ACKNOWLEDGEMENT I, Tej Naik, an MBA Student of Cardiff University

ACKNOWLEDGEMENT

I, Tej Naik, an MBA student of Cardiff University, Wales would like to acknowledge the company and all the employees of the organization for their kind guidance, co-operation and support given to me.

I, sincerely thank New Millennium Baker’s India ltd for allowing me to be a part of their renowned firm for my training program.

I, express my gratitude towards all the employees of the stores, H.O.D‘s, and the Chairman of the plant Mr. Datta Naik for their support during my training period. I thank the workers of the plant for their co-operation given to me.

I would also like to thank Professor Kevin Stagg, for being ever ready to resolve any of my doubts and queries on mail and in person.

It was because of their support, knowledge and information that my project was a success. I express my sincere thanks for all that the company has done for me.

Abstract

In today’s economic climate, reduction of costs and improvisation of supply chain has been the major focus for most of the enterprises. Hence proper management of inventory has been the key to the success of many businesses. This study was conducted to find out and investigate the issues in the New Millennium Baker’s inventory management and how could it be resolved.

The study was carried out in the form of case analysis and data was collected using primary and secondary sources. In depth interviews of managers and other store and purchase personnel were taken. The findings in the research revealed that New Millennium Bakers had stored excess of inventory and used old outdated techniques to manage it. Based on the findings the appropriate solutions were discussed and an inventory management tool was developed to help the company in further management of inventory.

Chapter 1 - Introduction

Today due to increasing competition and volatility in external factors, companies have majorly shifted their attention towards reduction in costs. Reduction of costs and meeting customer demands has been every organization’s dream to fulfill, Companies have tried and implemented a number of different techniques to minimize wastes, reduce costs and meet the demands of the customer. Proper supply chain management is the key to success of business today (sri 5,10,11). It’s seen that today competition is just not within individual companies but their supply chains as well (Christopher 2009). A supply chain consists of a number of elements such as logistics management, procurement, distribution and inventory management. Proper management of inventory within the players among the chain is considered to be the last resort of any supply chain (Liyanage 2010).

Inventory management consists of different processes like keeping a track of goods, handling and managing the goods held in stock (Chay 2006). Effective management of inventory will give the company competitive an edge in its business (Chay 2006). Efficient management of stock, accurate visibility and fast efficient fulfillments can help the company in executing comparative pricing strategy towards its customers and build relationship with them (Chay 2006). Hence companies like Apple and Dell focus majorly on Supply Chain management which is one of the major contributors to their revenues and more share in the market (Dignan 2009). A study done by AMR ranked Apple as No.1 and Dell as No.2 in managing their supply chain in 2009 (Dignan 2009). It was seen that Apple kept only 5 days of inventory in store as compared to Dell and Lenovo with 7 and 15 days respectively during the holiday season (Berka 2009).

In my project here I am going to do a study on inventory management in a food processing firm called Millennium Baker’s in Goa, India. Inventory management is a key to achieving success in the food industry as both the raw materials and the finished goods inventory is perishable and customers lay a major focus on quality while purchasing the product. Hence the world’s largest fast food firm- McDonald’s- uses a system called ‘Just In Time’, where they begin to cook their burgers only after the customer have placed their order (Atkinson 2005). This helps McDonald’s reduce their inventory and supply customers with fresh food, as compared to earlier where McDonald used to pre-cook a batch of burgers and eventually discard those that wouldn’t be sold (Atkinson 2005).

1.2 Objectives and Aims of the project

Reducing inventory and maximizing service levels of its functional departments and company’s customers has been the main objective of managing the inventory (Narayan et al. 2008). Study done by Silver (1981) found a number of objectives behind managing inventory. These include maximizing rate of return on stock investments, cost minimization, profit maximization and ensuring flexibility in operation. The objectives of my project aim at a similar motive. The first phase of the project which will be discussed in chapter 3, it focuses on inventory management system adopted by New Millennium Bakers and methods used to track inventory. Later in chapter 5 the focus would be on finding the costs incurred by New Millennium Bakers in managing inventory in Goa. Here a sample of few raw materials would be taken based on raw materials consumed most frequently and a further study would be carried out on holding of inventory in proportion with the sales trends, the level of safety stock maintained for the products, the lead time taken and the shelf life of the raw materials. All these studies would be carried out by interviewing the managers and employees of the organization. The final part of the project, chapter 6 focuses on developing an inventory management model which will help the organization to reduce overhead expenses and working capital losses resulting from excessive dead stock, improve the accuracy of managing inventory and avoid wastage due to stocking of perishable goods on shelves (major cause of high overheads) for New Millennium Bakers. However, this project will start in chapter 2 with a literature review which will highlight on the importance of inventory management and the benefits a firm gets from implementing it. The 2nd part of this chapter focuses on the views of different the authors regarding managing of inventory and why inventory management plays a key role in New Millennium Bakers operations. The final part of the chapter focuses on different tools of inventory management that exists, how they would help the company in minimising costs and despite technological advancements today, still some small and medium manufacturers can’t use tools like barcode scanners because of huge investment.

