INTRODUCTION
Company profile
Name : THE HE MOI TRADING AND CONSTRUCTION LTD., CO
ADDRESS: 299, TAN KY TAN QUY STREET, TAN SON NHI WARD, TAN PHU DISTRICT, HO CHI MINH CITY.
Established in 1996, THM has been a trusted supplier of construction materials, including stone, steel, paints, and civil tools Over the years, THM has fostered strong relationships with various construction material agencies while adapting to market trends and customer needs This growth led to the formation of THE HE MOI TRADING AND CONSTRUCTION LTD., CO, which specializes in paints and painting tools.
The company has established a strong market presence and reputation, leading to a significant increase in orders and an expansion of its market segment nationwide.
ACCOUNTING DEPT WAREHOUSE DEPT employees
About the labor force, the company has the senior sales teams, which trained carefully Human resources department set up to treat management, contribute to the development of the company.
2.1.2 Scale and organization Chart of THM Company
- Human resource: 1 Director, 1 vice- director, 1 chief accountant, 1 warehouse manager,
1 sales manager, and 20 employees in department.
The infrastructure is located at 299 Tan Ky Tan Quy Street in Tan Son Nhi Ward, Tan Phu District, Ho Chi Minh City Additionally, the warehouse is situated at 259 Tan Ky Tan Quy in the same ward and district.
Since establishment, THM specialized in trading paints and supporting materials, as followings:
- Dulux interior paint: Inspire, Easyclean, 5 in 1
- DULUX base interior paints: inspire BA( BB), Easyclean P1( p2,p3,p4), 5 in 1 PA( BB,
- Maxilite Base interior base: BA, BB
- Dulux standards interior paint: Inspire, Wheathershield ( solid surface-anti-water - PowerFlexx)
- Dulux Base outside paints: Inspire BA (BB), Wheathershield BA (BB, BC, BD)
- Maxilite Base outside paints: BA, BB
- Dulux inside and outdoor power
- Joton, Jotun, Expo, Nippon, Apollo, Maltcoat, USA…powers
- Anti-heat, anti fade color, anti-
The Vietnam Paint and Printing Ink Association (VPIA) reports that over 600 companies are involved in the paint production and trading sector in Vietnam, with many major international brands established in the market As competition intensifies, foreign brands currently hold a 65% market share Notably, Akzo Nobel Vietnam and Expo lead in productivity, producing 30,000 and 40,000 tons per year, respectively Despite this competitive landscape, significant opportunities remain for local Vietnamese enterprises to grow and thrive.
The market is divided into four segments: high-quality brands from Japan, America, and England, such as AKZO NOBEL, NIPPON, and JOTUN, which account for 35% of the market share The second segment consists of Asian brands like 4 Organges, TOA, and SeaMaster, representing 25% of the market Domestic brands, including Joton, Kova, and Tison, make up 15% of the market, while other brands comprise the remaining 25%.
2.2 Perceived Problem from the Financial Statement context
From 2002 to 2011, THM was a leader in sales and revenue, experiencing consistent growth in customer volume and sales However, starting in 2012, the company faced a rapid decline in sales, revenues, and profitability due to rising warehouse and management costs, coupled with low sales attributed to excess inventory This excess inventory significantly impacted profit margins, as evidenced by financial statements from 2010 to 2014, which show a clear correlation between high inventory levels and decreasing sales revenues for THM.
2011 to 2014 Chart 1 below show the declines of the sales revenue.
Chart 1 Sales revenues of THMC from 2011- 2014
Source: Financial Statement of THMC from 2011- 2014( Appendix 2)
The declines of sales revenues has an affect on the profit of THMC, it leads the profits go down over the years, eventually some years the profits are minus.
Chart 2 THMC’S of sales and service
Source: Financial Statement of THMC from 2011- 2014
The Return on Asset (ROA), and Return on Equity ( ROE) have also gone down, in the low level from the findings from the Financial Statements.
Return on Asset is defined and calculated by the formula in summarizing:
ROA= Net Incomes/ Total Assets
ROA is over 5% in 2011, and minus in 2013, 2014 ROE ratios are also the same The chart 3 will show the results of THMC year by year.
Chart 3 ROA and ROE ratios of THMC from 2010-2014.
Source: Financial Statement of THMC from 2011- 2014
A higher Return on Assets (ROA) indicates that a company generates more profit from its investments However, THM's ROA has significantly declined from 0.191 in 2011 to just 0.028 in 2014, falling well below the performance of competitors like MOC THUY and the industry average.
MOC THUY's Return on Assets (ROA) ratios were 0.114 in 2011, 0.14 in 2013, and 0.108 in 2014 When compared to the industry average ROA of 0.06, MOC THUY's performance remains lower than that of TMH Detailed comparisons can be found in the balance sheet and financial statements of both THM and MOC THUY from 2011 to 2014.
2014, see more in appendix 1,2,3 That indicates the lower ROA‟s THM is, the less earning the firm can collect.
( Sources: Financial Statement of THMC and MOC THUY)
In addition to, the finding from other component of ROA, the THM‟s turnings, which measured by total Revenue by Total Assets, also indicated the declines in turning from 1.86 in
From 2010 to 2014, the MOC THUY ratio increased from 1.79 to 2.03, indicating a positive trend Detailed results can be found in Appendix 1, while the accounting information is provided in Appendix 3.
The low Return on Equity (ROE) of THM indicates that the company's profitability is limited, as ROE measures the percentage of net income generated relative to shareholders' equity This metric reveals how effectively a corporation utilizes shareholders' investments to generate profit.
The THM company has experienced a significant decline in its Return on Equity (ROE) ratios from 2010 to 2014 ROE is calculated by dividing net income by shareholder equity, highlighting the company's poor performance during this period.
