Sample Case Analysis on Inventory Management Process Design

Introduction

The operational environment in any organization is characterized by various activities that aim at improving process efficiency, reducing waste, and enhancing sustainability. One of such operations that are common in many organizations is the inventory management process. As a part of operations management, inventory management is a crucial practice as it has impacts on the entire supply chain. At the Jupiter Organics Company (the name has been changed) where I previously worked for instance, inventory management took a key part of daily operations management. The operation involved management of raw materials inventory including placing requests for new orders, issuing raw materials to the production department, performing inventory balances for both raw and packaging materials, and managing the flow of finished packaged good from production and into the markets. The operation was characterized by various challenges, and there was consistently need to improve the process. One of the activities that were handled entailed the design of an inventory management process that would eliminate the process inefficiencies that characterized the traditional inventory management process that was previously being followed. Various reports were collected to help identify the issues of concern in the organization’s operations. From the data collected, top three issues were identified and made the focus of the new inventory management system. The overall objective of the new system however, incorporated all the issues into the single purpose of eliminating waste from the process and generally improving the inventory management efficiency and effectiveness.

Inventory Management Process Design

Key Issues

The inventory management process design focused on developing a system that would help address various key issues in the operations of the company. One of these issues addressed was the frequent failure to meet the sales demands. Complaints from the sales department about stock outages were recorded in a general monitoring sheet and used to develop a general overview of the company’s effectiveness in meeting customer demands. The table below gives a general snapshot of the observed trends.

Month Ordered volumes (units) Volume Delivered (units) Product outage (units) Percentage outage Value of Missed Delivery ($)
July 100,200 80,200 20,000 20 18000
August 122,000 110,800 11,200 9 10080
September 175,000 169,000 6,000 3 5400
October 121,600 121,000 600 0 540
November 136,800 130,800 6,000 4 5400
December 129,900 121,000 8,900 7 8010
Totals 785,500 732,800 52,700 7 47,430

Table 1. Order Completion Rates

From the table above, it is clear that the highest product outage percentage was experienced in July. The product outage was calculated as the difference between the ordered volumes and the delivered volumes. It is important to note that customers rarely accept more than they order for, and the company has a policy that customers should not be compelled to collect product they have not ordered for or those that are delivered beyond their order timelines. Concerns around product outage encouraged the developed of a process that would help eliminate these outages, hence the observable improvement. The value of the products was calculated by multiplying the product volumes, which are in terms of units by the product value per unit, i.e. $0.90. In terms of this issue therefore, the new system is being developed with the objective of reducing the product outages to 0% and with a 0 value.

The second issue that this new system would be focused on is the overstocking of raw materials. Following the concern around product outages, a root cause analysis was conducted to determine the reasons for the product outages. The analysis showed that most of the times, the orders came at a time when raw materials were deficient. The chart below shows the volume of raw materials required for producing the targeted products for the month, and the volumes of raw materials delivered. In some months such as July and September, the volumes of raw materials delivered were higher than the volumes needed, yet there were product outages due to misalignment in the timelines of raw materials deliver and those of the product order.

Figure 1. Trends in Production Needs and Delivered Raw Materials

The table below provides information on the magnitudes of deficits and excess deliveries made relative to the production needs.

Month Production needs Raw materials delivered Material deficits
July 160320 180320 -20000
August 195200 111000 84200
September 280000 316000 -36000
October 194560 181000 13560
November 218880 211800 7080
December 207840 198780 9060
Totals 1,256,800 1,198,900 57,900

Table 2: Material Deficits Report

It is observable that from the month of July to December, there was a deficit in the total raw materials delivered. Excess raw materials delivered in the months of July and September were used as the starting stock in the months of August and October, respectively.

The deficits in the raw materials during that period, led to the realization of the need for more robust planning for raw materials procurement. The company began a system in which sufficient raw materials were purchased for one and a half months of operation. The raw materials requirements would be predicted based on the previous sales reports for the corresponding month. However, this resulted in high percentages of raw material spoilage, which becomes the second issue that the new system is supposed to address. Through the new inventory management system, it is expected that raw materials purchases will be better managed to ensure that there are no spoilages and thus reducing wastes. The chart below shows the raw materials defective rates reported over the months of January to April following the change in the procurement process.

