Improving the inventory management activities in phat dat joint stock company

INTRODUCTION Context of the thesis In the global economy, in order to develop, every business must ensure the autonomy in production and profitable business activities Businesses must pay attention to all stages in order to best meet the needs of business operations and improve the quality, lower production costs so that it is able to ensure competitiveness for the products For manufacturing enterprises, warehousing activities, especially warehouse and inventory management, are particularly important If these activities are done well, businesses will reduce a large amount of costs including the cost of storage of raw materials, the cost of renting space, At the same time, good warehouse management will ensure adequate supply of raw materials for production, avoiding material shortages leading to production bottlenecks or shortages of market supply products The management of warehouse and inventory has a strong impact on the performance of business but has not been given adequate attention, especially in small businesses Therefore, I decided to spend my internship at Phat Dat's warehousing department to be able to learn more about inventory management activities Eventually, I chose the theme: “Improving the inventory management activities in Phat Dat Joint Stock Company” for my thesis In addition, the thesis will clarify the pros and cons of inventory and inventory management activities at Phat Dat Joint Stock Company (JSC) and provide solutions to overcome the negative aspects Subject and purpose of research 2.1 Subject of research The subject of the thesis is the inventory management activities at Phat Dat JSC 2.2 Purpose of research The purpose of the thesis is to give recommendations and solutions to improve the inventory management activities at Phat Dat JSC 2.3 Missions of research The thesis needs to focus on main missions as follow: Summarizing basic theoretical and concrete knowledge about the - inventory and inventory management - Analyzing the inventory management activities at Phat Dat JSC - Giving solutions to improve the inventory management activities at Phat Dat JSC Scale of research The thesis analyse the activities realated to the invnetory management of Phat Dat JSC These activities mainly take place in the warehousing and manufacturing department of the company In addition, the data is calculated between 2017 and 2019 Methodology 4.1 Data collection The thesis is made mainly based on the collection of secondary data, in addition to collecting primary data These two data sources are collected as follows: - Secondary data: Analysis data is collected through accounting reports and business statements of the company Other sources are newspapers, magazines, statistic offices, and websites, etc Secondary data is plentiful, varied, and comes from different sources Therefore, researchers must be familiar with the sources to exploit information easily and quickly Secondary data is easy to collect and less time-consuming This type of data is an important document in research as well as other academic papers However, secondary data is not enough when it comes to research because of the incompletetion - Primary data: the data is collected by the writer while working at the company, based on the observation and recording process during the internship The data is considered simple and incompete.However, this is also a helpful source of information so that the writer can make conclution about the subject of research 4.2 Data processing Statistical, descriptive, and synthesized methods of data: using statistical tools to collect data and then analyze, compare, evaluate, and draw conclusions about the causes of the change 4.3 Case study Disposition The thesis includes parts: - Chapter I: Literature review about inventory and inventory management Chapter II: Phat Dat JSC and the warehousing management activities of the company - Chapter III: Recommendations and solutions CHAPTER 1: LITERATURE REVIEW ABOUT INVENTORY AND INVENTORY MANAGEMENT 1.1 Overview about inventory 1.1.1 Inventory definition Inventory is the array of finished goods or goods used in the production held by a company Inventory is classified as a current asset on a company's balance sheet, and it serves as a buffer between manufacturing and order fulfillment (Kenton, 2019) Inventory is either goods or materials or both of these that the company holds for different purposes It plays an important role in the business and other activities related Inventory appears in both manufacture and sevices For manufacture, inventory refers to all work that has occurred – raw materials, partially finished products, finished products prior to sale and departure from the manufacturing system In the context of services, inventory refers to all work done prior to sale, including partially process information (Wikipedia: Inventory, n.d.) There are some main reasons for keeping an inventory which makes stook important to the business: - Time: the time lag appears at different stages of the supply chain It is also called by a familiar name – lead time To maintain the production and shorten the ordering time, the company needs to store inventory and calculate other factors related - Seasonal demand: the consumption of goods depends on periods of the year Special times such as the new year or vacations can affect customer’s psychology and demand - Economies of scale: the cost advantages could be obtained more when the company store inventory specifically activities in bulk - Uncertainty: the instability in supply, demand, etc is the reason to hold inventory to adapt to the production of the company In short, inventory is needed in every sector of the economy Due to its importance, inventory has been studied for a long time and the theoretical framework about it