Chapter 2- Literature Review

2.1 Importance of Inventory Management Today supply chain has gained a lot of attention and yet many companies are struggling with their processes of supply chain (Croxton et.al 2002). As already mentioned above inventory management is a major component of supply chain, it helps in matching the supply and demand among supply chain partners and helps to cope up by providing flexibility in the uncertain globalized business environment (Croxton et.al 2002). As per the 17th annual logistics report of supply chain management, United States economy has already paid a huge price for holding excessive inventory, the country has spent over $1 trillion on logistics, out of which 33% is said to be incurred just on holding inventory and its believed that the logistics cost has grown to 9.5% as a part of the U.S gross domestic product (Wilson 2006). Inventory Management plays a pivotal role in the functioning of an efficient organization (Adeyemi et al 2010). The goal of inventory management is to reduce the holding of stock as to have a balance between conflicting economies and there by tying up capital as a lead against different costs like storage, obsolescence and spoilage incurred(Adeyemi et al 2010). The firms also desire to make items readily available, whenever required to exempt the costs of not meeting demand (Adeyemi et al 2010). Business failures can be caused by inventory problems (Adeyemi et al 2010). If an item is not available on shelf when the customer requires, the firm will lose the customers not only that time but also on many occasions in the future (Adeyemi et al 2010). As per the studies done in the past its found that most of the managers lacked professional expertise and tended to take decisions of managing inventory based intuition which leads to inventory not being analyzed properly, decisions of inventory not being integrated with strategic organizational needs and in all results in improper practices of managing inventory in the organization (Liyanage 2010).The conclusion which we can draw from this is that inventory management helps in making a significant contribution to firm’s assets as well as increase the profitability of the organization. 2.2 Definition and Concepts of Inventory Management Different authors came with different views regarding managing of inventory. According to Kotler (2002) proper management of raw materials, work in progress and finished goods inventory level helps in achieving adequate supply and helps in reducing the costs of under or over stocks. On the other side according to Rosenblatt (1977) “The cost of maintaining inventory is included in the final price paid by the consumer. Good in inventory represents a cost to their owner. The manufacturer has the expense of materials and labour. The wholesaler also has funds tied up”. So as you can conclude the goal of both the researcher’s are similar and they believe in maintaining inventory level that will give optimum stock and lowest cost (Adeyemi et al 2010). According to Morris (1995), managing inventory helps in increasing the total value of all assets in organization which includes material and human resources by keeping in the one kind of asset which is most economical. While Keth et al. (1994) stated that the major objective of managing and controlling the inventory is to inform managers when, how much and how frequently the re- orders should be placed and also how to minimize stockouts by maintaining appropriate safety stock levels. Thus to conclude the goal of inventory management is to minimize the stockouts occurring and that the goods should be available on shelf when needed (Adeyemi et al 2010). Silver (1981) highlighted that there are four relevant costs that play a decisive factor in making decisions regarding inventory, namely Carrying costs, Replenishment costs, System control costs and costs of insufficient supply in the short run. In my project here I am going to focus more on carrying costs since I am trying to formulate strategies to reduce carrying costs and make optimal use of inventory of New Millennium Bakers. It’s important for all the firms to realize that having excess of stock results in tying down money in maintaining warehouses, the cost of borrowing the capital is tied hence cannot be made use for other investments, high insurance costs are incurred for managing the huge pile of stock, and there are also chances of spoilage of goods (Adeyemi et al 2010). . Planning and controlling are the two important factors of inventory management (Adeyemi et al 2010). Planning involves predicting the future and getting ready in advance (Adeyemi et al 2010). The firm needs to plan as to what type of items to order, how much quantity to order and how often should the firm order as to maintain stock coordination in a economically effective way (Adeyemi et al 2010). As said by Robinson, Logan and Salem (20) that the major cause for small business failure is improper inventory planning (8,14). The controlling of stock is about achieving the above objective by setting up at the planning stage (Adeyemi et al 2010). It involves periodical monitoring of stocks and deciding the way to act on the basis of information gathered (Adeyemi et al 2010).

2.3 Risks of improper Inventory Management Already the researchers and financial analysts have spoken a lot about the continuity and the long run profitability of business when inventories are managed improperly (Adeyemi et al 2010). If a management neglects its inventory management, the firm is unable to maintain low costs as to maximize profits and there also chances of bottle necks in production (Adeyemi et al 2010). Second, goods not available to customers in time will create an irreparable loss in market apart from the sale being affected due to the highly competitive world (Adeyemi et al 2010). As mentioned earlier, a company keeping excess of inventory will tie down funds, there are chances of goods getting obsolete and spoiled, however the company can’t keep less stock as well because it has to meet the demand of production and sales when required (Adeyemi et al 2010). So to conclude improper inventory management affects the objectives of the organization and hence is a key area which the companies need to focus on (Adeyemi et al 2010).

2.4 Inventory Management tools and techniques

In recent times majority of the companies have started implementing technologies like bar coding systems and Radio Frequency Identification (RFID) scanners for accurate inventory management (Piasecki 2011). These systems are called as Automated Data Collection (ADC) and if implemented properly can help in reducing inventory errors (Piasecki 2011).

Bar code scanners- Here the companies normally use laser scanners to read the bar codes (Piasecki 2011).

RFID- These are devices like hardware pieces or small devices attached to an object to transmit data to RFID receiver (Piasecki 2011). They are more efficient than bar code system because they can hold more data and change it during processing (Piasecki 2011). http://www.inventoryops.com/ADC.htm

However many of the small scale and medium scale industries like New Millennium Bakers can’t use the Automated Data Collection systems because of the fear of six figure project costs (Piasecki 2011). Also if this systems are poorly implemented can result in putting the company in a more worst case scenario, hence it’s important for companies to focus on the basic inventory models first.

My study here is going to be based on the Classical inventory models used by many small and medium scale businesses and which can be used by New Millennium Bakers as well to manage inventories of individual products (Roumiantsev and Netessine 2007). Economic Order Quantity (EOQ) is one of the famous classical inventory model used to manage the inventory by a majority of firms (Roumiantsev and Netessine 2007). The EOQ model focuses on choosing the right amount of quantity to use in replenishing items of inventory by managing the tradeoffs between storage costs and ordering costs (Schwarz 2008). Ordering a large quantity reduces the frequency of ordering and hence reduces the ordering cost however this leads to holding a larger inventory stock which increase the storage costs (Schwarz 2008). On the other hand ordering a smaller quantity reduces the inventory holding costs but requires the items to be ordered more frequently hence increases the ordering costs (Schwarz 2008). Hence companies use EOQ as it helps minimizing the cost of order-quantity (Schwarz 2008).

