Principles of Inventory and Materials Management

Final report

Group members
Baqir Sherazi SP20-BBA-174
Hashim Shami SP20-BBA-110
Subhan Najib SP20-BBA-172
Aaimen Masood SP20-BBA-001
Abdullah Bin Omer SP20-BBA-009
Fatima Urooi Inam SP20-BBA-221

Submitted to: Moeen Yaqoob

Submission Date: 11 January,2022

Department of Management Sciences

COMSTATS University Islamabad
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Contents
Executive Summary: ................................................................................................................................... 3
Introduction ................................................................................................................................................. 3
Basic working: ......................................................................................................................................... 3
Literature review: ....................................................................................................................................... 3
Supply chain: ........................................................................................................................................... 3
Different Inventory Management Models: ........................................................................................... 4
Economic Order Quantity: ................................................................................................................... 4
Lot for Lot: ............................................................................................................................................ 4
ABC Method of Inventory Control and Warehousing: ................................................................... 4
Significance of the ABC method: ....................................................................................................... 5
Aqua Green Warehouse and its practices: ............................................................................................... 5
Warehousing details: .............................................................................................................................. 6
Configuration: ..................................................................................................................................... 6
Lead Time:........................................................................................................................................... 6
Warehouse gate and space for other products: ................................................................................ 6
Techniques Used: ................................................................................................................................ 6
Aisle Configuration:............................................................................................................................ 6
Reorder Point .............................................................................................................................................. 7
Safety stock:................................................................................................................................................. 7
ABC model: ................................................................................................................................................. 7
Final Interpretation and Recommendation .............................................................................................. 8
Conclusion ................................................................................................................................................... 9

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Executive Summary:
This report discusses the warehousing and production methodology used by a water purifying
company named AQUA GREEN. This report stresses management techniques used by the
company to meet the demand of their customers in major cities including Islamabad, Lahore,
Peshawar, and Faisalabad. Along with the inventory management models discussed in the report,
some recommendations and suggestions are also mentioned that can maximize the profits for the
company. Data gathered and methodologies used include, visiting the warehouse, and interviewing
the CEO and the plant operations manager. This data was also gathered by our own analysis of the
plant and warehouse tour. The study breaks down various aspects of warehousing inventory
management implemented by the company. The purpose of this report is to educate its readers, on
how inventories are managed by the companies operating in Pakistan, and what factors, if
implemented properly can be a major factor in the growth of the company.

Introduction
Aqua green is a water purifying company located at Naval Anchorage Islamabad. Water is
produced by distillation, deionization, reverse osmosis, and other suitable processes that meet the
definition of “purified water”. It is treated with an imported purification plant, with 6 jumbo stages
and an ultraviolet system that guarantees complete safety from bacteria. The company produces
bottled water in categories of two basic categories; disposal water (500ml, 1.5-liter, 6-liter, and
12-liter) and bulk water (19-liter). Other services include the installation of water dispensers and
reserve osmosis devices in homes and offices. The company is privately owned with its land
purchased on lease.
Basic working:
Aqua green has an automatic plant system in which we manufacture 500-ml and 1.5-liter bottles.
Pre-form of plastic is run through a 2-cavity and 4-cavity in order to make a bottle. Then air is
blown into the bottles through air compressors. Meanwhile, water is processed through filtration
and minerals are added. A setup is created where the filling of bottles and placement of caps on
the top of bottles takes place. Labor is also required in this setup. Labels are given to the bottles
manually. At last, the bottles are packed in the form of pets by wrapping plastic rolls on them.
19-liter bottles are just washed and refilled.
Literature review:

Supply chain:

A supply chain is a network of people and businesses who are involved in the process of
generating a product and delivering it to the consumer. The production of the raw materials
marks the beginning of the chain, and the delivery of the finished product to the consumer
marks its conclusion.

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Key supply chain processes:

• Forecasting
• Procurement
• Inbound Logistics
• Production
• Inventory
• Warehousing
• Outbound logistics
• Distribution
• Reverse logistics

Different Inventory Management Models:

Economic Order Quantity:

For the fixed order size inventory models, the economic order quantity (EOQ) model is most
well-known. The basic EOQ model is a formula for determining the optimal order size that
minimizes the sum of carrying costs and ordering costs. The model is derived under a set of
restrictive assumptions as follows:

• Demand is known with certainty and is constant over time

• No shortages are allowed
• Lead time of orders is constant.
• The order quantity is received all at once.