Hence: ROE( Return on Equity)
The profitability of the firm has significantly declined, with ratios dropping from 0.456 in 2011 to negative values of -0.01745 in 2013 and -0.09704 in 2014, which are considerably lower than those of MOC THUY Despite this downturn, the firm exhibited a strong return on equity (ROE) of 0.24 in 2010 and 0.22 in 2014, indicating that it remains one of the more profitable companies in the industry Furthermore, the industrial average ratio of 0.2 surpasses that of THM company, highlighting the firm's competitive position.
( Sources: Financial Statement of THMC and MOC THUY)
Since 2011, the inventory turnover ratios have significantly declined, dropping from 5.62 in 2011 to 1.82 in 2014, as detailed in Table 1 Concurrently, the Days Sales of Inventory have surged from over 64 days in 2011 to more than 200 days, indicating potential sales losses for the company In contrast, the Moc Thuy Paint Joint Stock Company has demonstrated superior performance, with an inventory turnover ratio ranging from 5.47 to over 6.7, significantly outperforming TMH.
( Sources: Financial Statement of THMC and MOC THUY )
A high inventory turnover ratio is typically advantageous for a company, as it reflects strong sales performance However, if demand for a product exceeds available inventory, even a high turnover ratio can lead to lost sales opportunities.
Days Sales of Inventory ( DSI)
Days Sales of Inventory ( DSI ) is defined and calculated as the following formula :
From 2011 to 2014, THM's Days Sales of Inventory increased significantly, rising from 64 days to over 200 days, indicating a prolonged inventory turnover In contrast, MOC THUY maintains a more efficient inventory management system, with Days Sales of Inventory ranging from 55 to 66 days This shorter timeframe suggests that MOC THUY effectively utilizes its inventory compared to THM Supporting data can be found in Appendix 2.
The four tentative problem- The inadequate planning and execution system
proper planning methods, erroneous purchase)
To achieve sales targets, companies like THM are prepared to purchase excess inventory during specific periods However, THM lacks a robust planning and execution system, which is crucial for effective firm management.
Stockholder findings indicate that excess inventory is primarily caused by over-purchasing to meet sales targets set by manufacturers When the company fails to reach these targets within a month, it is compelled to purchase additional products from manufacturers, contributing to the surplus inventory, as noted by the Directors.
When market prices increase, companies often respond by accumulating inventory to sell at higher rates, aiming to maximize their profits.
According to research by Dobler, Burt & Lee (1990), Quayle & Quayle (2000), and Lining B & Ying Z (2008), purchasing serves two primary purposes: for resale and for consumption or transformation Firms typically adopt a more cautious purchasing approach when the costs of items rise Additionally, Toelle & Tersin (1989) identified that excess inventory often results from improper planning methods, inaccurate purchasing or work orders, and inadequate production scheduling.
Planning and control activities are crucial for companies as they help reduce operating costs, maintain optimal inventory levels, fulfill customer demand, and adapt effectively to market changes (Thales, Carlos et al., 2014).
The fifth tentative problem- Low Expectations and forecasting
Low expectations and inaccurate forecasting significantly contribute to excess inventory, as highlighted by the Sales Manager of THM The challenge lies in predicting market demand and future customer preferences, which are constantly evolving Customer behaviors and tastes shift frequently, influenced by factors such as branding, product design, and color choices As a result, companies struggle to align their offerings with the ever-changing demands of consumers.
Lastly, Low Expectations and poor forecasting demand management , such as forecasting errors the market demand, and future customer‟s demands, market trends….is substantial reason for excess inventory.”
Forecasting inventory levels poses challenges for companies, as they must balance the risk of lost sales due to stock-outs with the potential reduction in profit margins from holding excess inventory According to Lining Bai and Ying Zhong (2008), maintaining lower inventory levels can lead to stock-outs William J Stevenson (2003) highlights that businesses hold inventories for various reasons, including meeting customer demand, smoothing production processes, decoupling internal operations, hedging against stock-outs and price increases, and facilitating economical purchasing.
Excess inventory often arises from inaccurate demand tracking and forecasting, as noted by Rafael M Pefianco (2013) Overestimating future demand can lead to excessive cash flow tied up in unnecessary stock, while underestimating can result in over-ordering to meet unexpected high sales Factors influencing inventory levels include business type, supply chain length, product lead times, and actual demand Dan Dowling (2014) highlights that poor management of demand forecasting and product life-cycle tracking typically contributes to excess stock According to Blackwell & Blackwell (1999), demand management involves efforts to estimate and influence customer demand to inform operational decisions Additionally, changes in customer preferences and retail competition continuously affect demand forecasting Effective inventory management relies on accurate future demand forecasting, as emphasized by Bala (2012).
Demand forecasting is crucial for businesses as it directly impacts their ability to predict future customer demand, which is influenced by various factors and presents significant challenges Accurate demand forecasting enhances financial savings, competitiveness, and customer satisfaction while fostering better channel relationships, as highlighted by Moon et al (2003) Similarly, Agrawal and Schorling (1996) and Barksdale and Hilliard (1975) emphasize that precise demand forecasting is vital for profitable operations and effective inventory management Toelle and Tersine (1989) noted that forecasting errors, such as failing to anticipate declines in product demand, can lead to excess inventory Furthermore, Hengdrick and Singhal (2009) identified that poor forecasting and issues related to new product introductions are common causes of excess inventory.
2.8 The sixth tentative problem-External factors economic growth, Suppliers policies,competitive
External factors such as economic conditions, competitive advantages, and industry competitiveness significantly influence efficient inventory management These elements contribute to a company's growth, expansion, and market credibility (Hiller, Frederick & Lieberman, Gerald, 2001, P.935) Research by Chan et al (2005) indicates that firms with higher inventory levels often experience poor long-term stock returns In interviews, Mrs Nga highlighted that inefficiencies in inventory management stem from external factors, including changes in supplier policies from DULUX and JOTUN, which limited THM's market segments to construction projects Additionally, the competitive landscape, characterized by both foreign brands like Akzonobel, Dulux, and Jotun, and local brands such as Dong Tam, further exacerbates high inventory levels.
