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Designing an information system for inventory management in a computer service company.

quite common. In such a service system, an efficient inventory management system is essential. The objective of this study is to design a computer-based information system for inventory management for the spare parts in the given service department. The advantages[1] of such a system would be to: q relate the stock quantities to demand, thus avoiding both overstocking and understocking; q avoid losses due to spoilage, pilferage, and obsolescence; q develop a model that will minimize total inventory cost while increasing the efficiency of order policy. Since the planned information system would be computerized it would also be possible to equip it with the ability to simulate. The resulting system could be applied to the actual situation in the department to provide better decision making for the inventory related problem domain. The service department of the company is responsible for both internal and external failures. If a new computer is found to be defective before it is handed over to the customer, it is repaired at the company premises. For the external failures, servicemen from this department carry out on-site repairs and take the spare parts with them. Alternatively, in some cases, the customers leave their computers or accessories to be repaired at the company. The spare parts are procured both locally and from overseas depending on the particular part and the vendor. The current study concentrates on the design of a management information system, incorporating a sound decision support system, for inventory management. The decision support system involves determining the optimal stock and ordering policies for each item. At present, the method of inventory management is carried out manually, based on experience, without using any formal approach. The use of computers in industry is growing rapidly, and as the scale of work is increasing constantly, it is difficult to keep pace with the growing number of items and their attributes without the aid of computers.

A Computerbased Inventory Management System for Spare Parts


Nagen N. Nagarur, Tai-san Hu and Nirmal K. Baid
Industrial Management & Data Systems, Vol. 94 No. 9, 1994, pp. 22-28 MCB University Press Limited, 0263-5577

Introduction
This article deals with management aspects of inventory of spare parts in a service branch of an office automation company. The company sells mainframe and personal computers and their accessories, and undertakes repairs and replacement of their components. Efficient servicing is essential as it affects the sales of the computers directly. Inventory management of the spare parts, then, is a very important part of the activities of the company. If the parts are understocked, then the defective computers cannot be serviced, resulting in customer dissatisfaction. On the other hand, if the parts are overstocked, the holding costs are high. Tracking individual part types is a major task as the number of types of spare parts runs into several thousands. Situations where some parts have very high inventory and some are in shortage could be

System Design
The system will be required to provide: q an easy update and retrieval of inventory information; q an efficient ordering system for replenishment; q more information for the management control of spare parts; q accountability and accuracy of information.

A COMPUTER-BASED INVENTORY MANAGEMENT SYSTEM FOR SPARE PARTS

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Information System Design An overall design of an information system involves design of its individual modules and their interaction. The basic modules are listed below. The interaction between these modules is shown in Figure 1. 0. IS kernel 1. Demand input 2. Parts-in transaction 3. Parts-out transaction 4. Release order 5. Reporting. The overall IS (Information System) kernel basically contains the control program and interacts with the database and the user. The control program takes care of the order quantity and safety stock calculation, and query handling for various transactions. The parts-in module handles all the transactions related to the incoming parts, and the parts-out module handles all the transactions related to the outgoing parts. The reporting module takes care of the reporting at the end of specified periods. Daily, weekly and monthly reports are designed to be produced with this information system. The release order module will release the orders whenever the stock is to be replenished. This is calculated on the basis of the replenishment policy.

The ABCD Classification of Spare Parts There are approximately 20,000 types of spare parts in the inventory. Therefore it is wise to classify these parts into groups, to establish appropriate levels of control over each category. Based on the source of supply and cost, the spare parts are classified into four groups of items, A, B, C and D. They are described below. A: The parts can be procured overseas only and the unit cost is very high. B: The parts can be procured overseas only and the unit cost is not high. C: The parts are available locally and the unit cost is very high. D: The parts are available locally and the unit cost is not high. The advantage of this classification scheme lies in a relaxation rather than in a tightening of inventory control. This comes from less emphasis being placed on class B and D items, which represent the bulk of the inventory. This analysis gives a measure of inventory importance to each part, and also results in simplicity and ease of operation. Demand Forecast Models The demand module consists of various models for forecasting the demand. The demand generated is fed to the IS kernel, where order quantity and the safety stock are determined. The models for the order quantity and safety stock are included in the IS kernel of the information system and are transparent to the user. These are described separately in the following section. Three forecasting models are considered in this study. (1) Product reliability-based model. The demand for spare parts is entirely generated by the failure of components in the products sold by this company. Therefore, from the reliability of the component parts, the individual demands can be computed

Theoretical Design Considerations


The main activity of an inventory management system is to keep track of the spare parts coming in, the spare parts going out, and order releasing. The new system is designed on the basis of the existing system and by studying some systems already implemented. The following sections will describe the ordering policies for this new system.

