is clear that a delicate balancing act is needed to achieve these two objectives simultaneously. (Edc.Mercado-2007)

2.4 Need of inventory

Some of the more important reason for obtaining and holding inventory are:

- Predictability: to engage in capacity planning and production scheduling, you need to control haw much raw material and how many parts and assembles you process at a given time. Inventory buffers what you need from what you process.

- Fluctuation in demand: a supply of inventory on hand is protection. You don’t know always how much you are likely to need at any given time, but you still need to satisfy customer or production demand on time. If you can now customers are acting in the supply chain, surprise fluctuations in demand are held to minimum.

- Uncertainty of supply: inventory protects you from unreliable supplies or when an item is scarce and steady supply is difficult to ensure. When every possible unreliable supplier should be rehabilitated through discussions or replaced. Rehabilitation can be accomplished through master purchase order with timed product releases, price or term penalty for nonperformance, better verbal and electronic communication between the parties and so, on. This will lower your on-hand inventory need.

- Price prediction: - Buying quantity of inventory at appropriate time helps to avoid the impact of cost inflation note that contracting to assure a price does not require actually taking delivery at the time of purchase.

- Buffer/safety stock: - this types of inventory can serve various purpose, such as: -

- Compensating for demand and supply uncertainty.

- Decoupling and separating different part of your operation so that they can function independently from one another. (Max Muller – 2011)

2.5 Inventory store/storage

Store is a place that keeps the material in a way that the materials are well accounted for and is maintained safe. A typical store has a process and a space within, to receive the incoming material (receiving bay) ,keep them for as long as they are required for use (custody) and then to move them out of the store to use (issue).

2.5.1 Different types of stores

a) Closed-store: - closed store systems are utilized when closed control and accounting for inventories are desirable. In such case, storage areas are kept locked and entry is limited to store employee or only on authorized basis.
b) Open store: - there are instance where the cost of closely controlling inventory out weight expected loss in an uncontrolled environment. In such case, inventory storage area may be left open efficient user access.
c) Random-access: - in random access system, good are stored without regarded for commodity grouping; instead goods are stored on the next or nearest available space of suitable site. (R.S. Saxen – 2009)

2.6 Function of inventory management

Inventory management covers a wide variety of activity. Some of the functions are: -

- To carry adequate stock to avoid stock out
- To ensure optimum level of inventory so that total inventory cost is minimized.
- To buy the right quantity of perishable items so that loss incurred by unsold item are minimized.
- To order sufficiently higher quantity at a time so that repeated ordering and cost incurred can minimized (Nair, 2005)

2.7 Aim of inventory management

There is aim for everything to do something. There for inventory management are:

- Provide both internal and external customer with required service level interms of quantity and order rate fill.
- A certain present and future requirement for all types of inventory and to avoid stocking while avoiding bad in production.
- Keep cost to minimum by variety reduction economical lot size and analysis of cost incurred in obtaining are caring inventory. (Max. Muller 2011)

2.8 Types of inventory

Inventory may be classified as:

i. Raw material inventory: which is used in manufacturing the demand a rise they are drown from other and misused or use value is added during the process and finally finished product come out.
ii. Semi finished good: when the material are known as small finished good material or work in process.
iii. Components: - the parts used in assembly of product are known as components. When there components are purchased from outside it is known as bought out component or bought out material.
iv. Spare parts inventory: - when manufacturing servicing facility of the machine is to be replaced by new. These new part of the machine are known as spare parts.
v. Absolute inventory: - which any facility became serviceable and it is to be replaced by a new one after replaying the old machine facility is to be disposed such machine which have become useless are termed as absolute inventory. (Roma Murthy Mur, 2002)

2.9 Cost of inventory

The basic objective of inventory management is to maximize customer service through maintaining appropriate amount of inventory with minimum possible costs. Inventory costs are costs associated with operation of an inventory system. Thus the relevant costs included inventories are:-

A) Purchase cost: - the purchase cost of an item is the unit purchase, it is obtained from an external source or the unit production cost is produced internally. For the purchase items, it is the purchase cost less modified for different quantity level. Manufacturing items unit cost includes direct labor or company over head.
B) Ordering cost/set up cost: - this is the cost of placing an order. This cost directly with the number of order or set up placed and not all weigh the site of the order. The ordering cost included making analyzing, material inspecting, material follow up order and doing the processing necessary to complete the transaction.
C) Carrying /holding cost: - there is cost of items (inventories) in storage. These costs vary with the level of inventory and occasionally with the length of item and an item held. The greater the level of inventory over time, the higher the carrying cost. Carrying cost can be included the cost of losing the use of funds filled up in inventory like storage cost such as rent as building, cooling light security, record keeping, obsolescence and product deterioration etc…
D) Stock out cost /shortage cost: - this is the cost of as a result of not having items in the storage. This can be bringing loss of goodwill. Profit on loss of incurs back order cost and delay in the customer service. Establishing the correct quantity to order from the vender or the size of lot submitted to the firm’s productive facility. Involves a search for the minimum total cost resulting from the compared of fewer individual costs holding cost, set up cost, ordering cost and storage costs. (Tersine R.J, 1994)

