Effective Inventory Control and Management

“EFFECTIVE INVENTORY CONTROL AND MANAGEMENT: A CASE STUDY OF IKEA” UNIVERSITY OF WALES JANUARY 2012 Table of Contents ABSTRACT4 CHAPTER – 15 1. 1 INTRODUCTION5 1. 2 BACKGROUND OF THE ORGANIZATION7 1. 3 OBJECTIVES8 1. 4 RESEARCH QUESTIONS8 1. 5 PURPOSE OF THE RESEARCH9 1. 6 DELIMITATIONS9 1. 7 TARGET GROUP10 1. 8 JUSTIFICATION FOR CHOOSING THIS RESEARCH TOPIC10 1. 9 PROBLEMS FORMULATION11 1. 10 OVERVIEW OF THE DISSERTATION11 2. 4 INVENTORY CONTROL17 2. 5 APPROACHES USED FOR INVENTORY CONTROL:17 2. 6 INVENTORY CONTROL SYSTEM19 2. 7 INVENTORY MANAGEMENT SOFTWARE:20 2. 7. Components of the software:20 Asset tracking20 Barcoding20 Order management20 Service management20 2. 8 CONTROLLING INVENTORY21 CHAPTER – 3 Research Methodology:29 3. 1 RESEARCH TYPES:29 3. 1. 1. Exploratory Research:29 3. 1. 2 Descriptive Research:30 3. 1. 3 Explanatory Research:30 3. 1. 4 Chosen method for this research:30 3. 2 RESEARCH APPROACH:30 3. 2. 1 Qualitative Approach:31 3. 2. 2 Quantitative Approach:31 3. 2. 3 Chosen approach in this study:32 3. 3 RESEARCH METHOD:32 Inductive versus Deductive approach:32 3. 4 RESEARCH STRATEGY:33 3. 4. 1 Experiment:33 3. 4. Survey:33 3. 4. 3 Action Research:34 3. 4. 4 Case Study:34 3. 4. 5 Operations Research Modeling:34 3. 4. 6 Chosen strategy for the research:35 3. 5 DATA COLLECTION:36 3. 5. 1 Primary Data:36 3. 5. 2 Secondary Data:36 3. 6 APPROACHES FOR ANALYSIS:37 3. 7 QUALITY CRITERIA:37 3. 7. 1. Validity:37 3. 7. 2 Reliability:38 CHAPTER – 4 FINDINGS & ANALYSIS:39 CHAPTER – 6 CONCLUSION & RECOMMENDATIONS:50 CHAPTER – 6 FURTHER RESEARCH:52 6. 1 DIFFERENCES BETWEEN THE MODEL & REALITY53 6. 2 FINAL REMARKS:55 ABSTRACT In this research study the inventory management and control at IKEA is studied.

IKEA is a home furnishing company that produces high quality products at very low prices. This is only possible with the help of VMI i. e. vendor managed inventory system. To reduce the cost of logistics, the inventory must be reduced from the supply chain. VMI is a very good strategy of supply chain management where supplier is whole solely is responsible for full filling the demand inventory at customer’s stock. There are 19 VMI relationships which are maintained by IKEA. In this way IKEA is able to reduce the inventory at their stores and enhance the service level and satisfy consumers very well.

The main purpose behind doing this research is to determine whether the coordinated inventory management is useful for reducing the inventory levels at the IKEA stores or not. In this research a complete study about the inventory control and management is done. The results shows that there are various innovative ways used by IKEA to reduce its inventory level so that low prices can get involved in managing the inventory and good quality of service can be provided to the consumers. The VMI system used by the IKEA benefits the supply chain; therefore this is responsible for increasing the productivity of suppliers.

The increased number of inventory at distribution centre of IKEA may be troublesome but it can be also solved with the help of VMI CHAPTER – 1 INTRODUCTION 1. 1 INTRODUCTION The stream of management that is related to the keep and manages the objects and material or goods is called as inventory management. The basic domains of inventory management is to correct determination of order, asking for the material on correct time means proper timing. Inventory management is very important in supply chain management. To reduce the cost of total inventory keeping is referred as Inventory control.

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At present time inventory control is done with the help of barcodes and radio-frequency identification (RFID) tags that enable documentation of inventory automatically. Some of the inventory objects are fixed assets, circulating tools, library books, merchandise. The inventory objects are scanned under a barcode scanner or RFID reader so that all the data related to these transactions are recorded. After that collects additional information from the operators via fixed terminals or mobile computers. This whole process is used for the automation of sales and satisfies the consumers to fulfill his needs.

This all information is recorded in a system and then workers are required for packing and shipping of the order to the final consumer. In and outward hardware materials are also maintained by the inventory system. Various wireless and mobile terminals are used at the time of transactions moment and real-time inventory control system. The name IKEA stands for “Ingvar Kamprad Elmtaryd Agunnaryd”. Ikea is one of the largest and well-known companies for home furnishing. The main objective of IKEA is to provide good quality home furnishing products at comparatively lower prices.

The main core specialized areas of IKEA is designing, buying and selling home furnishing. At present there are more than 300 IKEA stores that are located in 37 different countries and are enhancing its number continuously. At present there are 127 000 employees are working in the company in the entire world such as in Europe, North America, Asia and Australia. This research study is mainly concerned with improvement of inventory control systems in order to lower inventory levels at IKEA. Most of the companies at national as well as international level are facing huge challenges due to immense competition in the market.

The challenges that occur in front of the companies are production of innovative product line and that too in lower prices. The company can overcome these challenges if it will be enhanced its strengths and overcome its weaknesses by various efforts. The analysis of target market has to done very properly so that company’s products will be purchased by more and more clients and company will earn profits and generate more revenues. This research paper is mainly related to the fact that how multinational companies manage all its operations related to the inventory and its control.