Figure 1. Block Diagram of the Overall Information System


Database Spare parts Parts-in module SP-control Order SP-usage Sales
. . .

Information system

Demand module

K E R N E L

Parts-out module

Release order

Reporting module

Inventory controller

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using mathematical models. The advantage is that the company can keep a track of the exact number of units used by their customers at any given time, and the age of individual units. The company can also use the reliability data already collected by the quality control department. However, this type of model tends to be complex and also needs a large amount of data for estimating statistical parameters. (2) Regression models. This model forecasts the demand by regressing the demand on the number of units currently used in the market. Statistical parameters are computed from the causal correlation between the demand for the spare parts and the number of parent units in the market. This model ignores the age and specific failure patterns that were considered in the previous model, and is mathematically less complicated. (3) Time series forecasting. This model uses the past time series data to forecast the future demand. The moving averages method is used to smooth the time series data. The regression analysis model and time series forecasting model are easy to use, and they need less data, compared with the reliability model. The choice of an appropriate model depends on the item class and the agreement between forecasts and empirical data.

maximizing the advantages that a company possesses. The BFI order point calculation is given by: Order Point = (Dem LT ) + (Dem LT ) (D% + V% + E% + L%) where, Dem= Average historical demand over a reasonable period of time, or, the forecast demand LT = Normal current replenishment time D = The effect the shortage of items will have on profit or production V = The dollar value of the item E = The deviation of demand from average usage L = The lead time and lead time variation in replenishing the stock. In practice, BFI order points best fit the individual needs of business in a way that the usual, conventional order points have not been able to do. The values of D, V, E and L in the above formula are provided by the managers involved in the decision-making process. These values are subjective and reflect the relative effects of various factors, and importance of different items. This approach not only facilitates management involvement in the decision making, but also makes them more aware of the system so that it can be further improved. For the present case, the values of D,V, E and L are specified after consultations with the managers, and according to the ABCD classification scheme discussed earlier. The input values are: D = 18% (the variation in demand is not more than 100%) V = 5% (the value of each order is more than 80,000 Baht) E = 5% (this is a common stock), and L = 25% (for A and B items) = 5% (for C and D items) (the lead time for overseas procurement is 3 months and for local procurement is 1 week). These values result in the following formulas: For A and B class items: Order Point = (Dem LT ) + (Dem LT ) (D% + V% + E% + L%) = (Dem LT ) + (Dem LT ) (18% + 5% + 5% + 25%) = (Dem LT ) + (Dem LT ) (53%) = 1.53 (Dem LT ). For C and D class items: Order Point = (Dem LT ) + (Dem LT ) (D% + V% + E% + L%) = (Dem LT ) + (Dem LT ) (18% + 5% + 5% + 5%)

Models with a high degree of accuracy are needed


Items belonging to classes B and D do not need complicated and sensitive models. A time series model would be sufficient. For class A and C items, models with a high degree of accuracy are needed. The data are tried with the three models and the model which gives the least deviation of the forecast values from the actual data is used for that particular item. Order Points and Safety Stock Design Once the demand forecasts are determined, the order point and safety stocks can be computed. After studying various models, a BFI (business factor index) order point model is adopted for this proposed system[2]. The BFI order point technique is described as one that allows management the opportunity to identify and emphasize the success factors. The resultant effect would be that of

A COMPUTER-BASED INVENTORY MANAGEMENT SYSTEM FOR SPARE PARTS

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= (Dem LT ) + (Dem LT ) (33%) = 1.33 (Dem LT ). The value of variable Dem, the demand of the spare parts of the previous month, is used to calculate the adjusted demand during lead time. Order Quantity Design For replenishment, the quantity per order should balance the effects of reorder and inventory costs. The EOQ model[3] is adopted for this proposed system, to obtain the optimal order quantity, and to minimize the total inventory cost for A and C items. The formula is given by: Q= 2 C p Dem Ch

the ordering cycle need be calculated this way. The rest of the calculations are the same as the normal A items.

