Proceedigs

Information of the 15th

Control IFAC Symposium
Problems on
in Manufacturing
Proceedigs of
Information the 15th
Control IFAC Symposium
Problems on
in Manufacturing
May 11-13,
Proceedigs 2015.
of Ottawa,
theOttawa,
15th Canada
IFAC Symposium on
Information
May Control
11-13, 2015. Problems in Manufacturing
Canada Available online at www.sciencedirect.com
Information Control
May 11-13, 2015. Problems
Ottawa, in Manufacturing
Canada
May 11-13, 2015. Ottawa, Canada
ScienceDirect
Inventory IFAC-PapersOnLine 48-3 (2015)to
260–265
Inventory Management
Management Framework
Framework to minimize minimize supply
supply and
and demand
demand
Inventory Management
mismatch
Inventory Management onFramework
a manufacturing
Framework to minimize supply
supply and demand
organization
to minimize and demand
mismatch on a manufacturing organization
mismatch on a manufacturing
mismatch on a manufacturing organization organization
M.G. Matsebatlela* & K. Mpofu** 
M.G. Matsebatlela* & K. Mpofu** 
M.G. Matsebatlela* & K. Mpofu** 
M.G. Matsebatlela*
*Department of Industrial Engineering, & K.ofMpofu**
Tshwane University  Private Bag X680, Pretoria
Technology,
*Department of Industrial Engineering, Tshwane University of Technology, Private Bag X680, Pretoria
*Department of Industrial SA (Tel: +27 12 382
Engineering, 5571; e-mail:
Tshwane rrmatseba@gmail.com).
University of Technology, Private Bag X680, Pretoria
*Department of SA (Tel: +27 12 382 5571; e-mail: rrmatseba@gmail.com).
**Department of Industrial
Industrial
SA
Engineering,
Engineering,
(Tel: +27 12
Tshwane
382Tshwane
5571;
University
University
e-mail:
of
of Technology,
Technology, Private
rrmatseba@gmail.com). Private Bag
Bag X680,
X680, Pretoria
Pretoria,
**Department of Industrial Engineering,
SA (Tel: +27 12 382Tshwane
5571; University
e-mail: of Technology, Private Bag X680, Pretoria,
rrmatseba@gmail.com).
**Department of Industrial Engineering, +27 12 382
Tshwane 5571; e-mail:
University mpofuk@tut.ac.za).
**Department of Industrial SA (Tel: +27 +27 12
Engineering, 382 5571;
Tshwane e-mail:of
University
Technology, Private Bag X680, Pretoria,
ofmpofuk@tut.ac.za).
Technology, Private Bag X680, Pretoria,
SA (Tel: +27 +27 12 382 5571; e-mail: mpofuk@tut.ac.za).
SA (Tel: +27 +27 12 382 5571; e-mail: mpofuk@tut.ac.za).
Abstract: There is a problem of excessive inventory in a Manufacturing Company, situated in South
Abstract: There is a problem of excessive inventory in a Manufacturing Company, situated in South
Africa.
Abstract: In this
There study
is aan Inventory
problem Management
of excessive Framework
inventory (IMF) was developed.
in a Manufacturing Company, Quantitative
situated incontent
South
Africa. In this
Abstract: There study
istoaan Inventory
problem Management
of excessive Framework
inventory inused (IMF) was developed.
a Manufacturing Company, Quantitative
situated incontent
South
analysis
Africa. Inwas was used
thisused study collect
an data.
Inventory Statistical
Management tools were
Framework to
(IMF) select the
wasthe fiscal
developed. year with the vast
Quantitative data
content
analysis
Africa. In this study to collect
an data.
Inventory Statistical
Management tools were
Framework used to
(IMF) select
was fiscal
developed. year with the
Quantitative vast data
content
variation
analysis was for data
used analysis for
to collectfor this
data. study.
Statistical The results
tools reveal
werereveal that
used that uncertainties
to select the fiscaland and lot sizing
yearlotwith inventory
the inventory
vast data
variation
analysisinwas for data analysis
used toinventory
collect data. this study.
Statistical The results
toolscollaborated
were used to uncertainties sizing
results
variation excessive for and
this not havingThe aaresults andselect the fiscal
integrated Supplyyearchain
with Management
the vast data
results in for
variation for
data analysis
excessive
data inventory
analysis and
forsupply
study.
this not
study.havingThe results
reveal that
collaborated
reveal and uncertainties
that integrated Supply
uncertainties
and lot
and
sizing
chain
lot
inventory
Management
sizing inventory
also
results results
in in a
excessive mismatch
inventoryof and and
not Demand.
having a IMF is
collaboratedproposed
and in this
integrated paper to
Supply minimize
chain the impact
Management
also
results results in a mismatch
in excessive inventoryof supply
and not andhaving
Demand. IMF is proposed
a collaborated in this paper
and integrated to minimize
Supply the impact
chain Management
of
also the mismatch.
of
also theresults
mismatch.
results
in a mismatch of supply and Demand. IMF is proposed in this paper to minimize the impact
in a mismatch of supply and Demand. IMF is proposed in this paper to minimize the impact
© the
of
of 2015,
the
Keywords: IFAC
mismatch.
mismatch. (International
Inventory, Federation
Uncertainties, of sizing,
Lot Automatic Control)
Inventory Hosting by Elsevier Ltd. All rights reserved.
