Impact of Proper Inventory Control System of Electric

Equipment in RUET: A Case Study

Khairun Nahar*, Khan Md. Ariful Haque**, Mahbub A Jannat*, Sonia
Akhter*, Umme Khatune Jannat* and Md. Mosharraf Hossain

This paper is directed to develop effective inventory control strategy for
electrical equipments in RUET. An efficient and effective inventory control
strategy is essential to obtain maximum output from any production or
service oriented organization. Store was stratified by using monetary value
of consumption (ABC analysis) and optimization was focused on material
with highest consumption amount (A category material). Using forecasted
demand which was derived by weighted moving average method and
optimizing between ordering, carrying and material cost economic order
quantity (EOQ) for joint replenishment was determined assuming demands,
lead times, costs and inventory carrying percentage for all items are given
and deterministic. Cost of traditional order quantity and EOQ was
compared, showing a significant amount of saving of BDT 234,384 in later
technique. This saving would release tied up capital which can be used as
resource in other operations.

Keywords: Inventory Control, ABC Analysis, Forecast, EOQ, Store Management.

1. Introduction

Inventory is essential to provide flexibility in operating a system. Hence inventory
control is the technique of maintaining the size of the inventory at some desired level
keeping in view the best economic interest of an organization. Many businesses
have too much of their limited resource, capital tied up in their major asset, inventory,
where some of them could be damaged, obsolete, or wrong purchased raw material/
finished goods or equipments. To control desired inventory level associated costs
such as set up costs, inventory carrying costs, material purchase costs, storage
costs, stock-out costs, backorder costs etc. can be minimized by efficient inventory
policies.

_______________
*Khairun Nahar, Email: shapla05.ipe@gmail.com

**Khan Md. Ariful Haque, North Carolina A & T State University, U.S.A. Email: arif99ipe@yahoo.com

*Mahbub A Jannat,

*Sonia Akhter,

*Umme Khatune Jannat,

*Dr. Md. Mosharraf Hossain, (Corresponding Author) Email: mosharraf80@yahoo.com

*Department of Industrial and Production Engineering (IPE), Rajshahi University of Engineering and
Technology, Rajshahi 6204, Bangladesh.




2

2. Literature Review

Various studies and researches had been conducted on last few decades among
them several significant works are discussed to summarize the goal or purpose of
this paper with clarity. Crostons (1972; with corrections by Rao, 1973) key insight
was that, when a system is being used for stock replenishment, or batch size
ordering, the replenishment will almost certainly be triggered by a demand which has
occurred in the most recent interval. The net effect of this phenomenon when
forecasting demand for a product that is required only intermittently is that the mean
demand is over-estimated and the variance is underestimated. Thus, an inventory
decision based upon application of the usual exponential smoothing formulae will
typically produce inappropriate stock levels. Croston proceeded to develop an
alternative approach based upon: an exponential smoothing scheme to update
expected order size, an exponential smoothing scheme to update the time gap to the
next order and an assumption that timing and order size are independent. Van Eijs et
al (1992) divided the joint replenishment strategy into two types. One is direct
grouping strategy and another is indirect grouping strategy. They mentioned direct
grouping strategy as the replenishment cycles of the groups are not an integer
multiple of a basic cycle, so the family replenishments are not equally spaced.
Indirect grouping strategies outperform direct grouping strategies for high major set-
up cost, because different groups are jointly replenished when using an indirect
grouping strategy. In direct grouping strategy the problem is to form (directly) a
predetermined number of groups in such a way that the total costs of the items in the
family are as low as possible. And indirect grouping Strategies is less flexible in
setting replenishment cycles, since these cycles are restricted to integer multiples of
the basic cycle time. Johnston and Boylan (1996a) and Syntetos and Boylan (2005)
notably made a number of extensions and improvements to the original Croston
method. Syntetos and Boylan (2001) had shown that the original Croston estimators
were biased; they then (Syntetos and Boylan, 2005) developed a new method, which
refers to as the bias-adjusted Croston method, and evaluated its performance in an
extensive empirical study. Out-of-sample comparisons indicate that the new method
provides superior point forecasts for faster intermittent items; that is, those with
relatively short mean times between orders. Helo (2004) mentioned that as a result
of the level of inventory in the entire supply chain is reduced and inventory turnover
increases, while inventory carrying cost and working capital cost decreases. But he
does not mentioned that maximum possible level of inventory could reduce the
possibility of stock out hence reduce the customer dissatisfaction and reduce the
possibility of loss of market of a product. Min and Yu (ICEB2004) said that
collaborative planning, forecasting and replenishment (CPFR) that was proven to be
successful in minimizing safety stocks, improving order fill rates, increasing sales,
and reducing customer response time. The broad subcategories of methodological
classification are descriptive (conceptual) and normative (analytical) studies. The
descriptive studies often illustrate the numerous managerial benefits of using CPFR
or evaluate the outcomes of CPFR. On the other hand, normative studies designed
quantitative models to assess the positive impact of CPFR (or information sharing
across the vertical supply chain) on various supply chain performances in
comparison to old legacy systems or less structured forecasting procedures. These
quantitative models can be broken down into mathematical models and simulation
experiments. The core mathematical models also include various forecasting
techniques which may be categorized as: time series and causal methods.
3

