(LUẬN văn THẠC sĩ) ineffciency inventory managerment case of excess inventory of THM company

UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business LU THI TAM HIEN INEFFICIENCY INVENTORY MANAGEMENT: CASE OF EXCESS INVENTORY OF THM COMPANY ID: 22130022 MASTER OF BUSINESS ADMINISTRATION SUPERVISOR: DR PHAM PHU QUOC Ho Chi Minh City – March 2016 1|Page TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT This thesis becomes a reality with the kind support and help of many individuals I would like to extend my truthful thanks to all of them First of all , I would like to express my gratitude and sincere thanks to my advisor, PhD Pham Phu Quoc for hid guidance, imparting his knowledge and expertise my study Special thanks to members of THM Company for cooperating, supporting and providing necessary information regarding this thesis Besides, the contribution of my group mates who have cooperated with me to complete this thesis and classmates who have willingly helped me out with their abilities, play an important role for my thesis finishing More interest, I would like to give my warmest thanks to my family who always support and encourage me in completion of this thesis 2|Page TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT In every industry, every enterprise or business, operating and managing their organization are very important The company will grow and make profit if they utilities their working capital including the inventory, debtors, loans and Advances, Gross working Cycle, Creditor and Net working Cycle Therefore, inventory, account receivable, account payable, cash management are the factors that impacts on the profitability The object of the research find the problems of working capital management of THM including the inventory management, account receivable management, account receivable, cash flow management In segment of inventory management, the study also makes clear the factors that impacts on the inventory management including product samples and design, product feature differentiation, specific software request, objective of inventory, failure customer service, using too much working capital in inventory and low of control the market demand Beside the external factors such as market trends, customer‟s demand, competitive impact on the high inventory in the company directly It is important to find the best solutions of excess inventory and effective inventory management Exploring of methods of reducing the current inventory and enhance the Inventory Turnover (ITO), the best ratio to measure the inventory management Additionally, it is necessary to find the properly inventory management models to apply for the company 3|Page TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENT ACKNOWLEDGEMENT ABSTRACT INTRODUCTION PROBLEM IDENTIFICATION- CASE OF THM COMPANY 10 2.1 Company profile 10 2.2 Perceived Problems from Financial Statement context 13 2.3 The first tentative problems- Inventory record inaccuracies 19 2.4 The second tentative problems- Product samples and differentiation, failure customer service……………………………………………………………………………………… 20 2.5 The third tentative problems- The obsolescence 22 2.6 The four tentative problem- The inadequate planning and execution system 24 2.7 The fifth tentative problem- Low Expectations and forecasting 25 2.8 The sixth tentative problems- External factors economic growth, competitive 27 2.9 Cause- effect tree of real problems- Low Expectations and forecasting 30 POSSIBLE SOLUTIONS DESIGN 32 4|Page TIEU LUAN MOI download : skknchat@gmail.com 3.1 Alternation 1- Using the proper Forecasting Methods 32 3.2 Alternative 2-Forecast as Close to the Customer as Possible- 34 3.3 Alternative 3-Communicate, Share, and Use the Data to Drive Your Sales and Operations Planning Process- 36 3.4 Alternative -Consider Inventory planning , controlling inventory more efficiency Long- term Strategies 37 IMPLEMENTATION 39 CONCLUSION 46 SUPPORTING INFORMATION 47 6.1 Methodology of collecting data- 47 6.2 The consequences