(Luận văn) ineffciency inventory managerment case of excess inventory of thm company

t to ng hi UNIVERSITY OF ECONOMICS HO CHI MINH CITY ep International School of Business w n lo ad ju y th yi LU THI TAM HIEN pl ua al n INEFFICIENCY INVENTORY MANAGEMENT: CASE OF EXCESS INVENTORY OF THM COMPANY n va ll fu oi m ID: 22130022 at nh z z jm ht vb MASTER OF BUSINESS ADMINISTRATION k om l.c gm SUPERVISOR: DR PHAM PHU QUOC an Lu n va ey t re Ho Chi Minh City – March 2016 th 1|Page t to ng hi ACKNOWLEDGEMENT ep This thesis becomes a reality with the kind support and help of many individuals I would like w n to extend my truthful thanks to all of them lo ad ju y th First of all , I would like to express my gratitude and sincere thanks to my advisor, PhD Pham yi Phu Quoc for hid guidance, imparting his knowledge and expertise my study Special thanks to pl n regarding this thesis ua al members of THM Company for cooperating, supporting and providing necessary information n va ll fu Besides, the contribution of my group mates who have cooperated with me to complete this m oi thesis and classmates who have willingly helped me out with their abilities, play an important at nh role for my thesis finishing z z More interest, I would like to give my warmest thanks to my family who always support and k jm ht vb encourage me in completion of this thesis om l.c gm an Lu n va ey t re th 2|Page t to ng hi ABSTRACT ep In every industry, every enterprise or business, operating and managing their organization are w n very important The company will grow and make profit if they utilities their working capital lo ad including the inventory, debtors, loans and Advances, Gross working Cycle, Creditor and Net y th ju working Cycle Therefore, inventory, account receivable, account payable, cash management yi pl are the factors that impacts on the profitability The object of the research find the problems of ua al working capital management of THM including the inventory management, account receivable n va management, account receivable, cash flow management In segment of inventory n fu ll management, the study also makes clear the factors that impacts on the inventory management oi m including product samples and design, product feature differentiation, specific software request, at nh objective of inventory, failure customer service, using too much working capital in inventory z z ht vb and low of control the market demand Beside the external factors such as market trends, k jm customer‟s demand, competitive impact on the high inventory in the company directly It is l.c gm 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 om the properly inventory management models to apply for the company an Lu (ITO), the best ratio to measure the inventory management Additionally, it is necessary to find n va ey t re th 3|Page t to ng hi TABLE OF CONTENT ep ACKNOWLEDGEMENT w n lo ABSTRACT ad y th INTRODUCTION ju yi pl PROBLEM IDENTIFICATION- CASE OF THM COMPANY 10 ua al n 2.1 Company profile 10 n va ll fu 2.2 Perceived Problems from Financial Statement context 13 m oi 2.3 The first tentative problems- Inventory record inaccuracies 19 at nh 2.4 The second tentative problems- Product samples and differentiation, failure customer z z jm ht vb service……………………………………………………………………………………… 20 2.5 The third tentative problems- The obsolescence 22 k gm om l.c 2.6 The four tentative problem- The inadequate planning and execution system 24 2.7 The fifth tentative problem- Low Expectations and forecasting 25 an Lu 2.8 The sixth tentative problems- External factors economic growth, competitive 27 n va ey t re 2.9 Cause- effect tree of real problems- Low Expectations and forecasting 30 4|Page th POSSIBLE SOLUTIONS DESIGN 32 t to ng hi 3.1 Alternation 1- Using the proper Forecasting Methods 32 ep 3.2 Alternative 2-Forecast as Close to the Customer as Possible- 34 w 3.3 Alternative 3-Communicate, Share, and Use the Data to Drive