Management.
Keywords: Inventory, Uncertainties, Lot sizing, Inventory Management.
Keywords: Inventory, Uncertainties, Lot sizing, Inventory  Management.
Keywords: Inventory, Uncertainties, Lot sizing, Inventory  Management.
 organization continuously acquires various businesses in
1. INTRODUCTION 
organization continuously acquires various businesses in
1. INTRODUCTION order to expand
organization their footacquires
continuously print; this primarily
various businessesleads to in
1. INTRODUCTION order to expand
organization such their footacquires
continuously print; this primarily
various businessesleads to in
Some of the South 1. African organizations have various challenges
INTRODUCTION order to expand as: uncertainties
their foot print; thatprimarily
this might lead
leads the
to
Some of the South African organizations have various challenges order
supporting to such their
expand
businesses
as: uncertainties
to foot print;
increase
thatprimarily
this
their
might lead
inventory and leads
this
the
to
has
systemsof intheplace
Some Southfor Material
African Requirement
organizations havePlanning,
various challenges
supporting such as: touncertainties
businesses increase their that mightandlead
inventory the
this has
systemsof intheplace
Some SouthforAfrican Material Requirement
organizations havelotPlanning,
various challenges
caused such inas:
difficulty uncertainties
forecasting accuratelythat might oflead
because the the
high
replenishment strategies and various types of sizing supporting businesses to increase their inventory and this has
systems in place
replenishment
systems in strategies
place
for Material
for and various
Material
Requirement
types of lot
Requirement sizing caused
Planning,
Planning, supporting
speed
difficulty
of change
in forecasting
businessesin to
the increaseaccurately
marketplacetheir becauseand
inventory
and ability
of the
to thishigh
has
predict
techniques to control inventory as well types
as satisfy customer
sizing speedcaused of difficulty
changein forecasting accurately andbecause
ability of tothe high
replenishment
techniques to control
replenishment
needs. But to they
strategies
strategies
are still
and various
inventory as well types
and various
experiencing
as satisfy
problem
of lot customer
ofof lot sizing caused
excessive demand. difficulty
Inventory ininforecasting
the marketplace
isthe accurately
the marketplace
lifeblood thebecause
of and supply of
chain,
predict
the high
it is
techniques
needs. But they control
are inventory
still as
experiencing well as
problem satisfy
of customer
excessive speed
demand. of change
Inventory in is the lifeblood of the ability
supply to
chain, predict
it is
speed
what of
flows change
from in
node the
to marketplace
node and at and
each ability
node it is to predict
critical
techniques
inventory. to control
As we all inventory
know systemas well
needs as people
satisfy to customer
feed it demand.
what flows Inventory
from node is the
to lifeblood
node and atof the
each supply
node it ischain,
criticalit to
is
needs.
needs.
with
But
inventory.
But As
accurate
they
they
are
information
still
weareallstillknow experiencing
system needs
experiencing
to be
problem
problem
efficient.
people
Therefore
of
of to
excessive
feed it demand.
excessive
accurate figure outInventory
that is the lifeblood
perfect balance of the supply
supply and chain, it to
demand is
inventory.
with accurateAs we all
information know to system
be needs
efficient. people
Therefore to feed
accurate it what
figure flows
out from
that node
perfect to node and
balance at each
of node
supply it is
and critical
demand to
inventory. records
inventory As we all andknow lead system
times needs
are highly people to feedfor
important what flows
it (Napolitano, from
2013).node to node and at each node it is critical to
with accurate
inventory
with accurate
information
records and leadto
information
be efficient.
times
tocomponent are highly
be efficient.
Therefore
important
Therefore
accurate
accuratefor figure
(Napolitano,out that
figure out that 2013). perfect balance of supply and demand
perfect balance of supply and demand
stocking required
inventory required
records and type of or raw material to (Napolitano, 2013).
stocking
inventory records type lead
and lead
times are highly
of component
times are or rawimportant
highly material for
important to (Napolitano, 2013).
for
produce
stocking the finished
required type goods without overstocking
of component or raw material wrong to 1.1 Aim of the study
produce
stocking the finished
required type goodsofThe without overstocking
component or rawof material wrong to 1.1 Aim of the study
quantities or
produce theor finished material. development Inventory
quantities
produce the Framework material.goods
finished goods The without
without
overstocking
development
overstockingof Inventorywrong 1.1 Aim of the study
Management material. (IMF) study was initiated atwrong
ABC 1.1 Aim
mainoffocus
the study
quantities or Framework
Management
quantities ordivision material.