Various processes such as customer requirements, operations management, monitoring projects and other theories and processes applied in actual operation are studied here. In this research various findings related to the management of inventory and its control are gathered that underpins the theoretical aspects and the real strategies behind this concept. To ensure the correct supply of items or material at perfect timing the supervision of supply, its storage and good accessibility is required and that can be done with control of the inventory.

This is also called as internally control of all the things. Inventory control is an accounting process or system that is made for promoting efficiency or ensures proper implementation of a policy or safeguards for the assets to reduce any error or fraudulent activity. Inventory control can be explained as following ways also: ? In economics, it can be elaborated as the inventory control problem, that’s main objective is to decrease the overhead cost without declining the sales graph. ? In the field of loss prevention, systems designed to introduce technical barriers to shoplifting . 2 BACKGROUND OF THE ORGANIZATION IKEA is a privately owned home products company in the international market that deals in designing and selling of ready-to-assemble furniture such as beds and desks, appliances and various home accessories. IKEA is the best retailer in the home accessories sector. This was started in the year 1943 by 17-year-old Ingvar Kamprad in Sweden, the name of the company is decided according to the name initials of founder such as (Ingvar Kamprad), and the farm where he grew up (Elmtaryd), and his home parish (Agunnaryd in smaland , South Sweden).

This was a well-known organization that reduces the controlling cost of the inventory, various operational things and good management of inventory. Due to its innovative products it was able to generate more profits and global expansion in the year 2010. But with the help of its operational efficiency it could able to keep its prices lower. The groups of companies that form IKEA are all controlled by INGKA Holding B. V. , a Dutch corporation, which in turn is controlled by a tax-exempt, not-for-profit Dutch foundation. The ntellectual property of IKEA is controlled by a series of corporations that can be traced to the Netherlands Antilles and to the Interogo Foundation in Liechtenstein. INGKA Holding B. V. owns the industrial group Swedwood, which sources the manufacturing of IKEA furniture, the sales companies that run IKEA stores, as well as purchasing and supply functions, and IKEA of Sweden, which is responsible for the design and development of products in the IKEA range. INGKA Holding B. V. is wholly owned by Stichting INGKA Foundation, which is a non-profit foundation registered in Leiden, Netherlands.

The European logistics centre is located in Dortmund, Germany, and the Asian logistics centre is located in Singapore. In Delft and Netherlands, Inter IKEA Systems B. V. consists of the concept and trademark of IKEA and there is an agreement between these two companies. The IKEA Group is the biggest franchisee of Inter IKEA Systems B. V. Inter IKEA Systems B. V. is not owned by INGKA Holding B. V. , but by Inter IKEA Holding S. A. registered in Luxembourg, which in turn is controlled by the Interogo Foundation in Liechtenstein. Ingvar Kamprad has confirmed that this foundation is controlled by him and his family.

The company which was originated in Smaland, Sweden, distributes its products through its retail outlets. There are 332 stores of IKEA is the 88 countries of the entire world as of October 2011. In fiscal year 2010, it sold $23. 1 billion worth of goods; a 7. 7 percent increase over 2009. On February 17, 2011, IKEA announced its plans for a wind farm in Dalarna County, Sweden, furthering the furniture giant’s goal of running on 100 percent renewable energy. (Handfield, 2001) On the website of IKEA there are about 12,000 products that show the whole range of IKEA products and its specialties also.

From the year September 2007 to September 2008, there were total 470 million visitors of the website of IKEA. At that time, Company is very much interested in taking up eco-friendly processes for the production of its products. The number of IKEA is 3rd for the consumption of woods and it is lagging behind The Home Depot and Lowe’s. (Simchi-Levi D, 2007) Business idea: The main business idea of IKEA is to provide huge range of good designed products for home furnishing and that must be given in low prices so that many people can use them more. Vision: “To create a better everyday life for the many people. 1. 3 OBJECTIVES • To identify the challenges that occurs in the supply chain of IKEA. • To decrease the cost that is responsible for generating more profits at IKEA. • To improve customer services while scrutinizing the approaches for inventory control in order to lower stock levels • To determine the usage of coordinated inventory management for proper management and control of inventory. 1. 4 RESEARCH QUESTIONS • How the challenges can be solved in supply chain for IKEA? • At what level, reduction of holding cost can increase the profitability of IKEA? Is it a good idea to finding new approaches for inventory control in order to improve customer services? • How does coordinated inventory management is helpful in proper management of inventory? 1. 5 PURPOSE OF THE RESEARCH The main aim of this research is to find out the operational efficiency of IKEA and to determine the inventory management at IKEA. This study includes operational efficiency, capacity planning, process layout, and product services/scheduling, inventory and how all the projects were managed in the organization. Simchi-Levi D, 2007) The evaluation and monitoring of all the operational processes can be done, this all will going to explore in this case. This research will be helpful in getting all the empirical findings related to the research and the matter that supports the theories related to operations, inventory management and control. This research study will scrutinize the thing that how a model can control the multi-level inventory system and it is also used for calculating the reorder points for IKEA’s distribution centers and retail stores. (Hines, T. 2004)

This research study will also give knowledge about the simulation software that is used for calculation of inventory that how much inventory can be decreased if a coordinated inventory control method is executed rather than the uncoordinated control system used today. This analysis is done by using a sample of articles and the corresponding real case data from a geographically limited area. For conduting this study in a smooth way, the flow of material that is chosen was simplest multi-level case where one distribution center is there and more number of retail stores are selected.