is quite adequate Aspects such as classification of inventory and how to store it efficiently were presented throughout the years 1.1.2 Functions of inventory There are some main functions as follow: - Improving the service quality: inventory helps reduce the waiting time of customers Also, defective products can be converted easily if there is any request from the buyer - Reducing logistics cost: the costs for shipment, warehouses could be reduced thanks to suitable inventory - Adapting unexpected orders: having enough inventory will offset the limited production capacity when there are unexpected orders with large quantities - Saving cost for business: the company can preserve more inventory at low price periods to cut down buying cost as well as to use for business when the price rises On the other hand, different industries would hold inventory for different purposes, which makes this asset become varied functional 1.1.3 Classification of inventory Inventories are diversified and different industries have seperated ways to classify Therefore, to manage inventory well, we need to classify inventory by some specific methods: Classify inventory based on purpose and uses Inventory in the business will be divided into: - Inventory for production: material, semi-produced goods, etc - Inventory for sales: fully-made products and other goods for sales This method helps managers make purchasing estimate as well as reserving plans for inventory and other business activities Classify inventory based on source of formation - Purchased inventory includes internal purchased inventories are bought from suppliers inside the system of the business (these suppliers and the company usually share the capital or have the same owner) On the other hand, external purchased inventories would contrast to internal purchased ones - Self-produced inventory: stock produced and store by the company itself - Inventory from other sources: inventories as gifts or venture, etc It is easier for managers to calculated cost of good sold in this method so the firm could evaluate the stable level of inventories’ formation Classify inventory based on Standard no.2 The standard was Issued and publicized together with Decision No 149/2001/QD-BTC of December 31, 2001 of the Minister of Finance In this standard, inventory is divided into: - Goods purchased for sale: goods in stock, purchased goods being transported en route, goods sent for sale, goods sent for processing; - Finished products in stock and finished products sent for sale; - Unfinished products: uncompleted products and completed products not yet going through the procedures for being put into stores of finished products; - Raw materials, materials, tools and instruments in stock, sent for processing, and already purchased but being transported en route; - Costs of unfinished services (VAS - Inventories, 2001) This document is the standard for business to determine the types of inventory and how to make the balance sheet as well as the financial statements In short, every method has a specific meaning to business activities Depends on the situation and the requests of the company, the managers can choose their ways of classifying inventory 1.2 Inventory management 1.2.1 Definition There are many difinitions about inventory management since this is an important party of supply chain These difinitions could be all summarized to the following words: Inventory management is the supervision of non-capitalized assets, or inventory, and stock items As a component of supply chain management, inventory management supervises the flow of goods from manufacturers to warehouses and from these facilities to point of sale (Inventory management, 2020) 1.2.2 Functions and meaning of inventory management To manage inventory is to: - Make sure the quantity and characteristics of inventory stable during the production - Take care of the value of inventory so that the stock so that the company can avoid damage and the decrease in value to inventory - Ensure the capital of the firm at the reasonable and optimal level to increase the effect of capital and reduce the costs Inventory management is significant because inventory is a valuable asset to the business Managing current assets in a good way will bring back great influences on the accomplishment of the tasks and goals set out by the company On the other hand, if these assets are not effectively used, the business activities will have difficulities Therefore, inventory management is one of the most important thing to in business There are two costrary sides of inventory management: - If the firm wants a continuous production and there is no interruption, the manager will have to increase the amount of inventory in the warehouse - On the contrary, a rise of stock makes the company bear more cost related to inventory 1.2.3 The costs of inventory management Ordering cost The costs relate to making orders, searching suppliers and other activities in the order process such as negociation, etc Storage cost Costs of storage includes: - - Renal and other fee related: + Rental or depreciation for houses + Insuarance for warehouses or stores Costs for using devices and vehicles: + Rental or depreciation for devices and vehicles + Energy cost + Equipment operating costs - Labour cost - Costs of damage or broken inventory - Other costs such as taxes, insurance for inventory, etc 1.3 Content of inventory management 1.3.1 Criterias for inventory management To manage the quantity and quality of inventory by: - Guaranteed the condition of the warehouse such as temperature, space, etc to preserve goods - Classify the inventory suitably - Apply appropriately methods and tools to manage the inventory in the strorage To manage the value of inventory by: Control the capital of goods in physical form as a basis for assessing the assets of enterprises