The development
(IMF)
The study was
development
of Inventory
initiated at
of Inventory ABC The of the study was on inventory in the form of
The main focus of the study was on inventory in the form of
Engineering of a(IMF)bigger company based inat South raw material and components.
Management
Engineering division
Management
Framework
Framework of a(IMF) study
biggerstudy was
company
was
initiated
based inat South
initiated
ABC
ABC The raw main
material focusandof the study wasThe
components. on aim
The
of theinstudy
inventory
aim the form
of theinstudy
was of
was of
to
to
African due to
Engineering the problem
division of a of excessive
bigger company inventory
based as
in shown
South The
developmain focus
an IMF of the
that study
will was
manageon inventory
and reduce the form
excessive
African due to
Engineering the problem
division of excessive
of a bigger company inventory
based as in shown
South raw developmaterialan IMFand components.
that will manage The aim andof the study
reduce was to
excessive
on figure 1. the problem of excessive inventory as shown inventory. raw material and components. The aim of the study was to
African
on figuredue
African 1. to
due to the problem of excessive inventory as shown inventory. develop an To IMFachieve
To that will
achieve
the manage
aim, the
the manage
aim, the andfollowing
reduce excessive
following
specific
specific
develop
objectives an IMF that will and reduce excessive
on
The figure
ABC1. Engineering comprises a group of product focused objectives inventory. were To formulated:
were achieve the aim, the following specific
on
Thefigure
ABC1.Engineering comprises a group of product focused inventory. To formulated:
achieve the aim, the following specific
businesses in manufacturing, maintenance and fabrication of objectives
1.To investigate were formulated:
the factors that lead to excessive inventory
The ABC Engineering
businesses in manufacturing, comprises a group of
maintenance and product focused
fabrication of objectives were formulated:
1.To investigate the factors that lead to excessive inventory
The ABC
various Engineering
product groups.comprises
ABC maintenance a group of
Engineering product focused
operational model by collecting Stock
businesses
various in manufacturing,
product groups. ABC Engineering and fabrication
operational model of 1.To
of by investigate
collecting Stock theProjection
factors thatReports
lead toforexcessive
the past fiscal Year
inventory
businesses
is complex,
various
is
inasmanufacturing,
product
complex, as
the organization
groups.
the
maintenance
ABC Engineering
organization internal
and fabrication
internal structure
operational
structure
comprises
model 1.To
comprises (FY) investigate
of the Stock theProjection
Organization factorsand Reports
that lead to
analyze
forexcessive
the past fiscal
totheidentify
Year
inventory
the Year
root
various product groups. ABC Engineering operational model by
(FY) collecting
of the Projection
Organization andReports
analyze forto past
identify fiscal
the root
eight
is businesses.
complex, as the The Four Businesses
organization internal are thecomprises
structure primary by causecollecting
of the Stock
problem. Projection Reports for the past fiscal Year
eight
is businesses.
complex, as the The Four Businesses
organization internal are thecomprises
structure primary (FY) cause of
of the problem.
the Organization and analyze to identify the root
customer-facing
eight businesses. entities The Four and Businesses
revenue generators,
are the primary their (FY) of the Organization and analyze to identify the root
customer-facing
eight businesses. entities
The isFour and Businesses
revenue generators,
are the.While their cause
primary 2. To of the problem.
propose establishment of measures that can be put in
manufacturing
customer-facing strategy
entities make-to-order
and revenue (MTO)
generators, the cause
their 2. To of the problem.
propose establishment of measures that can be put in
manufacturing
customer-facing strategy
entities is make-to-order
and revenue (MTO)
generators,.While the
theira place
other remaining
manufacturing four
strategy operational
isoperational
make-to-order businesses
(MTO) provideprovide
.While thea place 2. To to to ensure
propose that inventory of
establishment is effectively
measures that managed.
can be put in
other remaining
manufacturing four
strategy isorganization
make-to-order businesses
(MTO) 2. To ensure
.While the place to ensure establishment
propose that inventory of is effectively
measures that managed.
can be put in
supportive
other role
remaining withinfour the operational to the
businesses customer-facing
provide a that inventory is effectively managed.