2.10 Alternative inventory system

There are two types of inventory system that aid to control inventory in stock.

i. Perpetual inventor system: - it maintains a continues record of physical quantities inventory. It records the purchase of each item of inventory. This system is essential for adequate management planning and controls over inventory are to be maintained and stock out avoided. A firm uses this type of just how physical count at least ones a year or to confirm the balance in the inventory account

ii. Periodic inventory system: - a company using periodic system does not maintain in continuous records of the physical quantity of inventory on hand. It is a physical count periodically.

2.11 Inventory control

Inventory control may be said to be planned method where by investment in inventories held in stock or maintained in such a manner that it ensure proper and smooth flow of material needed for production, operation as well as sales while at the same time, the total cost of inventory keep at minimum. (A.K. Datta-2001)

2.12 Inventory costing

The assumed flow of cost for accounting purpose depends on the method used. The following four methods aregenerally used:

i. First-In-First-Out (FIFO)
ii. Last-In-First-Out (LIFO)
iii. Average costing method
iv. Specific cost method

i. First-In-First-Out (FIFO) method: it is in most common use. It assumes that material is issued from the oldest stock and their unitcost also represents the oldest cost on the stock ledger. Under this method goods consumed are those which have been in stock on hand for the longest period and those remaining represent the latest purchase. This method is fairly simple and computable with many organizational operations. But, when theprice is subject to change, this method is not likely to match cost against revenue on a current cost basis. This creates distraction in the income statement. FIFO, however, simplifies record keeping activity or the actual flow coincides with it.

ii. Last-In-First-Out: this method assumed that most current cost should be classed to the goods. Under this method cost of inventory on hand represents the oldest inventory at oldest cost. This means that current revenue represents the current replacement cost, the underlying purpose being to match current revenue against current cost. But this result in a realistic inventory valuation for the balance that and thus differ the ration of current inventory with other current asset valuation. During inflation, LIFO means lower profit: such inventory costing is unrealistic because it ignores the need for replenishment at higher price.

iii. Average cost method: - in order to provide realistic basis for inventory evaluation and the cost of goods sold, the average cost method is used. This method of costing does not take in to account which item went out of inventory first or last, rather determine the average cost for each item during a period in time.

iv. Specific cost method: - specific method provides the most specific valuation of inventory as well as flow of cost. Cost flow and physical flow are identical under this method, but require maintenance of proper records. It has a flexibility of being suitable for either periodic inventory system or perpetual inventory system, the object of which is to indicate inventory at all time through physical verification of inventory around the year in order to reconcile the current balance with store ledger. (Material management, 2nd edition; by A.K. Datta -p- 269)

2.13 Stock taking

It refers to the process of testing or checking the store record with actual items stocked in the stores. The store reserved at any time should show the exact potential quantity of material and part which are available for use. Stock taking which enables to known whether there are any discrepancy between actual account and record. In the postings, whether any good in condition. Stock taking is also called internal audits of stores usually external activity is a must for any organization for conducting check on the account.

2.14 Re-order point

The replenishment order is given either on out firm or to the production department. At the time of issue replacement order stock should be sufficient for each item so that demand can reasonably be meeting. From the stock until replenishment their stock level when replenishment order issued is known as reorder level. This level is determined for each item by compromising between the cost of maintaining those stock and the disservice to the customer if this demand is not meet in time.

2.15 Inventory decision

In inventory management decision encampuses the principle, procedure and technique for deciding what to order, what it is needed, how much to order and how and where stores. If there decision at each of these level should be contains with decision at the other level and should support the objective of the university. By achieving the desired level of customer service and achieving in venture inventory objective. (Black store Hoffmam 1991)

2.16 Inventory-management model

There are three model of inventory management. These are: -

A) Deterministic inventory model
B) Probability inventory model
C) Just in time

- The purpose of the discussion on inventory model is to show how quantity model can assist in making the decision of how much to order and when to order.

A) Deterministic inventory management model

i. Economic order quantity model (EOQ)

This model is the basic model in achieving optimal ordering quantity which minimizes the total inventory cost. However these are some assumptions to be up hold.