and the efficiency of using capital goods From there, the administrator sets the basis of a reasonable selling price and calculates the profit after sale 1.3.2 Models for inventory management CHAPTER 2: PHAT DAT JSC AND THE WAREHOUSING MANAGEMENT ACTIVITIES OF THE COMPANY 2.1 Introduction of Phat Dat JSC 2.1.1 Overview - Company’s name: Phat Dat JSC - Location : Bac Hong, Dong Anh, Hanoi - Tell: 0977386986 - Fax: 0348836792 - Email: phatdat0666@gmail.com - Business Code: 0102018662 - Legal Representative: Truong Van Phong Phat Dat JSC was established in 25/08/2006 with the main business area is producing wood household appliances such as table, chair, etc, and office stationeries like bookshelf With a wide range of products, the company has created a flexible business activity that can help to provide the most needed product and adapt the market’s demand at an instant point Orders from other manufacturers are taken which makes the company become a production supporter producing semi-finished products or accessories At the same time, the firm manufactures products based on typical designs and offers to customers by planning marketing and sale strategies These selfproduced products are the advantages of the company in diversifying and expanding the business The suppliers of the company: - Dai Hiep Import and Export Co., Ltd - Hoang Anh Gia Lai JSC - Minh Long Production and Trading Co., Ltd The customers of the company: - TMC Hanoi production, trade and construction limited company inventory scale but the number of products sold decreased In 2019, the pace has increased again to be 2.91 and became the highest rate in three years due to the company's stable performance and a much lower import volume than exports Even so, the company still needs to recalculate a reasonable inventory to reduce management costs, and storage costs to increase capital, avoid congestion to improve business profits CHAPTER III: RECOMMENTDATIONS AND SOLUTIONS Comment on inventory management activities at Phat Dat JSC 1.1 Advantages In recent years, despite the volatile economy and fierce competition among competitors in the market, Phat Dat JSC still attracts new customers and enhances the business with annual sales maintained at the stable level - The company has tried to diversify the suppliers in order to improve the quality and enrich the sources of goods In addition, there is a variety of products to meet the needs of different customers The company has also quickly captured consumers' tastes to offer highly competitive products, diversified in form, design, price - To improve the amount of products consumed, the company has made advertising on websites Accompanied by promotions through new customer care programs In addition to improving its reputation, the company has added a number of services such as warranty, product changing with defective or broken products, - The company's employees have diverse ages, mainly from 21-40 The human resource here has a combination of young, agile workers who are ready to learn new things and employees who have much experience and professional skills This combination creates not only professional but also comfortable atmosphere for employees to be able to complete the work well - The company has introduced new policies to improve the working efficiency and labor productivity of employees, one of which is the policy of using bonus points Each employee who works beyond the norm, being selfdiscipline, will be rewarded by their direct manager and evaluated by colleagues The points will be converted directly into money In addition, there are also sanctions policies to limit frauds and mistakes of regulations These policies have helped improve the working efficiency of the company in general and the warehouse department in particular - Although there are many types of inventory, they are all furniture and objects in the wooden industry, making inventory management and storage more convenient and helping to save classification costs - The reasonable inventory reserves help the company cope with fluctuations in the market such as prices, customer deamnd, showing that the company has a proactive business attitude - The warehouse built by the company has good conditions, which helps to preserve the products better and there is no phenomenon of products being termite, moldy during storage 1.2 Drawbacks - The company has not been able to find a cheap supply, resulting in high cost of goods sold which reduced profits - The inventory turnover time is long - an average of 120 days in all years analyzed The company needs to recalculate a reasonable quantity of inventory to meet production and reduce inventory-related costs - The arrangement and management of products in the warehouse are still manual and lack of uniformity, leading to difficulties in checking and causing a lot of calculation as well as efforts at the end of the accounting period - The number of employees and equipment in the warehouse that does not meet the growing scale of the company Only employees are highly qualified and there is a lack of management systems and technologies In addition, remuneration has not met employee expectations, depressed mentality and reduced labor productivity About the inventory activities, Phat Dat JSC currently does not have a forecast work such as a clear demand for products, each order is based on a director's decision or a previous inventory Morover, the company has not developed a specific method of calculating inventories, so it is difficult to collect costs related to inventory Another point is the excess or shortage of inventory occurs quite often Most inventories always exceed the necessary level which leads to: - Increase in cost of maintenance, storage and the capital stagnant in inventory - Lack of capital for production and business activities Inventories are not well