The goods or material is distributed from that one distribution centre only. The chosen articles are taken from different price, frequency and service level categories. This means that even though only a fraction of the total number of articles is included, the results of the project should be representative for a larger number of other articles. (Haag, S. , 2006) 1. 6 DELIMITATIONS In any research study the geographical area must be chosen so that this area can be selected as a sample to conduct this research study. The geographical area chosen in this case study is the distribution center and the seventeen retail stores.

The common goods are sent to all retail stores from the single distribution centre and direct deliveries from the suppliers are not entertained. All articles are also found in the self-serve range of products. In this research the products that are already used is not used for conducting the project because that can affect the results of this research. The distribution of new products is done from the distribution centers. The goods that are moved very less from the distribution centre is not used for this research. (Hines, T. 2004) 1. 7 TARGET GROUP In any research study the target group carries the utmost importance.

The one target group is IKEA and the fellow students at the university, especially those studying inventory management and future master’s thesis authors. The usage of this research thesis for IKEA is to see the operational things and inventory management at its place and evaluation of its overall inventory management and control. This project is also concerned with the employees that are working with the supply chain management at IKEA (Handfield, 2001). The coordinated inventory management will be helpful in reduction of inventory, this concept will be explored in this research report. . 8 JUSTIFICATION FOR CHOOSING THIS RESEARCH TOPIC This research is mainly concerned with the operational aspects of IKEA. The inventory is very important part of any organization but the most important thing is to maintain this inventory and its proper management is taken care of. The companies’ main motto is to maintain its inventory in lowest cost and satisfy its consumers to provide the products and services on time means timely delivery of goods and services is very important for the organizations to achieve its organizational goals.

If company is able to manage its inventory cost, it will ultimately born to earn lots and lots of profits. (Simchi-Levi D, 2007) 1. 9 PROBLEMS FORMULATION The main problem that is searched by IKEA is that its retail stores dealing with the problem of inventory management. There are lots of inventory is collected at the retail stores and distribution centers. If there is a lot of inventory is available at the retail, it will increase its retaining cost and that affect the profits of the organization. If the level of inventory is high, it becomes very costly for the organizations. Hines, T. 2004) Some products are moved but remaining is disposed from the stores and the profits get very lower. Most of the inventory related systems are optimizing the level of stocks and they do not care for other installations. The inventories are kept in the organization so that stocks must be maintained and when demand is arouse company will be able to meet the demand. The different levels will not benefit from information from the other actors and the system as a whole will only be sub optimized.

The distribution store and retail store has the same service levels requirements are similar. With this system, it is likely that the central warehouse keeps a non-optimal amount of stock. The service level that is experienced by customers is the important one. It does not matter what service level the retail stores experience from the distribution centre, as long as the customers do not experience shortages. (Handfield, 2001) This master’s thesis will give IKEA a chance to see how a coordinated inventory control system will affect the company.

It will not provide any exact or detailed recommendations on how to implement the coordination approach into the current ERP-system, but instead show a possible next step in the development of the control system. (Larson, P. D, 2004) 1. 10 OVERVIEW OF THE DISSERTATION The complete dissertation will go according to the following structure: Chapter 1: The research problem, its background, organizational background, the aims and objectives of the research, research questions will explained in this part of the dissertation. The justification behind choosing this research subject and scope of the research is also explained.

Chapter 2: This chapter consists of literature related to this topic and all theoretical aspects of the inventory management and control. The operations are very important department of any big industry. The inventory always kept in the stores but the huge money is invested in it to maintain this inventory so that we are here studying the practices to manage inventory and control it. Chapter 3: This chapter consists of the research methodology of the research. The determination of research methodology must be done very carefully so that research will go in right direction.

The triangulation methodology is used here that is the combination of qualitative as well as quantitative research methods. The methods of data analysis and rational for choosing this research approach these all questions will be answered in this chapter. Chapter 4: This chapter will collect the analysis of data that is gathered through various sources. The analysis of collected data is very important part of any research study because it will give the solution of or problem. Therefore the data analysis various graphs, charts, tables, etc are given in this chapter and findings from each data is explained here.

Chapter 5: In this chapter, the conclusions drawn from the project are presented. Finally, recommendations on the use of this master’s thesis are given. Suggestions on how to expand the study and improve results is also provided. [pic] Figure-1: Flow of whole dissertation CHAPTER – 2 LITERATURE REVIEW 2. 1 INTRODUCTION IKEA one of the big players which deal in home products and this organization is famous for good product quality, less expensive product in comparison of other players. On the facts if we compare prices offer by IKEA with other layers, they offered 30-50% less price. In last four year IKEA claim that they reduced 20% price in total where other players are continue increases there product prices. Now this question is arises in mind that who it is possible when the cost of raw material, transportation and the other related things are increasing regularly, this is possible because IKEA now start work on their production designing, they manage all the production related work in such a way that they are able to reduce the overall cost and at the same time there is no compromise with the product quality.

For an example in the starting phase IKEA able to fit 864 mugs in pallet but after redesigning of this plate they got success to fit 2024 mugs in a plate, with this strategy they able to reduce the shipping cost by 60%. (Simchi-Levi D, 2007) In the era of neck to neck competition all industries are locking to make the operations at the best level and with the help of this they want to cut down the cost, because this is the only way by which an organization is able to reduce the cost without any compromise on product quality.

Flow of material from the point of origin to customer is the chain where there is maximum possibility of cost cutting. In this chain there are many drivers which convert the raw material into end product and after that sale it to customers. Common drivers include procurement, design of the supply chain, inventory, transportation, warehousing, and collaboration. Cost reduction requires timely and improved decision-making for common processes under each driver. (Cannella S. , 2010) 2. 2 INVENTORY Inventory is the essential evil of every business; inventory is there in business at every driver of the supply chain.