Mr Thanh, the Sales Manager, stated that the business environment is increasingly challenging due to heightened market competition With numerous agencies and enterprises entering the field, both foreign and local brands are vying for attention As a result, it is essential for the company to continuously update its brand offerings to remain competitive in this dynamic market.
A study by Signhal (2005) identified a significant link between stock market fluctuations and excess inventory in companies Analyzing 900 announcements of excess inventory from 1990 to 2002, the research revealed a median abnormal return of -37.22%, highlighting the detrimental effects of excess inventory on stock performance Additionally, findings from Chen et al (2005) further support this connection.
Kontus ( 2008) had found that the company with poor long – term stock returns would have abnormally high inventories.
Research by Hendrick and Singhal (2009) highlights that the competitiveness of a firm's industry significantly affects stock reactions In highly competitive industries, firms can leverage excess inventory, but the consequences of such inventory may be more detrimental To gauge industry competitiveness, the Herfindahl Index is employed, which calculates the sum of the squared market shares of each firm within the industry A higher value of one minus the Herfindahl Index indicates greater industry competitiveness.
The mismatch between supply and demand significantly affects inventory levels, leading to excess inventory when supply exceeds demand A study by Hendricks and Singhal (2003, 2005) revealed that 73% to 74% of firms experienced negative market reactions due to this imbalance Additionally, Roumiantsev and Netessine (2005) emphasized that in volatile environments, effectively matching supply and demand is crucial for managing inventory, influencing both the quantity and the rate of inventory changes.
Mrs Mai emphasized that market changes and evolving customer behaviors significantly influence company operations For instance, this year, customers have shown a preference for specific product types, leading agencies to stock these items However, as customer preferences shift next year, there is a risk of excess inventory Additionally, the popularity of colors and paint models varies annually, with customers often staying informed about trends online, allowing them to modify their choices accordingly.
Effective inventory management relies heavily on accurately forecasting market demand and implementing optimal promotional strategies Research by Zhang and Ju-Liang (2012) highlights the interconnectedness of pricing, promotions, and inventory demand, demonstrating that anticipated demand and well-planned promotions can significantly enhance inventory levels.
2.9 The real core problem of THM context- Low expectation and poor forecasting demand
The financial statements reveal a concerning trend in THM's inventory management, with a significant decline in the Inventory Turnover (ITO) ratio and a sharp increase in Inventory Days from 2010 to 2014 This indicates inefficiencies, as reflected in the Days Inventory on Hand and Days Sales metrics The company is grappling with excess inventory, primarily due to low expectations and inadequate demand forecasting Figure 2 illustrates the cause-effect relationships derived from this analysis.
Inventory record inaccuracies replenishments, disbursements, stock level, stock locations, part identification numbers, and product structure Increase handling cost firm size, product samples and
Inefficiency INVENTORY management differentiation, failure customer service Consumes/ increase working capital
Inadequate planning and execution system( failure to use proper planning methods, erroneous purchase )
Obsolescence (Lack of inventory management objective, poorly planned, coordinated engineering change design excess inventory
Low Expectations and poor forecasting demand management
External factors(considered by the great benefits, economic, and competitive industry competitiveness, recession period
Figure 2 The cause-effect trees exploring from the analysis
POSSIBLE SOLUTIONS DESIGN
Alternation 1- Using the proper Forecasting Methods
Establishing the optimal inventory level relies on analyzing historical sales data and accurately predicting market and customer demands Effective forecasting methods encompass both qualitative and quantitative approaches, with quantitative methods such as time series analysis playing a crucial role in enhancing accuracy.
Models (Moving Average and Exponential Smoothing, Casual Methods (Regression Analysis). While Qualitative methods include Jury of executive opinion – Sales team opinion.
Mrs Mai, General Director of MOC THUY, emphasized that the painting market is expected to grow alongside the recovery of the real estate sector She noted the importance of establishing robust delivery channels, as paint is primarily distributed through agencies and project sites Additionally, she highlighted that competitive pricing and exceptional after-sales service will be key advantages for businesses looking to thrive in this market.
Mark A Moon, John T Mentzer, Carlo D Smith, and Michael S Garver (1998) emphasize that effective sales forecasting relies on both quantitative and qualitative tools For optimal results, these tools must be understood and applied thoughtfully, taking into account the specific business environment of the firm.
Effectively utilizing forecasting tools involves understanding their strengths and limitations, and creating a tailored process that leverages these advantages within the specific context of the organization Sales professionals who may struggle to translate their experience into an initial forecast can still excel by refining a quantitative forecast with qualitative adjustments to enhance overall accuracy.
- companies that experience changing trends and seasonal patterns.
-it no use in determining the 'relationship between demand and such external factors as
Regression analysis is a powerful tool for evaluating the impact of price changes, economic activity, and marketing strategies It effectively assesses relationships and trends, making it invaluable for forecasting future changes However, it is less effective in measuring the efforts of a company compared to its competitors.
- it needs training in using the techniques, seasonality. determining where they work and do not
- it is Easily understood, Easily computed, work, and incorporating qualitative Provides stable forecasts adjustments in the overall forecasting process -usestimeseriestoforecast trendand
To effectively forecast demand over the next N periods, it is essential to save and analyze extensive historical data points This includes examining seasonality and employing regression analysis to understand the relationships between demand and external factors Additionally, incorporating qualitative insights from sales personnel enhances the accuracy of these forecasts.