controlled and outdated due to technology failure to catch up 1.3 New situation and background In 2020, the economy of Vietnam is predicted not to have good growth due to the coronavirus pandemic GDP and other important indexes are also expected to decrease because of lower demand and the limitation of business activities, etc This new global economic crisis impacts on every country and industry in the world Phat Dat JSC is not the exception when the wooden industry was said to have low development for the first time in ten years (Nguyen, 2020) The outbreak has a great effect on the capacity of transportation and consumption The price for material is now rising because of the difficulty in logistics and shipment that made the average price level rise 2-3 USD on cubic meters China, the main source of supply and also a huge customer is now limiting import and export activities, which makes the situation more difficult Some other problems that the company has to suffer from are the decrease of orders and the cost to maintain the business The new situation and policies of the government to fight against the virus made the company reduce the output And to overcome all the challenges, the company need to change their way not only in 2020 but also in the near future The main supply of material from China should be replaced by other sources Also, the inventory will need to be adjusted to cut down the cost but still ensure the production of the company The inventory management which plays an important role will need to be cared more by the company Recommendations and solutions 2.1 Development orientation in the future Long-term orientation: Phat Dat JSC is a company that mainly supplies wooden products, the company always focuses on product quality and customer service Human resources have differences in professional qualifications, cultural levels, awareness levels, social relations, geographic location, which create diversity and complexity in the working environment Improving corporate culture, training qualified and responsible staff members is one of the company's longterm development goals In the future, the company plans to focus more on developing furniture production, expanding the variety of designs and items with the goal of becoming a quality and trusted supplier of furniture by customers To achieve these goals, the company needs to: - Build a qualitative workforce, improve organization and operation effectively - Ensure the balance between revenue and expenditure, using the investment capital effectively, forecasting and eliminating from bad debt step and risk factors - Research the market carefully and look for opportunities to implement intensive production strategies and create stability in business to take initiative in market fluctuations - Develop marketing stratergies to maintain old customers while developing a new customer base - Create and promote the image of a professional company to customers, and spread the brand in the community in an extensive way - Develop service and post-service activities both in quantity and quality - Promote sales promotion activities such as building product images, product introduction videos or organizing factory tours, service and product introduction sessions Short-term orientation: The optimistic point is that Vietnam's timber industry is likely to break out when the Chinese market (the biggest competitor) is "frozen" because of the disease But opportunities are only opportunities if businesses are unable to connect with customers because of the pandemic Therefore, the company need to turn the traditional way of business into new and mordern activities One of the effective choice is ecommerce Phat Dat will need to showcase the products on ecommerce platforms and invest on its own website to promote sale For the inventory, the company will have adjust the plan for purchase and production in 2020 The amount of inventory bought need to be decreased yet maintain at a stable level so that the manufacture can work when the situation become normal The company also has to limit the cut down of the laborforce since this is one of the most valuable asset The solution might be working as shifts and negotiate with employees to reduce wages 2.2 The ABC inventory system The ABC analysis is an inventory categorization technique (Wikipedia: ABC analysis, n.d.) This method is used to divide the inventory into three categories (A, B, C) in order of their importance “A” products are the most valuable and important and they need frequent value analysis “B” and “C” are less important items than A when these products’ value is lower and they account for lower consumption too The application of ABC system will help classify the inventory and the company can have suitable ways of storing different types of goods To apply this method in the warehousing activities of the company, we need to know about the products and also their value, quality, etc Table will introduce the inventory with specific data (note: the table only provides information about main self-produced goods and regardless of semi-finished products and inventories which are not in the warehouse regularly): Table Classification of main products Types of No products 4-unit shelf 2-drawer chest Bookcase Chair Wardrobe Total Source: Synthesized by the author ABC analysis does not have a fixed proportion for each class; however, base on the core rule is that A will have a large percentage of the value, but a small share of the quantity and vice versa for B or C Therefore, the products of Phat Dat can be divided as follows: Table Classes of products Categories No Proportion to total Proportion to total inventory quanlity annual value A B C Total Source: Synthesized by the author After classifying the products, the company should pay attention to which types of products to produce and hoard The capital