Appendix B: System analysis for inventory control

CASE STUDY - II

SYSTEM ANALYSIS FOR INVENTORY CONTROL

B.1  Problem Definition

A dairy plant is processing 100000 liter milk per day and its capacity is expected to increase. A wide range of milk products are being manufactured by the plant. A number of machines are installed in different sections for manufacturing products. To keep all machines in running state, inventory of large number of engineering spare parts are being maintained in the plant by store section. The basic purpose is to provide related spare part at the time of need to avoid longer breakdown of machines. The term INVENTORY is defined as “the systematic control and regulation of purchase, storage and usage of materials in such a way so as to maintain an even flow of production and at the same time avoiding excessive investment in inventories”. The store manager is interested to computerize the operations of inventory to keep track on items available in the store.

B.2  Introductory Investigation

The system analyst interviewed various officials like manager of the store, dealing hand, and users to discuss present way of working and possible improvement in the system. During the discussions it was found that first user has to place a request on preprinted form to store manager through the concerned head of the section. Depending on the availability, item will be issued to user otherwise NOC is issued.  Quantity of item issued is subtracted from the balance and when item is received from the supplier quantity is added in the balance.  A special ledger is maintained to records issue and receipt entries of items. When the particular item reaches below reorder level procurement procedure starts to replenish the item. ABC analysis of inventory items is performed on regular basis which is time consuming process. The management also finds fast moving and slow items from time to time so that sufficient stock of fast moving items can be maintained and slow moving items can be reduced from the inventory. To facilitate inventory management, ABC analysis classifies the inventory items into following three classes based on the consumption value:

I. Class “A”: These items constitute the most important class of inventories so far as the proportion in the total value of inventory .The “A” items consists of approximately 10% of the total inventory items, accounts for 70% of the total consumption value of items. These items need a tightly controlled inventory system with constant attention to the purchase & stores management. A larger effort per item on only a few items will cost only moderately, but the effort can result in larger savings.

II. Class “B”: These items constitute an intermediate position, which constitute approximately 20% of the total items, accounts for approximately 20% of the total material consumption value. These items merit a formalized inventory system & periodic attention but the purchase & the stores management.

III. Class “C”: It consists remaining 70% items, accounting only 10% of the monetary value of total material usage. Quite relaxed inventory procedures are used. Low cost items that are typically commercially available and require little management control.

Some of the problems faced in existing manual system are:

i. A lot of paper work

ii. Occasionally register entries found misplaced

iii. Items have been ordered prior to the reorder level

iv. Orders have not been placed well in time therefore items run out of stock

v. Items issued are more than the available items in stock.

vi. Difficult to check the availability of items in store.

vii. Not able to perform ABC analysis regularly.

viii. Difficulty in finding fast and slow moving items.

The main concern of the store manager was that it is becoming difficult to manage large number of spare parts. He was also interested to know the availability of quantity in stock at the click of mouse. At the same time he wants to reduce the inventory cost as plant is spending large amount on inventory. After, thorough discussions with the concerned users a set of objectives for computerization of existing system were developed as described below:

I.  Providing better services to users and inventory managers.  

II. To reduce inventory cost avoiding under stocking.

III. Efficient management of items in stock.

B.2.1  Expected outputs from the system

I.  Current balance of item in stock.

II. List of items below reorder level.

III. Item wise cost of inventory.

IV. List of spoiled items.

V. List of items received and issued within a specific period.

VI. Ledger preparations as required by management

VII. ABC analysis of inventory items.

VIII.       Placement of orders for replenishment of items

B.2.2  Input requirements

I. Details of Inventory items

II. Details of items received

III. Details of items issued

IV. Details of issue form

V. Details of items ordered for procurement

VI. Details of potential vendors’

B.2.3  Methods and procedure

Computing Current Balance:  Current balance = Current Balance + Receipt - Issue

Computing Reorder Level:     Reorder Level = DailyDemand * ProcurementTime

DailyDemand = YearlyDemand / No.of WorkingDays

                                                Procurement time is generally constant

B.2.4  Model the existing logical system

Based upon detailed investigation of the present manual system, modular chat or functional decomposition diagram of the existing system is drawn in figure B.1 as given below. It should be noted that neither the equipment nor the type of manual and computer processing are shown in this diagram. The total concentration is on the logical flow of data.  All data needed in the above processing steps serve as a basis for developing model of the system and data dictionary.

Fig. B.1 Functional decomposition of components of inventory control system.