-Lags behind a trend marketing, and general management to adjust
-Ignores complex relationships in data these initial quantitative forecasts
Alternative 2-Forecast as Close to the Customer as Possible
A forecasting process can be defined at various points in a supply chain and is frequently attempted wherever inventory moves from one point to another Forecasting points could be:
Customer Distribution Center (DC) Customer DC DC Plant DC Suppliers Plant However, the sources forecasting process is from the end user, the more distorted a demand signal becomes.
Each stage of the supply chain is influenced by various internal and external inventory factors, including re-ordering practices, safety stock policies, and the challenges of effectively conveying real consumer demand throughout the supply chain.
Operations management teams at various levels consistently request a forecasting tool to enhance their processes, specifically for predicting components and raw materials based on historical demand The guiding principle is to "never forecast what you can calculate." Therefore, forecasts for raw materials and components should be derived from the net replenishment forecast of finished products, which is ultimately based on customer sales forecasts informed by POS data.
In summary, moving the process closer to the ultimate consumer, there is some benefit points according to Mark A Moon, John T Mentzer, Carlo D Smith, and Michael S Garver, 1998.
-Minimizes the distorting effects of factors such as inventory stockpiles and re-ordering criteria
-Improves communication between you and your customer
-Allows you to take a step towards ground- breaking inventory reduction models such as
- Corporate the Customer Distribution Center (DC)
Effective inventory management is influenced by various internal and external factors, including re-ordering policies, safety stock strategies, and vendor-managed inventory systems By optimizing these elements, businesses can significantly reduce their own inventory levels as well as those of their customers.
Alternative 3-Communicate, Share, and Use the Data to Drive Your Sales and
Demand forecasting is essential for establishing a unified approach to Sales and Operations Planning within a business Relying on static spreadsheets for managing financial data, budgets, demand forecasts, resource plans, and inventory targets complicates this process This fragmented approach fosters siloed thinking, as each department operates with its own version of the truth, making it challenging to achieve cohesive business objectives.
Implementing a dynamic and flexible forecasting system that integrates with your ERP and other data systems enhances communication, ensures data consistency, and facilitates KPI measurement, ultimately leading to improved forecast accuracy and greater business efficiency.
Inconsistent data across supply chain forecasts can lead to significant waste, resulting in excess or insufficient inventory, higher labor costs, and unnecessary activities that do not add value.
However, it has some difficulties in practice:
Effective forecasting performance in organizations often suffers due to employees' reluctance or inability to collaborate across different functions Achieving high levels of accuracy requires substantial communication between departments, and the quality of this communication varies significantly among companies, with some excelling in fostering interdepartmental dialogue.
- Companies at lower levels of sophistication merely communicate
One-way reports play a crucial role in forecasting, as they inform other functional areas about the outcomes of their efforts To enhance coordination, representatives from various functional groups convene to discuss these forecasts It is essential for these groups to engage in discussions and work collaboratively to persuade others to accept the forecasts they have developed.
Effective forecasting relies on creating a collaborative mechanism that unites individuals from various organizational departments By organizing this effort through an independent forecasting group, all pertinent information can be thoroughly evaluated prior to the development of forecasts.
Alternative 4 -Consider Inventory planning , controlling inventory more efficiency Long- term Strategies
For effective long-term strategies, it is essential for companies to implement inventory management models According to Dan Dowling (2014), inventory management involves planning and controlling inventories using appropriate tools and techniques to determine the best items to purchase, their prices, quantities, and timing to maximize profits Key components include assessing lead times, establishing optimal safety stock levels, and accurately managing inventory post-purchase Additionally, the PDCA models of inventory management and the IMAP model designed by Thomas C et al (1990) can further enhance inventory control practices.
The Directors emphasized the importance of overseeing inventory management systems, which includes purchasing, selling, and monitoring market conditions and customer demands Sales Manager Mr Nam echoed this sentiment, suggesting that reducing inventory through promotions and effective sales strategies is crucial He highlighted the need for better forecasting of demand and market trends, alongside enhancing product quality and after-sales services Additionally, implementing user-friendly software on the company’s website would facilitate customer orders and support, ultimately leading to increased sales.
IMPLEMENTATION
To effectively address the challenges faced by small and medium enterprises (SMEs) like THM, it is crucial to implement suitable inventory management methods Given the current issue of overstock or excess inventory, THM should focus on increasing its Inventory Turnover Ratios This can be achieved by reducing the average inventory levels and streamlining stock categories through the application of ABC analysis.
An effective forecasting method involves a process closely aligned with customer interactions, utilizing key forecasting points such as Customer Distribution Centers (DC), Plant DCs, and Supplier Plants The primary source of the forecasting process originates from the end user; however, it is important to note that as demand signals become increasingly distorted, the accuracy of forecasts may diminish.
Effective communication and data sharing are essential for enhancing your sales and operations planning process Implementing the PDCA (Plan-Do-Check-Act) approach in inventory management can be more beneficial than traditional IMAP methods Setting the order quantity strategically ensures it meets the desired coverage period set by the manager.
4.1 The followings of proposes for the THM company can be set for forecasting of demand in short-term 2016
According to the production manager's experience, establishing initial stock levels is not a purely mathematical process Instead, it involves setting stock levels that align with the desired service level, implementing these levels in practice, and continuously monitoring and adjusting them as needed.
In 2016, we will forecast demand based on the Customer Distribution Center (DC) and Supplier Plant data The Director anticipates growth in this market driven by a recovery in the real estate and construction sectors As a result, we expect sales to increase by 6-10% in the upcoming year.
The Vietnam Real Estate Association estimates that the real estate market may recover by 5-10% in 2016, leading to growth in related industries such as construction materials and interior-exterior equipment, as reported by baodautu.vn Approved initiatives currently in progress aim to reduce inventory, leveraging forecasting methods like moving averages and expert insights to increase Inventory Turnover (ITO) by 10% in the coming years.