Shenstone and Hyndman (2005) showed that there is no possible model leading to
the Croston forecast function unless we allow a sample space for order size that can
take on negative as well as positive values. Rahman (2008) stated the models which
are extended to forecast demand from an incomplete dataset by the assumption that
the original dataset contains missing values. The forecast by a multiplicative
exponential smoothing model is used to compare all the forecast. The performances
are tested by several error measures such as relative errors, mean absolute
deviation, and tracking signals. A newsvendor inventory model with emergency
procurement options and a periodic review model are studied to determine the
procurement quantity and inventory costs. The inventory cost of each demand
forecast relative to the cost of actual demand is used as the basis to choose an
appropriate forecast for the dataset. The result reveals that forecasting models using
Bayesian ARIMA model and Bayesian probability models perform better. The
flexibility in the Bayesian approaches allows wider variability in the model
parameters helps to improve demand forecasts. This models are particularly useful
when the past demand information is incomplete. There are other important sources
of uncertainty which have received relatively little attention. Praharsi et al (2010)
developed an innovative heuristic that offer a different approach to solve a joint
replenishment problem. The innovative heuristic can be implemented for classical as
well as for the decentralized models. For the centralized policy, the innovative
heuristic does not work well because the policy does not use an integer multiple. For
stochastic demand such as Poisson or Negative Exponential distribution, the
innovative heuristic can be implemented in random variants which are generated by
Monte Carlo simulation.

3. Research Methodology

The approach of this paper work was a deductive approach. Qualitative method in
secondary data collection that provides a deeper understanding of the problem is
used. The paper covers both secondary and primary data. Here secondary and
primary data sources are used with an aim of strengthening the content of the entire
work. The authors used the secondary data first which provide more information to
make comparison, interpretation and understanding the primary data. Data is
analyzed with the traditional method of ABC analysis. Forecasting is done for the A
category items using the 3 period moving average method. Multiple items joint
replenishment policy is used to determine the Economic Order Quantity (EOQ) for
those items. Then comparison between EOQ and Actual Order Quantity is done.

4. Results

4.1 ABC Analysis
The ABC analysis is a business term used to define an inventory categorization
technique often used in materials management. It is also known as selective
inventory control. Example of ABC class is:
A Category: 20% of the items accounts for 70% of the annual consumption
value of the items.
B Category: 30% of the items accounts for 25% of the annual consumption
value of the items.
C Category: 50% of the items accounts for 5% of the annual consumption
value of the items.
4


There are 111 items of electric equipment in the store house from 2007-2008 to
2010-2011 fiscal years. According to annual demand/ consumption per unit of these
items that are categorized (A, B & C category), from which targeted A category is
found for further analysis, forecast demand and determine EOQ; and compared
those corresponding values for fiscal year 2010-2011.