Inventory management is the process which helps to control in inventory at optimum level so that the organization never face the problem of stock out condition and at the same time product is available at the time of demand. When the inventory is at optimum level flow of material is in continuous process. When flow of material is fast inventory is at minimum level and when flow of material is slow inventory level is at high level. There is the cost which is associate with inventory known as inventory cost, the cost which required managing inventory and to manage the quality of holding product is called Inventory cost.

There are two methods which are more famous in current era for inventory management and those are Vendor-Management inventory (VMI) and Drop-shipment. In Vendor management inventory model the organization is in coordination with their vendors to manage the inventory level at optimum level, in this approach the whole process is controlled by some software so that the all point of this chain are aware about the current status of the flow of material and on the basis of that vendors make raw material orders.

Drop-shipment inventory model is different model this work on ABC model in this model A class inventory cover the item which are costlier and use very rarely and C class inventory cover the items which are used frequently by not costlier and B class are medium. 2. 3 IN-STORE LOGISTICS AT IKEA IKEA mainly famous for its customization, the design unique product and with the help of inventory management system they make this type of product at lower cost. Most of the product are design in such way that customer assemble all the parts at home, so with this kind of strategy they able to tumble down the transportation cost.

This type of strategy is beneficial for both the point of business customer and provider. IKEA is big organization so they deal in high volume and this helps to cut down the cost at high level. IKEA’s store operations are supported by high-flow facilities (focused on the 20 percent of SKUs that account for 80 percent of the volume) and low-flow warehouses that are more manual. In its high-flow warehouses, IKEA employs automatic storage and retrieval systems (AS/RS) to drive down its costs-per-touch. (Larson, P. D, 2004)

IKEA stores are design in such way that they all have warehouse in the same premises, First floor is for customer visit at this store all the product are in customer range so that they can touch it and feel the real comfort while check them, second floor is for the product which are fast moving products, so in case if the product from first floor is sold out customer come to second floor and here can check the product and the last floor is only and only play the role of warehouse; this floor is out of the reach of customer and at this floor product used to store in bulk.

IKEA employs logistics personnel at its stores. There is an in-store logistics manager responsible for the ordering process and a store goods manager responsible for material handling logistics. Having logistics personnel work in stores is rare, but there are good arguments for this. The in-store logistics manager uses a proprietary system developed by IKEA to set and respond to store-level inventory reorder points (min and max settings), which is also fairly unique. Most retailers forecast at the distribution center (DC) level and inventory replenishment logic (e. . , minimum order quantity before reordering, maximum amount of a particular product to reorder at any one time) also resides at the DC level. (Cannella S. , 2010) Because IKEA doesn’t replenish during the day, the logic of its min/max is based on having a bin large enough to cover all the sales for one day. Because what is sold is known (POS data) and what comes into the store is also known (WMS data), very little cycle counting is done. However, IKEA’s system is able to catch anomalies.

If the system expects a certain volume of a particular product to have sold during a two day period, and much less has sold, the system will direct in-store logistics to go to the location and conduct a manual stock check. Store-level inventory accuracy at other retailers is often surprisingly low. IKEA believes its process and system allows for the right goods to be in the store with greater certainty, and at a lower cost, than the traditional retail forecasting/replenishment process. (Handfield, 2001) IKEA is moving to having in-store logistics personnel work with RF terminals.

These terminals will direct workers to bins and tell them how much inventory to let down. Unlike in a DC, where WMS logic is often focused on minimizing travel distances, the guiding principle here is to minimize touches. (Larson, P. D, 2004) At many companies, advances can be easily copied by competitors. But IKEA has a clear vision supported by complementary cross-functional logic. This not only differentiates IKEA from its peers, but also provides it with a competitive advantage that is difficult to duplicate. (Cannella S. , 2010) 2. 4 INVENTORY CONTROL

It is the supervision of supply, storage and accessibility of items in order to ensure an adequate supply without excessive oversupply. It can also be referred as internal control – an accounting procedure or system designed to promote efficiency or assure the implementation of a policy or safeguard assets or avoid fraud and error etc. (Axsater Sven, 2007) Inventory control may refer to: ? In economics, the inventory control problem, which aims to reduce overhead cost without hurting sales ? In the field of loss prevention, systems designed to introduce technical barriers to shoplifting . 5 APPROACHES USED FOR INVENTORY CONTROL: The Eyeball System This is the standard inventory control system for the vast majority of small retail and many small manufacturing operations and is very simple in application. The key manager stands in the middle of the store or manufacturing area and looks around. If he or she happens to notice that some items are out of stock, they are reordered. (Halldorsson, 2003) In retailing, the difficulty with the eyeball system is that a particularly good item may be out of stock for sometime before anyone notices.

Throughout the time it is out of stock, sales are being lost on it. Similarly, in a small manufacturing operation, low stocks of some particularly critical item may not be noticed until there are none left. Then production suffers until the supply of that part can be replenished. Such unsystematic but simple retailers and manufacturers to their inherent disadvantage. (Cannella S. , 2010) Reserve Stock (or Brown Bag) System This approach is much more systematic than the eyeball system. It involves eeping a reserve stock of items aside, often literally in a brown bag placed at the rear of the stock bin or storage area. When the last unit of open inventory is used, the brown bag of reserve stock is opened and the new supplies it contains are placed in the bin as open stock. At this time, a reorder is immediately placed. (Mentzer, 2001) If the reserve stock quantity has been calculated properly, the new shipment should arrive just as the last of the reserve stock is being used. This is a very simple system to operate and one that is highly effective for virtually any type of organization.

