Implementing an

improved inventory
control system in a
small company

By
Pramesh Anuragi (1404008)
Vaibhav Sham Sutrave (1404014)

ABOUT THE CASE

It represents the implementation of an improved

inventory management control system
Company is related to mining mineral resources
Firstly, design for the inventory control
management system is developed
Secondly, an inventory control tool was developed
using EXCEL spreadsheet for determining the
category
Finally, Key Performance Indicators(KPI) were
also established to give benchmark to operations

INTRODUCTION

The store should operated in such a way that the

storage time of each stock item is as short as
possible consistent with economic operation
if demand is steady or highly predictable, then
storage should be for a very short
Shortages must be avoided or production will stop, at
the same time excess should not be ordered as this
will tie up capital
The factors that affect the cost of storage are:
o loss of interest on capital tied up in stock,
o Operating expenses of storehouses including wages,

depreciation, rates, repairs, lighting and so on,

o loss and deterioration of stock, obsolescence, insurance,
stock checking, and recording and accounting

INTRODUCTION
CONT

Inventory carrying cost can vary from 15% to 40%

of the value of the inventory
Highly expensive materials or components require
a very high degree of co-operation and efficiency in
the control of their stock
ABC analysis is useful to identify such highly
expensive materials or components
This paper reports the work in developing and
installing an improved inventory management
system at Bindura Nickel Corporation
An ABC analysis methodology was used to classify
stock at Trojan mine stores according to annual
usage value (AUV).

INVENTORY
MANAGEMENT

The ingredients of such systems are:

o how inventory items can be classified (ABC analysis),
o how accurate inventory records can be maintained

A conceptual framework developed as shown in

figure

INVENTORY
MANAGEMENT

INVENTORY
MANAGEMENT

When ABC analysis is applied to an inventory

situation, it determines the importance of items and
the level of controls placed on the items
Two possible factors are the usage rate for an item
and its unit value which make a significant level of
control important for any item
Close control is more important for fast moving items
with a high unit value & vice versa
Normally the classifications are based upon annual
dollar usage, but other criteria can be used, such as
transaction usage, unit cost, lead-time, and others
ABC Analysis

Inventory
Management
Tool

Key
Performance
Indicator

Shrinkage
Tracking

INVENTORY
MANAGEMENT

The steps for ABC Analysis are

Determine annual quantity usage of each item
Obtain the total annual dollar usage of each item
Calculate the aggregate annual dollar inventory expenditure
Obtain the percentage of total usage for each item
List the items in rank order by %of aggregate usage
Review annual usage distribution and classify items as A, B, or C

ABC Analysis

Inventory
Management
Tool

Key
Performance
Indicator

Shrinkage
Tracking

INVENTORY
MANAGEMENT

ABC Analysis

Inventory
Management
Tool

Key
Performance
Indicator

Shrinkage
Tracking

INVENTORY
MANAGEMENT

The advantage of dividing inventory items into classes

allows policies and controls to be established for each
class
Policies that may be based on ABC analysis include the
following:
o The purchasing resources expended on supplier development should

be much higher for individual A items than for C items

o A items should have tighter physical inventory control; and the
accuracy of inventory records for A items should be verified more
frequently
o At BNC operations all stock items are treated more or less the same
way.
o Forecasting A items may warrant more care than forecasting other
items
ABC Analysis

Inventory
Management
Tool

Key
Performance
Indicator

Shrinkage
Tracking

INVENTORY
MANAGEMENT

Economic order quantity (EOQ) Model:

o The inventory model addresses two important questions:

(i) when to order, and (ii) how much to order

o The technique is based on several assumptions:
i.
ii.
iii.
iv.
v.
vi.