would be used suitably between groups and it is also important that the company need to calculate different auditing cycle for each group: - Products in class A should be audited and checked more frequently and the recommendation is once a month - Class B will have a longer audit cycle such as months and class C might have approximately months The warehousing department could formulate a plan to manage inventory according to the following table: Table Plan of auditing the inventory Class Quantity A B C 2.3 EOQ model Economic Order Quantity – EOQ is one of the methods to help manage inventory effectively It is the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs (Will, 2020) EOQ will help the company to find the optimal number of products to order and cut down the cost of buying, transportation, etc EOQ helps to manage the cash flow in the inventory balance and for this model, the company also can decide the reorder point The formula of EOQ is shown as: √ With Q* = EOQ units D = Demand in units S = Order cost H = Holding cost It is important to know all the information about D, S and H of Phat Dat Co., LTD in 2018 and 2019 (the number of working day is 300 days a year) Table shows the inventory demand in 2018 and 2019 as follows: Table Inventory demand in 2018-2019 Inventory demand every year (D) Inventory demand every day (L) Then, we have the costs for order in table 9: Table 10 Order cost for order Order cost (S) Source: Synthesized by the author Finally, find the cost of storing for unit of products in this period Table 11 Holding cost for unit of inventory in 2018-2019 Formula Total holding cost Holding cost for unit (H) Based on the data collected, we calculate the quantity order (Q*) and other important targets assuming that every order has L equal Table 12 Calculation of optimal quantity and other targets EOQ units (Q*) Optimal holding period (T) Reorder point (ROP) Optimal number of order (n) From these tables, it is clear that the real quantity of order (Q) of the company is higher than the ideal quantity (Q*) calculated from EOQ method Table 12 compares these two number as bellow: Table 13 Comparision between real quantity order and optimal quantity order Unit: unit Q Q* Source: Synthesized by the author The large excess of inventory increased several costs including labor cost, opportunity cost, etc and cause waste of sources for inventory However, the EOQ model only includes order cost and holding cost Other important costs such as purchasing cost, damage cost when there are no goods, so that the result of this model is not completely correct to the real business situation 2.4 Reorganizing the warehouse In chapter 2, the Warehouse's diagram shows drawbacks and it is possible to have better arrangement in the warehouse The new arrangement is suggested as Picture 4: Picture New warehouse's diagram Source: Synthesized by the author Since the warehouse has good condition and types of inventory has been divided, the new diagram recommends to put the inventory in parallel Two paths (grey areas) that have the width enough for forklift would be added Moreover, the inventory with high value will be moved to outside, near the showroom so that visitors could know about these products This new arrangement expected to overcome the circumstance of inventory hidden and difficulty to pick 2.5 System to support inventory management The VsoftBMS.IM software is recommended since it was built and designed completely new with Microsoft NET V2.0 and SQL Server 2005 technology, full Unicode Font support, and fully compatible with Windows The software also can integrate and expand business management into a complete solution for enterprise management (such as integration of remote management thesiss, integration of business booths on the Internet, ) Some of the advantages of VsoftBMS.IM are: - The software was designed to manage data in the system easier - VsoftBMS.IM let the center know the operation situation by real-time in the warehouse From the headquarter, the manager could control every activity in the warehouse - VsoftBMS.IM also helps aggregate data from sources and give analysis for system activities CONCLUSION In recent years, the continuous development of the world economy has led to the development of a global supply chain in which warehousing is indispensable It can be said that warehousing acitivities in general and warehousing management in particular are and will play an essential role in the global economy During my internship at Phat Dat JSC, I had a better overview of warehousing management and warehouse operations of a company Thereby, I realize that the knowledge I have is very little and I will need more learning to be able to catch up with the development of the era and to open up career opportunities for myself Due to time constraints and qualifications, the analysis and evaluation in the thesis are still many errors and subjective of the author The solutions given in this article have not been optimized I look forward to the appreciation and suggestions from the teachers Once again, I would like to express my appreciation to Ph.D Pham Ngoc Tru and employees at the warehousing department of Phat Dat JSC for helping me with this thesis Hanoi, 5/2020 ... Summarizing basic theoretical and concrete knowledge about the - inventory and inventory management - Analyzing the inventory management activities at Phat Dat JSC - Giving solutions to improve the inventory. .. preparing inventory for shipment - Picking the inventory: the warehousing department will prepare the inventory and documents needed after receiving the order Then, the employees will bring the inventory. .. inventory management activities at Phat Dat JSC Scale of research The thesis analyse the activities realated to the invnetory management of Phat Dat JSC These activities mainly take place in the warehousing