It’s important for the firms to realize that for implementing EOQ they first need to have knowledge about how much does it cost the company to place an order and how much cost is incurred for holding the items in stock (Schwarz 2008). Research undertaken by S. L. Adeyemi and A. O. Salami (2010) on inventory management followed by Coco-cola plant in Nigeria and they found out that even Multinational Giants like Coke always don’t implement EOQ model for ordering raw materials. It was proved that out of the 5 years of study for at least 3 years the expected value of each product was greater than the value observed of each product which basically means that the coca-cola bottling company in Nigeria was holding excess of inventory and had more money blocked in their systems (Adeyemi et al. 2010). Therefore it’s important to understand that management of inventory is a must for the survival and continuity of organizations that are focused on achieving their goals (Adeyemi et al. 2010).

The second tool which I am going to highlight upon and implement is the ABC analysis used for managing inventory. ABC analysis has evolved from the Pareto principle of the 80:20 rule, the philosopher from Italy stated that a small proportion of population (20%) in Italy owned the majority of wealth (80%) (Jessop, et al. 1994). Similarly in context to inventory systems it states that most of the inventory costs (80%) is contributed by a few items(20%) and the costs of large items (80%) are relatively low and account for around 20% of costs (Tanwari, et al. 2000). It means large interest and majority of the focus should be on 20% of the items and the rest 80% should get moderate attention (Water 1992). Thus large amount of costs like inventory and clerical are reduced by focusing and controlling few items (Carson, et al. 1972). Therefore it’s important for firms to understand that ABC analysis helps in classification of inventory according to their contributions to annual costs of entire system (Tanwari, et al. 2000).

Reid (1987) decided to carry out ABC analysis in hospital inventory systems. Here he had decided to take a sample of 47 disposable respiratory therapy units and partition them on the basis of their annual dollar usage value. The class A items consisted of 20% of stock keeping units (SKU’s) and accounted for 70% of total value, thus was given maximum importance and helped in minor potential savings for the hospital.

The final tool which I would like to highlight upon is Just In Time (JIT) which also can be called as pull based or made to order system (Yeh 2000). It was a system founded in 1980’s to change the manufacturing environment by Taichi Ohno and Shigeo Shingo (Bragg et al. 2005). JIT helps the firm in minimizing its inventory by building a leaner manufacturing system and enhancing productivity (Helo 2004) which in turn reduces the cost of manufacturing by minimizing risk (Curry and Kenney 1999; Rahman 2004). Study done by Lieberman and Demeester (1995) showed that implementation of JIT leads to immediate reduction of raw materials. The cost of holding inventory reduces due to reduction in work in process and it helps in reducing the level of finished goods due to reduced cycle times and improved process reliability (Kros et al. 2006).

Majority of the companies still implement the traditional push system (e.g. Hewlett Packard and Compaq) and are believed to face higher financial risks, as the positive cash to cash cycle and decreasing product lifecycles lead to inventories to lose their value (Kros et al. (2006). In both the systems location of suppliers is the key due to increasing transportation costs (Helo 2004). For example Mercedes which is implementing the pull-based system for its M Class SUV in Vanceboro have located their major component suppliers within 4 hours driving distance from the manufacturing facility (Kros et al. (2006).

Various authors have done studies on JIT systems adopted in different industries. Billesbach and Hayen (1994) had done a comparative study on 28 firms implementing JIT systems with regard to average sales to inventory ratio for the period 1977-1979 and during 1987-1989 and concluded that 25 firms showed increase in average sales to total inventory ratio at 0.05 level. Also as we know, JIT has helped Toyota save money (Tokarev 2010). Thus from the various studies done on JIT we can see that implementing it can help on average reducing costs of inventory, improving productivity and shortening lead times for the purchasing organization (Kros et al. 2006).

Chapter – 3: New Millennium Bakers case study

3.1 Introduction

This section is going to focus on New Millennium Bakers. Here the background and the history of the company will be highlighted followed by the methods the firm follows to manage inventory, the roles of the purchase and stores department and later describing the importance of inventory management for New Millennium Bakers. All this information was provided by Ms. Nisha Chodankar the H.R Manager and a few other store and purchase department employees of New Millennium Bakers.

3.2 Background of New Millennium Bakers in Goa and Monginis

New Millennium Bakers was founded in Verna, Goa, India in the year 2000 under the leadership of an Goan entrepreneur Datta Naik (Kamat 2002). The company runs as a franchisee for Monginis and was initially started with an investment of Rs. 1.5 crore (£ 200,000) and continues to invest more in the state of art technology bakery and expand (Kamat 2002). Presently the firm has around 29 franchised outlets scattered all over Goa (GoaLive Blog 2010).

Monginis initially was founded in Mumbai in the year 1971 by HT Kharakhiwala (Kamat 2002). Today Monginis has got the credentials as the number one cake brand in India with more than 480 cake shops an additional 15000 retailers selling Monginis products in 12 different cities across India (Monginis 2011). In 1991 the company moved across international borders by targeting Egypt as their new market, since than the company has got its presence in Cairo and Alexandria with over 35 exclusive shops and acquired the tag of one of the leading bakery brands in Egypt (Monginis 2011).

2.2 Background of the fast food Industry

Today due to customer sophistication and changing gender roles (working women), fast food is one of the world’s largest growing food type (meri news 2011). Fast food industry in India is growing at 30%-35% and all the major brands of the world have succeeded in the Indian market and made their presence felt (Business Wire 2011). For examples Dominos plans to expand by more than 60 outlets every year, while Yum brands Inc by 2015 plans to open 1000 fast food outlets (Maheshwari 2009).

3.3 Background of Goa

Goa is a small state in India located in the konkan belt on the western coast of the Indian peninsula (Maps of India 2011). It’s said to be one of the most visited tourist destinations in India (Goa India Tourism 2011) and Euromonitor ranked it among the top 150 leading tourist destinations of the world (Bremner 2007). Tourism contributes to 15% of state’s gross domestic product and is the primary industry of Goa (GVPedia.com 2011). It’s closely followed by Mining and Agriculture (GVPedia.com 2011). There are other pharmaceutical and Multinational companies as well like Bosch and Siemens, who have setup they are operations in Goa.