supportive
other remainingrole withinfour the organization
operationalstrategy to the
businesses customer-facing
provide a The
place consideration
to ensure that of these
inventory objectives
is effectivelyprovided
managed. the Author
entities androle their manufacturing to theis make-to-stock
supportive
entities
supportive androle within
their
within
the organization
manufacturing
the organization strategy
to the make-to-stock The
iscustomer-facing
customer-facing with
consideration of these objectives provided the Author
an understanding
The consideration of
of these the current status and development
(MTS). ABCtheir
entities and Engineering
manufacturing operational
strategymodel is complex with
is make-to-stock
is complex The an understanding of theobjectives
current status provided the Author
and development
(MTS).
because
ABCtheir
entities and
the
Engineering
manufacturing
organization MTO
operational
and strategy
MTS
model
is always
are make-to-stock
having of
with anconsideration
an IMF. Figure
understanding
of these
1 the
of
objectives
below
currentshows provided
statusABCand
the Author
Engineering
development
(MTS). the
because ABC Engineering
organization MTO operational
and MTS model
are is complex
always having of
with anan IMF. Figure
understanding 1
of below
the currentshowsstatusABCand Engineering
development
(MTS). ABC
different demand Engineering
figures and operational
is using modelcentre
the profit is complex
model, inventory
of an IMF. cost from
Figure FY1(01below
April 2010
showsto 30
ABC March 2014).
Engineering
because
different the
demandorganization
figures and MTO and MTS
is using are always
the profit having inventory
centre model, of an IMF. cost from
Figure FY1(01below
April 2010
showsto 30 ABC March 2014).
Engineering
because
where each the organization
profitfigures
centre and MTO
is given and MTS
a certain are always
yearly having
budget or inventory cost from FY (01 April 2010 to 30 March 2014).
different
where demand
each profitfigures
centre and is
is given using the
a certainprofit centre
yearly model,
budget or inventory cost from FY (01 April 2010 to 30 March 2014).
different
sales demand
target to meet and most isofusing
these the profit
budget centre
or sales model,
target
where each to
sales target profit
meetcentre
and most is given a certain
of these budget yearly budget
or sales or
target
where
for each profit
supporting centre
businesses isare
given aaligned
certain
notthese toyearly
the budget
businesses or
sales
for target to meet and most of budget or sales target
salessupporting
that target
are
businesses
to meet
customer-facing and entities
mostare of notthese
and
aligned
budget
revenue
to the businesses
or sales
generators. target
The
for
that supporting businessesentities
are customer-facing are not andaligned
revenue to generators.
the businesses The
for supporting businesses are not aligned to the businesses
that are customer-facing entities and revenue generators. The
that are customer-facing
Copyright © 2015 IFAC entities and revenue generators. The 281
Copyright
2405-8963 ©© 2015,
2015 IFAC 281Hosting by Elsevier Ltd. All rights reserved.
IFAC (International Federation of Automatic Control)
Copyright
Peer review©under
2015 responsibility
IFAC 281Control.
of International Federation of Automatic
Copyright © 2015 IFAC 281
10.1016/j.ifacol.2015.06.091
INCOM 2015
M.G. Matsebatlela et al. / IFAC-PapersOnLine 48-3 (2015) 260–265 261
May 11-13, 2015. Ottawa, Canada
Fig. 1. ABC Engineering inventory cost from FY (01 April
2010 to 30 March 2014).
2. METHODOLOGY
The study focused on inventory in the form of raw material.
The criteria of data selection emerged from literature
revealed. Thus to be able to analyse data, historical data was
retrieved from the organization Enterprise Resources
Planning (ERP) system. Quantitative content analysis was
used for two purposes namely: selection of reports to be
sampled and for analysing the sample. The analysed sample
data revealed the factors that lead to excessive inventory.
2.1 Population and sampling
Population is consisted of all Supply Chain reports retrieved
from the ERP system at the organization headquarters for one
FY, April 2012 to March 2013, focusing on stock projection
reports. Non-probability sampling through purposive
sampling was used to select a total of 624 reports from a total
of 2 912 stock projection reports. Mitchell (2005) described
non-probability sampling as the probability that any element
(unit of analysis) will be included in a sample. In some
instances, certain members may have no chance of being
included in such a sample (Mitchell, 2005). Purposive
sampling is a non-probability sampling technique in which
the researcher decides to involve a small subset of a larger
population in data collection based upon a variety of criteria
for the purposes of the study (Babbie & Mouton, 2001). In
this study purposive sampling was used to select a sample on
the basis of the authors own knowledge of the population and
the research aims. Content analysis which will be explained
in detail in section 2.2 was used to collect data from 624
sampled reports.
According to Leedy and Ormrod (2013) content analysis
designs are not necessarily stand-alone designs; for example,
a systematic content analysis might be an integral part of data
analysis in a phenomenological study. After the content
analysis the researcher gathered the data, entered it into
computers and analysed it with statistics in the same way that
an experimenter or survey researcher would (Neuman, 2000).