Input and Output Design


The purpose of input and output (I/O) design is to devise computer programs for inventory management. The main considerations are the actual working requirements and the computer operation. The structure of the I/O design is shown in Figure 2. Forms and files which are used in the existing manual system for data input and output in the inventory management centre were analysed to design an efficient I/O system. The description of the structure of each database for input is shown in Table I. The form of output should be designed to give a brief presentation, abstracting only essential and high utility information. Excessive information is troublesome for the user to interpret, unless it has been specifically requested. The output reports designed for this system are given in Table II.

where, Q = economic order quantity Cp = ordering set-up cost Ch = holding cost, cost of the spare part (interest rate + insurance rate (per month)) Dem = average monthly demand. On the other hand, for the items of B and D classes, the policy of economic order quantity is not applied. Since these items are not expensive, the ordering procedure is simplified, and the order quantity for a class B item is taken to be the two years demand for the item. For a class D item, it is taken to be only six months demand, as these items are locally procured and need a small lead time[4]. The Ordering Policy Design The basic idea of the (S, c, s) model is adopted for this proposed system to get the ordering policy (i.e. when to release the order and how much to order). Whenever the available inventory level of the item hits s (minimum stock) or lower, it triggers a replenishment action so as to raise the spare parts inventory level to S. At the same time, any other spare part within the same family, with available inventory at or below its can-order point, c, is included in the replenishment. The grouping into families is based on their common sources of supply. The value of s comes from the calculations in section 2.2.3, i.e. from Hoyts Model. It is assumed that there are no sudden jumps in the demand, and the maximum stock S is taken to be equal to the sum of s and Q, the economic order quantity. The can-order point c is specified by the supervisor of the inventory control centre. For A class items, if the value of the order quantity divided by minimum stock (adjusted demand during lead time) is less than 1, then these items are called special items and a special procedure is used for these items. The special procedure is to set up the ordering cycle (ordering cycle = order quantity lead time/minimum stock) for releasing orders. If an A item becomes a special item, only

Functions of the System


By studying the existing system and theoretical aspects, seven basic functions are considered for this new computerized system. (1) Parts take-out. Updates the database of the spare parts and saves the record of daily transactions for the spare parts which are taken out from the storage. (2) Parts come-in. Updates the database of the spare parts and saves the record of daily transactions for the spare parts which come into the inventory from an order, or which are returned from the user. (3) Release order. Prepares orders for replenishment, prints the order, and saves the information on them. (4) Daily report. Produces daily report of all the transactions occurring on that particular day. (5) Monthly report. Produces a monthly summary report of all the transactions occurring in that particular month. (6) Manual list. Provides the user with a manual of the desired spare parts. (7) Setup. To set up minimum stock and order quantity of each spare part and to update the database of spare parts for them.

Implementation
After determining the functions of the system and requirements of input and output, the main program and

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Figure 2. The Structure of I/O Design for the Information System

SP-part in

SP-part master

SP-part order

SP-part master

SP-part out

SP-part master

Add/ Change/ Delete/ Enquiry Part-in

Add/ Change/ Delete/ Enquiry Part

Add/ Change/ Delete/ Enquiry Part-out

Received Returned SP-part in SP-part order SP-part order SP-part out

Repaired Sold, claim

Transaction file maintenance

Daily report on cancel transaction record

SP-part master maintenance

Cancel transaction record Daily transaction file maintenance

Day end

Master file maintenance

Add/ Change/ Delete/ Enquiry SP-part master

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Table I. Description of All the Database Structures