The variations on the reserve stock system merely involve the management of the reserve stock itself. Larger items may remain in inventory but be cordoned off in some way to indicate that it is the reserve stock and should trigger a reorder. (Lavassani K. , et al, 2009) Perpetual Inventory Systems Various types of perpetual inventory systems include manual, card-oriented, and computer- operated systems. In computer-operated systems, a programmed instruction referred to commonly as a trigger, automatically transmits an order to the appropriate vendor once supplies fall below a prescribed level. Halldorsson, 2003) The purpose of each of the three types of perpetual inventory approaches is to tally either the unit use or the dollar use (or both) of different itemsand product lines. This information will serve to help avoid stock-outs and to maintain a constant evaluation of the sales of different product lines to see where the emphasis should be placed for both selling and buying. (Axsater Sven, 2007) 2. 6 INVENTORY CONTROL SYSTEM An inventory control system is a process for managing and locating objects or materials.

In common usage, the term may also refer to just the software components… Modern inventory control systems often rely upon barcodes and radio-frequency identification (RFID) tags to provide automatic identification of inventory objects. In an academic studyperformed at Wal-Mart, RFID reduced Out of Stocks by 30 percent for products selling between 0. 1 and 15 units a day. Inventory objects could include any kind of physical asset: merchandise, consumables, fixed assets, circulating tools, library books, or capital equipment.

To record an inventory transaction, the system uses a barcode scanner or RFID reader to automatically identify the inventory object, and then collects additional information from the operators via fixed terminals (workstations), or mobile computers. (Simchi-Levi D, 2007) Its applications are written below: An inventory control system may be used to automate a sales order fulfillment process. Such a system contains a list of order to be filled, and then prompts workers to pick the necessary items, and provides them with packaging and shipping information.

An inventory system also manages in and outwards material of hardware. Real-time inventory control systems may use wireless, mobile terminals to record inventory transactions at the moment they occur. A wireless LAN transmits the transaction information to a central database. Physical inventory counting and cycle counting are features of many inventory control systems which can enhance the organization. (Axsater Sven, 2007) 2. 7 INVENTORY MANAGEMENT SOFTWARE: Inventory management software is a computer-based system for tracking product levels, orders, sales and deliveries.

It can also be used in the manufacturing industry to create a work order, bill of materials and other production-related documents. Companies use inventory management software to avoid product overstock and outages. It is a tool for organizing inventory data that before was generally stored in hard-copy form or in Microsoft Excel spreadsheets. (Handfield, 2001) 2. 7. 1 Components of the software: Inventory management software is made up of several components, all working together to create a cohesive inventory and stocks for many organisations control systems. These components include (in alphabetical order): (Mentzer, 2001)

Asset tracking When a product is in a warehouse or store, it can be tracked via its bar code and/or other tracking criteria, such as serial number, lot number or revision number. Barcoding Barcodes are the means whereby data on products and orders is inputted into inventory management software. A barcode reader is required to read barcodes and look up information on the products they represent. (Larson, P. D, 2004) Order management Once products reach a certain low level, a company’s inventory management system can be programmed to tell managers to reorder that product.

This helps companies avoid running out of products or tying up too much capital in inventory. (Lavassani K. , et al, 2009) Service management Companies that are primarily service-oriented rather than product-oriented can use inventory management software to track the cost of the materials they use to provide services, such as cleaning supplies. This way, they can attach prices to their services that reflect the total cost of performing them. (Cannella S. , 2010) 2. 8 CONTROLLING INVENTORY Controlling inventory does not have to be an onerous or complex proposition. It is a process and thoughtful inventory management.

There are no hard and fast rules to abide by, but some extremely useful guidelines to help your thinking about the subject. A five step process has been designed that will help any business bring this potential problem under control to think systematically thorough the process and allow the business to make the most efficient use possible of the resources represented. The final decisions, of course, must be the result of good judgment, and not the product of a mechanical set of formulas. (Axsater Sven, 2007) STEP 1: Inventory Planning Inventory control requires inventory planning.

Inventory refers to more than the goods on hand in the retail operation, service business, or manufacturing facility. It also represents goods that must be in transit for arrival after the goods in the store or plant are sold or used. An ideal inventory control system would arrange for the arrival of new goods at the same moment the last item has been sold or used. The economic order quantity, or base orders, depends upon the amount of cash (or credit) available to invest in inventories, the number of units that qualify for a quantity discount from the manufacturer, and the amount of time goods spend in shipment. (Halldorsson, 2003)

STEP 2: Establish order cycles If demand can be predicted for the product or if demand can be measured on a regular basis, regular ordering quantities can be setup that take into consideration the most economic relationships among the costs of preparing an order, the aggregate shipping costs, and the economic order cost. When demand is regular, it is possible to program regular ordering levels so that stock-outs will be avoided and costs will be minimized. If it is known that every so many weeks or months a certain quantity of goods will be sold at a steady pace, then replacements should be scheduled to arrive with equal regularity. Mentzer, 2001) Time should be spent developing a system tailored to the needs of each business. It is useful to focus on items whose costs justify such control, recognizing that in some cases control efforts may cost more the items worth. At the same time, it is also necessary to include low return items that are critical to the overall sales effort. (Simchi-Levi D, 2007) If the business experiences seasonal cycles, it is important to recognize the demands that will be placed on suppliers as well as other sellers.

A given firm must recognize that if it begins to run out of product in the middle of a busy season, other sellers are also beginning to run out and are looking for more goods. The problem is compounded in that the producer may have already switched over to next season’s production and so is not interested in (or probably even capable of) filling any further orders for the current selling season. Production resources are likely to already be allocated to filling orders for the next selling season. (Larson, P. D, 2004) Changes in this momentum would be extremely costly for both the supplier and the customer.