Inventory turnover Ratio=COGS/Average Inventory THM‟ s COMPANY Jan –Feb 2016 Mar- June,2016 July- Sep 2016 Oct-Dec,2016
The emphasis is currently on short- and mid-term timeframes due to the numerous uncertainties surrounding long-term emission reduction initiatives, making it challenging to evaluate their effectiveness with a reasonable degree of validity and accuracy.
Jan –Feb 2016 Mar- June,2016 July- Sep 2016 Oct-Dec,2016
Table 6 Estimate the reducing in average inventory
Initially, three different timeframes were identified within the action planning process:
July- Sep 2016 Oct-Dec,2016 Jan-2017
C, Pay attention to buy A-Items,
C, Pay attention to buy A-Items,
C, Pay attention to buy A-Items,
Set Safety Stock and Order
OQ aprroach, forecast SS by Experiences‟s Managers)
OQ aprroach, forecast SS by Experiences‟s Managers
OQ Approach forecast SS by Experiences‟s Managers
OQ Approach, forecast SS by Experiences‟s Managers
OQ Approach, forecast SS by Experiences‟s Managers
Table 7 Planning the Action Plan of THM 4.2 Do product classification
A fundamental approach to inventory management involves categorizing products and customers based on their aggregated inventory value This differentiation enables managers to concentrate their efforts on key areas and identify appropriate actions for each specific improvement opportunity.
Generally, a three -level priority rating is sufficient to determine the order of priority: A (most important), B (intermediate), and C (least important).
Table 8 ABC Analysis of Items in Stock of THM
— THM pays attention its Capitals to purchase group A, need much more than Group C. Priority, management of group B should be invested.
— Items in group A need to be priority in arranging, checking, and controlling Accuracy reported of Group required to carry out often.
— Each of group will be forecasted with suitable forecasting methods Especially, the forecasting on group A.
4.3 Set safety stock and order quantities
The basic idea is to give high priority to class A items (products with high volume value, i.e. quantity x unit value is high) and lower the inventory levels of these.
To optimize stock management in the volatile painting market, it is crucial to maintain a low safety stock level while frequently replenishing inventory Given the fluctuating demand, safety stock should exceed the order quantity, both measured in weeks of consumption As total consumption rises, adjustments to safety stock and order quantities will be necessary to ensure adequate supply and minimize total stock value impact.
The supporting of calculating the Optimal inventory Level can be used by EOQ ( Economic Optimal Quantity - Chamber, Lacey (2012).
Or using the Alternative Order Approach.
OQ= Maximum Inventory level- Reorder Point+ DDLT
Table 9 Safety and Stock Level
Resource Attention High Moderate Low
Next year, the THM service level is anticipated to reach 0.9, with a lead time of three months The director can determine the Safety Stock based on her experience and utilize Excel to calculate the necessary inventory for the company An example calculation for A-items in the specified categories is provided.
Table 10 Estimate the Safety Stock and Order Quantity of A- items
Aug-07 Sep-07 Oct-07 Nov-07 Dec-07
Summing the forecasts Deviation in the past sales
Service factor: 1 NORMSINV(D7) Inverse of the normal distribution
Lead time factor: 2 SQRT(D6) Square root of lead-time to forecast ratio
Reorder point: 7,809,246,412 D9+D13 Lead time demand + safety stock
Estimate Reducing in AI and Increase
0 Jan –Feb 2016 Mar- June,2016 July- Sep 2016 Oct-Dec,2016
4.4 The estimate target for the reduce of average inventory along with Short-term times can be showed at Chart 4 followings:
Chart 4 Target result Estimate of ITOS and AI
CONCLUSION
In today's dynamic market, small and medium enterprises (SMEs) like THM Company face significant challenges, particularly in inventory management Issues such as inaccurate inventory records, ineffective systems, and poor demand forecasting contribute to excess inventory, which negatively impacts assets, return on assets (ROA), return on equity (ROE), and overall profitability Research indicates that inadequate demand forecasting is a primary cause of high inventory levels To mitigate this, THM Company should enhance its demand forecasting by closely engaging with customers and optimizing the Customer Distribution Center and Suppliers Plant Additionally, the company must address various internal and external inventory drivers, including re-ordering practices and safety stock levels Implementing strategies such as Economic Order Quantity (EOQ), Alternation Order Quantity, or Just-in-Time purchasing, along with effective inventory management techniques like the PDCA (Plan-Do-Check-Act) method, will be crucial for improving inventory control and overall business performance.
SUPPORTING INFORMATION
Methodology of collecting data
This research investigates the internal and external factors influencing effective inventory management at THM Company, a supplier of construction materials like DULUX and JOTUN Inefficient inventory management leads to low working capital, adversely affecting the company's profitability Employing quantitative methods, the study utilizes questionnaires as qualitative tools, while the literature review provides essential evidence regarding the impact of various variables on inventory management The analysis is based on inventory ratios derived from financial statements from 2009 to the present, with the Dupont Model serving as a critical tool for identifying issues and proposing solutions.
The consequences of excess inventory
Mrs Nga, the director, identified significant issues with excessive product samples and feature differentiation in the warehouse, leading to high inventory costs This situation ties up working capital in both new and old products and necessitates additional warehouse space, as the company currently operates two warehouses Furthermore, the need for more employees to manage sales and warehouse maintenance increases operational costs, compounded by rising taxes Consequently, these factors contribute to higher rental and management expenses for the warehouse.
Mrs Mai, General Director of MOC THUY CO., emphasized that excessive inventory leads to lost investment opportunities and increased costs, including warehousing, maintenance, insurance, and labor As sales slow down, the company experiences reduced revenue and declining profitability.
Excess inventory has significant negative consequences, including increased handling costs and the consumption of valuable storage space According to Toelle and Tersine (1989), overstocking not only ties up working capital but also raises interest payments on borrowed funds, ultimately providing no immediate benefits.