Your Sales and n lo ad Operations Planning Process- 36 ju y th yi 3.4 Alternative -Consider Inventory planning , controlling inventory more efficiency pl ua al Long- term Strategies 37 n IMPLEMENTATION 39 n va ll fu CONCLUSION 46 m oi SUPPORTING INFORMATION 47 nh at 6.1 Methodology of collecting data- 47 z z 6.2 The consequences of excess inventory 47 ht vb k jm 6.3 Forecasting demand models 51 l.c gm 6.4 Inventory Management models 54 6.5 Model for suitable purchasing 59 om 6.6 Transcript 62 an Lu REFERENCES 73 n va ey t re APPENDIX 79 th 5|Page t to ng hi List of Chart ep Chart Sales revenues of THMC from 2011- 2014 w n lo Chart THMC‟S of sales and service ad y th Chart ROA and ROE ratios of THMC from 2010-2014 ju yi pl Lists of Tables n ua al Table ROA Ratios n va Table 2: ROE ratios ll fu oi m Table 3: Inventory Turnover at nh Table 4: Day Sales of Inventory z z Table 6: Estimate the reducing in average inventory k jm ht vb Table Target of Increase ITO an Lu n va Table 10 : Estimate the Safety Stock and Order Quantity of A- items om Table : Safety and Stock Level l.c Table 8: ABC Analysis of Items in Stock of THM gm Table 7: Planning the Action Plan of THM ey t re List of figures th Figure 1: The THM Organization Chart 6|Page t to ng hi Figure : The cause-effect trees exploring from the analysis: ep Figure 3: PDCA Model w n lo Figure 4: Inventory management and Asset protection ( IMAP) ad ju y th yi pl n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm an Lu n va ey t re th 7|Page t to ng hi INTRODUCTION ep This study found the reasons of decline of revenues and profitability over the years 2011- 2014 w n The decrease of Return on Asset ( ROA) and Return on Equity ( ROE) exhibited many lo ad tentative problems of the THM company The declines of sales, increase of holding costs y th ju effect to the low of revenues and low of profitability The costs from increasing of COGS, yi pl renting more warehouses, labors, cash investment in payments, short-term loans, or called ua al working Capital Management impact on the company performances n va n The primary findings of measurement of Inventory Turnover Ratios (ITO) , Days sales of ll fu oi m Inventory (DSI) and internal, external factors that impact on Inventory Management of the at nh company The ineffective Inventory Management of THM‟s presented through the low of ITO z and declines over the years In addition, factors of internal like Capital management of THM z vb the product sample and design, product feature differentiation, specific software request, jm ht objective of working management play an important role in effective of Inventory Management k gm of the company The too much slow moving or obsolete inventory, customer service failures l.c om and back orders due to lack of the correct inventory, product type, inventory size, are listed as an Lu reasons for inefficiency inventory management The changes in product design, excessive n va purchasing and forecasting errors are reasons for overstocking Among, forecasting errors, ey t re mismatching the demand- supply, or un-predicting customer‟s demand are substantial factors to th excess inventory 8|Page t to ng hi External environment factors like economic growth, market demands, competitive, customer ep behavior, recession periods contribute to the management of inventory Theories of inventory w management will prove for those variables The analysis will analyze the most influenced n lo ad factors to high or excess inventories, correlation between the variables y th ju Finally, base on the analysis, we found the possible solution to solve the excess inventory and yi pl manage the inventory effectively The improvement of ITO should be done by most of the ua al Directors by reducing the average inventory and reducing the number of merchandises n va Applying the accurate forecasting method, qualitative or quantitative methods likes Times n fu ll Series, Exponential