On the other hand, because suppliers have problems with inventory control, just as sellers do, they may be interested in making deals to induce customers to purchase inventories offseason, usually at substantial savings. They want to shift the carrying costs of purchase and storage from the seller to the buyer. Thus, there are seasonal implications to inventory control as well, both positive and negative. The point is that these seasonable implications must be built into the planning process in order to support an effective inventory management system. Axsater Sven, 2007) [pic] Figure 2: Inventory Control STEP 3: Balance Inventory Levels Efficient or inefficient management of merchandise inventory by a firm is a major factor between healthy profits and operating at a loss. There are both market-related and budget-related issues that must be dealt with in terms of coming up with an ideal inventory balance: (Axsater Sven, 2007) • Is the inventory correct for the market being served? • Does the inventory have the proper turnover? • What is the ideal inventory for a typical retailer or wholesaler in this business?

To answer the last question first, the ideal inventory is the inventory that does not lose profitable sales and can still justify the investment in each part of its whole. An inventory that is not compatible with the firm’s market will lose profitable sales. Customers who cannot find the items they desire in one store or from one supplier are forced to go to a competitor. Customer will be especially irritated if the item out of stock is one they would normally expect to find from such a supplier. Repeated experiences of this type will motivate customers to become regular customers of competitors. (Simchi-Levi D, 2007)

STEP 4: Review Stocks Items sitting on the shelf as obsolete inventory are simply dead capital. Keeping inventory up to date and devoid of obsolete merchandise is another critical aspect of good inventory control. This is particularly important with style merchandise, but it is important with any merchandise that is turning at a lower rate than the average stock turns for that particular business. One of the important principles newer sellers frequently find difficult is the need to mark down merchandise that is not moving well. (Mentzer, 2001) Markups are usually highest when a new style first comes out.

As the style fades, efficient sellers gradually begin to mark it down to avoid being stuck with large inventories, thus keeping inventory capital working. They will begin to mark down their inventory, take less gross margin, and return the funds to working capital rather than have their investment stand on the shelves as obsolete merchandise. Markdowns are an important part of the working capital cycle. Even though the margins on markdown sales are lower, turning these items into cash allows you to purchase other, more current goods, where you can make the margin you desire. (Cannella S. , 2010)

Keeping an inventory fresh and up to date requires constant attention by any organization, large or small. Style merchandise should be disposed of before the style fades. Fad merchandise must have its inventory levels kept in line with the passing fancy. Obsolete merchandise usually must be sold at less than normal markup or even as loss leaders where it is priced more competitively. (Handfield, 2001) Loss leader pricing strategies can also serve to attract more’ consumer traffic for the business thus creating opportunities to sell other merchandise as well as well as the obsolete items.

Technologically obsolete merchandise should normally be removed from inventory at any cost. Stock turnover is really the way businesses make money. It is not so much the profit per unit of sale that makes money for the business, but sales on a regular basis over time that eventually results in profitability. The stock turnover rate is the rate at which the average inventory is replaced or turned over, throughout a pre-defined standard operating period, typically one year. It is generally seen as the multiple that sales represent of the average inventory for a given period of time. Axsater Sven, 2007) Turnover averages are available for virtually any industry or business maintaining inventories and having sales. These figures act as an efficient and effective benchmark with which to compare the business in question, in order to determine its effectiveness relative to its capital investment. Too frequent inventory turns can be as great a potential problem as too few. Too frequent inventory turns may indicate the business is trying to overwork a limited capital base, and may carry with it the attendant costs of stock-outs and unhappy and lost customers.

Stock turns or turnover, is the number of times the “average” inventory of a given product is sold annually. It is an important concept because it helps to determine what the inventory level should be to achieve or support the sales levels predicted or desired. Inventory turnover is computed by dividing the volume of goods sold by the average inventory. (Simchi-Levi D, 2007) STEP 5: Follow-up and Control Periodic reviews of the inventory to detect slow-moving or obsolete stock and to identify fast sellers are essential for proper inventory management.

Taking regular and periodic inventories must be more than just totaling the costs. Any clerk can do the work of recording an inventory. However, it is the responsibility of key management to study the figures and review the items themselves in order to make correct decisions about the disposal, replacement, or discontinuance of different segments of the inventory base. (Lavassani K. , et al, 2009) Just as an airline cannot make money with its airplanes on the ground, a firm cannot earn a profit in the absence of sales of goods. Keeping the inventory attractive to customers is a prime prerequisite for healthy sales.

Again, the seller’s inventory is usually his largest investment. It will earn profits in direct proportion to the effort and skill applied in its management. Inventory quantities must be organized and measured carefully. (Mentzer, 2001) Minimum stocks must be assured to prevent stock-outs or the lack of product. At the same time, they must be balanced against excessive inventory because of carrying costs. In larger retail organizations and in many manufacturing operations, purchasing has evolved as a distinct new and separate phase of management to achieve the dual objective of higher turnover and lower investment.

If this type of strategy is to be utilized, however, extremely careful attention and constant review must be built into the management system in order to avoid getting caught short by unexpected changes in the larger business environment. Caution and periodic review of reorder points and quantities are a must. Individual market size of some products can change suddenly and corrections should be made. (Halldorsson, 2003) Basic definitions: Holding cost – The cost of keeping one product in stock for one time unit. Shortage cost – The cost per unit and time unit of not having a product in stock when it is demanded.

Lead time- The time it takes to receive an order after placing it, including the potential delays due to stock out at upper echelons. Transportation – The time it takes to receive an order after placing it, given time that it can be delivered immediately (may include fixed times for picking, receiving and other handling). Lost sales -When customers leave the store empty handed because the demanded item is not available. This presumes that the customers are not willing to wait until the product is delivered from the next level supplier.