of excess inventory 47 6.3 Forecasting demand models 51 6.4 Inventory Management models 54 6.5 Model for suitable purchasing 59 6.6 Transcript 62 REFERENCES 73 APPENDIX 79 5|Page TIEU LUAN MOI download : skknchat@gmail.com List of Chart Chart Sales revenues of THMC from 2011- 2014 Chart THMC‟S of sales and service Chart ROA and ROE ratios of THMC from 2010-2014 Lists of Tables Table ROA Ratios Table 2: ROE ratios Table 3: Inventory Turnover Table 4: Day Sales of Inventory Table Target of Increase ITO Table 6: Estimate the reducing in average inventory Table 7: Planning the Action Plan of THM Table 8: ABC Analysis of Items in Stock of THM Table : Safety and Stock Level Table 10 : Estimate the Safety Stock and Order Quantity of A- items List of figures Figure 1: The THM Organization Chart 6|Page TIEU LUAN MOI download : skknchat@gmail.com Figure : The cause-effect trees exploring from the analysis: Figure 3: PDCA Model Figure 4: Inventory management and Asset protection ( IMAP) 7|Page TIEU LUAN MOI download : skknchat@gmail.com INTRODUCTION This study found the reasons of decline of revenues and profitability over the years 2011- 2014 The decrease of Return on Asset ( ROA) and Return on Equity ( ROE) exhibited many tentative problems of the THM company The declines of sales, increase of holding costs effect to the low of revenues and low of profitability The costs from increasing of COGS, renting more warehouses, labors, cash investment in payments, short-term loans, or called working Capital Management impact on the company performances The primary findings of measurement of Inventory Turnover Ratios (ITO) , Days sales of Inventory (DSI) and internal, external factors that impact on Inventory Management of the company The ineffective Inventory Management of THM‟s presented through the low of ITO and declines over the years In addition, factors of internal like Capital management of THM the product sample and design, product feature differentiation, specific software request, objective of working management play an important role in effective of Inventory Management of the company The too much slow moving or obsolete inventory, customer service failures and back orders due to lack of the correct inventory, product type, inventory size, are listed as reasons for inefficiency inventory management The changes in product design, excessive purchasing and forecasting errors are reasons for overstocking Among, forecasting errors, mismatching the demand- supply, or un-predicting customer‟s demand are substantial factors to excess inventory 8|Page TIEU LUAN MOI download : skknchat@gmail.com External environment factors like economic growth, market demands, competitive, customer behavior, recession periods contribute to the management of inventory Theories of inventory management will prove for those variables The analysis will analyze the most influenced factors to high or excess inventories, correlation between the variables Finally, base on the analysis, we found the possible solution to solve the excess inventory and manage the inventory effectively The improvement of ITO should be done by most of the Directors by reducing the average inventory and reducing the number of merchandises Applying the accurate forecasting method, qualitative or quantitative methods likes Times Series, Exponential Smoothing (ES), liner regression will make the company reduce the unexpectation inventory ( R Lindeke , 2006) To a SMEs, as THM, applying the suitable inventory management, PDCA inventory management methods, which categories the inventory by ABC analysis, calculating the EOQ, Alternative Order Quantity Approach (Mathur, Kamlesh, et al., 1996, 697; Morales, Sierra, Lopez 2015) which used for SMEs, and setting target depending on the Manager‟ Experiences Alternative Order Quantity Approach, establish purchasing review criteria to the inventory characteristics, collaboration with vendors to improve the purchasing practice 9|Page TIEU LUAN MOI download : skknchat@gmail.com PROBLEMS