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Inventory management models and their effects on uncertain demand

Conference Paper · December 2016

DOI: 10.1109/IEEM.2016.7798037

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 Inventory Management Models and Their Effects on Uncertain Demand
N. Nemtajela1, C. Mbohwa2
1
Department of Operations Management, University of South Africa, Pretoria, South Africa
2
Department of Quality and Operations Management, University of Johannesburg, Johannesburg, South Africa
somethingnew.83860@gmail.com

Abstract - This paper focuses on the use of inventory

models to control the material flow and purchased inventory
items in manufacturing companies. The objectives of this
paper are to assess the effects of demand uncertainty on
inventory management and to evaluate the difference on
uncertain demand subject to demand controls as determined
and the models used. Three inventory management models
are studied; the Economic Order Quantity (EOQ), the
Activity-Based Costing (ABC), and Just-in-time (JIT). The
paper was a descriptive in nature and was conducted
through the use of quantitative research methods. Survey
questionnaire was compiled to gather primary data from
five FMCG companies in manufacturing organisations.
Survey data of 255 respondents from FMCG manufacturing
companies was used in the analysis.

Keywords - Fast moving consumer goods (FMCG),

inventory management, inventory management models,
uncertain demand
Fig.1: ECONOMIC ORDER QUANTITY (EOQ),
I. INTRODUCTION [19]
Survival of organisations in this economical world is restrictions scheduled batch order size, (v) order costs are
about the value of managing inventories. In any uninterrupted, and (vi) item value is uninterrupted.
manufacturing organisation there must be some kind of Agreeing [6] state that inventory models are recognized
inventory types such as; raw materials that are going to be by the traditions made about the elementary variables:
processed through production, work-in-process of what the demand is, what the cost structure is, and
material on the process not yet finished and completed physical characteristics of the system. The EOQ model is
products for sales which are controlled for the calculated as the following equation to determine “how
organisation. Good and effective management of much to order” [20]:
inventories remains critical aimed at improvement and
existence of organisation [12]. Inventory management is
√2 / (1)
about controlling of any item an organisation keeps, it can
be a physical item or a service which will be used for the
Where, Q = EOQ order quantity, variable for optimizing,
organisation’s output. When inventory is controlled
as others are solid amounts.
poorly, it will cause the organisation’s capital to be tiered
D = yearly demand capacity per time in units.
in the resources. According to [1] inventory characterizes
S = the product cost per order. Is an independent cost to Q
a significant percentage of the overall capital of an
and has a charged flat fee for orders made.
organisation; they characterize many important functions
C = Cost per unit
which are: (i) smooth production. (ii) coordinating
H = cost for holding stock
operations. (iii) improving customer service. and (iv)
[18] state that, when demand level varies from time to
achieving economies of scale, [2] and keeping total costs
time the results from the EOQ method could be
at minimal. The core determination of all inventory
unreliable. Inventory models may possibly be put as
models is to give solutions to the key questions to be
deterministic and probabilistic and both account for the
answered again and again; exactly how much to order and
consistency of the allied production method [1]. Different
at what point should replenishment take place and this is
and operational systems are required for modelling
labeled as economic order quantity [1], [3], [6]. The
systems related to inventory management, in the
standard method to inventory control is “economic order
expression of demand uncertainty [6]; uncertainty is real
quantity” (EOQ) model [4]. According to [5] EOQ model
concerning the control
is grounded on certain traditions which are; (i) demand is
of an item, as the system of achieving the actual
known and constant, (ii) prompt orders, (iii) no backorder,
information about the item is mostly challenging always.
(iv) no
Inventory management of different types of items held in