Smoothing (ES), liner regression will make the company reduce the un- oi m expectation inventory ( R Lindeke , 2006) To a SMEs, as THM, applying the suitable at nh inventory management, PDCA inventory management methods, which categories the z z ht vb inventory by ABC analysis, calculating the EOQ, Alternative Order Quantity Approach k jm (Mathur, Kamlesh, et al., 1996, 697; Morales, Sierra, Lopez 2015) which used for SMEs, and l.c gm setting target depending on the Manager‟ Experiences Alternative Order Quantity Approach, establish purchasing review criteria to the inventory characteristics, collaboration with vendors om an Lu to improve the purchasing practice n va ey t re th 9|Page t to ng hi PROBLEMS IDENTIFICATION -CASE OF THM COMPANY ep 2.1 Company profile w n lo 2.1.2 Overview of THM ad y th Name : THE HE MOI TRADING AND CONSTRUCTION LTD., CO ju yi pl TAX CODE: 0302696827 ua al ADDRESS: 299, TAN KY TAN QUY STREET, TAN SON NHI WARD, TAN PHU n n va DISTRICT, HO CHI MINH CITY ll fu FAX: 08.38472838 oi m TEL: 08.35367276 nh at Since 1996, THM is a shop, which sold construction materials like stone, steel, paints, civil z z tools…Since then THM have been developing, creating many good relationships with other vb MOI TRADING AND k conditions, customer behaviors Therefore, the THE HE jm ht constructions; materials agencies Moreover, the company have been catching the market gm om l.c 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 an Lu Amount of orders has substantial increased, and expanded the market segment whole the n va country ey t re th 10 | P a g e t to Our company works with Big construction Projects However, since 2008, the real estate hi I have worked with THM for a long This is a qualified and reputation enterprises ep ng - market went down, therefore amount of orders have decreased accordingly w n What are your standard to choose a Suppliers of paints? lo It is depended so much on each project It‟s required the financial conditions of That ad - ju y th company, enough finance to supply to the Investors Qualified paints, competitive prices, after-sales service - Diversification in samples, brands, good in delivery, in time yi - pl al Volume of orders has been decreased from 2011-2014 about 30-40% due to the declines n - ua How have The Amount of your orders your company changed recently? n fu Moreover, there are other suppliers who provide with the competitive prices, promotion oi m policies, and credits for customers ll - va of amount of Construction Projects at nh z z k jm ht vb om l.c gm an Lu n va ey t re th 72 | P a g e t to ng hi REFERENCE ep Agrawal, D and Schorling, C ( 1996),” Market share forecasting: an empirical comparison of artificial neural w netnetworks and multinomial logit model”, Journal of retailing Vol 72 No.4 pp 383-407 n lo ad Ayad K Ali, Inventory Management in Pharmacy Practice: A Review of Literature, Archives of Pharmacy ju y th Practice 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http://rmpconsultancy.com/en/how-to-deal-with-excess-inventory/ an Lu n va ey t re th 78 | P a g e t to ng hi APPENDIX ep APPENDIX 1- RATIOS OF THM FROM 2010-2014 w n lo BALANCE SHEETS ad Đơn vị tính:.Đồng Việt Nam y th ju ASSETS yi pl 2013 2012 2011 31,104,656,317 36,331,973,260 44,463,768,655 9,143,524,331 1,333,853,168 5,912,901,441 1,333,853,168 5,912,901,441 9,228,399,034 12,156,451,169 9,228,399,034 12,156,451,169 al 28,399,207,109 I Cash and cash equivalents 6,680,845,994 n va (100=110+120+130+140+150) n ua a Current assets 2014 ll fu 6,300,090,088 at Accounts receivable from 8,624,257,077 nh 6,310,737,088 oi III Shorterm Account Receivavle 9,143,524,331 m 6,680,845,994 1.Cash 8,624,257,077 z z other Account Receivables 10,647,000 15,055,117,494 13,112,068,742 24,176,924,545 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 om an Lu 18,180,000 Short-term prepayments VAT deductibles 24,448,027,340 l.c V Other shor-term