Historical data was collected from the ERP system. Stock
projections reports are drawn and collated on a weekly basis
from an ERP system for each FY from April to March. The
criteria for selecting the 624 reports were primarily based on
282
the themes that emerged from literature. These themes
consisted (i) inventory cost vs sales and inventory
classifications, (ii) Supply and demand, and (iii) operation
model of ABE Engineering.
The tools used to analyse data were Microsoft excel and
sigma excel (sigmaxl). Sigmaxl is a data analysis platform on
the six sigma software. By using excel the researcher was
able to sort data quickly and in various configurations. Excel
helped with formulas of formatting the data and representing
it on suitable graphs and charts. Although, excel has a variety
of useful statistical tools, it cannot assist with some of the
more complex statistical analyses that needed to be
performed in this study. To fill this void, Sigmaxl was used
to select the FY with the most data variation for further
investigation and data analysis to arrive at sound conclusions.
Figure 2 depicts the steps followed in analysing data
Fig. 2. Data analysis method followed
3. DATA ANALYSIS
For all four graphs shown on figure 1, the trend from week
(wk) 1 shows an increase of inventory because it is the start
of the new FY. Only in 2010 – 2011 there was a decline from
wk 10 until between wk 33 and wk 34 in the middle of the
month. These are the last three month of closing the year-end
sales. More stock was consumed to meet year-end sales for
all four FYs. The graphs also show a similar trend each year,
from wk 1 inventory starts increasing and towards the end of
a year there is a decline. Except for FY (2010 - 2011), which
shows there were two declines in the middle of the year and
towards the end of the FY. The annual stock targets were not
met after close of annual sales for FY (2012-2013) and FY
(2011-2012) which is a major problem. Statistical tools were
used to measure the variation of data in a graph and select the
year with the most variation for further investigation. For
further investigation data analysis focused on one FY and the
reports analysed include; Inventory classification and
inventory cost vs sales, supply vs demand (orders exceeding
demand) and lastly the review of ABC Engineering SC
reporting structure.
3.1 Box plot and standard deviation per FY
A box plot on figure 3 shows the range of data falling
between the 25th (minimum) and 75th (maximum)
INCOM 2015
262 M.G. Matsebatlela et al. / IFAC-PapersOnLine 48-3 (2015) 260–265
May 11-13, 2015. Ottawa, Canada

percentiles as well as one outlier. The outlier represents data
points that are faulty, fall more than a specified distance of
minimum and maximum percentile. The horizontal solid line
inside the box is showing the median, and the dotted lines
represent the mean also known as the average. The whiskers
plot and box are drawn vertically. Figure 3 shows four data
sets that are different in terms of the median and standard
deviation (stdev) shown in detail on table 1. The FY (2010-
2011) dispersion is the least of all with one outliner followed
by FY (2011-20120), these two FY are showing a much
smaller box when compared with the other two FY (2012-
2013) and FY (2013-2014).The first two FY (2010-2011), FY
(2011-2012) and last FY (2013-2014) are negatively skewed
as the distance from the median to the minimum percentile is
greater than the distance from the median to the maximum
percentile. The FY (2012-2013) is positively skewed as the
distance from the median to the maximum percentile is
greater than the distance from the median to the minimum
percentile. Small stdev means that the data points on a box
plot are close to the mean of the data set on average and large
stdev means the data point on box plot are farther away from
the mean on average. FY (2012-2013) has the largest stdev
when compared to the other three FY on table 1, which
means there is more variation. A focus should be more on FY
(2012-2013) to further investigate the cause of high variation.
lead to shortages of material, disrupted schedules, late
deliveries, lost sales, low productivity and excess inventory
of wrong things. From September sales started going up and
down because the right material was ordered to meet quarter
target and year-end sales. October 2012 inventory costs
continue increasing as more correct stock was received and
between January 2012 and March 2012 inventory started
declining because ABC was consuming more stock to meet
year-end sales. The annual stock target of R 1.6 billion was
not met after close of annual sales which is a major concern.
If the value of inventories seems indisputable, this is the
dilemma of IM (Pycraft et al., 2000). A primary goal of IM is
to achieve an optimum balance between inventory carrying
costs and customer service (Lambert et al., 1998). Due to the
rate of increase in procuring raw materials to meet year-end
sales, there is less cash inflow and high cash outflow.
The inventory on figure 4 and figure 5 are classified as dead
stock or obsolete and active stock as material that is issued
out or used almost on a daily basis also this can be referred to
as frequently used material. ABC Engineering classifies
items stored in inventory into different groups based on usage
and value for inventory control. Arnold et al. and Pycraft
described the groupings namely; Group A are strategic items
that account for about 80% of the total value in the
organization, Group B account for about 10% or 15% of
total value spend and Group C are low value items that
account 5% value spend. The 37% on figure 5 is the result of
inaccurate forecasting and lot sizing inventory. The supply
chain suffer from excessive inventory and this might be a
result of lot sizing inventory as the organization is currently
dealing with multiple suppliers and is experiencing
uncertainties such as long lead times and unknown demand.