Figure 2: Trends in Defective Percentages

The accompanying table, which shows the purchased, utilized and defective raw materials, is also shown below.

Month Raw materials ordered Materials used Defectives Defective Percentage
January 210,000 181000 2,000 0.952380952
February 200000 180,000 3900 1.95
March 165000 167,800 4,100 2.484848485
April 165000 181,000 6,000 3.636363636
Totals 740,000 709,800 16,000 2.162162162

Table 3: Material Needs, Utilization and Defective Rates

From the chart above, the percentages of raw materials defectives increase with time. This is attributed to the accumulation of raw materials over prolonged periods. For instance, some of the materials purchased in January or early February could have stayed up to mid-March due to low utilization, thereby increasing waste. The new system will thus address such waste issues as well.

With the increased wastes, the company had to reduce the costs incurred in purchasing raw materials. This meant a reduction of the positive impacts on the suppliers, who are mostly community members. The trends in per unit cost of raw materials as purchased from the suppliers are shown in the chart below.

Figure 3: Cost of Raw Materials per Unit

From the chart, the cost per unit of raw materials from July to April, which was the period of data collection, is shown. The declining costs indicate declining income to suppliers and subsequently a probable violation of their rights. This outcome was therefore also part of the issues to be addressed by the new inventory management system. The objective is to develop a system that enhances efficiency in operations, thereby reducing wastes and reduces losses. By reducing losses, the company would eliminate the need for cost balancing through reduction of raw material purchase costs.

Theoretical Frameworks

In analyzing the mentioned issues for the design of the inventory management system, various theoretical frameworks will be used. The first is the theory of constraints (TOC). The TOC emphasizes operations scheduling based on the bottlenecks available in the process (Slack & Brandon-Jones, 2006). The inventory management process at our company has been characterized with a lot of bottlenecks, shifting from time to times. The objective of the project under consideration is to ensure that operations run smoothly across all departments without any constraints. The theory of constraints is based on various principles including focusing on flow and not capacity, the limiting factor of a constraining factor on the utilization of other factors, utilization of a resource is not similar to activation, and both throughput and inventory are governed by bottlenecks in a system (Slack & Brandon-Jones, 2006). The theory can thus explain some of the issues that are pertinent in the target organization’s processes.

The second consideration is the resource-based theory (RBV). The RBV emphasizes the need for organizations to build strength through their resources rather than through based on opportunities and threats in the environment (Slack & Brandon-Jones, 2006). The RBV is considered in relation to the current organization’s operations because of the seeming dependence on environmental factors and opportunities such as sales to initiate the entire process chain including the purchase of raw materials, which eventually results in delays in the system and weaknesses in various operational aspects.

The systems perspective is the other theoretical framework used in this study. The systems perspective avers that all phenomena can be viewed through a lens of interrelationships among various elements (Walker et al., 2015). In the organizational context, the operations system can be viewed as an interlinked web of the supply chain, where the actions of any of the players affect the entire system. Changes in any part of the system result in corresponding changes in various other parts of the system. For the organization, the decision to implement certain changes should thus be considered an effective approach to improving performance, and thus the probable effects of those changes on the other parts of the system should be evaluated.

Analysis

Operational Issue Theoretical framework Analysis
Raw material shortages Theory of constraints The shortage of raw materials in the organization was considered to be the cause of unfulfilled orders.

The raw material constraints thus affected the operations of all departments, i.e. the sales team could not realize their sales goals due to the limiting factor, namely the raw materials. The consideration of the raw materials within the context of the theory of constraints can also be extended to the application of the both the cradle-to-cradle design and the circular economy concepts. The circular economy concept purposes to decouple organizational growth from the consumption of limited resources (Korhonen, Honkasalo, & Seppala, 2018). In this regard, the finite resource is the raw material, and the organizational growth in terms of profitability had been intricately linked to it. By decoupling growth from the utilization of finite resources, it is implied that the company would continue to be profitable, and to sustain its customer orders regardless on the dynamics on the supplier side. The only way to do this is to build an inventory management model that uses supplier relationships as an organizational strength.

High defectives Systems theory The high defective rates experienced at the company point to the systems operations. Purchase of high quantities of raw materials without consideration of the production capacity and possible fluctuations in customer orders, or the possibility of storing inventory as finished goods resulted in over-capacity, which eventually led to high spoilage rates.