In the fiscal year 2009-2010, Goa recorded the highest per capita income among all the states and union territories in India (The Hindu 2011), making it an attractive destination for all the major brands on their calendar.

3.4 The market size and the major players in the Goan market:

Pastry Palace a local based company in Goa is the major competitor of Monginis with more than 30 outlets and was present long before Monginis entered in the year 2000 (Pastry Palace Goa 2010). There are other local brands like Pastry Cottage (2 outlets), Pastelaria (2 outlets), Bread and more (4 outlets) and Great Oven (6 outlets) who are the principal competitors for Monginis as well.

Name Of Pastry Shop Number Of Outlet In Goa 1 Pastry Palace 30 2 Pastry Cottage 2 4 Pastelaria 2 5 Bread and more 4 6 Cake walk 4 7 Great oven 6

MAJOR PLAYERS (indirect competition) a) Domino’s pizza is present in around 7 locations (Just dial 2010). b) Subways have established around 2 outlets. c) Cafe Coffee Day at around 10 locations (Gifts to India 24×7.com 2011).

3.4 Monginis Inventory Purchase In assessing the evidence relating to Monginis and its inventories, it will be appropriate to consider the company’s outsourcing policies. Initially the firm decides to take quotations from two to three suppliers from whom a supplier is chosen based on negotiations with regard to the price, availability of product and the terms of payment. Later the purchase department prepares a purchase order, according to the quantity required and a payment is made within 15 days after the goods are purchased.

A requisition is made and sent to the main suppliers in Mumbai, since transportation takes 7 days and a safety stock of 7 days is always maintained to avoid shortage of supply. Sometimes products are sourced from 3-4 different suppliers to guarantee delivery and add a competitive element to the price paid for raw materials. For every order bought, the orders are sampled, lab tested, approved and the production trial is taken. The same process is implied for daily and new suppliers as well and if the results deviate from the standard, then the order is rejected. However there is a permanent contract system followed only for eggs as it is based on comparative rate studies. New Millennium Bakers generally buys vegetables twice and cherries and chocolate once a month.

The company has its own store house at Verna, which stores the packing material (cartons) bought from the suppliers (Shinde Packaging). Certain suppliers supply directly to the company with the help of companies like Rajesh Road lines, Garge road lines.

The companies normally prefer to place orders of raw materials from outside Goa as excise duty benefits prevail. During the seasons like Christmas the firm increases their orders of raw materials from suppliers due to heavy demand.

The company has loyal suppliers throughout the country. For example the Vegetables are ordered from the city of Belgaum 159 kilometers away from Goa, twice a month. Chocolate is ordered from Mumbai and cherries from Jammu 579 kilometers and 2524 kilometers away from Goa (distance between cities.co.in. 2011).The local groceries are ordered from Goa itself. Eggs are the most essential ingredients and hence are contracted. An advanced intimation is made and given to all the suppliers. All contracts are valid for a year and payments are made in 15 to 30 days. The relations with the suppliers are very flexible and if raw materials are of sub standard quality they are rejected. Long term relations with Goan suppliers are not followed because they are often expensive and there is inconsistency in supply. Hence it’s vital for the success of the company that good supply chains are maintained outside the local area but this can make supervision more expensive or difficult but is also subject to excise duty regulations.

3.5 Stores Department

Here all the materials are kept to the requirements of the production department. The store room consists of both perishable and non perishable raw materials. The company follows a First In First Out method of monitoring inventory materials. The entire department consists of nine employees comprising of store in charge, store keepers and helpers.

STORE

MAIDA OTHER RAW PACKAGING (SEIVING) MATERIAL

The store forms a very important sub department of the production department. Since New Millennium Baker’s procure their raw materials from different parts of the country, for storing perishables like vegetables, milk, curds etc the firm has a cold room, whereas for chicken, prawns and other foods that need to be frozen there is a special freezer. Besides this there is a separate storage area for flour, wheat, sugar and icing sugar. The items like colouring essence and other materials are divided into batches and stored on racks. The division into batches helps the company to consume products before the expiry date nears. Process of raw material

Placing order

Raw material received from supplier

Checking the material Quantity

Inspection by QA

Lot label

Storage

Issuing

3.6 Reasons why New Millennium Bakers needs to focus on inventory management The major international fast food franchisor’s have entered Indian and the Goan market and they play a major part of the competition to Monginis, as today the customer sophistication has increased, double income has lead to more disposable income and people have also started becoming brand conscious (meri news 2011). This has made local Fast food franchisers like Monginis increasingly cost and quality conscious.

Due to intensive competition in market and less differentiation among the competitors’ products Monginis needs to focus on product quality, variety and price. In such case proper inventory management is essential to ensure that a company has sufficient inventory on hand to meet the needs of both its customers and its operations. However, an excessive amount of inventory on hand or shipping the wrong goods to customers ties up cash and increases expenses such as additional storage, transportation and labor costs (Accu-Dart 2009). In addition, excess inventory can’t be held too long due to perishable items in the food industry, this would significantly result in reducing inventory value (White 2008).

Chapter 4- Research Methodology and Selection of Sample

4.1 This chapter is going to highlight the research methods used to carry out the study and reach the conclusions. This project is based on a case study involving, interviews with employees of the organization, my findings from my own research and data analysis. Secondary sources will also be used to analyze the problems New Millennium Bakers is facing on inventory and help to come up with some recommendations.

