Procurement and Inventory Management

PROCUREMENT & INVENTORY MANAGEMENT

TEAM AFFANUL HAQ SIDDIQI (10587) FURQAN MAHMOOD (10917) ABU BAKAR IQBAL (10335)

TABLE OF CONTENTS LETTER OF TRANSMITTAL ....................................................................................................................... ii LETTER OF ACKNOWLEDGEMENT .......................................................................................................... iii ABSTRACT ............................................................................................................................................... iv INTRODUCTION....................................................................................................................................... 1 METHODOLOGY ...................................................................................................................................... 1 LITERATURE REVIEW ............................................................................................................................... 2 PROBLEM IDENTIFICATION, ANALYSIS AND SOLUTION .......................................................................... 6 CONCLUSION......................................................................................................................................... 12 REFERENCES .......................................................................................................................................... 14

TABLE OF FIGURES Figure 1: Supply Chain of Al-Karam Textiles ............................................................................. 6 Figure 2: Baseline Process ................................................................................................................. 7 Figure 3: To Be Process ................................................................................................................... 10 Figure 4: Comparative Analysis ....................................................................................................... 12

INSTITUTE OF BUSINESS MANAGEMENT

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LETTER OF TRANSMITTAL

Sir Asif Ali Khan, Institute of Business Management.

Dear Sir,

We are pleased to submit the report on, “ Al-Karam Textiles’s Inventory Management Issue” a course requirement for Procurement & Inventory Management in the MBA program at Institute of Business Management. During all the phases and stages of report analysis, writing and designing the report, we have gained useful knowledge about the topic and its effect on the corporate world as well.

We have tried out our level best to cover all aspects of the subject and hope that this report will serve its purpose. All rules and regulations for the preparation of the formal report have been taken into consideration.

We would dearly like to thank you Sir for the faith you showed in our capabilities & the encouragement you gave us when assigning us the report. If there is anything else you wish to know. We are glad to assist.

Thanking You


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LETTER OF ACKNOWLEDGEMENT

Behind every effort no matter how minute or significant, and irrespective of the fact whether its capable of bringing a conducive and positive change, what is imperative is to appreciate not only the people who took the initiative of under taking a task and completing it to the fullest of their capabilities and skills, it is also important to acknowledge and thank those silent souls looking around in the background amidst the action. To begin with we would like to thank the supreme divine being, our ALLAH for vast never ending countless blessings, Mercy on us and for all the times pulled us through circumstances beyond our imagination. We are truly indebted to our course instructor Sir Asif Ali Khan for his constant guidance, encouragement and help. Sincerely, Affanul Haq Siddiqi Furqan Mahmood Abu Bakar Iqbal


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ABSTRACT

Mishandling of raw components and work-in-process products is a common exercise for fabric companies. They are unacquainted with the crucial and serious shock it hits to their performance. The setbacks in the transport with delayed transport give organization not only bad popularity in market but also they have to face financial failures due to inappropriate inventory control. This review features this crucial problem along with a suggested plan to fix it. The effective execution of the above suggested procedure will not only fix the stock relevant problems to a certain level but will also carry the idea of traceability of the obtained products. We anticipate setbacks in the purchase procedure because of the cooperation of the online program as no products will be provided until it has been joined into the program. While in the past situation the purchase was done on phone which was quicker. Also deficiency managing will not be possible because of the arranged procedure as each purchase must adhere to the above described procedure. To deal with such scenario, we recommend to originally obtaining products a bit previously and at an improved wastefulness


amount.

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INTRODUCTION

Inventory is a costly asset which can be replaced by information for cost saving of a company. With the same idea in mind, we noticed the handling of inventory at our workplace done rather improper or an inefficient one. This report deals with the inventory related issues of our company, how they are adversely affecting the efficiency and profitability of the company plus giving nightmares to the merchandisers at the time of their shipments. Mishandling of raw materials and work-in-process goods is a common practice for textile firms. They are unaware of the critical and serious jolts it strikes to their productivity. The delays in the shipments with late deliveries give company not only bad reputation in market but also they are faced with monetary losses due to improper inventory management. This report highlights this critical issue along with a proposed plan to rectify it.

METHODOLOGY

Since the topic of the report is a practical one of solving inventory related issues of a textile firm, the methodology is more researched and discussion based with emphasis on firsthand knowledge from those related to the company. The problem was identified from the complications and hitches faced by the employees in their daily routine. The solution was also a comparative analysis from the current process with the best practice from a case study. We would like to mention that the solution proposed later in the report is more of a theoretical framework without any sort of implementation yet.