978-1-5090-3665-3/16/$31.00 ©2016 IEEE 1046

 Proceedings of the 2016 IEEE IEEM
inventory stores of the organisation are not of equal
significance in terms of capital put in, revenue
prospective, transaction volumes, or shortage
shortcomings [12]. Thus, practical method remains to
assign regulator determinations according to virtual
significance on various items of inventory as perceived by
[13]. [14] explain ABC analysis as “inventory
categorization method which consists in dividing items
into three categories, A, B, and C; A being the most
valuable items, C being the least valuable once”. ABC
analysis objective is to measure and allocate items in
inventory [17]. According to [13] ABC Analysis offers
significant systematic framework for stocked items and
are commonly apportioned under three sessions
conferring to their revenue ranking and considered A
(most significant), B (Moderate significant) and C ( just
significant). ABC Analysis is one of the models that are
used in organisations. Furthermore, [14] explains the A-
items as products or stocks that have a highest value
consumed annually, they rate the items as the over three
quarters of items consumed yearly of the organisation
naturally accounts for only less than a quarter of entire
inventory items, B-items are the interclass items, with a
medium consumption level. Quarter of the items
consumed yearly naturally accounts for just of a quarter
of entire inventory items, and C-items are on the contrary,
items with the lowest consumption level. The lower list
percentage of the items consumed yearly naturally
accounts for half of entire inventory items. Undeniably
most businesses fail due to overstocked or understocked
inventory [15]. Just-in-time (JIT) is a model which helps
in minimizing inventory costs due to only goods that are
needed are manufactured and received. [16] explain “just-
in-Time” as “only what is needed, when it is needed, and
in the amount needed.” The achievement of JIT main
goals brings key point benefits, which are; (i) elimination
of inventories will enable the organisation to control the
ordering and delivering process for meeting the
production orders, and organisation’s flexibility. (ii)
elimination of inventories results to very low inventory
carrying costs for the organisation. There is continually an
excessive impact of uncertainty and variability.
The objectives of the inventory management are to
develop, implement, and to administer the procedures,
policies and the systems [7]. Inventory management’s
objectives often reduce the challenge of profitability
about doing quickly at an expensive cost or slower at a
cheaper cost [6]. Inventory is made up of raw materials,
partly finished goods called the work-in-progress (WIP)
and finished goods, an operation reserves to meeting its
operational requirements. It characterizes a considerable
asset and a potential basis of waste that requests to be
cautiously managed [8]. Inventories are kept due to
uncertainty [9]. Most of the work is characterised by
excessive inventory on hand, raw materials losing their
quality, inventory no longer saleable, improper sourcing
methods, and poor personnel management skills, poor
delegation of responsibilities and inefficiencies and
ineffectiveness of inventory management control system
1047
[10]. [11] State that inventory management in most
organisations is disregarded and top management is not
convinced by managers on how to control and consider
inventory more than other different functions of the
organisation. According to [14] an effective inventory
management must: (i) make sure that there is a
uninterrupted supply of raw materials to enable
uninterrupted production process, (ii) keep enough
finished manufactured goods for uninterrupted sales
transactions and proficient service to customers, (iii)
reduce the holding cost and period, (iv) manage assets and
keep it at the best level, (v) allow improved utilization of
on hand stocks by simplifying interdepartmental
handovers within a company, (vi) keep enough stocks of
raw materials in periods of shortage in supply and
expected price increases.
II. METHODOLOGY
The study was conducted primarily through the survey
method of the employees who deal with inventory control
on a daily basis from the FMCG organisation in Gauteng,
South Africa. The secondary data were obtained through
textbooks, and journal articles. The sample of 450
personnel for this research was generated from the
population of fast moving consumer goods sector in
Gauteng, Johannesburg. The sample signified a subset of
the population and gave a fair and equal opportunity to
every population element of being selected for the study.
450 questionnaires were distributed by hand to the
respondents and 285 questionnaires were received back.
Out of the 285 received back 30 questionnaires were
incomplete or partially filled and the researcher had to
reject them. A five point Likert scale was used with 1 =
strongly disagree to 5 = strongly agree. Inventory
management models questions and uncertain demand
were asked. Likert scale creates the request to be similar
to a statement and requires the respondents to mark their
degree of agreement to the stated sentence [21]. The
respondents were randomly sampled which made
everyone in the sample to participate. Received responses
of 285 which is equivalent to the rate of 63.33 % were
used to analyse data. Data obtained from the field were
presented and analysed with descriptive statistics to
provide answers for the research questions and the
hypothesis tested with Pearson’s Correlation and linear
regression at 0.05 alpha level. The data collected were
analysed using SPSS. Data obtained from the field were
presented and analysed with descriptive statistics to
answer how effective are the inventory models and their
implications on uncertain demand.
 Proceedings of the 2016 IEEE IEEM