Fig. 3. Box plot of inventory costs per FY

Table 1. Standard deviation per FY (Rand billion -Rb)

Descriptive Statistics Count Mean Stdev Range

2010-2011 48 1.41 0.04 0.22 Fig. 4. Inventory cost vs sales

2011-2012 50 1.60 0.11 0.43

2012-2013 46 1.99 0.27 0.75

2013 -2014 48 2.21 0.24 0.85

3.2 Inventory cost vs sales

More stock was consumed in March to meet year-end sales

and reach the stock target of the previous year. The decrease
continued in April and May, as the stock continued to be
consumed, the sales increased from April to June. From June
there was a decrease in sale while there was an increase in
inventory. This was caused by wrong material being ordered.
Bill of Material in MRP leads to ordering wrong material.
(Arnold et. al., 2008) revealed that indeed inaccurate records

283
INCOM 2015
M.G. Matsebatlela et al. / IFAC-PapersOnLine 48-3 (2015) 260–265 263
May 11-13, 2015. Ottawa, Canada
Fig. 5. Inventory classifications
3.3 Mismatch of supply and demand (orders exceeding
demand)
Figure 6 shows the demand is less than the supply from wk
13 to wk 52, this simply means there was a mismatch of
supply and demand for FY (2012-2013). Purchase orders
exceeding demand are a result of lot sizing inventory. Lot
sizing inventory is created when item purchased or
manufactured in quantities is greater than needed (Arnold et
al., 2008).When supply is higher than demand, an
organization bears the economic consequences of excess
inventory (Hendricks and Singhal, 2009). ABC Engineering
is procuring raw material that exceeds customer demand. The
occurrence of demand uncertainties has mainly caused
difficulty in forecasting accurately because of the high speed
of change in the marketplace meaning historical data is no
longer a good predictor of future demand at ABC. More
inventories were stored for safety of demand uncertainties,
which proves poor forecasting ability. By linking supply
chain objectives to company strategy, decisions can be made
between competing demands on the supply chain (Lummus,
1999).
Fig. 6. Mismatch of supply and demand (orders exceeding
demand)
3.4 Operation model of ABC Engineering
The ABC Engineering is using the profit centre model which
refers to the business units, where each business unit is given
a certain FY budget or sales target to meet and most of this
budget are not aligned. Each business unit will have their
own forecast to meet the target. The concern is that MTO and
MTS are always having different demand figures. Although
the MTS supposed to get demand from MTO, that is not the
case. Forecast is provided to MTS but the change it to align
to their business unit to manufacturing cost, at times yearly
demand is compressed to shorter period to level the
production cost. Once the MTO demand changes, the MTS
Material Requirement Planning (MRP) is messed up and by
that time the supporting business units may have committed
to a material plan and purchased orders issued to the
suppliers. All demand plans per business unit are not
synchronised, therefore the MRP of supporting business is
independent to the business units that are the customer-facing
entities and revenue generators. These bring challenges to
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identify dead stock or slow moving stock in other planning
businesses. Improvements in supply chain performance are
driven by externally-based targets rather than by internal
department objectives (Lummus, 1999). This model indicates
a lack of collaboration among supply chain. This shows lack
of coordination within the organization. Lack of coordination
increases inventory cost in the supply chain.
5. DISCUSSION OF RESULTS
Data analysis results revealed ABC Engineering is
experiencing excessive inventory due to lack of guidelines in
place for inventory control. There are high demand
uncertainties which increased inventory at ABC Engineering.
The demand is unstable as shown in figure 6. Therefore more
stock was ordered for the safety of demand uncertainties and
historical data is no longer a good predictor of future demand,
meaning data used for forecasting was distorted. ABC
Engineering does not use S&OP known as integrated
business management process and for ABC Engineering
complex operation model, the organization needs an
integrated business management process that can assist with
the review of customer demand and forecast and the balance
of supply and demand on both strategic and item level.
Organizations that have an integrated business management
processes resolve conflicts of supply and demand between
the various supply chain departments. ABC Engineering is
procuring purchase orders that exceed customer demand.
This latter is mainly due to lack of coordination and
collaboration between the supply chains, lack of advanced
replenishment and inventory control. Lack of coordination
increases inventory cost in the supply chain. Two
manufacturing strategies, MTS and MTO results in excessive
inventory as the supporting business units and the business
units that are customer-facing entities are always having
different demand figures. According to Kaminsky and Kaya
(2009) in a supply chain, using a push strategy for some
products or components, and a pull strategy for others, might
be much more effective than using either system exclusively.