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LITERATURE REVIEW

Inventory is a term used to describe unsold goods held for sale or raw materials awaiting manufacture. These items may be on the shelves of a store, in the backroom or in a warehouse mile away from the point of sale. In the case of manufacturing, they are typically kept at the factory. Any goods needed to keep things running beyond the next few hours are considered inventory. Inventory is one of the more visible and tangible aspects of doing business. Raw materials, goods in process and finished goods all represent various forms of inventory. Each type represents money tied up until the inventory leaves the company as purchased products. Likewise, merchandise stocks in a retail store contribute to profits only when their sale puts money into the cash register. In a literal sense, inventory refers to stocks of anything necessary to do business. These stocks represent a large portion of the business investment and must be well managed in order to maximize profits. In fact, many small businesses cannot absorb the types of losses arising from poor inventory management. Unless inventories are controlled, they are unreliable, inefficient and costly. Inventory management simply means the methods you use to organize, store and replace inventory, to keep an adequate supply of goods while minimizing costs. Each location where goods are kept will require different methods of inventory management. Keeping an inventory, or stock of goods, is a necessity in retail. Customers often prefer to physically touch what they are considering purchasing, so you must have items on hand. In addition, most customers prefer to have it now, rather than wait for something to be ordered from a distributor. Every minute that is spent down because the supply of raw m aterials was interrupted costs the company unplanned expenses. A number of studies have been done in the field of inventory management by various researchers. Some of them are given below:


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Author: Bern at de William (2008)

This study tells that the main focus of inventory management is on transportation and warehousing. The decision taken by management depend s on the traditional method of inventory control models. The traditional method of inventory management is how much useful in these days the author tell about it. He is also saying that the traditional method is not a cost reducing, it is so much expensive. But the managing the inventory is most important work for any manufacturing unit. Author: Jon Schreibfeder (1992)

He said that it is easy to turn cash into inventory, the challenge is to turn inventory back into cash. In early 1990’s many distributor recognize that they needed help controlling and

managing their largest asset inventory. In response to this need several companies developed comprehensive inventory management modules and systems. These new package include many new features designed to help distributors effectively managed warehouse stock. But after implementing this many distributors do not feel that they have gained control of their inventory. Author: Wolf Bagby, Managing inventory

In this study author explains that by managing the inventory it becomes easier for the organization to meet the profit goals, shorter the cash cycle, avoid inventory shortage, avoid excessive carrying costs for unused inventory, and improve profitability by decreasing cash conversion and adopt JIT system. According to this study companies need to get smart about inventory. Boosting financial performance is another benefit that comes from better inventory management. Infect large number of manufacturers enjoy savings and better performance by choosing the approach of inventory reduction. For this, company needs to maximize the cash flow and profitability which include keeping a watchful discerning eye on charge in supply and demand. Author: Asfaque Ahmed (October 12, 2004)

He said that most of the manufacturing company vendors have planning and scheduling product which assume either infinite production capacity for calculating quantities of row material and work in progress (WIP) requirements or infinite quantities of raw material and INSTITUTE OF BUSINESS MANAGEMENT

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WIP materials for calculating production capacity. There are many problems with this approach and how to avoid these by making sure that the product you are buying indeed takes into account finite quantities of required materials as well as finite capacities of work centres in your manufacturing facilities. Author: D. Hoopman (April 7, 2003)

In this article he said that inventory optimization recognize that different industry have different inventory profiles and requirements. Research has indicated that solutions are priced in a large range from tens of thousands of dollars to millions of dollars. In this niche market sector price is definitely not an indicator of the quality of solution, ROI and usability are paramount.

Effective stock management contains handling the costs of stock with the benefits of stock. Many organization owners fall short to appreciate fully the true costs of holding stock, such as not only immediate costs of space for storage, insurance and taxes, but also the cost of money connected up in stock. This thin line between keeping too much stock and not enough is not the manager's only issue. Others include:

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Maintaining a wide range of stock -- but not circulating the quickly going ones too thin;

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Improving stock earnings -- but not limiting the support level;

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Keeping stock low -- but not limiting support or performance.

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Acquiring reasonable prices by making amount purchases -- but not finishing up with slow-moving inventory; and

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Having a sufficient stock on hand -- but not getting taken with obsolete items.

The level of success in interacting with these issues is easier to evaluate for some than for others. For example, handling the stock earnings amount is a simple evaluate of handling performance. This value gives a difficult information by which experts can set objectives and evaluate performance, but it must be observed that the earnings amount varies with operate of stock, the kind of organization and how the amount is established (whether on


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sales or cost of products sold). Regular stock earnings rates for individual areas can be acquired from business companies.

To sustain an in-stock place of desired items and to get rid of undesirable items, it is necessary to identify sufficient controls over inventory on purchase and inventory in inventory. There are several confirmed methods for inventory control. They are detailed below, from easiest to obscure ones.