Saunders et. al. (2009) said that it’s always important to have a plan ready before carrying forward with the research and it’s important to meet the standards of the examination board. Saunders et. al (2009) defines research as a method used for collection of data and specifies that it’s just not about reading articles and books but talking and taking interviews of people as well. Becker (1998), Davies (2003), Creswell (2003) and many other say that in research both, qualitative and quantitative data should be used or atleast one of them. Qualitative research is when data is collected from participant observations, documents, interviews, direct observation, physical artifacts and archival records (Yin 1989). On the other hand quantitative research deals with statistical methods for analysis and is used to verify theories and identify variables to study (Creswell 2003). This project uses both qualitative and quantitative research.

There are also other methods of research such as primary and secondary research.

Primary research – As this project research uses interviews with employees as a method of collecting primary data, I shall focus on interviews in this section. Interview is considered as a dialogue or a conversation between two or more people (Saunders et. al 2009). It helps in directly collecting information applicable to research and it can be carried through face to face conversation, internet or telephone (Saunders et. al 2009). Secondary research – Involves the data collected for a specific report by a particular person but later used to solve the purpose of the other party (McQuarrie 2006). It’s said to be the cheapest and quickest source of market research and normally consist of past reports of market research, sales report and customer databases (McQuarrie 2006).

With the help of the primary and secondary research the flaws in the inventory management of New Millennium Bakers will be identified and suitable solution will be developed to benefit the company in the long run.

4.2 There are 2 sampling decisions to be considered in this project.

1. Inventory- Monginis has got two types of inventory, raw materials and finished goods as it’s a manufacturing unit. The inventory constitutes of perishable and non perishable items. Raw materials constitute a major part of the inventory which are stored in warehouse and supplied to the production department on the basis of the demand.

Selected – as the project was based on studying the inventory model followed by Monginis Goa. I decided to choose raw materials as they are ordered in bulk and stored in huge quantities.

2. Raw material- Raw material division itself holds an inventory of over a hundred products, each classified under various tags like cocoa products, sweetener etc. This project is based on a product sample of 9 products for which the data requirements for the analysing instruments (ABC) will be done and from that a (sales trends, holding cost) will be carried out on the 6 products chosen on basis of consumption value and which constitute to 15% of the average inventory .

SELECTED PRODUCTS

Products Maida Eggs (NOS) Sugar Margrine Fresh Cream Icing Sugar Characteristics of final sample

The use of inventory tools like ABC, Sales trend, etc requires a specific kind of input data, and therefore it is essential that the sample should have the following characteristics.

Sales of the item should be known for the past few months. It’s also necessary to know the amount of stock in hand, the details of when the goods receipt note ( GRN) was made and it’s important to know about the orders placed to avoid the dead stocks.

Chapter 5- Collection of data and finding’s

Primary Data

5.1 ABC analysis As mentioned earlier in the chapter 2 of project, ABC analysis is an inventory tool which helps the firm classifies their items on the basis of their importance with regards to the yearly cost of the entire inventory system (Tanwari et al. 2000).

a) A items are important and expensive – here normally 10% - 20% of the items value at 70% - 80% of the cost and require special attention and care (Tanwari et al. 2000). The orders for these items should be placed with the help of Economic Order Quantity and key attention should be placed on safety stock by specifying accurate service levels (Tanwari et al. 2000). Here relationships with the vendors need to be explored, to reduce the variance in lead times and the level of safety stock (Tanwari et al. 2000). b) B items are of average importance and considered ordinary – here 20% - 40% of all items value at 15% - 20% of the total cost and require standard care (Tanwari et al. 2000). Generally the approach followed here is to deviate from optimal EOQ and safety stock level to reduce operating costs (Tanwari et al. 2000). c) C items are considered of less importance and cheap – here 40% - 70% of the items value at 5% - 10% of the total cost and require little care (Tanwari et al. 2000). Since these items are of low demand or low costs, strict control isn’t required and as the items are economic to stock in large quantities, it makes the possibility of stock out negligible. Hence these items are ordered annually or semi-annually and not normally in EOQ batches. It’s too believed that the C items would not normally cause an expensive service or production system to be stopped (Tanwari et al. 2000).

They are classified on the basis of annual dollar volumes (World Academy Online 2011). It’s calculated using the formula Annual dollar volume = annual demand × unit cost (World Academy Online 2011)

consumption in KGS Annual dollar Products volume Class

Eggs (NOS) 199060.34 A Sugar 910705.95 A Maida 699850.8 A Margrine 535456.5 B Fresh Cream 454281.75 B Icing Sugar 224941.5 B Cocoa Powder 164738 C Emgel 81000 C Powder Sugar 24477.2 C

The C category item’s will be omitted for further analysis as they are of marginal value and are less important. 5.2 Consumption Statistics

The consumption of each product included in the sample was studied over the period of three months. These figures were obtained from production report and added to give total figures.

Product Wise Consumption APRIL MAY JUNE Break-up

Maida 11,250 10,118 12,800

Egg’s 24,663 23,357 25,434

Sugar 7144.9 6841.6 9668.2

Margarine 3390 2880 4725

Fresh cream 1510 1470 2197

Icing sugar 2350 2117.6 2880.6

5.3 Consumption Trends

It’s important to realize that the characteristics of managing a business are similar to that of running a little ship. When you’re the ship’s captain, it’s important that your eyes are wide open and kept on the horizon to plan your next move. If there is a storm cloud gathering, it’s important that you warn your deck mates to secure the ship's cargo and take cover below. Incase of rocky waters ahead, it’s important that your deck mates are on your side and do what is necessary to overcome the crisis and navigate safely to the other side. Finally if the journey is long, it’s necessary that you start stocking up supplies before leaving the port (Roos 2011).

It’s similar in business as well, where the captain is the entrepreneur or the CEO and its equally important for him to plan the future and keep your eyes wide open on the horizon. It’s said that the best way of planning the future is achieved through proper analyzing of past trends (Roos 2011). Consumption forecasting is said to be one of the trickiest job as factors like turnover of employees, changing customer trends, economic slowdown and increasing competiton can affect the future sales of the firm (Roos 2011). In fast food industry, short term forecasting is normally used as there are perishable items, customers tastes keep on changing and it’s really difficult to predict the future trend, hence one of the options commonly used to predict the future is the past consumption trend (Roos 2011).