IDENTIFICATION -CASE OF THM COMPANY 2.1 Company profile 2.1.2 Overview of THM Name : THE HE MOI TRADING AND CONSTRUCTION LTD., CO TAX CODE: 0302696827 ADDRESS: 299, TAN KY TAN QUY STREET, TAN SON NHI WARD, TAN PHU DISTRICT, HO CHI MINH CITY TEL: 08.35367276 FAX: 08.38472838 Since 1996, THM is a shop, which sold construction materials like stone, steel, paints, civil tools…Since then THM have been developing, creating many good relationships with other constructions; materials agencies Moreover, the company have been catching the market conditions, customer behaviors Therefore, the THE HE MOI TRADING AND CONSTRUCTION LTD., CO has been established, specialized in paintings and painting tools Until now, the company has created the prestige and determined the its strong in the market Amount of orders has substantial increased, and expanded the market segment whole the country 10 | P a g e TIEU LUAN MOI download : skknchat@gmail.com - I have worked with THM for a long This is a qualified and reputation enterprises - Our company works with Big construction Projects However, since 2008, the real estate market went down, therefore amount of orders have decreased accordingly What are your standard to choose a Suppliers of paints? - It is depended so much on each project It‟s required the financial conditions of That company, enough finance to supply to the Investors - Qualified paints, competitive prices, after-sales service - Diversification in samples, brands, good in delivery, in time How have The Amount of your orders your company changed recently? - Volume of orders has been decreased from 2011-2014 about 30-40% due to the declines of amount of Construction Projects - Moreover, there are other suppliers who provide with the competitive prices, promotion policies, and credits for customers 72 | P a g e TIEU LUAN MOI download : skknchat@gmail.com REFERENCE Agrawal, D and Schorling, C ( 1996),” Market share forecasting: an empirical comparison of artificial 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Sales: A Longitudinal Study, Production and Operations Management, Vol 19, No5 September- October 2010, pp 546- 650 West D Purchasing and Inventory Management In: Desselle Sp, Zgarrick DP, editors Pharmacy Management Essentials for All practice Settings, nd ed New York: McGraw- Hill Co., Inc; 2009, 383p Kim Thuy Painting Market: Color Diversifying, “ hot competitive”, 2nd June 2015, Retrieved :http://cafebiz.vn/cau-chuyen-kinh-doanh/thi-truong-son-da-sac-mau-nong-canh-tranh20150528161840934.chn William J Stevenson, Operations Management: 2003 Media Edition, 7/Edition Retrieved: :http://highered.mheducation.com/sites/0072443901/student_view0/chapter13/index.html Rafael M Pefianco MPM FAAPM ( 2013), How to Deal with Excess Inventory, retrieved from http://rmpconsultancy.com/en/how-to-deal-with-excess-inventory/ 78 | P a g e TIEU LUAN MOI download : skknchat@gmail.com APPENDIX APPENDIX 1- RATIOS OF THM FROM 2010-2014 BALANCE SHEETS Đơn vị tính:.Đồng Việt Nam ASSETS 2014 2013 2012 2011 a Current assets 28,399,207,109 31,104,656,317 36,331,973,260 44,463,768,655 6,680,845,994 9,143,524,331 1,333,853,168 5,912,901,441 (100=110+120+130+140+150) I Cash and cash equivalents 6,680,845,994 9,143,524,331 1,333,853,168 5,912,901,441 III Shorterm Account Receivavle 6,310,737,088 8,624,257,077 9,228,399,034 12,156,451,169 Accounts receivable from 6,300,090,088 8,624,257,077 9,228,399,034 12,156,451,169 1.Cash customers other Account Receivables 10,647,000 IV Inventory 15,055,117,494 13,112,068,742 24,176,924,545 24,448,027,340 Inventory 15,055,117,494 13,112,068,742 24,176,924,545 24,448,027,340 352,506,533 224,806,167 1,592,796,513 1,946,388,705 V Other shor-term assets 18,180,000 Short-term prepayments VAT deductibles 352,506,533 224,806,167 1,592,796,513 1,928,208,705 317,050,726 391,505,110 520,705,069 556,824,894 Tax Government’s Account Receivable B –Non- current assets(200 = 210 + 79 | P a g e TIEU LUAN MOI download : skknchat@gmail.com 220 + 240 + 250 + 260) II