Lot for Lot:

A lot size method in which the suggested quantity is equal to the net requirement for a given day,
and is not rounded up to a minimum or multiple. A lot-for-lot technique help to generate a
greater volume of orders than a fixed lot size system. In lot for lot technique, the warehouse is in
an expensive area so we have to minimize the holding cost. Hence, the production cycle meets
the daily demand so that less inventory should be held. In the scenario, the cost of production per
individual unit also increases.

ABC Method of Inventory Control and Warehousing:

The ABC method of inventory control makes use of a system that regulates inventory and is
implemented for the management of supplies and distribution throughout the entire process.
Selective inventory control, or SIC, is another name for this method. The ABC analysis is a
method that divides an inventory into three categories, which are denoted by the letters A, B, and
C in descending order of sales volume in currency (rupees). The items in category A have the
highest sales volume, whereas the items in category B have a value that is lower than that of
category A, and the products in category C have the least value. Controlling and managing one's
inventory is an essential component of every successful firm. They contribute to the company's
ability to maintain cost control. The ABC analysis is beneficial to the company's inventory

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management since it enables management to concentrate on the products with the highest value
(the A-items) rather than the numerous items with the lowest value (the C-items).

Significance of the ABC method:

The ABC analysis is widely used in supply chain management and stock checking and inventory.
It is most important for companies that seek to bring down their working capital and carrying
costs. This is done by analyzing the inventory that is in excess stock and those that are obsolete
by making way for items that are readily sold. This helps avoid keeping the working capital
available for use rather than keeping it tied up in unhealthy inventory.

Aqua Green Warehouse and its practices:

Aqua green warehouse is located in a very prime location near Khurd Naval Anchorage, Islamabad
Capital. It is a privately owned 50-55 canal warehouse. The land for production and warehousing
is on a lease contract. The warehouse of Aqua Green has a proper setup including the production
area, a production store where products are kept and the space is according to the demand of the
product, have proper inventory management setup, and an office where meetings are held.
Products
In total there are 5 products of Aqua Green, they are as follows:
• 0.5 Liter Bottle
• 1.5 Liter bottle
• 6 Liter bottle
• 12 Liter bottle
• 19 Liter bottle
Working
The production of these products is done through proper machines where some of the work is done
through machines while manual work is also done when required. They have 3 to 4 permanent
employees in the warehouse. The warehouse we visited was not using any modern inventory
management techniques, though the machines were good and they do keep a regular check on them
if any fault occurs.
• They were following old and traditional and simple techniques.
• Inventory was not properly managed for their products.
• There were no trolleys or any carts to move the products from the warehouse to the point
where they load stacks for inventory, instead, they were doing it manually with the help of
workers.
• On the other hand, there was a pathway for transportation where the truck/vehicle arrives
and loaded or unload the stock.
• No equipment is allotted to the workers for their help to load or unload the stock.

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 • Warehouse is not following any sequence to store the products and still following the old
techniques.
Warehousing details:
Some of the details regarding the warehouse we visited are as follows:
Configuration:
It was a Dedicated warehouse. Dedicated warehouse means the products are arranged in a
systematic order which follows a proper sequence in a row. They have used a dedicated storage
for their products, they have an enough large space to store their products by category. The most
selling products comes near to the gate following the A Category. The most selling product is the
19 Liter Bottle which generates the most of the revenue for the company.
Lead Time:
Lead time is known as the time which is allotted by the company or any industry to deliver the
particular products being ordered or the time which supplier of a company takes to deliver the
products is lead time. If lead time is disturbed then inventory and delivery will be disturbed as well.
In the warehouse, the lot-for-lot technique is being practiced so the lead time is 1 day.
Warehouse gate and space for other products:
This warehouse has a single gate from where the truck arrives and leaves accordingly. The
transport facility is owned by the company itself by their labels. The products are loaded and
unloaded accordingly with different time frame. Warehouse have dedicated space for A Category
products and B & C products have a Shared space alongside. B & C category products are not put
in front of gate because they are not sold more, so they have a shared space at the end.
Techniques Used:
The warehouse gets order on daily basis. The transport facility is owned by them so they don’t
have to rent the vehicles to deliver their products. They hold a specific time frame which is
followed by the company so they deliver products accordingly. They have their warehouse in a
very prime location in Islamabad. They also deliver their products in different regions and cities
through distributors as their business is expanding rapidly.
Aisle Configuration:
For a warehouse, more companies want to maximize existing space for their inventory. Getting
more pallets or cartons from the door in the same amount of space they have. The warehouse we
visited has no proper aisle configuration. Neither U-shaped nor V-shaped, not even a straight line,
the pets are stacked as soon as they come out of the production center and loaded out for delivery.
Inventory Models:
Inventory has two types of characteristics:
• Lead Time &
• Demand