30,000

25,000

20,000

15,000 April 10,000 May

5,000 June 0

5.4 Consumption Volumes

The monthly consumption volumes for the products included in the sample are as follows: These volumes have been computed by adding figures from the outward consumption register to first come up with the monthly consumption and later were added up to arrive at a quarterly consumption figure.

Products Total Maida 36168 Icing Sugar 4998.7 Sugar 23654.7 Margarine 10995 Eggs (NOS) 74454 Fresh Cream 5177 80000 70000 60000 50000 40000 30000

20000 10000 0

Note- all items consumption are in kg except for eggs the consumption is in number of pieces.

5.5 Carrying Costs of per unit of inventory per month

Carrying Cost refers to the over heads an organization carries to aid its inventory. It’s the money spent on holding the inventory in addition to the money spent originally on purchasing it (Harding 2004). Carrying cost consists of both, fixed and variable cost factors (Harding 2004). Fixed costs include the cost of personnel and the space. For example if an organization operates a warehouse, there are significant costs incurred to establish and maintain the premises. There also costs incurred on staff in stores which is dependent on the level of inventory (Harding 2004). On the other hand there are variable costs like taxes, cost of capital, insurance, taxes and reserve for obsolescence which the organization incurs for holding excessive inventory (Harding 2004).

There are other factors as well which the organizations need to look into depending on their inventory. These include cost of re-inspection, for example an inventory which is fragile or has a shorter shelf life would require a inspection once again before use (Harding 2004). To study the carrying costs, the warehousing procedures and technicalities were studied, later with the help of cost accounting techniques all warehousing components were quantified and a cost was allocated to them.

Fixed costs

I. Storage cost per unit :

Normally companies calculate storage costs of the firm by taking the total cost and dividing it by the average inventory (Piasecki 2011). However this consist of costs which are not affected by inventory levels (Piasecki 2011). To calculate the storage cost per unit the following costing formula was devised keeping in mind the nature of the calculation. This formula calculates the total surface area of the distributor’s workspace and divides it with the renting cost to find the rent per unit of space. This unit is further broken down to the size of each unit of product and thus we can find out the cost of storage space per unit.

Storage Area = Area of the Warehouse

= 30m2

Rent per month = Rs. 15,000

Cost per square meter per month = Rent per year / Total Area m2 = Rs.15,000 / 30m2 =Rs. 500per m2

“For convenience of the distributor a Microsoft office excel tool has been developed by me, which automatically asks for all required variables and does the required calculations. This tool is on the CD pasted at the End of the report copy.”

Avg Cost of storage per kg space total number of total storage cost Product (m2) Storage cost per month KGS per kg Maida 8 4000 12000 0.333333333 Eggs (NOS) 2 1000 24,000 0.041666667 Sugar 7 3500 7000 0.5 Margarine 5 2500 3,000 0.833333333 Fresh cream 3 1500 1,500 1 icing sugar 4 2000 2,100 0.952380952

II. Labour cost:

Labour is an input in the storage process. It includes people who handle the inventory such as store keepers, inventory managers and material handlers (Harding 2004). It’s calculated by adding the total cost of labour upon the number of kgs.

i. Cost of Labour (store handler) = Rs. 4000 / month ii. Number of workers= 4 iii. Total labour cost per month = Rs.16000 iv. Storage cost of labour per kg= avg cost of labour per month/ Number of kgs(nos)

= 16000/132000

= 0.121

Therefore the average cost of labour per kg is 0.121 per month.

labour cost per product cost of labour per total no. of total cost of labour per Product kg kgs product Maida 0.121 12000 1452 Eggs (NOS) 0.121 24,000 2904 Sugar 0.121 7000 847 Margarine 0.121 3,000 363 Fresh cream 0.121 1,500 181.5 icing sugar 0.121 2,100 254.1

Variable Costs

I. Cost of capital per unit.

The cost of capital is the rate of interest the firm can earn on the invested money in the inventory, if it were to be invested somewhere else, or it’s also could be the interest rate the firm pays for the business loan taken (Harding 2004). Normally in the food industry cost of capital is taken at around 14 % to 17% (Omran and Pointon 2004), hence to be on the safer side an average rate of 16 % is taken as cost of capital. This cost is applied on the distributor cost price for each unit.

cost of capital per kg yearly cost of monthly cost of Products cost price capital capital Maida 19.35 3.096 0.258 Eggs (NOS) 2.71 0.4336 0.036133333 Sugar 38.5 6.16 0.513333333 Margrine 48.7 7.792 0.649333333 Fresh Cream 87.75 14.04 1.17 Icing Sugar 45 7.2 0.6

II. Taxes per unit.

In some jurisdictions inventory is taxed (Harding 2004). However in New Millennium Baker’s tax paid is included directly in the cost price of items purchased. Therefore there is no direct tax that could be applied to the product storage. Taxes on revenue paid by the company are not allocated to storage costs as it varies with quantum of consumption. Irrespective of consumption, the storage cost remains constant.

5.6 Ordering Costs

It includes all the costs such as salaries of purchase clerks, telephone usage and purchase invoice which help in preparing a purchase order (Siegel and Shim 2006). The ordering costs in this case were found by first making a study of the ordering process. How long and how many times a call is made to place the order? On an average it was found that all phone calls last for around 5minutes and are made only once to place each order. The manpower costs were calculated at Rs. 0.52 per minute based on the salary of Rs. 6000 month.