assets k IV Inventory gm jm ht vb customers 224,806,167 1,592,796,513 1,928,208,705 317,050,726 391,505,110 520,705,069 556,824,894 va 352,506,533 n Tax Government’s Account t re 79 | P a g e th B –Non- current assets(200 = 210 + ey Receivable t to ng 220 + 240 + 250 + 260) hi ep II Non- Current Assets w Tangible fixed assets 391,505,110 520,705,069 556,824,894 317,050,726 391,505,110 520,705,069 556,824,894 686,782,638 686,782,638 686,782,638 675,828,092 (369,731,912) (295,277,528) (166,077,569) (119,003,198) 28,716,257,835 31,496,161,427 36,852,678,329 45,020,593,549 27,730,971,074 33,040,742,551 39,851,059,406 31,490,742,551 39,851,059,406 5,383,846,256 1,550,000,000 25,528,383,192 23,916,561,891 38,270,257,935 390,334,404 30,801,471 n 317,050,726 lo - Cost ad ju y th - Accumulated depreciation TOTAL ASSETS (270 = 100 + 200) yi pl RESOURCES al 25,203,378,910 25,203,378,910 27,730,971,074 Short- term loans and liabilities 1,400,000,000 1,851,864,235 Trade accounts payable 23,803,378,910 n I Current liabilities va n ua a - LIABILITY (300 = 310 + 330) ll fu oi m at nh Taxes and amounts payable to 350,723,647 z the state budget z - - k 1,550,000,000 Long- term loans and liabilities 3,765,190,353 3,811,935,778 2,674,592,899 l.c 3,512,878,925 gm B - EQUITY(400 = 410 + 430) 1,550,000,000 jm - ht II Long- term liabilities 1,800,000,000 vb Other current Payables I Owner‟s equity 3,512,878,925 3,765,190,353 3,811,935,778 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 om 2,674,592,899 an Lu n va t re ey 400) th 80 | P a g e t to ng 26,441,898,754 hi Net sales ep Các khoản giảm trừ doanh thu w Doanh thu bán hàng 26,441,898,754 50,348,740,377 83,873,256,871 11,771,663 64,704,160 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 6,353,922 13,643,320 299,831,043 449,712,166 584,626,898 299,831,043 449,712,166 584,626,898 1,129,376,456 1,177,971,708 514,300,083 1,089,332,090 n 34,229,467,209 lo cung cấp dịch vụ (10 = 01 - 02) ad 25,605,589,897 ju y th Cost of sales yi gross profit from sales (20 = 10 836,308,857 pl ua al - 11) 4,691,687 n Financial income ll 786,082,349 at nh adminitration 501,528,084 oi m and fu General 99,534,130 492,249,759 sales Expenses 99,534,130 n - In which: Interest expense va Financial expenses 440,563,460 z z (45,377,948) 1,437,026,313 k 61,886,318 12 Other expenses (61,886,318) (45,377,948) 31,986,750 1,437,026,313 5,597,681 251,479,604 an Lu 14 Accounting profit before taxes (252,311,429) om l.c gm 22)-(24+25)} 13 Other profit (40 = 31 - 32) 93,873,068 jm 10 Profit from sales{30=20+(21- (252,311,429) ht vb expenses va (50=30+40) n ey t re 15 Current corporate income tax th expenses 81 | P a g e t to ng (45,377,948) 26,389,069 1,185,546,709 25,605,589,897 32,744,104,349 48,178,631,553 92,284,358,366 14,083,593,118 18,644,496,644 24,312,475,943 16,422,968,923 1.82 1.76 1.98 5.62 200.76 207.83 184.19 64.96 34,174,419,878 40,936,635,939 22,510,296,775 1.37 1.86 9.67 16.83 0.043 0.053 0.191 0.0006 0.0527 hi 17 Net profit after corporate (252,311,429) ep income tax( 60=50-51-52) w FINANCIAL ANALYSIS RATIOS n lo COGS ad ju y th average inventory yi Inventory turnover Ratio pl Days sales of Inventory ua al Average Total Asset 30,106,209,631 n 0.92 1.09 Leverage=Total Assets/ Total Equity 8.17 8.37 Total Assets Turnover Ratio 0.028 n va Turnings ll fu nh (0.0084) oi m ROA (0.0013) at -0.09704 -0.01745 0.01015 z ROE 0.45598 z k jm ht vb ( THM’s Financial Statement from 2010-2014) om l.c gm an Lu n va ey t re th 82 | P a g e t to ng hi APPENDIX MTC’S ( MOC THUY PAINTING COMPANY) BALANCE SHEET AND ep FINANCIAL RATIOS w n SDN'S BALANCE SHEET lo ASSETS ad I 2014 2013 2012 2011 2010 y th CURRENT ASSETS ju yi Cash and cash equivalents 6,203 1,731 4,192 3,621 23,422 19,059 18,723 15,607 14,198 14,989 12,184 9,987 12,694 11,281 315 120 45 101 153 pl 10,633 5,700 n ll fu Other receivables va Inventories n Short-term account receivables ua al Short-term financial