Backorder- Occurs when a customer waits for an order until it becomes available; if the supplier is out of stock at the time the order is placed. This can lead to a queue. Inventory level – The actual physical inventory on hand Inventory position – The inventory level plus outstanding orders minus possible backorders. SERV1 – Probability of no stockout per order cycle, also known as cycle service level. SERV2 -Fraction of demand that can be satisfied immediately from stock on hand, also referred to as the fill rate. SERV3 – Fraction of time with positive stock on hand, also known as ready rate.

SERV3 =SERV2 when demand is continuous or customers can only purchase one unit a time. (R,Q)-policy Stock replenishment policy where Q units are ordered as soon as the inventory position drops down to or below R. The maximum inventory level can thus be R + Q. CHAPTER – 3 Research Methodology: In this chapter of the dissertation all the methodologies that are used for conducting this research is expressed. First of all the research purpose and then research approach is explained over here. The research method and its strategies are also described.

Then the chapter continues with the process of data collection and approach of analysis. (Holliday, 2007) The research process that is given by Saunders et al, are given below. This is given in an onion shape model: [pic] Figure 3: Saunders Onion Model for Research Methodology 3. 1 RESEARCH TYPES: The purpose of this research is divided in following ways: 3. 1. 1. Exploratory Research: In this researcher is keen to know what is going on in the research and try to find out new things about the research problem. This is useful when researcher wants to understand the problem properly.

Exploratory research is open for change so that is adaptable and flexible. It is useful in formulation of hypothesis. (Creswell, J. W. 2003). 3. 1. 2 Descriptive Research: It is used when research objectives and information is clear about the research. In this the researcher does not form any conclusion from the data collected, he just shows what he observes. The research object must be very clear in this research. 3. 1. 3 Explanatory Research: In explanatory research, the problem solution can be done by explaining the relationships between variables. Saunders, et al, 2000) In explanatory research the research is planned and structured so that systematic errors can be reduced. The researcher is able to draw the conclusions on the basis of the relationships. The main source of data for explanatory research is by interviewing the people through surveys or interview protocol. (DeWalt, et al 2002) 3. 1. 4 Chosen method for this research: In this research the data is collected through interviewing the employees at IKEA and case companies. So that explanatory research approach is used here for conducting this research study.

This method is used because the researcher wants to form a conclusion from the research problem. (Holliday, 2007) 3. 2 RESEARCH APPROACH: The researcher chooses the research approach on the basis of the relationship between theory and empirics in the project. The research approach can be inductive or deductive. The Qualitative or Quantitative research approaches are also used. These approaches are given below: 3. 2. 1 Qualitative Approach: The qualitative approach is very flexible and the questions can be mould according to the situation and according to the respondents’ responses during interview.

Its flexibility is useful for the researcher because it gives the opportunity to him to explore more about the research subject. But the negative side is that it is impossible to compare data from two respondents. The advantages of qualitative research are given below: • This data is present in quality and gives in-depth knowledge about the subject. (Creswell, J. W. 2003). • In qualitative approach more than one possible explanation of the objects are given. The disadvantages of this approach are given below: The result of qualitative approach is not open for generalizations because small numbers of objects are studied. • The analysis and interpretation of the data is dependent upon the experiences of the researcher. • This analysis takes long time. 3. 2. 2 Quantitative Approach: In this approach, the researcher collects the quantitative data through rigorous survey that is conducted to gather the data. There is a set format of questionnaire that consists of various structured questions and these surveys are filled by the respondents in order to get the data. The advantages of quantitative analysis are given below: The results that are achieved through quantitative approach can be generalized easily on the whole population. • This gives the scientific basis to the study. • The result of quantitative research is highly credible and authentic. The disadvantages of quantitative analysis are given in the following points: • The negative aspect of this approach is that sometimes irrelevant data is also gathered through quantitative research and that is not usable in the research. (Saunders, et al, 2000) • If the quality of input is low the quality of output is also low. 3. 2. 3 Chosen approach in this study:

The triangulation approach is used over here in this research study. In triangulation method both qualitative as well as quantitative research methodology is used. Some of the data is collected through benchmarking case studies of different companies and thoughts about vendor managed inventory and its evaluation is collected through qualitative research and interviews are also conducted and surveys are also get filled by the people so quantitative method is also used. The questions are similar and can be generalized on whole population. (DeWalt, et al 2002) 3. 3 RESEARCH METHOD:

Inductive versus Deductive approach: There are two kinds of research method one is inductive and another is deductive theory. In inductive method the data is firstly collected by the researcher and then he develops the theory on the basis of that collective data. In this approach the study is done on the real scenario and then a general theory is formed on the basis of that analysis. The data is collected via various sources. The main problem with the inductive approach is that the data is collected to form the theories so that data collection is no more unconditional. Saunders, et al, 2000) In deductive approach the research starts on the basis of theoretical studies and then these theories are applied to the real empirical case and conclusion of the research is formed according to the theory. In this kind of approach the hypothesis is formed according to the pre-existing theories and then it is tested in the real world. The conclusion made through this will reject or accept the hypothesis. Deduction method is related to the collection of quantitative data and in induction theory, the qualitative data is gathered.