Ordering Process

Ordering Process Activity Sequence Compile Order 1 Fax Order 2 Make Demand Draft 3 Confirm order over 4 phone and follow up

Calculation of Ordering Costs

Ordering Costs Activity Medium Time Cost of Activity(Rs.) Compile Order HR 10 min. 5.2 Fax Order Telephone/Fax --- 35 Make Demand Draft HR 30 min. 15.6 Confirm order over Telephone + HR 5 min. 5 + 2.6= 7.6 phone and follow up Total 58.4

Therefore it is observed that the average cost of placing an order is Rs. 58.4. This cost is irrespective of the order quantity and has to be incurred every time an order is placed.

5.7 Lead time.

Lead time is the time taken between the order of the customer and delivery of the final product . Its normally dependant on the complexity of the product, a custom made product might have a lead time of few weeks while a readily available product will have only a few hours of lead time(Wise Geek 2011).The lead time was computed by taking lead times for the past 3 orders and computing their average

Product Ordered Lead Time Maida Goa 3 days Egg’s Goa 3days Sugar Goa 3days

Margarine Goa 3days

Fresh cream Goa 3days

Icing Goa 3 days

5.8 Inventory Ordering Point

It is the Minimum appropriate level of Inventory at which the stock is replenished (all business 2005). The reorder point takes into consideration the average rate of inventory consumption, the cost of stock out and the delay of time in arrival of new inventory (all business 2005).

These figures were computed by taking averages of inventory and inventory levels over a period of three months.

Product Average Reorder Number of Avg Reorder Inventory (kgs) level(kgs) times Level(kgs)per ordered in a month month Maida 1,950 500 3 1500 Eggs (nos) 8,544 1,500 4 6,000 Sugar 1,225 250 4 1,000 Margarine 650 210 3 630 Fresh cream 400 60 4 240 Icing sugar 550 120 4 480 Secondary Data

5.9 Economic Order Quantity (EOQ)

Underlying assumptions that need to be made: In order to find out the EOQ model, there are certain assumptions that need to be made such as the demand rate is constant and known, the cost of ordering should be fixed and constant, the price of the goods remains constant, the lead time is said to be zero which basically means the goods are delivered instantaneously and finally the demand is said to be forever hence the horizon of planning is infinite (Schwarz 2008).

The derivation of the EOQ formula:

The basic formula of EOQ is TC = PD + HQ/2 + SD/Q (eNotes 2006).

Where TC stands for the total cost of inventory for the year, PD stands for price into the demand which gives the firm the inventory purchase cost, H stands for the holding cost, Q stands for the quantity ordered and S is the cost of ordering in Rupees. The formula is further broken down where the average number of units Q/2 of inventory is multiplied by the holding cost and the ordering cost S is multiplied by the total number of orders taken for that year, which states the annual demand D and is further divided by the total number of orders Q, giving D/Q. Finally, its PD that stays constant regardless of the quantity ordered (eNotes 2006).

http://2point8.blogspot.com/2007/07/management-lite-ezy-38-inventory.html

Hence considering the above factors following conclusion is derived.

HQ/2 = SD/Q (eNotes 2006), or http://bp2.blogger.com/_b- jw0MlcPlg/RkqsKBca9gI/AAAAAAAAAa8/8bw3z0kSHro/s1600-h/eoq_formula.jpg

5.10 Inventory Re-ordering point

It is the point of inventory at which a purchase requisition is given out and a new order is placed. The order points are dependent upon the consumption, the allowance of safety stock and the lead time taken (all business 2005).

Normally the firms calculate the re-order point using the following two formulas:

Re-order point = maximum monthly or weekly or daily usage × lead time (Accounting For Management 2011).

When the lead time is constant and certain the above formula is used. However in case there is uncertainty in lead time, safety stock is added and following formula is used (Accounting For Management 2011).

Re- order point = maximum monthly or weekly or daily usage × lead time + safety stock (Accounting For Management 2011). Chapter -6

Analysis of Data

The analysis of the data will be structured in the following format.

i. Calculation of carrying cost per kg. ii. Calculation of ordering cost. iii. Calculation of Economic order quantity. iv. Calculation of reorder point. v. Calculation of carrying cost before and after the model implementation. vi. Calculation of Annual Inventory cost before and after the model implementation

6.1 Calculation of carrying cost per kg.

The Carrying cost was calculated by adding the final results of storage costs, tax, cost of capital and labour cost of each product. This analysis plays a vital role in calculating the economic ordering quantity.

carrying cost per kg cost total storage cost cost of cost of labour Product price per kg Tax capital per kg Total Maida 19.35 0.33 0 0.26 0.121 20.061 Eggs (NOS) 2.71 0.04 0 0.03 0.121 2.901 Sugar 38.5 0.5 0 0.51 0.121 39.631 Margarine 48.7 0.83 0 0.65 0.121 50.301 Fresh cream 87.75 1 0 1.17 0.121 90.041 icing sugar 45 0.95 0 0.6 0.121 46.671

6.2 Calculation of Ordering Costs

The ordering cost is an essential input while calculating economic order quantity. Ordering Costs Activity Medium Time Cost of Activity(Rs.) Compile Order HR 10 min. 5.2 Fax Order Telephone/Fax --- 35 Make Demand Draft HR 30 min. 15.6 Confirm order over Telephone + HR 5 min. 5 + 2.6= 7.6 phone and follow up Total 58.4

6.3 Calculation of Economic Reorder Quantity (EOQ)

With the help of Economic Order Quantity (EOQ) the total costs of inventory, such as shortage costs, holding costs and ordering costs are minimized (eNotes 2006) .

The EOQ for each product was arrived to by using the Formula:

http://bp2.blogger.com/_b- jw0MlcPlg/RkqsKBca9gI/AAAAAAAAAa8/8bw3z0kSHro/s1600-h/eoq_formula.jpg

Where ‘S’ is the ordering cost, ‘D’ is the demand and ‘H’ is the holding cost (eNotes 2006).