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Reorder Point
ROP stands for Re-order Point. A point where we place another or a new order is being placed. To
avoid stock-outs we use re-order points.
Formula Re-order point = d x l
Finished goods:
As the daily demand of the company is 3750 pets,
the average demand is calculated as 3750 x 365 = 1,368,750
ROP = 1,368,750 x 1 = 1,368,750
Raw material:
The warehouse we went to follows ROP, as when the stock is about to be finished so considering
their lead time, they place an order for whatever is required.

Safety stock:
Safety stock inventory is used to satisfy the demand for unpredictable demand fluctuations and to
reduce product shortages. The company does follow a safety stock when an unpredictable demand
occurs, so they do have a secured safety stock preserved to meet those demands without any
problem.
Formula Safety stock= [Maximum D x Maximum L. T] - [Average D x Average L. T]
Maximum demand is reached to 7500 pets
7500 x 365= 2,737,500
SS = [2,737,500 x 1] – [ 1,368,750 x 1] = 1,368,750

ABC model:
Categorization of your inventory on the basis of sales volume in rupees e.g., PKR, USD, etc. ABC
categorizes the products into three categories, ‘A’ the category that generates the most sales which
is the top priority, ‘B’ the category that generates the second highest sales and ‘C’ which generates
the lowest sales.
ABC model is used in both Inventory and Warehousing.
ABC in inventory: ABC in inventory controls the overstocking in a company and reduces/controls
the stock out as well.
ABC in warehousing: ABC in the warehouse means that labor will be used less, the lead time
will be less used and the same goes for cost will be less as well.
The ABC analysis of the Aqua Green products has been done by calculating the sales volume of
the five products. The following ABC analysis provides the sales volume of off-
season demand (winter)

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ABC Analysis
s. no product Units Price Sales Sorting Average Percentage
Sold (Rs) Volume sales
1. 0.5 liter 1160 250 290,000 326,160 0.349 34.9%
2. 1.5 liter 1359 240 326,160 312,000 0.334 33.4%
3. 6 liter 20 150 3000 290,000 0.3106 31.06%
4. 12 liter 10 250 2500 3000 0.0032 0.321%
5. 19 liter 1560 200 312,000 2500 0.0027 0.267%
T=933,660 99.98%

A Category = 1.5 L and 19 L

B Category = 0.5L
C Category = 6 L and 12 L

Lot for lot: Reasons of Applying

The production and warehouse area of the company is merged. As the soon the production
completes, pets are loaded in trucks and delivered to end users. The end users include shops, offices
and homes. The production meets the daily demand of the bottles. That’s why the holding cost for
the storage of bottles is less or nothing. In rare scenarios, the bottles (finished products) are stored
in the warehouse.
EOQ: Reasons of Ignoring
Economic order quantity is the fixed order quantity to optimize holding and set up cost, however,
this inventory model is not suitable for the warehouse. Hence, there is no fixed order quantity
because the production is taking place on daily demand basis. As the demand increases, production
cycle also increases. EOQ model is used for long term production cycle. However, the production
cycle of bottles is created for short-term period.

Final Interpretation and Recommendation

• Factory expansion
Factory expansion is very much needed to manage the warehouse inventory. The storage of raw
materials has very less capacity. Therefore, the raw materials including plastic, caps and labels are
transported weekly for the production of bottles. It increases the cost of inbound logistics.

• Parking area
Initially, the company had two vans in the business to carry out outbound logistics. The increased
revenue (in the past 3 years) and rising demand enabled the company to multiply the number of
vans. Currently, they own 32 vans which also requires a large area for the parking. The parking
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for the warehouse vans is congested. A proper parking area is very necessary for the warehouse
management system.
• Separation of storage from production
The storage room should not be mixed with the setup area. This will create a mess between the
two activities. Furthermore, labor activities are performed inefficiently. Therefore, storage of pets
should be shifted to another room.

Conclusion
The overall production and warehousing of the plant was efficient and good. The machinery was
in stable state and the tanks of waters are cleaned on regular basis. Aqua Green is rising their
demand rates with every year ahead. For Future, they require a big and managed plant to
generate greater revenue.

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