Excess inventory negatively impacts a firm's net cash flows by increasing holding costs, including storage, insurance, taxes, spoilage, losses, and interest (Hendrick & Singhal, 2009) This surplus leads to a decline in value and raises the costs associated with price protections and product returns (Callioni et al., 2005) Additionally, high inventory levels contribute to increased expenses related to storage, insurance, spoilage, and interest on borrowed funds (Sim & Siegel, 2007).
Excess inventory tied to low market demand can result in significant lost revenue for companies Capital is locked in these products, leading to various carrying costs, including rent, equipment expenses, labor, utilities, insurance, and accrued interest on unsold stock, as noted by Dan Dowling (2014).
Goldsby et at., 2005 indicated that when holding all inventories, the costs go beyond the expenditure of the inventory investment, inventory carrying cost including accounting costs and economic cost.
Excess inventory can lead to reduced profits for companies, as they are often forced to place surplus items on clearance to attract buyers with lower prices This strategy results in significantly lower profit margins and decreased cash flow compared to selling products at regular prices Additionally, overstocked inventories increase storage costs, including expenses for space, insurance, labor, and other utilities, ultimately leading to higher operational costs for the company.
Many companies often resort to reducing inventory through write-offs, markdowns, and promotions, which can lead to increased per-unit costs due to the persistence of fixed expenses The financial implications of inventory write-offs indicate that capital invested in inventory loses value, necessitating either disposal or sale at significantly reduced prices.
Excess inventory can lead to reduced revenue, increased costs, and decreased profitability, as highlighted by Hendrick and Singhal (2009) Additionally, markdowns on inventory can further squeeze profit margins, underscoring the financial challenges associated with holding surplus stock.
According to Morales, Sierra, and Lopez (2015), their research on inventory management at Taxcommercial SAS reveals that both inventory deficits and surpluses significantly increase the likelihood of financial losses The study further indicates that ineffective inventory management leads to excessive assets in storage, higher working capital requirements, and reduced profitability.
- Limit resources and funding Avenues
Excess inventory can strategically respond to favorable market opportunities, as studies indicate that unusually high inventory levels may correlate with strong financial market performance However, elevated inventory can also signify challenges in product sales, potentially leading to a negative impact on inventory turnover, wasted storage space, and diminished return on investment.
Excess inventory can restrict a firm's resources and funding options, as noted by Hendrick and Singhal (2009) This limitation can hinder the company's capacity to seize new business opportunities and may also obstruct the introduction of new products while efforts are focused on clearing existing surplus stock.
Excess inventory restricts a firm's resources and funding options, leading to heightened uncertainty regarding future earnings and sales growth This uncertainty raises concerns about the quality of earnings, resulting in lower price-earnings ratios and uncertain future prospects for the firm.
According to Neil Kokemuller (2007) on the "Small Business" page, firms face space issues when dealing with excess inventory, as it occupies valuable floor space and hinders the introduction of new products Additionally, the turnover-per-foot of shelf space becomes ineffective when outdated products remain in storage.
Forecasting demand models
One of the most cost-effective methods for demand forecasting is to analyze historical data, although this approach primarily concentrates on numerical trends and may overlook other influencing factors The core principle of this model is that past demand patterns are expected to repeat, allowing for projections into the future.
D=F(t) While D : The variable to be forecast
F(t) : function whose exact form can be estimated from past data.
Dt+1= f( Dt, Dt-1, Dt-2…) b) The simple moving average models
F t+1 is the forecast for next period n is the forecasting horizon (how far back we look),
A is the actual sales figure from each period
The Moving Average Method offers several advantages, including ease of understanding, straightforward computation, and stable forecasting However, it also has notable disadvantages, such as the need to retain a significant amount of historical data points—specifically, at least the number of periods used in the calculation Additionally, this method tends to lag behind trends and fails to account for complex relationships within the data.
Assume that we are currently in period t We calculated the forecast for the last period (F t-1 ) and we know the actual demand last period (A t-1 ) …
The smoothing constant α expresses how much our forecast will react to observed differences…
If α is low: there is little reaction to differences
If α is high: there is a lot of reaction to differences α is the smoothing constant (usually between 0.1 and 0.2)
However, the time series method has their advantages and advantages: d) Casual Methods
This model analyzes the mathematical relationship between demand and an additional variable, though it requires more time and resources Nevertheless, it offers valuable insights into how demand fluctuates with changes in that variable In demand forecasting, it is essential to clarify the specific needs and the causal factors involved.
- Let Y be the quantity to be forecasted and (X1,
- X2, , Xn) are n variables that have predictive power for Y A causal model is Y = f (X1, X2,
- A typical relationship is a linear one:Y = a0 + a1X1 + + an Xn It is useful in cases:
The relationship between future demand and past events lacks a logical connection; however, various other factors can be identified that are logically associated with demand trends One effective method for analyzing these relationships is regression analysis, which helps to uncover the underlying patterns influencing demand.
This model used the dependence and involves estimating the value of a dependant variable Y, from an independent variable X Regression can be linear or non- linear. dependent variable = a + b × (independent variable
The error component can be categorized into three types: seasonal variations, which occur at regular intervals; cyclical variations, which resemble seasonal changes but have longer durations; and random variations, which are unpredictable and lack any discernible pattern To analyze these influences, we employ linear regression to identify the independent variables that significantly impact the dependent variable.
Inventory Management models
6.4.1 PDCA model of inventory management
PLAN is including Setting the layout and set the ambition level, or Planning how much inventory reduction you will make by the production Manager.
To effectively reduce inventory, prioritize addressing parts with the highest excess first Analyze detailed data for each part to understand its specifics, determine the necessary actions to take, and apply those actions accordingly Additionally, ensure to document your decisions with relevant comments for future reference.