Non- Current Assets 317,050,726 391,505,110 520,705,069 556,824,894 Tangible fixed assets 317,050,726 391,505,110 520,705,069 556,824,894 - Cost 686,782,638 686,782,638 686,782,638 675,828,092 - Accumulated depreciation (369,731,912) (295,277,528) (166,077,569) (119,003,198) TOTAL ASSETS (270 = 100 + 200) 28,716,257,835 31,496,161,427 36,852,678,329 45,020,593,549 a - LIABILITY (300 = 310 + 330) 25,203,378,910 27,730,971,074 33,040,742,551 39,851,059,406 I Current liabilities 25,203,378,910 27,730,971,074 31,490,742,551 39,851,059,406 Short- term loans and liabilities 1,400,000,000 1,851,864,235 5,383,846,256 1,550,000,000 Trade accounts payable 23,803,378,910 25,528,383,192 23,916,561,891 38,270,257,935 350,723,647 390,334,404 30,801,471 RESOURCES Taxes and amounts payable to the state budget 1,800,000,000 Other current Payables II Long- term liabilities - - - 1,550,000,000 Long- term loans and liabilities B - EQUITY(400 = 410 + 430) 1,550,000,000 3,512,878,925 3,765,190,353 3,811,935,778 2,674,592,899 I Owner‟s equity 3,512,878,925 3,765,190,353 3,811,935,778 2,674,592,899 Chapter capital 2,600,000,000 2,600,000,000 2,600,000,000 2,600,000,000 10 Profit after tax 912,878,925 1,165,190,353 1,211,935,778 74,592,899 TOTAL RESOURCES (440 = 300 + 28,716,257,835 31,496,161,427 36,852,678,329 42,525,652,305 400) 80 | P a g e TIEU LUAN MOI download : skknchat@gmail.com 26,441,898,754 34,229,467,209 50,348,740,377 Các khoản giảm trừ doanh thu 11,771,663 64,704,160 Doanh thu bán hàng 26,441,898,754 34,217,695,546 50,284,036,217 83,873,256,871 32,742,950,564 48,110,417,764 79,584,299,862 1,474,744,982 2,173,618,453 4,288,957,009 Net sales 83,873,256,871 cung cấp dịch vụ (10 = 01 - 02) 25,605,589,897 Cost of sales gross profit from sales (20 = 10 836,308,857 - 11) Financial income 4,691,687 6,353,922 13,643,320 Financial expenses 99,534,130 299,831,043 449,712,166 584,626,898 99,534,130 299,831,043 449,712,166 584,626,898 492,249,759 786,082,349 1,129,376,456 1,177,971,708 adminitration 501,528,084 440,563,460 514,300,083 1,089,332,090 (45,377,948) 93,873,068 1,437,026,313 - In which: Interest expense sales Expenses General and expenses 10 Profit from sales{30=20+(21- (252,311,429) 22)-(24+25)} 61,886,318 12 Other expenses 13 Other profit (40 = 31 - 32) 14 Accounting profit before taxes (252,311,429) (61,886,318) (45,377,948) 31,986,750 1,437,026,313 5,597,681 251,479,604 (50=30+40) 15 Current corporate income tax expenses 81 | P a g e TIEU LUAN MOI download : skknchat@gmail.com 17 Net profit after corporate (252,311,429) (45,377,948) 26,389,069 1,185,546,709 income tax( 60=50-51-52) FINANCIAL ANALYSIS RATIOS COGS 25,605,589,897 32,744,104,349 48,178,631,553 92,284,358,366 average inventory 14,083,593,118 18,644,496,644 24,312,475,943 16,422,968,923 Inventory turnover Ratio 1.82 1.76 1.98 5.62 Days sales of Inventory 200.76 207.83 184.19 64.96 Average Total Asset 30,106,209,631 34,174,419,878 40,936,635,939 22,510,296,775 Turnings 0.92 1.09 1.37 1.86 Leverage=Total Assets/ Total Equity 8.17 8.37 9.67 16.83 Total Assets Turnover Ratio 0.028 0.043 0.053 0.191 (0.0084) (0.0013) 0.0006 0.0527 ROA ROE -0.09704 -0.01745 0.01015 0.45598 ( THM’s Financial Statement from 2010-2014) 82 | P a g e TIEU LUAN MOI download : skknchat@gmail.com APPENDIX MTC’S ( MOC THUY PAINTING COMPANY) BALANCE SHEET AND FINANCIAL RATIOS SDN'S BALANCE SHEET I ASSETS 2014 2013 2012 2011 2010 CURRENT ASSETS Cash and cash equivalents 6,203 10,633 1,731 4,192 3,621 Short-term financial investment 5,700 Short-term account receivables 23,422 19,059 18,723 15,607 14,198 Inventories 14,989 12,184 9,987 12,694 11,281 315 120 45 101 153 Other receivables II Total Current Assets 50629 41997 30485 32594 29254 Long-term receivables Tangible fixed assets Accumulated depreciation Long-term financial investments 5,451 (13,962) TOTAL ASSET (12,433) 5,730 (12,326) 6,035 (11,009) 5,156 (10,035) 5,019 5,019 5,019 5,019 5,019 734 637 335 335 335 Other Long- term Assets III 5,375 61834 53505 42003 44396 40177 LIABILITIES