III. RESULTS TABLE III

LINEAR REGRESSION OF THE INDEPENDENT VARIABLES ON
INVENTORY MANAGEMENT
TABLE I
DESCRIPTIVE STATISTICS OF INVENTORY MANAGEMENT SYSTEM
Unstandardized Standardized
N Mean Std.Deviation Coefficients Coefficients
IM3 255 3.24 0.837 B SE F R R² ∆R²
IM4 255 3.58 0.901 1.413 .122 300.701
IM26 255 3.69 1.012 .563 .032 .737 .737 .737
UD9 255 3.60 1.202
Valid N (list 255
wise) Source: SPSS field work 2015
Source: SPSS field work 2015
The descriptive statistics of inventory management Table III shows that the regression equation is highly
system is portrayed in Table I, the results indicate that all significant with an F = 300.701, p<0.01, R = 0.737, R² =
the statements have a mean value greater than 3.20. With 0.543, and ∆R² = 0.541. As per the variance explained
100% statements with positive, this indicates that and significance the regression model is good. This means
inventory management system is implemented well in the that should the F not be significant then the regression as
organisation. The higher the mean scores indicate that a whole will have failed and interpretation not necessary
there was agreement with the statements. The statement [22].
with higher score being (IM26 “Inventory records and
models are used to maintain effective inventory records.”) IV. DISCUSSION
is a key component of controlling inventory on the
system. When inventory models are used to maintain The key purpose for all inventory models is to be able to
effectiveness on inventory, there will be mitigating of know when to order and how much of the order.
demand uncertainty. Where the demand will be met and Inventory gives organisation support to survive against
customer satisfaction will be achieved. competitors. Inventory models like; EOQ, ABC and JIT
help the organisation to keep total cost at minimal. EOQ
Table II indicates how much of the variance in each is done in order to place orders whenever the inventory
variable has been accounted for by the extracted factors. levels reach the reorder point. ABC analysis is for
70% of the variance in “IM26 – inventory records and dividing inventory into classes of important. A-item being
models are used to maintain effective inventory records” the most important and C-items being the least important.
is accounted for, whereas only 53% of the variance in JIT is a model that helps the organisation to eliminate
“IM3 – the inventory model used to manage inventory is unnecessary inventory. there is a high positive
implemented well” Is accounted for. significance of uncertain demand on inventory
TABLE II management models. The high the levels of uncertainty
COMMUNALITIES OF INVENTORY MANAGEMENT SYSTEMS
the more the inventory will be difficult to control. The
regression coefficient of independent variable on
Initial Extraction inventory management models is highly significant. The
overall model is significant at the 1% level. The uncertain
IM3 1.000 .533 demand explains at 54% of the variance in the inventory
IM4 1.000 .604 management. Uncertain demand is positive (+) as a
predictor statistically different from zero and had
IM26 1.000 .703
significant and direct effect on inventory. Organisations
UD9 1.000 .695 are able to minimise costs relating to inventory through
their effective inventory management, though the market
Source: SPSS field work 2015 and environment conditions are unforeseeable and there
A. Regression are chances of stock outs [23]. The positive response on
The linear regression was calculated on uncertain demand the statement of implementing inventory management
as an overall measure on inventory demand. systems indicates that the organisation is implementing
the inventory models and they are user friendly.

V. CONCLUSION

Inventory management models are essential tools to put

inventory at minimal. The organisation should not have
too much or too little on hand for it to grow and succeed.
When an organisation implements inventory models, it
will gain a lot in regards to customer satisfaction, low cost
on holding inventory, meeting customer demand. When

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 Proceedings of the 2016 IEEE IEEM

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