- CHECK PROGESS aims at monitoring actual Stock levels.
- Finally, ACT TO MAKE THE CHANGE PERMANENT includes Identify root cause through Action Items, Identify root cause through adjusting planning factors.
- Set overall service level target
Setting initial stock levels is not a purely mathematical process; rather, it should align with the desired service level This involves implementing the initial stock levels in practice, closely monitoring actual inventory levels, and making necessary adjustments to optimize performance.
A fundamental approach to inventory management involves categorizing products and customers based on their aggregated inventory value This differentiation enables managers to concentrate their efforts on key areas and determine appropriate actions for improvement in each segment.
Generally, a three -level priority rating is sufficient to determine the order of priority: A (most important), B (intermediate), and C (least important) According to ABC analysis” (Joffrey Collignon, Joannes Vermore, 2012).
- Group A: including storage goods with high value, occupied from 70-80% in compare with the total storage volumes But the quantities are just 10-15% the storage goods.
- Group B is the goods with average value, occupied about 15-20% in compare with the total storage amounts, and the quantities of 30% in total.
- Group C includes low value goods, about 5% of total valuation, but the quantity of 50-
A- items should have tight inventory control, more secured storage areas and better sales forecasts; re-orders should be frequent, with weekly or even daily reorder; avoiding stock-outs on A-items is a priority.
B- items benefit from an intermediate status between A and C; an important aspect of class B is the monitoring of potential evolution toward class A or, in the contrary, toward the class C C-
Reordering C-items occurs infrequently, often following an inventory policy that maintains only one unit in stock and triggers a reorder only upon an actual purchase This strategy can result in stock-out situations after each sale, which is generally acceptable given that C-items have low demand and a higher risk of incurring excessive inventory costs.
- Set safety stock and order quantities
To optimize inventory management, prioritize class A items, which are characterized by high volume value (quantity multiplied by unit value) Maintain low safety stock levels for these products and replenish them frequently to significantly reduce total stock value Conversely, allocate minimal resources to low volume value items by keeping higher safety stock levels and replenishing them infrequently This strategic approach ensures that resources are effectively directed towards high-demand products.
To establish initial procurement levels effectively, it's essential to consult with the daily purchasing team, as their expertise can identify optimal levels that minimize disruptions.
Monitoring also plays an important role in continuously giving signals to adjust safety stock levels and ordering quantities.
Monitoring class A parts weekly is more effective than infrequent monitoring of all parts For low-volume items, maintaining a larger safety stock reduces the need for constant oversight Proactive monitoring should align future demand with existing orders and stock levels to effectively identify potential stock-outs and surplus inventory.
Forward-looking monitoring is conducted regularly, usually on a weekly basis, to effectively manage the supply required for production This process involves placing, adjusting, or canceling orders to maintain stock levels at the desired short-term threshold.
Parts that chronically seem to have too low or too high stock levels should be adjusted. Adjustments can be done in three ways.
6.4.2 IMAP Model for Inventory Management and Control
Thomas C et al (1990) developed an effective inventory management system to address inaccuracies in inventory records Their study highlighted the importance of physical inventory, operational processes, and management information systems in controlling inventory effectively.
The variance between periodic physical inventory and corporate perpetual records is essential for assessing record accuracy Implementing a cycle count program enables timely detection and resolution of inventory integrity issues, ensuring routine checks are conducted to maintain accuracy.
Implementing a policy to verify 2% of all stock items weekly helps identify errors early, mitigating the disruptive impacts of annual inventory counts This proactive approach not only minimizes the risk of significant write-offs but also reduces the costs associated with conducting an annual physical inventory.
Effective physical operations necessitate a detailed supervisor to oversee all facets of a firm's activities, including warehouse management, employee oversight, and customer service levels Key factors to consider include the volume of inward and outward movements at each operational node, delivery and receipt methods, stocking procedures, customer service requirements, and the establishment and location of inventory control points.
The IMAP management information system aims to enhance the information system by implementing a comprehensive two-and-a-half-year plan for the development, purchase, or modification of software that supports key functions such as inventory control, purchasing, planning, invoice processing, and accounting applications (Thomas C., et al 1990).
Figure 4 Inventory management and Asset protection ( IMAP)
6.5.1(EOQ－Economic Order Quantity) model of Optimal Inventory Level for
Excess inventory results in higher handling costs, as discussed earlier To reduce overall inventory expenses, Chamber and Lacey (2011) examined the Economic Order Quantity (EOQ) model, which helps determine the optimal order size and select the most cost-effective supplier, thereby minimizing total inventory investment costs.
Transcript
The interview of Director (CEO)
From the financial Statement, the finding is that Company’s revenues have decreased since 2011- 2014 The reasons why the revenues have changed?
- First of all, the Supplier, Akzonobel, has changed their policies to THM They cut the right of agencies, just selling to Construction Project.
- Real estate market has gone down from 2008, and continue to effect the construction market It is more difficult to sell, especially big Construction Projects.
- The competitive in this industry is more and more intense.
What are the main points for reducing the profitability?
Low profitability can stem from various factors, including rising costs such as increased cost of goods sold (COGS), the necessity of renting additional warehouses, and higher labor expenses Additionally, the policies implemented by the head office play a significant role in contributing to reduced profit margins.
- Revenues or sales of selling goods is high, The net income from sales declines accordingly.
Between 2012 and 2014, a lack of vision led to the decision to eliminate the agent segment, causing the company to focus solely on projects However, construction activity has been declining since 2008, and misguided policies have contributed to a recent drop in profitability.
So, the main reasons for high cost in operating activities of the company?
- There are many costs for operating activities, for examples, administrated costs, selling expenses, labor expenditures, waste the working capitals ( buying too much inventory goods, account receivable, cash…)
What are the main reasons for high inventory?