Name of database 1. Spare parts 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Reference Part number Dealer code Type of part Description Cost of part Exchange code Tax code Retail price Wholesale price Number of parts Location Quantity on hand Minimum stock Order quantity Pending order quantity 17. Order cycle 2. Spare parts control 1. 2. 3. 4. 5. Part comes in/out (I/O) Date of transaction Part number Quantity Purpose of the transaction 6. Person doing transaction 7. Quantity on hand 3. Order 3.1 Basic information 1. Order number 2. Order releasing date 3. Department releasing the order 4. Dealer of the part 3.2 Part order 1. Order number 2. Part number 3. Quantity 4. Cost of the part 4. Spare parts usage 1. 2. 3. 4. 5. 6. 7. 8. 9. Year Month Part number Quantity of internal use Quantity of repair use Customer purchase Total usage Quantity on hand Failure rate of the part 5. Sales 1. Year 2. Month 3. Units sold each month 4. Cumulative sale

Table II. Output Reports


Report Frequency Purpose Contains The drawing of the product and component layout, reference number, part number, retail and wholesale price

Spare part manual Each product For reference and customers Purchasing order Daily report Per demand Daily

To sales department for purchase Order number, order date, ordering department, dealer, part number, description, order quantity, cost per unit and total amount of the order For supervisor of the inventory control centre to check the inventory For the managers of sales department, hardware and the supplier Date, part number, description, location in store, quantity taken out, who took out, quantity come in, who brought in, quantity on hand, and quantity on hand of the previous day Month, part number, description, location, quantity of internal use, repair use, customer purchase and total usage, failure rate, quantity on hand, and minimum stock

Monthly report

Monthly

seven sub-programs are designed. All the programs are written in CLIPPER and the database is implemented in dBASE III PLUS which can be run on both mainframe and microcomputers. The flow charts and the source codes of all the programs are available in the Division of Industrial Engineering and Management, Asian Institute of Technology, Bangkok[1].

analysis of the existing system of inventory management, determines the problems with the system, defines its functional requirements, and designs a computer-based system for such an application. The associated benefits of the system can be summarized in two parts, namely tangible and intangible benefits. Tangible Benefits The major tangible benefit is the reduction in total inventory costs. The total inventory cost saving resulting from the increased efficiency and improved accuracy of the ordering policies can be observed from the

Concluding Remarks
In this study, the feasibility of using a computer-based inventory management system for a computer service company has been looked at. The study starts with the

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comparison of manual and computerized ordering policies. Data were collected from the past manual ordering policy system and the costs were calculated. Using the same demand pattern, costs were simulated for the modified system. A considerable amount of reduction in the total inventory costs was observed. Intangible Benefits These are the benefits which will be enjoyed by the company thanks to the application of the computerized system for inventory management, but which cannot be quantified. These benefits are enumerated below. (1) Accurate information: it can easily provide accurate information of the inventory of each spare part, by viewing the screen or hard copies. (2) More information: this system gives more and structured information like generating daily and monthly reports. (3) Data entry errors are corrected quickly and easily through a visual display unit.

(4) Over-stocking and under-stocking of the spare parts can be reduced, resulting in improved ordering policy. (5) The process of managing the inventory of spare parts is speeded up. (6) The amount of paper usage and handling is reduced.
References 1. Hu, Tai-san, Computer Based Inventory Management System for Spare Parts in a Computer Service Company, unpublished masters thesis, Asian Institute of Technology, Bangkok, December, 1990. 2. Hoyt, J., Order Points Tailored to Suit your Business: BFI Order Points, Production and Inventory Management, 4th Quarter, 1973, pp. 42-8. 3. Fabrycky, W.J., Procurement and Inventory Systems: Theory and Analysis, Reinhold Publishing Corporation, New York, NY, 1967, Chapter 4. 4. Riggs, J.L., Production Systems: Planning, Analysis and Control, John Wiley & Sons, New York, NY, 1981, pp. 399-446.

Nagen N. Nagarur is Assistant Professor and Tai-san Hu and Nirmal K. Baid are graduate students at the Asian Institute of Technology, Division of Industrial Engineering and Management, Bangkok, Thailand.

Erratum
Owing to an error in the production process one authors name was omitted from the article A Method for Assessing JIT Effectiveness (IMDS, Vol. 94 No. 7, pp. 14-17). The articles authors are Abolfazl Kazazi and A.Z. Keller The Editors and publisher sincerely apologize for this omission.