investment Total Current Assets oi m II 50629 30485 32594 29254 nh at Long-term receivables 5,375 5,730 z 5,451 z Tangible fixed assets 41997 6,035 5,156 (13,962) (12,433) jm ht vb Accumulated depreciation (12,326) (11,009) (10,035) k 5,019 5,019 734 637 335 61834 53505 5,019 335 335 42003 om TOTAL ASSET 5,019 l.c 5,019 Other Long- term Assets III gm Long-term financial investments 44396 40177 an Lu LIABILITIES va 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 n Short-term liabilities th 83 | P a g e ey t re Total Liabilities t to ng EQUITY hi ep 28,214 TOTAL RESOURCES 26,925 61,834 w IV Owner’s Capital n lo Net sales ad Cost of Sales y th ju Gross profit from sales yi pl Net profit from activities al 53,505 42,003 22,816 44,396 21,703 40,177 125,540 108,800 92,460 84,537 72,057 91,840 80,763 69,339 65,690 55,754 33,700 28,037 23,121 18,847 16,303 8,927 8,844 8,545 5,387 5,532 6,254 6,695 7,248 4,840 5,317 n ua Net profit after corporate income tax 25,392 n va FINANCIAL RATIOS ANALYSIS 13,587 11,086 11,341 11,988 47,754 43,200 42,287 80,763 69,339 65,537 ll fu Average inventory m Average Total Asset 57,670 oi 91,840 at nh COGS 6.76 7.29 Day sales of Inventory 54.00 50.10 Turnings 2.03 2.03 Leverage= Total Asset/ Equity 2.19 1.99 z Inventory Turnover 5.47 59.70 66.76 z 6.11 55,745 1.90 1.79 1.65 1.95 1.85 k jm ht vb 0.29 0.21 0.24 om l.c 0.25 gm 0.22 ROE= Net Income/shareholder Equity 2.20 0.108 0.140 0.168 0.114 INCOME STATEMENT 2014 2013 2012 2011 Net sales 125,540 108,800 92,460 84,537 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 an Lu ROA= Net income/ Average Total Asset 2010 n va 72,057 ey t re th Operating expenses 84 | P a g e t to ng Financing expenses 3,176 873 1,643 1,042 673 700 870 1,264 831 9,589 6,074 5,100 4,902 4,106 12,045 10,228 8,803 7,263 6,155 25,322 19,478 14,776 13,808 11,303 551 284 200 347 531 8,927 8,844 8,545 5,387 5,532 96 121 181 126 246 8,965 8,727 5,512 5,779 1,479 672 461 1,479 672 461 4,840 5,317 hi 3,688 ep In which: loan interest expenses w Sales expenses n lo Adminitration expense ad ju y th Total Operating expenses yi pl al n ua Revenues from financing activities n va Net sales from sales activities ll fu Other Net profit m 9,023 oi Accounting profit before tax nh Profit expenses at 2,769 2,270 Total Profit expense 2,769 2,270 Net profit after corporate income tax 6,254 6,695 z Current corporate income tax expenses z jm ht vb 7,248 k om l.c gm an Lu n va ey t re th 85 | P a g e t to ng hi APPENDIX CONSTRUCTION MATERIALS’S INDUSTRY RATIOS ep n lo ad y th Inventory 2011 2010 15,930,323 14,858,088 14,332,750 14,352,016 12,898,837 5,611,008 5,586,697 5,341,547 4,752,051 4,659,207 6,569,990 6,204,840 6,391,841 6,642,729 5,676,247 29,914,174 31,348,217 31,496,597 31,707,660 27,797,614 46,206,305 45,829,347 46,059,676 40,696,451 34,188,384 31,029,072 30,970,944 25,002,890 5,517,352 5,441,258 6,506,716 4,642,767 198,951 786,873 1,421,959 304,653 918,264 1,593,798 192,140 696,224 1,290,958 11,354,923 11,262,549 ju 2012 z w short-term A.R 2013 pl A.CURRENT ASSET 2014 yi Long term assets 45,844,497 Revenue 37,646,543 Gross profit from sales and services 6,438,511 Net profit from operating activities 1,525,485 fu Accouting profit before tax 1,645,928 188,685 Net profit after incoporate income tax 1,315,108 83,284 B - EQUITY 13,908,600 12,298,131 n ua al Total Assets n va ll 44,998 oi m at nh 11,067,512 z vb Ratio 14,069,987,964 18,478,976,481 jm ht average inventory 24,146,955,780 16,422,968,923 6,290,935,204 k 1.218 0.0946 0.007 0.03 Industry average ROE-2015 0.05 0.0613 0.00418 0.02 0.1146 - n 0.02 43,378,064 va Industry average ROA-2015 45,944,512 0.01736 0.0018 1.628 an Lu ROA 46,017,826 1.487 om ROE 46,025,401 1.477 l.c Average Total Asset 1.352 gm Total Assets Turnover Statement of Construction materials industry from 2010-2014, retrieved ey Financial t re ( th from:http://www.cophieu68.vn/category_ib2.php) 86 | P a g e