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Visible control allows the manager to analyze the inventory imaginatively to determine if additional inventory is required. In very little companies where this strategy is used, information may not be needed at all or only for slowly going or expensive items.

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Tickler control allows the manager to actually rely a little aspect of the inventory each day so that each area of the inventory is described every so many days consistently.

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Click on item control allows the manager to record the item as it is used on certificates. Such information is then used for reorder specifications.

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Stub control (used by retailers) allows the manager to sustain an aspect of the cost admission when the item is available. The manager can then use the stub to record the item that was available.

These days, two methods have had a important impact on inventory management: Material Requirements Preparing (MRP) and Just-In-Time (JIT and Kanban). Their system is mainly within development but services might find new specifications placed on them and sometimes clients of created products will encounter a difference in circulation. Material specification planning is usually an information system in which revenue are modified immediately into a lot on the service by sub-unit and time interval. Components are organized more properly, thereby reducing choices, and circulation times become little and more predicted. Its primary use is with products made up of many elements. MRP methods are easy for businesses. The pc is only one part of the finish project which is usually long-term, taking one to three years to make.


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Just-in-time inventory management is a technique which performs to eliminate choices rather than increase them. The inventory of recyclables and work-in-process falls to that needed in just one day. This is obtained by reducing set-up times and cause times so that little plenty may be asked for. Providers may have to make several transportations a day or switch near to the person plants to back up this plan.

PROBLEM IDENTIFICATION, ANALYSIS AND SOLUTION The Al-Karam group was founded in March 1986. They are manufacturer and supplier of distinguished fabric for apparel, home and industrial markets with clients all over the world. It is a vertically integrated textile mill with almost the complete supply chain of a textile industry under one roof.

RAW COTTON FROM SUPPLIER

SPINNING

WEAVING

WET PROCESSING

STITCHING & PACKING

SHIPPED TO CUSTOMER

Figure 1: Supply Chain of Al-Karam Textiles

Al-Karam textile is renowned for its high quality distinguished products with timely shipments to its customers but lately has faced some serious issues of on time deliveries due to last minute accessories shortages and poor tracking of stored / procured goods.

One of the prime reasons of the failure if the inventory management system is the lingering nature of process with lots of non value added activities involved. The system is so designed that there is no tracking of the goods inward and outward movement plus heavily relies on the merchandiser to perform all the tasks from making the purchase order to continuous follow-up with the store in-charge for the receipt of the goods. The new process designed will not only automate the process of purchase orders and invoices but will also keep the traceability of the goods entering in the store.


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The objectives that we intent to achieve after the successful implementation of the inventory management process are as follows: -

Reduction in time to make purchase orders and invoices

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Removal of non value added activities

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Traceability of the goods received and issued

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Record for all balance goods held with store

Baseline Process:

This is a process in which we are highly involved and is related in our daily activities. The process is repeated for every new and repeat order. It is a very hectic and consumes a

STEP 1 Forwards the new/repeat order MERCHANDISER

SUPPLIER Sends the Rate and Invoice after Delivery STEP 3

7 P E T S

t n e m y a P r o f e c i o v n I d e z i r o h t u A

s t n e k m u c a 6 c b o P d d E d e T e n r S i z t u r e o r h t u A

P O , f I n S o v r w o T i E a c r e P d 4 a e d n d D C

PURCHASE MANAGER

n a l l a h C y r e v i l e D

STEP 5 For Authorization

G o o d s D e l i v e r y

S T E P 2 8 P E T S

GENERAL MANAGER STORE

ACCOUNTS DEPARTMENT

Figure 2: Baseline Process

several days for its completion. Below is the graphical representation of the existing process flow.

Step 1: Order Placement

The merchandiser after receiving a new order does the working for accessories and places the order with the respective supplier. The delivery date is settled between merchandiser and supplier depending upon the shipment date of that respective order. The rate of goods


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P a y m e n t

is not often decided at this very point. This takes a maximum of 10-15 minutes to get it done. Step 2: Goods Deliver

As per the committed delivery date or sometime a little fluctuation depending upon the nature of goods; the supplier delivers the goods in the store along with the delivery challan. In return, the store keeper checks the receiving goods and returns the delivery challan with sign and stamp ensuring that the goods have been received. The time duration is not fixed but on average it takes around 20-30 minutes. Step 3: Rate Negotiation and Invoicing

The supplier then negotiates the rate of the delivered goods with the merchandiser and prepares the invoice. This invoice is then sent to the merchandiser along with the delivery challan provided from the store. This process takes roughly around 10 minutes. Step 4: PO generation and forward to Purchase Manager