Short-term liabilities 32,953 26,184 16,264 21,175 18,112 Long-term liabilities 667 397 347 405 362 33,619 26,580 16,611 21,580 18,474 Total Liabilities 83 | P a g e TIEU LUAN MOI download : skknchat@gmail.com EQUITY Owner’s Capital IV TOTAL RESOURCES 28,214 61,834 26,925 53,505 25,392 42,003 22,816 44,396 21,703 40,177 Net sales 125,540 108,800 92,460 84,537 72,057 Cost of Sales 91,840 80,763 69,339 65,690 55,754 Gross profit from sales 33,700 28,037 23,121 18,847 16,303 Net profit from activities 8,927 8,844 8,545 5,387 5,532 Net profit after corporate income tax 6,254 6,695 7,248 4,840 5,317 FINANCIAL RATIOS ANALYSIS Average inventory 13,587 11,086 11,341 11,988 Average Total Asset 57,670 47,754 43,200 42,287 COGS 91,840 80,763 69,339 65,537 55,745 Inventory Turnover 6.76 7.29 6.11 5.47 Day sales of Inventory 54.00 50.10 59.70 66.76 Turnings 2.03 2.03 2.20 1.90 1.79 Leverage= Total Asset/ Equity 2.19 1.99 1.65 1.95 1.85 0.22 ROE= Net Income/shareholder Equity 0.25 0.29 0.21 0.24 ROA= Net income/ Average Total Asset 0.108 0.140 0.168 0.114 INCOME STATEMENT 2014 2013 2012 2011 2010 Net sales 125,540 108,800 92,460 84,537 72,057 Cost of sales 91,840 80,763 69,339 65,690 55,754 Gross Profit 33,700 28,037 23,121 18,847 16,303 Operating expenses 84 | P a g e TIEU LUAN MOI download : skknchat@gmail.com Financing expenses 3,688 3,176 873 1,643 1,042 673 700 870 1,264 831 Sales expenses 9,589 6,074 5,100 4,902 4,106 Adminitration expense 12,045 10,228 8,803 7,263 6,155 Total Operating expenses 25,322 19,478 14,776 13,808 11,303 Revenues from financing activities 551 284 200 347 531 Net sales from sales activities 8,927 8,844 8,545 5,387 5,532 Other Net profit 96 121 181 126 246 Accounting profit before tax 9,023 8,965 8,727 5,512 5,779 Current corporate income tax expenses 2,769 2,270 1,479 672 461 Total Profit expense 2,769 2,270 1,479 672 461 Net profit after corporate income tax 6,254 6,695 7,248 4,840 5,317 In which: loan interest expenses Profit expenses 85 | P a g e TIEU LUAN MOI download : skknchat@gmail.com APPENDIX CONSTRUCTION MATERIALS’S INDUSTRY RATIOS 2014 2013 2012 2011 2010 A.CURRENT ASSET 15,930,323 14,858,088 14,332,750 14,352,016 12,898,837 short-term A.R 5,611,008 5,586,697 5,341,547 4,752,051 4,659,207 Inventory 6,569,990 6,204,840 6,391,841 6,642,729 5,676,247 Long term assets 29,914,174 31,348,217 31,496,597 31,707,660 27,797,614 Total Assets 45,844,497 46,206,305 45,829,347 46,059,676 40,696,451 Revenue 37,646,543 34,188,384 31,029,072 30,970,944 25,002,890 Gross profit from sales and services 6,438,511 5,517,352 5,441,258 6,506,716 4,642,767 Net profit from operating activities 1,525,485 44,998 198,951 786,873 1,421,959 Accouting profit before tax 1,645,928 188,685 304,653 918,264 1,593,798 Net profit after incoporate income tax 1,315,108 83,284 192,140 696,224 1,290,958 B - EQUITY 13,908,600 12,298,131 11,067,512 11,354,923 11,262,549 Ratio average inventory Total Assets Turnover 14,069,987,964 1.218 Average Total Asset ROE 1.352 46,025,401 0.0946 ROA 0.02 Industry average ROE-2015 0.05 Financial Statement of 0.007 Construction 24,146,955,780 1.477 46,017,826 0.03 Industry average ROA-2015 ( 18,478,976,481 1.487 45,944,512 0.01736 0.0018 materials from 6,290,935,204 1.628 43,378,064 0.0613 0.00418 industry 16,422,968,923 0.1146 0.02 2010-2014, - retrieved from:http://www.cophieu68.vn/category_ib2.php) 86 | P a g e TIEU LUAN MOI download : skknchat@gmail.com ... the high inventory in the company directly It is important to find the best solutions of excess inventory and effective inventory management Exploring of methods of reducing the current inventory. .. findings of measurement of Inventory Turnover Ratios (ITO) , Days sales of Inventory (DSI) and internal, external factors that impact on Inventory Management of the company The ineffective Inventory. .. skknchat@gmail.com List of Chart Chart Sales revenues of THMC from 2011- 2014 Chart THMC‟S of sales and service Chart ROA and ROE ratios of THMC from 2010-2014 Lists of Tables Table ROA Ratios