Solving Increasing Issues of Warehouse Overflow Transaction Finance Essay

Introduction

This study aims at solving increasing issues of warehouse overflow transaction causing many difficulties in warehouse operations and increase safety risk on personnel and products in the warehouse area during past few weeks. The study has discovered that we are holding approximately 10 weeks of safety stock which is impractical on inventory management aspect and since our demand is stationary, why we need to carry unreasonable quantity of safety stock. We also look into our buyers who handle purchase order with our suppliers and found that all of them lack of skill in inventory management so they keep ordering new lots of products whenever they notice that their product stock is reduced. All of these issues are affecting to our capital, operational performance and safety. As a result from the study, we have come up with new inventory policy to resolve over stocking and warehouse issues, as well as giving right direction in managing inventory to enhance our competitive advantage and gain more benefits from our business. During the study, we have created some assumptions to meet requirements of formulae used for data calculation and analysis. List of assumptions made is as follow. Forecast Error Standard Deviation: 50 units per month Order cost: £ 5 Service Level factor (Z): 95% or 1.64

Impact of current inventory policy

petEssentials is carrying enormous excessive stock volume of pet foods and pet toiletries. Current stock holding policy does not reflect reasonable stock volume in the warehouse causing overflow warehouse transaction and large amount of cash flow is not recoverable from stock holding cost. Warehouse space is not utilized in an efficient way due to space shortage. As result of huge inventory, the company needs to rent large warehouse storage to carry inventory and lose significant amount in rental cost. From an investigation, the main reason of over stocking is that the buyers are not well-trained to handle practical stock volume from actual sale quantity so they issue Purchase Order for new shipments on every month for most of the products without considering sales volumes and current stock holding in the warehouse as well as order quantity per purchase order does not meet economic order quantity. Estimate amount of capital tied up with excessive stock is shown in the table below

Segmentation Policy

petEssentials is holding 234 stock keeping units (SKU) in its inventory, with around 90 items are high usage and also contribute to high profit margin. If we only categorize them using single criteria based on volume (or dollar usage) only, it would not reflect profit contribution of products providing high margin hence it may reduce service level e.g. stock out and lost sales. To cope with this challenge, categorizing them by using multi-criteria ABC analysis will give advantage in term of classifying them by both dollar usage and profit contribution because both of them are vital in managing inventory list. According to Flores and Whybark cited in Guvenir and Erel that using multi criteria ABC classification would give broad scope of managerial control and eliminate weak points found in single criteria. Thus, in our study to tackle high inventory volume at petEssentials we will develop multi-criteria based on profit margin contribution and annual usage using past 22-month data in our analysis.

Shifting to the new inventory policy.

As we have classified product into different segmentations, we will then prioritize them into 2 main groups. Group 1 consists of categories AA, AB, BA and BB: These groups contribute high profit margin as well as annual usage and sales revenue. Since demand is stationary, and cost to hold them is high. We will manage stock using Economic Order Quantity model (EOQ)which gives lower stock than Target Stock Level (TSL) (Water 2003, p. 186). Jurkat also suggests to use EOQ model for critical and high price product. The EOQ method needs continuous monitoring of inventory to prevent stock out when it reaches reorder point. This will help to ensure that we will not lose sales opportunity Group 2 consists of categories BC, CB and CC: Products belong to these groups are cheap and low in demand and profit margin, hence we will apply periodic review method or Target Stock Level (TSL) to manage them. Since these groups are quite low in demand and margin and also holding cost is low so we do not need to keep eyes on them as frequent as the group above (Water 2003, p. 186). We have set up stock review period of 15 days to check its status. In this study, safety stock policy on both inventory strategies are based on 95 percent service level with standard deviation of forecast error of 50 units a month.

Result from new inventory policy.

It's expected that the new policy will release significant amount of cash flow thus improving our financial statement. Overflow transaction in the warehouse will be reduced and improve operation working conditions, e.g. better safety, reduce product damage and etc. Estimate amount of cash tied up with the new policy will be as follows. Table 3: New Inventory Policy stock level and inventory turn. As seen from the table, the company will free up from excessive inventory in the warehouse space since most of the products are maintained at 2 weeks of demand plus safety stock on average. This safety stock can absorb certain volume in case of demand fluctuation. Table 4: Cash flow free up from inventory. Table above represents significant reduction of inventory and cash tied up with 10-week of safety stock on old inventory method. Stock volume will be decreased around 84.77 percent and capital regained from the stock is £ 728,219 or almost 90 percent reduction. However, order cost per year will be raised around 74.66 percent or £ 10,445, but since our order cost is quite low, this increased amount is not critical as the cash amount released from the inventory. Figure 4: Comparison of inventory level, total value and holding rate under EOQ model. This graph displays comparison of stock level, total stock value, and holding rate before and after we apply EOQ inventory management method to products belong to group AA, AB, BA, and BB Figure 5: Comparison of inventory level, total value and holding rate under TSL model. This graph displays comparison of stock level, total stock value, and holding rate before and after we apply EOQ inventory management method to products belong to group BC, CB, and CC According to the study, stock level, total value and holding rate are drastically reduced against current policy in use, but there will be additional cost increase on order numbers per year. The increased amount

Recommendation to Board of Director:

The study has clearly stated that we have lost large amount of money from our poor inventory management practice. Since our buyers are not skillful in inventory management, we should provide them a training in best inventory management practice to enhance their knowledge and bring back to use in their routine work. Their improved skill will benefit the company as a whole because proper management of stock holding is critical part in today's business. Most companies are trying to keep minimum inventory to be able to compete with competitors. The new inventory policy should be implement as soon as possible to improve our workhouse workload, free up storage space and capital of holding excessive stock. Other benefits that may include is we can rent out unused space to other companies and we can make money from them. Appendices

 

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