Because of this, firms are beginning to employ a hybrid
approach, a “push–pull” strategy, or combined MTO–MTS
system, holding inventory of some components, and
producing others to order (Kaminsky & Kaya, 2009). ABC
Engineering is already using the combination of the two
manufacturing strategies. The organization uses ABC
inventory control that provide valuable information that can
be used to determine how each part should be monitored and
managed from the perspectives of procurement, warehousing,
and inventory management and MRP that determines how
much to order at one time and when to place an order. These
prove that indeed distorted MRP and Forecasting, demand
uncertainties, lot sizing, mismatch of supply and demand,
lack of collaboration, coordinated and integrated supply chain
result in excessive inventory.
4. INVENTORY MANAGEMENT FRAMEWORK
The objective of this section is to present the proposed IMF
that can be used for inventory control and replenishment. The
IMF in Figure 8 covers five sections namely; aggregate IM,
item level IM, S&OP process, Technology, replenishment
strategies for MTO and MTS, as well as inventory polices.
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The Inventory is not only managed at business (strategic or
aggregate) level but also at the item (operational) level
(Arnold et al., 2008). Most of the organizations in South
Africa focus on item IM which is not sufficient without the
management of aggregate IM. The IMF for ABC Engineering
will help manage inventory at aggregate and item level.
S&OP manages inventory at Aggregate level and MRP
manages inventory at item level. Both MRP and S&OP
balance Supply and demand which reduces excessive
inventory. The S&OP is an essential part of ERP and may be
the most important element of all (Wallace & Kremzar,
2001). A properly implemented Integrated Business Planning
(Advanced S&OP) process routinely reviews the current and
projected business performance starting with a review of
strategy, updated product portfolio changes, updated
customer demand, required supply resources, and resulting
financial effects. It helps the management team to understand
how the company achieved its current level of performance
but is primarily focused on future actions and anticipated
results. It is the right balance between supply and demand
plans to create a single achievable plan as showed in figure 8
which is about the production plan that delivers business
goals. Companies without S&OP have frequent
disconnections between the Business Plan and the Master
Schedule. That is why some companies frequently get
unpleasant “surprises” late in the fiscal year (Wallace &
Kremzar, 2001). According to Wallace & Kremzar (2001) an
immutable law of nature states that garbage in garbage out. It
is essential to build a solid foundation of highly accurate
numbers before demand management, master scheduling, and
the other planning and scheduling tools within ERP system
can be implemented successfully, accurate numbers before,
not during or after.
In order for IMF to be efficient, inventory data should be
accurate. The new technology used to manage inventory data
and do inventory analysis is a Radio frequency identification
(RFID). If there is inaccurate inventory records results in
shortages of material, disrupted schedules, late deliveries, lost
sales, low productivity and excess inventory of wrong things.
To manage accuracy of data, an RFID should be included in
the proposed IMF. Arnold et. al. (2008) described these
technology applications as similar to bar codes, but rather
than light they use reflected radio waves from a small device
or tag to receive their information. The RFID devices do not
require a line of sight between the label and the reader and
can accurately identify products that are within containers
otherwise hidden from view. This feature makes RFID suited
for use as a security device or under conditions where labels
are hard to read or access.
The purpose of the S&OP meeting is to balance the supply
and demand. This S&OP meeting should occur on a monthly
basis to review whether there are changes, or if the plan is
still working to achieve business goals. The output of a
meeting is the production plan which consists of inventory
levels and aggregate plan by product group. The production
plan is an input to the Master Production Scheduling (MPS),
which will be broken down into detailed plan per end items.
Then Rough-Cut Capacity Plan will validate the detailed plan
comparing it with the production plan. The end items and
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inventory per end items from the MPS are inputs to the MRP.
The MRP will balance the supply and demand of raw
materials and components, taking into consideration stock on
hand. Perpetual or periodic inventory policy will be
considered to decide which execution phase needs to be
followed.
MRP inputs come from Master Production Schedule (MPS).
MPS is an extremely important planning tool and forms the
basis for communication between the sales and
manufacturing departments (Arnold et al., 2008). Before the
MPS priority plan for manufacturing is determined, there
should be an S&OP planning meeting which is held on a
monthly basis by Management team from Finance,
Marketing, Production/Operation, Engineering and Supply
Chain to align the plans with the organization’s Strategic
Business Plan. The output of S&OP is the signed off
production plan. The signed off production plan should be the
one that is loaded into the ERP system for MRP. As
described by Arnold et al. (2008) MPS breaks down the
production plan into the requirements for individual end item,
in each family, date and quantity. Therefore the total of items
in MPS should not be different from the total of the signed
off production plan (Arnold et al., 2008). The end items are
inputs to MRP which are calculated automatically by the
computer in the ERP system. By following this process, there
will be a balance of supply and demand which will result in
zero excessive inventories. Inventory policies included in an
IMF are described in the following sections.