- Demand is known and constant
- The lead time, the time between the placement of order and receipt of the order, is known and constant.
- The receipt of inventory is instantaneous.
- Quantity discount is not possible.
- The only variable cost are ordering cost and carrying cost.
- Orders are placed so that stock out or shortage is avoided completely.
- The economic order quantity model (EOQ) was first proposed by harries in 1915 and further developed by Wilson in 1928.

a. Inventory cost in the economic order quantity

Let, Q is the amount ordered. Thus an inventory level increases from O & Q units when an order arrives. Since the inventory level changes daily, we use the average inventory level to determine the annual carrying or ordering cost.

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The following variables are important in developing mathematical expression for the ACC & AOC for EOQ model

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- Annual ordering cost = (No of order year) X (ordering cost/year)

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- Annual carrying cost = (Average inventory) x (carrying cost per year)

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Fig 2.1 shows the graph of ordering cost, carrying cost and total inventory cost. The lower point on the total cost occurs where the ordering cost is equal to carrying cost.

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Fig. 2.1 Total cost as a function of order quantity.

b. Finding economic order quantity

The above graph shows that the total cost is minimized when annual ordering cost equal with annual carrying cost. Over all annual inventory cost = Acc + Aoc+ Dc,

where Dc = purchasing cost

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c. Finding the ROP (Re-Order point)

This or the question of when to order for this, we can should know the lead time first. Lead time, L, (or delivery time) means the time between the placing order and receiving order. This could be few days or few weeks and inventory must need the demand during these days. Therefore: -

illustration not visible in this excerpt

- This means, an order is placed when inventory level reaches the ROP, and the new inventory arrive at the same instant the inventory is reaching O.

ii. Economic production quantity (EPQ)

In the production environment, the inventory continuously flows or builds up over a period of time after an order has been placed or when units are produced and sold simultaneously. Hence the demand rate must be taken in to account in this model. In this model we have set up cost, sc, i.e. the cost of setting up the production facility to manufactures the desired product. Holding cost per unit remains unchanged. This model was developed by E.W. Taft in 1918. The following variable are used in developing mathematical expression for the annual set up cost and carrying cost for production run model.

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a. Inventory cost in the EPQ

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b. Finding economic production quantity

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iii. Quantity discount model

The previous inventory model considered have been develop under the assumption that the unit cost of an item was independent of quantity product or ordered. However, in many business and industry quantity discount are provided as incentive for the purchase of large quantity of product. When quantity discount are available and all the EOQ assumption are let, it is possible for us to find the quantity that minimize the total annual inventory cost. As the discount are usually lowering the material cost or unity cost of a product, based on the order quantity we have to calculate the total cost based up on the order quantity in determining the optimal order quantity.

illustration not visible in this excerpt

B) Probabilistic model

In practice, a large number of inventory situations can’t be described by deterministic model. In this case, the demand is not large constant and deterministic; but probabilistic.

i. Single period inventory model with probabilistic demand

It is necessary classify the term “single period”. This term refers to the situation where the inventory will only be demanded in one time duration, and can’t be transferred to the next duration. News paper securing is such an example. The news paper order for today will not be sold tomorrow. Fashion selling is another example. Incremental analysis is a method that can be used to determine the optional order quantity for a single period inventory model. The incremental analysis address the how to much to order question by comparing “the cost or loss of ordering one additional unit” with “the cost or loss of not ordering one additional unit”.

Let, Co = cost per unit of over estimating demand

- This lost represent the cost of ordering one additional unit which will not sell.

Cu = Cost per unit under estimating demand.

- This cost is represent the lost of net order one additional unit which could have been sold.

- Suppose that the probability of the demand of the inventory item being more than a certain level Y is P(D > Y) and that the probability of the demand of the inventory item being less than or this level Y is P(D > Y). Then, the expected loss (EL) will be either of the following.

- For over estimation: EL(Y + 1) = Co P(D > Y)
- For under estimation: EL(Y) = Co P(D > Y)

The optimal value of the demand level, Y*; being the optimal ordering quantity as well, can be found when:

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- From the study of probability, it is known that

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Where: Y= Total order quantity

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ii. Periodic review model with probabilistic demand

However, if a company dandles multiple products, continuous reviewon each of the product may mean heavily work load and probably low efficiency. In such case, an alternative inventory model is preferred because this model enables the order for several items to be placed at the present periodic review times. In this model we have assume that for any single product, the lead time is less than the length of review period. Then the how to order decision at any review period is determined using the following formulas.

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Details

Pages
48
Year
2014
ISBN (eBook)
9783668580282
ISBN (Book)
9783668580299
File size
736 KB
Language
English
Catalog Number
v381182
Institution / College
Arba Minch University – BUSINESS AND ECONOMICS
Grade
3.64 OUT OF 4.00
Tags
inventory management practice case arba minch university

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Title: Inventory Management Practice in Case of Arba Minch University