Table 1: Category A Items from Total List

Component
Code
Price/units
BDT
Annual
Demand
Units/ Year
Annual
Consumption
BDT
Annual
Cumulative
Consumption
BDT
Annual
Cumulative
Consumption %
C102 320 673 215,360 215,360 23.50
C047 320 205 65,600 280,960 30.66
C100 500 121 60,500 341,460 37.26
C001 100 354 35,400 376,860 41.12
C046 280 126 35,280 412,140 44.97
C036 1,700 20 34,272 446,412 48.71
C005 130 248 32,240 478,652 52.23
C025 250 128 32,000 510,652 55.72
C037 2,000 15 29,280 539,932 58.92
C051 70 345 24,150 564,082 61.55
C019 250 84 21,000 585,082 63.85
C011 150 137 20,550 605,632 66.09
C008 350 58 20,300 625,932 68.30
C099 500 40 20,000 645,932 70.49


Figure 1: Pie Chart for Annual Consumption Percentage

4.2 Demand Forecast
Having a forecast of demand is essential for determining how much capacity or
supply will be needed to meet demand. Two aspects of forecasts are important. One
is the expected level of demand; the other is the degree of accuracy that can be
assigned to a forecast (i.e., the potential size of forecast error). The expected level of
demand can be a function of some structural variation, such as a trend or seasonal
variation. This paper utilized weighted moving average method for forecasting
demand. F
t
= w
t
(A
t
) + w
t-1
(A
t-1
) + . + w
t-n
(A
t-n
)
Where, w
t
= Weight for the period t, w
t-1
= Weight for period t-1, etc .
A
t
= Actual value in period t, A
t-1
= Actual value for period t-1, etc.
71%
20%
9%
Percentage of Annual Consumption
A Catergory B Catergory C Catergory
5

Table 2: Calculation of Demand Forecasting (A Category material)

Product Code
Demand(D
t
) Forecast(F
t
)
2007-2008 2008-2009 2009-2010 2010-2011
C 102 673 0 0 134.6
C 047 205 99 85 113.2
C 100 12.1 2.19 0 24.86 Pack
C 001 354 249 514 402.5
C 046 126 50 76 78.2
C 036 20.16 18.31 12.08 15.56 Coil
C 005 248 167 295 247.2
C 025 128 75 88 92.1
C 037 14.64 10.22 13.4 12.7 Coil
C 051 345 167 176 207.1
C 019 84 81 91 86.6
C 011 137 53 95 90.8
C 008 58 26 20 22.2
C 099 40 0.25 0 8.075 Pack
Weight is used as 0.5, 0.3 and 0.1 from latest to earlier

4.3 Economic Order Quantity (EOQ)

To calculate economic order quantity multiple item joint replenishment policy is used.
Joint replenishment can occur when a firm is either purchasing a number of items
from an outside vendor or purchasing internally. The fixed cost is analogous to the
major setup cost incurred in manufacturing several items with a common setup. By
grouping families of these items, valuable capacity that would otherwise be spent on
several unnecessary setups might be saved. Therefore it is necessary to decide how
much of each item should be purchased during any given setup (order). The
objective of this model is to minimize the total relevant costs for a group of items
jointly purchased which is done by determining economic order quantities for a group
of items minimizing the total cost of inventories and setups per period. This model
offers an equation to determine the economic order quantity which is given bellow
assuming demands, lead times, costs and inventory carrying percentage for all items
are given and deterministic.
The optimal value of all items in taka ordered during a cycle is

(1)
Where,
Q (Tk.) = Total value of all items ordered during a cycle.
Q
i
(Tk.) = Value of item i (in Tk.) ordered during a cycle.
A (Tk.) = Annual value of all items in the group ordered.
S = Fixed cost of placing an order for a group of items.
s
i
= Item dependent marginal cost of placing an order associated with an
additional item i.
I = Inventory carrying charge expressed as a decimal.
Q
i
= Quantity of item i ordered during a cycle.
S + s
i
= Total cost of placing an order
S = Salary of employees + Administrative expenses
s
i
= (Labor cost + Transportation cost) for individual item
S + s
i
= Tk.14600 [Data is taken from the organization]
6

A =Tk. 390,176.035 [From table 1]
I = 0.1 [Given]

= BDT 337,537.2605

Q
1
(Tk) =

= BDT 45,085.983; Q
1
=

= 116.441 units
Similarly, Order quantity of each item per cycle (in table 3) is calculated.