Demand is known and constant;

Lead-time is known and constant;
Inventory from an order arrives in one batch, at one time;
Quantity discounts are not possible;
The only variable costs are ordering cost and holding cost;
and
Stock outs can be completely avoided if orders are placed
At the right time

ABC Analysis

Inventory
Management
Tool

Key
Performance
Indicator

Shrinkage
Tracking

INVENTORY
MANAGEMENT

Inventory cost at
EOQ

Where
D=annual demand (units per year)
C0=cost/order,
Ch=variable holding cost (cost/unit/year)

The simplified classical EOQ model assumes that stock is replenished just at the point when
inventory is zero

ABC Analysis

Inventory
Management
Tool

Key
Performance
Indicator

Shrinkage
Tracking

INVENTORY
MANAGEMENT

Inventory Control System:

o There are two inventory control systems commonly used

i. Continuous review system &

ii. Periodic review system
o

An important parameter for installing an inventory control

system is the service level, which is the percentage of orders
that are received before a stock-out occurs
Expected demand follows the normal distribution

. where, mean() = expected demand,

. standard deviation() 10% of ,
. S=Z, order point = ;

ABC Analysis

Inventory
Management
Tool

Key
Performance
Indicator

Shrinkage
Tracking

INVENTORY
MANAGEMENT

Continuous review system:o This review system uses all the tools discussed so farorder

point, based on safety stock and lead-time

Periodic review system:o Reviewing the inventory on continuous basis is very

expensive so this method, based on order up-to level (UTL)

can be utilised
o The review system R, is based on the EOQ and the annual
demand

ABC Analysis

Inventory
Management
Tool

Key
Performance
Indicator

Shrinkage
Tracking

INVENTORY
MANAGEMENT

Key performance indicators (KPI) are high-level snapshots of a

business or organisation based on specific predefined measures
KPIs typically consist of any combination of reports,
spreadsheets, or charts
They may include global or regional sales figures and trends
over time, personnel statistics and trends, real-time supply
chain information, or anything else that is deemed critical to a
corporations success
A KPI application such as an executive portal can give a
business executive a high-level, real-time view of the health of a
company by visually displaying vital statistical information
about that company
ABC Analysis

Inventory
Management
Tool

Key
Performance
Indicator

Shrinkage
Tracking

INVENTORY
MANAGEMENT

Even though an organisation may have made substantial

efforts to record inventory accurately, these records must
be verified through a continuing audit. Such audits are
known as cycle counting
Historically, many firms take annual physical count of
inventory. This often meant shutting down the facility and
having inexperienced people counting the commodities
Inventory records should instead be verified through cycle
counting
The cause of inaccuracy is then traced and appropriate
remedial action taken
In this way shrinkage of stock due to pilferage or some
other reason can be easily picked up
ABC Analysis

Inventory
Management
Tool

Key
Performance
Indicator

Shrinkage
Tracking

Implementation of improved
Inventory management
system at BNC A Case study

The company did not have a systematic control over its

expensive products in the store, & therefore incurred some
invisible losses
This project aimed to install a system that would enable
BNC to gain control over losses
The technique of ABC analysis was used to classify stock at
Trojan Nickel mine stores according to annual usage value
(AUV)
The following parameters were then established for items
falling in category A
o Economic order quantity.
o Inventory review interval.
o Stock order point.
o Safety stock level.

ABC analysis at BNC

The ABC analysis exercise carried out at BNC

reveals the following statistics:
o Only 10% of inventory items account for approximately

97% of total annual usage value. These items form the A

category of the ABC analysis curve
o Another 10% of inventory items account for
approximately 2% of total annual usage value. These
items form the B category of the ABC analysis curve
o The remaining 80% of inventory items account for only
1% of total annual usage value. These items form the C
category of the ABC analysis curve

Conti

The classical EOQ model already discussed was

used
To avoid stock-out, lead-time for order is taken
into account. Management has to establish an
order-point, which corresponds to the level of
inventory at which an order should be placed. It is
a function of the
o daily demand rate,
o lead-time, and
o safety-stock

Inventory
management tool

The concept of cycle

counting

Cycle counting based on inventory classifications

developed through ABC analysis follows a pattern:
o A items will be counted more frequently, perhaps once a

month
o B items will be counted less frequently, perhaps once a
quarter
o C items will be counted perhaps once in six months

Development of key performance

indicators

The essence of developing key performance

indicators (KPIs) is for BNC stores to carry on with
their future work of benchmarking their operations
using the KPIs
The standard formulae used are

Conclusion

This paper presents the implementation of an

improved inventory management control system
in a small company, Bindura Nickel Corporation
Firstly, a conceptual framework for the design of
an inventory control management system is
developed
Then, a case study is presented to discuss the
application of the model in a real-life small
company
The improved inventory control management
system developed is found to offer improvement
to the performance of the company.

Thank You