4.1 MTS inventory control (Push)
Vendor Management Inventory (VMI) has been described by
Irungu and Wanjau (2011) as an inventory and supply chain
management tool in which the supplier has taken the
responsibility for making decisions on the timing and
amounts of inventory replenishment. The VMI initiative has
the goal of accomplishing deeper integration and
collaboration between the members of the supply chain in
order to cope with the ever decreasing time windows for
product and service fulfilment, and the requirements for the
improvement of operational efficiency. Benefits cited as a
result of adoption of VMI systems include lowered inventory
levels; faster inventory turns, reduced ordering and
administrative costs, better cash flow management, zero
obsolescence, increased sales, and reduced out-of-stock costs
among others (Angulo et al. 2004 in Irungu & Wanjau,
2011). ABC engineering should continue using the ROP and
using ABC inventory control.
4.2 MTO inventory control (Pull)
Consignment stock in this study should be used for MTO as
the customer demand is known and it will reduce the longer
lead times. With consignment stock, the supplier keeps and
manages the stock at the customer’s premises, only when it is
consumed by the customer will it be owned by the customer.
With these inventory policies, inventory control, WMS and
an integrated business plan known as S&OP implemented in
an organization as shown on figure 6, there will be a balanced
supply and demand which results in zero excessive inventory
cost.
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Inputs
Department:
Inputs to S&OP Meeting · Marketing
· Business Plan
· Marketing Plan
· Manufacturing (Business Units)
· Procurement
· Financial Plan · Finance
· Capacity Plan · Human Resource
· Product Development
Goods
with tag Inventory Control
·
device
·
Consignment
Vendor Management
Inventory
· Lot for lot
e
Tag
Devic
Wireless waves
Central Database
WMS: RFID
Fig. 8. Inventory Management framework
6. CONCLUSIONS
These factors that lead to excessive inventory are a
consequence of the fact that there is no integrated business
management process that manages inventory and balances the
supply and demand. It is imperative to reduce excess
inventory at ABC by developing an IMF that will manage
excess inventory. Indeed ABC Engineering is experiencing
excessive inventory due to lack of guidelines in place for
inventory control, accurate inventory records and
replenishment. This section presents the research results that
briefly support the aim of the research and answer the
research questions indicated in this study as follows:
The aim of the research was to develop an IMF that will
manage and improve excessive inventory at ABC
Engineering. The research questions that guided this study
are listed below:
1. What are the factors that lead to excessive inventory at
ABC Engineering?
2. What measures can be put in place to ensure that inventory
is effectively managed?
The IMF focused on Aggregate matters including S&OP and
item IM covered the ERP process found in a typical ES
taking into consideration the key technology of WMS which
is RFID. Without accuracy of data from DeM, MPS and
MRP will be affected as inventory level/stock on hand is
considered for demand planning and material planning.
Accuracy of data is highly critical as it might result in
shortages or excessive inventory. Below are the factors that
emerged in regard to excessive inventory from the data
analysis; MRP and forecasting are direct causes of
inventories that are out of balance with a business's needs,
long lead time increases inventory, inaccuracy of data leads
to shortages and excessive inventory, the imbalance between
supply and demand, costs companies billions of rands in out
of stock, excess inventory and excessive discounting, Lack of
coordination increase inventory cost in the supply chain,
demand uncertainties that caused difficulty in forecasting
accurately and Lack of collaboration among supply chain
departments.
Aggregate IM: ERP Processes not found in a typical ES
These factors that lead to excessive inventory are a
S&OP Process Outputs consequence of the fact that there is no integrated business
management process that manages inventory and balances the
Production plan:
· Aggregate plan by product
group
supply and demand. The integrated business management
· Aggregate Inventory Levels
process frequently aligns the operational plan with the
business plan, marketing plan and capacity plan. These
measures are included in the IMF namely; Inventory control/
DeM
System Process: MTO
MPS RCCP MTS
polices incorporated into the ES item IMF and WMS for
MRP RCP
ROP accurate inventory records. MTO replenishment will be lot
Purchasing PAC
for lot, consignment and vendor inventory management.
MTS demand plans per business unit will be synchronised to
Item IM: ERP process found in a typical ES:
the MTO customer demand. Lot for lot is described by
Arnold et al., (2008) as exactly what is needed. Therefore the
MRP of supporting business is depended to the business units
that are the customer-facing entities and revenue generators
therefore VMI and ROP will be used.
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