This portrays the need to consider the impacts of various organizational decisions on the entire system prior to implementing them.

The systems theory and the high defectives issue could also be linked to the ‘cradle-to-cradle’ perspective of material utilization. The perspective is built off the systems framework, which emphasizes minimum waste from the entire industrial and economic process (Bakker et al., 2010). The focus of the theory is on efficient utilization of resources.

Fluctuating costs of raw materials Resource based theory (RBV) The targeted perspective in the resource based theory is the dependence of organizations on external resources and opportunities rather than internal strengths (Hitt, Xu, & Carnes, 2016). Considering the company’s history, it appears that the operations of the company including raw material predictions and purchases have previously been based on the number and quantity of customer orders coming, which is an external opportunity.

In the context in which the company applies RBV, it would seek to develop a strategy for consistent performance on the supplier and customer side, whereby a static capacity of operations would be used to ensure consistent order supply and adequate inventory keeping. This would eventually result in a constant raw materials pricing, which is counted by the suppliers as strength.

By leveraging organizational strengths for the benefit of the communities with which the organization operates, the human rights perspective in global supply chains is predicted. Using organizational bargaining power to reduce the cost of raw materials below sustainability limits for the primary suppliers would be considered as a violation of human rights based on the description given by Nolan and Bott (2018) as it would amount to oppression, which can be construed as a form of slavery when the returns from their activities do not match the resources (in time and energy) used on the activities related to the development of those raw materials.

Table 4. Analysis

Conclusion and Recommendations

To be able to address the issues that the company had faced in the past, the first recommendation is that the company operations be based on the equilibrium between the sales and the design capacity. To do this effectively, it would be necessary for the company to conduct a market analysis, which will help facilitate the understanding of the market capacity, and thus be able to plan production focused on the estimated market capacity rather than waiting for actual orders. The company would then purchase raw materials that continuously satisfy the estimated market capacity with sufficient capacity to store finished goods inventories to satisfy orders as they come. In this way, the company will be addressing the production constraints and eliminating wastes effectively.

The second recommendation is that the company should implement inventory management software that traces utilization of resources. An organizational resource management system can help in planning raw material purchases, scheduling production processes, allocating resources, and ensuring on-time-delivery of customer orders. In this way, the company will be able to avoid over-purchasing or under-purchasing raw materials, and will ensure on-time completion of customer orders, which are the key issues to be addressed in this project. The software is aimed at giving the organization a systems view to decision making as such a system would provide details sufficient to describe the entire organization’s inventory status in real time for decision making, thus eliminating dependence on external opportunities and building organizational strength in supplier relationships.

Implementing these recommendations should not be a challenge since the company already has a strong and robust marketing team, which can be used to conduct the market analysis. Additionally, there are currently many software in the market that can be customized to the company needs and thus used with success.

 

References

Bakker, C.A., Wever, R., Teoh, Ch., & De Clercq, S. (2010). Designing cradle-to-cradle products: A reality check. International Journal of Sustainable Engineering, 3(1), 2-8. https://www.tandfonline.com/doi/abs/10.1080/19397030903395166

Hitt, M.A., Xu, K., & Carnes, C. M. (2016). Resource based theory in operations management research. Journal of Operations Management, 41, 77-94. https://www.sciencedirect.com/science/article/abs/pii/S0272696315000972

Korhonen, J., Honkasalo, A., & Seppala, J. (2018). Circular economy: The concept and its limitations. Ecological Economics, 143, 37-46. https://www.sciencedirect.com/science/article/abs/pii/S0921800916300325

Nolan, J., & Bott, G. (2018). Global supply chains and human rights: spotlight on forced labour and modern slavery practices. Australian Journal of Human Rights, 24(1), 44-69. https://www.tandfonline.com/doi/abs/10.1080/1323238X.2018.1441610?journalCode=rjhu20

Slack, N., & Brandon-Jones, A. (2006). Operations and process management: Principles and practice for strategic impact, 5th Ed. Pearson Education Limited.

Walker, H., Chicksand, D., Radnor, Z., & Watson, G. (2015). Theoretical perspectives in operations management: An analysis of literature. International Journal of Operations & Production Management, 35(8), 1182-1206. https://www.researchgate.net/publication/281481889_Theoretical_perspectives_in_operations_management_An_analysis_of_the_literature