Economic order quantity Third no. of Avg EOQ quarter times its per month consumpti ordering carrying ordered in Product on costs cost EOQ a month 34,168 3 1338.0617 446.02 82 Maida 58.4 20.061 06 72,454 4 6831.8564 Eggs 1707.9 38 (NOS) 58.4 2.901 64 23,654 4 1056.1271 264.03 17 Sugar 58.4 39.631 18 10,995 3 479.34917 Margarin 159.78 41 e 58.4 50.301 31 5,177 4 327.79350 Fresh 81.948 22 cream 58.4 90.041 38 7,348 4 542.42841 icing 135.60 68 sugar 58.4 46.671 71

6.4 Calculation of Inventory Reorder point

The lead time taken to deliver the goods is constant in New Millennium Bakers, hence the following formula is used to calculate the reorder point:

Re-order point = daily usage × lead time (Accounting For Management 2011). Inventory Reorder point Avg reorder point per Product approx daily usage(kgs) lead time month Maida 480 3 1440 Eggs (NOS) 900 3 2700 Sugar 230 3 690 Margarine 105 3 315 Fresh cream 50 3 150 icing sugar 71 3 213

6.5 Comparison of reorder point

Average Reorder Level(kgs)per Average Reorder Level(kgs) per month old month optimized

1500 1440

6,000 2700

1,000 690

630 315

240 150

480 213

From the above table it can be seen that New Millennium Bakers can reduce the level of safety stock for each of the above 6 products which in turn will help the firm in reducing costs.

6.5 Calculation of carrying cost before and after the model implementation.

The total carrying costs for the sample are calculated before and after the EOQ model implementation to compare the costs and to determine the effectiveness of the model. The results are calculated both in rupee terms and percentage terms.

Carrying cost before and after the model implementation Carryi Carryi Carryi Produ ng Invent Invent ng ng Savin Savin ct cost ory ory cost cost gs gs Optimiz Optimize per kg old ed Old d Rupee (%) 1,950 39118. 26841. 12277 31.38 Maida 20.061 1,338 95 62 .33 462 Eggs 8,544 24786. 19819. 4966. 20.03 (NOS) 2.901 6,832 14 63 512 745 1,225 48547. 41850. 6697. 13.79 Sugar 39.631 1056 98 34 639 592 Margar 650 32695. 24094. 8601. 26.30 ine 50.301 479 6 18 471 769 Fresh 400 36016. 29443. 6572. cream 90.041 327 4 41 993 18.25 icing 550 25669. 25295. 373.3 1.454 sugar 46.671 542 05 68 68 545 167344 Total 206834 .8 39489 Total Rupee Savings .32

The comparative analysis shows that the optimized inventory model resulted in savings up to 31.4% per product and a total rupee savings of Rs. 39489.32 (£. 550). Therefore the effectiveness of the model is confirmed.

From this table the savings can be calculated by subtracting the optimized inventory cost from the old inventory cost.

Savings Avg per month Inventory Cost(old) 206834 Avg per month Inventory Cost(optimum) 167344.8 Total Savings 39489.2

Chapter -7

Conclusion

In today’s economic climate cost cutting is a new method for survival of effective and optimal inventory management and is a definite way of sustaining profitable operations. The study clearly indicates that the inventory management system followed by New Millennium Bakers is inefficient and that there is potential for it to be optimized to a great extent.

The comparative analysis shows that the optimized inventory model resulted in savings up to 31.4% per product and a total rupee savings of Rs. 39489.32. Therefore the effectiveness of the model is confirmed.

It is to be noted that the sample consists of only 6 of around 100 products in the inventory. Therefore there is immense potential for savings if this model is applied on the whole inventory.

Applying sophisticated tools requires a lot of expertise and therefore for convenience and easy use of the distributor, a Microsoft office excel tool has been developed by me, which automatically asks for all required variables and does the required calculations. This tool is on the CD pasted at the End of the report copy.

Chapter- 8 Recommendations

Inventory management is an important function in a business. In order to run a profitable venture efficient inventory management is of prime importance.

I recommend that Millenium Baker’s should implement a Scientific Inventory management system like ABC Analysis, Economic order quantity procedure and Inventory order level procedure to gain the following benefits.

1. Reduce overheads and working capital losses resulting from excessive inventory and dead stock.  The study indicated that the firm was incurring additional costs due to over stocking; this overstocking was due to the fact that the company was using a speculative inventory technique where the firm determined the inventory levels solely based on gut feelings. 2. Provide optimal inventory levels which ensure a continuous and uninterrupted supply of raw materials to the production department.  The EOQ model used in the study ensures a steady supply of products as it keeps in account the lead time (). 3. Leads to efficient utilization of space.  On Implementing The model there will be a creation of a large amount of space, this space could be used to stock more products (in efficient quantities) which could further increase the profitability of the firm. 4. Avoid wastage due to expiry of Goods on shelf.  The EOQ model as seen above helps in reducing wastage.  The firm could also implement the pull system which will help them in buying the approximate number of raw materials that they are going to use, based on the sales trend (IMEC 2011).

Chapter- 9

Limitations In the above research conducted on New Millennium Baker’s Goa, there are certain limitations which I would like to highlight. Firstly the research was only done on a sample of 6 out of the 100 raw materials due to time constraints. This limits my findings and analysis of data.

This research also lays its emphasis heavily on Economic Order Quantity and there are certain problems and limitations of EOQ that exist while implementation. As mentioned above EOQ is derived with the help of carrying and ordering cost (), and normally there are chances of miscalculation or mis-interpretations occurring when finding out these parameters (). EOQ formula is also said to use plenty of unrealistic assumptions such as the demand rate is constant, lead time is zero, the ordering cost and the price of the goods are constant ().However in reality that’s not the case, today due to the external factors such as worldwide recession and increasing crude oil prices there is high variability in the demand and the price of goods. Also due to the external factors, there are chances of scarcity of some products and possibilities of inflation in the prices, in such cases lot of firms prefer to buy and keep excess of stock to stay competitive in the market. All this factors could affect the research analysis and show inaccurate results.