Table 3: Order Value in BDT & Quantity of A Class Items Ordered per Cycle

Code No.
of items
Annual
demand a
i

(BDT)

Unit cost C
i
(BDT)
Annual
demand
quantity
Order size
Q
i
(BDT) Size quantity Q
i
C102 52,117.12 387.2 135 45,085.98 116.441
C047 43,831.04 387.2 114 37,917.78 97.93
C100 15,040.43 605 25 13,011.21 21.51
C001 48,702.5 121 403 42,132.03 348.2
C046 26,494.16 339 79 22,919.82 67.61
C036 32,006.92 2057 16 27,688.86 13.46
C005 38,884.56 157.3 248 33,638.63 213.85
C025 27,860.29 302.5 93 24,101.65 79.67
C037 30,734 2420 13 26,587.67 10.99
C051 17,541.37 84.7 208 15,174.86 179.16
C019 26,196.5 302.5 87 22,662.32 74.92
C011 16,480.2 181.5 91 14,256.85 78.55
C008 9,401.7 423.5 23 8,133.31 19.2
C099 4,885.38 605 9 4,226.29 6.99
Total 39,0176.04

In the Table 3, the value of Unit cost C
i
is obtained by the following way:
C
i
= Current market price + [Current market price * (11% Taxes + 10% Profit)].
For example, item C102 costs, C
i
= 320 + [320*(11%+10%)] =387.2

Table 4: Comparison between EOQ and Actual Order Quantity of A Class Items

Component
code
Economic
Order
Quantity
(EOQ)
Stocked
quantity
from
previous
year, S
E=
(EOQ-S)
Actual
Order
quantity
at (2010-
2011), A
(A-E)
Unit
Price
in
BDT
Saved
amount
BDT
C 102 116.44 5 111.44 0 -111.44 387.2 -43150
C 047 97.93 96 1.93 24 22.07 387.2 8,545.50
C 100 21.51 11 10.51 101 90.49 605 54,746.45
C 001 348.2 971 -622.8 0 622.8 121 75,358.8
C 046 67.61 148 -80.39 0 80.39 338.8 27,236.13
C 036 13.46 24 (-10.54)0 0 0 2,057 0
C 005 213.85 25 188.85 330 141.15 157.3 22,202.9
C 025 79.67 129 (-49.33)0 80 80 302.5 24,200
C 037 10.99 36 (-25.01)0 0 0 2420 0
C 051 179.16 14 165.16 250 56 84.7 4,743.2
C 019 74.92 29 45.92 100 38 302.5 11,495
C 011 78.55 92 (-13.45)0 170 170 181.5 30,855
C 008 19.2 128 (-108.8)0 0 0 423.5 0
C 099 6.99 29 (-22.01)0 30 30 605 18,150
Total 234,383
7


The relationship between Actual Order Quantity and Economic Order Quantity of A
Class items (for the year 2010-2011) is shown in the following graph:



Figure 2: Representation of Actual Order Quantity and Forecasted Quantity.

From the above figure it is shown that actual order quantity is greater than calculated
forecasted demand of items and zero actual order quantity means no order has been
placed.

5. Conclusion

A systematic ordering strategy, multiple item joint replenishment policy, is used the
economic order quantity using forecasted demand for each product of Category A
items and comparing with the existing value it has been found that the saved amount
is BDT 234,383. It has also seen that the maximum amount of product availability
can be achieved with minimum total cost. Reducing the amount of inventory, capital
tied up can also be released and this capital can be used for further improvement of
the total inventory system.

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8

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