The merchandiser checks the delivered quantity with the issuing quantity and prepares the purchase order; and then forwards it along with the invoice and delivery challan to the purchase manager for authorization. This complete process of PO generation and preparing the complete documents takes up to 15 minutes. Step 5: Authorization

The purchase manager then checks the documents received from the merchandiser and forwards it to General Manager; who authorizes and returns back the documents to the purchase manager. This complete process takes around 5 minutes. Step 6: Documents returned back to Merchandiser

The authorized documents are returned back to merchandiser by the purchase manager. This process takes hardly around 3 minutes. Step 7: Documents forwarded for Payment

The merchandiser then again checks the complete documents and forwards it to accounts for the payment purpose. This process takes around 7 minutes. INSTITUTE OF BUSINESS MANAGEMENT

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Step 8: Payment

The accounts department when receives the documents for payment; checks it with the payment schedule of 90 days and prepares the necessary documentation for payment. As per the schedule, the payment is done to the supplier. This process takes roughly around 15 minutes. Problems in the Baseline Process:

1) Lingering Process due to which a lot of time is wasted; around 100 minutes. 2) A Lot of Non Value Added work is done (Step # 4,5,6 and 7) 3) No record of previously ordered accessories which are left unused with the store 4) No tracking of the new orders; whether they are received at store or not To Be Process:

After the examination of baseline process, we compared it with the famous case study of the inventory management by Toyota Company; this gave us a better designed and structured process for Al-Karam Textiles with the desired objectives. Below is the graphical representation of the “To Be” process flow.


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MERCHANDISERS / PURCHASE OFFICER

1 P E T S

P G u r c e h n e a r s e a t i O o r n d e r

PURCHASE MANAGER

2 P E T S

i n A t o u t h t h o e r i z O e n s l i n a n e d S E y n s t t e e r m s

STEP 2 Order forwarded to Supplier

SUPPLIERS

Goods delivered to Store STEP 3

P S a T y E m P e n 6 t

STORE

Entry of Goods receipt into the Online System

ONLINE SYSTEM

I n v o i c A e c f c o o r u w n a t r s d e d t o

ACCOUNTS DEPARTMENT

STEP 4

PO quantity and Received quantity forwarded to Accounts STEP 5

Figure 3: To Be Process

Step 1: PO Generation

The merchandiser performs the working on the accessories of new order and generates the purchase order which is then forwarded to Purchase Manager. This takes hardly around 5 minutes. Step 2: Entry into Online System and order forwarded to Supplier

The Purchase Manager then enters the order into the online system and at the same time forward the order to the Supplier. This takes a maximum of 10 minutes to perform.


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S T E P 3

Step 3: Goods Delivery

The supplier delivers the goods at the store where the store keeper then checks the quantity delivered from the online system. At the same time; the supplier sends the invoice to accounts department. This process takes around 10 minutes. Step 4: Entry of Goods

The store keeper then performs the goods entry into the online system. This is a simple step which will take hardly 5 minutes. Step 5: Information of goods delivery forwarded to Accounts

As soon as the goods delivery entry is entered into the system; the online system automatically forwards the complete information of that particular order to accounts for payment. This process in real takes no time as it is an online process which is done automatically. Step 6: Payment

The accounts department compares the invoice received from the supplier and information from the online system and prepares the necessary documentation for the payment of supplier. This takes maximum of 5 minutes to complete. Advantages and Impacts of the proposed system:

1) Elimination of non value added activities from the shoulders of Merchandiser 2) Reduction in time from generation of purchase orders to submission of invoices for payment 3) Proper record and traceability of the ordered goods and balances being held at store 4) Since the system is now online, proper tracking of goods will be maintained by linking up the PO generation and goods receipt at store in the online system.


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Resources People Involved Process Steps Non Value Adding Work Cycle-Backs among Dept. (Step 4,5,6 & 7) Total Time –Minutes

Conventional Process

Proposed Process

% Reduction

6

5

17

8

6

25

4

0

100

3

0

100

100

35

65

Figure 4: Comparative Analysis

CONCLUSION The successful implementation of the above proposed process will not only solve the inventory related issues to a certain extent but will also bring the concept of traceability of the procured goods. We expect delays in the procurement process because of the collaboration of the online system as no goods will be delivered until it has been entered into the system. While in the previous case the procurement was done on phone which was faster. Also shortfall handling will not be possible because of the structured process as each order must follow the above mentioned process. To handle such situation, we suggest to initially procuring goods a bit earlier and at a higher wastage rate.


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REFERENCES Author: Bern at de William (2008) Author: Jon Schreibfeder (1992) Author: Wolf Bagby, Managing inventory Author: Asfaque Ahmed (October 12, 2004) Author: D. Hoopman (April 7, 2003)


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Procurement and Inventory Management

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