Manufacturers set sales targets for companies, and when these targets are not met by the end of the month, the company is compelled to purchase additional products to fulfill the requirements This practice often leads to excess inventory, as companies stockpile items in an effort to meet manufacturer expectations.
In a market characterized by rising product prices, companies often adopt strategies to stockpile goods, anticipating increased profits as prices climb.
- The demand of market: Market change always, therefore the seller can not estimate the demand according to the previous years.
Customer preferences for colors and styles are constantly evolving, making it challenging for companies to keep up For instance, while Dulux's blue color was popular last year, this year customers have shifted their preferences to different colors and brands This change in taste has disrupted initial inventory plans, resulting in excess stock.
The marketing department of manufacturers plays a crucial role in influencing sales and inventory management by frequently updating product samples and packaging designs to attract customers However, these changes can negatively impact suppliers, as unsold inventory of older packaging accumulates due to the continual introduction of new designs.
Do the competitors affect to the company?
- The competitive also influence on the company, such as lower prices, giving account receivable, new design and new samples.
In the situation of high inventory, Do you have any suggestions to handle the inventory?
In light of the current circumstances, the company aims to reduce inventory by lowering selling prices, which unfortunately leads to a decrease in profitability To navigate these challenges effectively, it is essential for the company to adapt to the existing conditions while simultaneously increasing inventory turnover to enhance overall profitability.
- I will supervise the inventory management Systems, from purchasing, selling, quantity of goods need to be orders, update the market conditions and customer‟s demands.
In-deep interview with the accounting staffs: Ms Ha, Mrs Nhi
How long have you been working at THM’s company?
- I have been working here since the THM‟s establishment.
What do you think about operating activities of THM’s?
- Since establishment, the company had a good operations However, the crisis 2008 affects on the company so much The revenue decreased till 2014.
According to your opinions, what do you think the problems of the company?
Mrs Nhi highlights significant challenges facing the company, including an excessive inventory volume resulting from declining sales and over-purchasing Additionally, the issue of uncollected accounts receivable is concerning, as many customers are unable to pay, leading to instances of "bad debt," while others are making limited payments.
Ms Ha shares Mrs Nhi's concerns, noting that in recent years, the company's revenue has declined, with sales volumes decreasing significantly Additionally, the warehouse is overstocked with inventory, and the accountant is facing challenges in collecting accounts receivable from customers.
As a chief accountant, what are reasons for excess inventory, your opinions?
The fluctuating market demand is a significant factor affecting the real estate and construction sectors As the real estate market experiences a downturn, the construction industry remains stagnant, leading to a slowdown in overall demand.
The inventory control system is inadequate, lacking effective management in both inventory and purchasing processes This weakness in planning and demand forecasting significantly contributes to the accumulation of excess inventory.
- Sometimes, the accountant department record inaccuracy the stocks that lead to the replenishment.
- The features of the products also impact on the inventory, for example the product structure, the differentiate in product ( importing products, or domestic products), packaging, delivery…
Have you suggested the solutions for excess and management the inventory effectively?
- I think the accounting department should set up a systems of controlling the inventory, also forecasting the demand and market accuracy.
- Recording the accuracy the amount of inventory every weeks and report in time to the stockholders.
- Planning the purchasing schedule, in time with a suitable volume.
Mr Thanh: the sales manager of THM- sales department.
Hello, can you introduce yourself?
- I am Thanh, I work as sales manager at THM for two years.
What is your opinions about THM’s company?
- Recently, the company‟s activities operating is gradually stables than in 2008 However, business is more competitive in goods, in price, and brands.
In your opinions, what is the main problems of THM’s company?
Inventory levels are excessively high, leading to sluggish operating activities and sales falling short of targets Additionally, rising costs for labor, warehouse rent, and maintenance are impacting profitability Compounding these issues, accounts receivable are on the rise, as goods are delivered but payments remain uncollected.
- The revenue is also reducing, and profitability is gone down.
Could you estimate some reasons for above situation?
The business landscape is increasingly challenging due to heightened market competition, with numerous agencies and enterprises entering the field Alongside the presence of foreign brands, local brands are also actively competing, necessitating that companies continuously update their brand strategies to remain relevant in this dynamic environment.
- Moreover, customer‟s behaviors, demands are always changing, it is difficult to forecast the demand and customer‟s behaviors.
Excess inventory often arises from the wide variety of product options available, including different types of packaging such as cans and boxes This diversification provides customers with more choices, but it can also lead to challenges in inventory management.
Do you have any solutions for the present situation?
- The first is that we have to sales off some inventories It is the method to reduce the amount of inventory.
May be the promotion should be done in this case.
- Besides, the sales staff also is trained and work hard
- It is should have a good strategy for sales, and inventory management.
- Forecasting the demand and market should be done more effective and accuracy.
- Moreover, the company should enhance the quality of products, improve the services, after- sales service, delivery.
Implementing a paint selection software on the company website can significantly enhance the customer experience, making it easier for them to choose and order products This innovative tool not only supports customers in making informed decisions but also has the potential to boost sales.
Moc Thuy Paint Company- Mrs Mai- Sales Managers
Good afternoon, sir, can you introduce a little about your business.?
- We specialized in supplying kinds of paint for construction sites, construction project, building such as decorating paint Dulux, Jotun, Joton, Mykolor, Maxilite, some local Brands likeDong Tam, Kova…
- Our business have started since 2010
How is your business this year?
- This year, market has been better, and recover the crisis due to the restarting real estate market.
However, the competitive is more and more fierce, Foreigner brands and local brands And over 600 enterprises join this industries.
- Our businesses are impacted a little, limit of sales, high inventory that make the revenue decrease, costs increase, and profitability decline accordingly.
What your opinions about the decorating paint industry?