The research is totally based on pre-existing theories so that deductive approach is applicable in this study. The theories that are already exists are tested in the practical terms and find the research results. The already used methods of inventory control or management at IKEA is tested and improves in order to enhance effectiveness. In this research the simulation method of inventory and vendor managed inventory is tested on the IKEA framework. The management of inventory and its control and vendor managed inventory the questions about all these concepts will be given with the help of this research method. Creswell, J. W. 2003). 3. 4 RESEARCH STRATEGY: To conduct a research is successful manner it is very necessary for the researcher to decide a strategy and plan accordingly for the way of collecting the data. The strategy is useful for getting the knowledge about the source of collecting the data. The main strategies are elaborated in the following points: 3. 4. 1 Experiment: Experiments are used in scientific as well as social science research. The definition of theoretical aspects, the sample selection and measurement of variables is done in this. Saunders, et al, 2000) These are used to find out the causalities between the input and output. The process of whole experiment is standard and fixed; it is not at all flexible. First of all a hypothesis is formed, then the parameters are decided that will be studied while experiment, and finally the resulting parameters are achieved. 3. 4. 2 Survey: The survey is conducted for systematic mapping of the phenomenon. When deductive methodology is used by the research, the survey is used at that time. The survey is full of questionnaires and that is distributed to all the population or its sample for collection of data.

The standard questions are used in the questionnaire and comparison can be done accordingly. This strategy takes so much of time. (DeWalt, et al 2002) 3. 4. 3 Action Research: The action research approach is applied when we are working for improving something while its studying. First of all observation is very necessary and identify and define a problem that is going to be solved. The proposal for solving the problem is formed and implemented. The evaluation of the solution is necessary to check how well it is working. If the solution is not appropriate, it is again check and changes the proposal accordingly.

The action research is done by a close relationship and the association between the researcher and the studied research problem. 3. 4. 4 Case Study: The main aim of the case study is to explain a particular object. If researcher is so much keen to know each and every aspect of the research problem and wants to understand the research subject in and out then he goes for the case study approach. The case study gives deeper insights of the research object. In this approach extensive knowledge about the research subject is collected through studying the case studies.

In case study there are no restrictions about how data is collected through this and how it should be analyzed. But the results that rose from case studies are not necessarily applicable to general cases. The collection of data is done through following methods: • Interviews • Observations and • Achieve analysis. 3. 4. 5 Operations Research Modeling: The cases where analytical model is used in the real scenario and quantitative research technique is used, this is called as operations research modeling (ORM). (Hillier, et al, 2005) The main steps of ORM are given below in following points: The problem is defined and collects the data that is relevant to it. • A mathematical model is being formulated to show the problem. • A computer based procedure is formed to derive the solutions to the problem. • The testing of model is done and refines it. • Ongoing application of the model is being formed. • Execute [pic] Figure 4: Operations Research Modeling 3. 4. 6 Chosen strategy for the research: The case study approach is used for this research study because here we are studying IKEA that is a world known home furnishing company. The whole focus s given on IKEA and its strategies of managing inventory and its control. The deep insights are created by studying this company and in-depth knowledge of its inventory management system is studied in this research. (Fischer, 2005) The operations research approach is also used for this research paper, a mathematical model i. e. model for optimizing multi echelon inventories is used. 3. 5 DATA COLLECTION: There are various sources that is used for data collection. There are two kinds of data collection first is primary data collection and second is secondary data collection.

Primary data is the one that is gathered for particularly this research according to the demand of that research and secondary data that is collected already for another purpose. But secondary data is used for support the primary data. (Holliday, 2007) 3. 5. 1 Primary Data: The primary data is collected through three ways such as observation, interview and questionnaires. Particularly for this research, the semi-structured interview protocols are formed that is used for getting the data from respondents. (Holliday, 2007) 3. 5. 2 Secondary Data: Both primary as well as secondary data is used for this research study.

The secondary data is collected firstly for getting a broad literature review about the inventory control and management and about vendor managed inventory. The secondary data is also gathered to issue the thesis for this research. The vendor managed inventory, supply chain management, logistics management at IKEA, economic evaluation these all terms are widely studied. (Flyvbjerg, B. 2011). The most common methods of collection of primary as well as secondary data are given below: • Literature: The literature review gives the deep insights about the research subject is given in it.

It gives better background knowledge of the subject. Various books, journals, articles, internet sources are used to gather data. • Interviews: Interview is also an important source to get the data from the respondent. The interviews are of different kinds structured as well as unstructured interviews. In structured interviews same questions are being asked by all the respondents but in unstructured the respondent are open to share all his thoughts. • Survey: Taking interviews will take long time so that a survey sheet is distributed among the candidates and get the data from them.

It is a questionnaire that consist similar questions. 3. 6 APPROACHES FOR ANALYSIS: The analysis of data that is collected through various research methods are done through two different approaches one is qualitative research approach that is used for analysis of qualitative data and another one is quantitative research approach, that is used for analysis of quantitative data. The economic method and parameters that affected the inventory control and management will be analyzed here to get the result of this research. (DeWalt, et al 2002) 3. 7 QUALITY CRITERIA:

To determine the validity and reliability of the research is very important step of the research and it is helpful in judging the quality of the research. (Holliday, 2007) 3. 7. 1. Validity: Here validity means the methods that are used for measurements are intended to measure. There are internal as well as external validity. To enhance the validity of any research subject, various views of problem must be seen. The internal validity means that how much the result of the research is corresponds to the phenomenon that is studied in this research. External validity means that the ability to generalize from the results.

The internal validity of this research is very well. The literature review is thoroughly reviewed by the researcher that is used for these research objectives. The literature review gives the rich knowledge about the inventory management and its control. (Fischer, 2005) An increased validity is also given by changing input parameters and controlling if the model behaves as expected. This is specially revealing if the parameters are extreme of both maximum and minimum values. Another way to enhance validity is to do a retrospective test, which means using historical data as input parameter.

The results are then compared to what actually happened and it reveals if the model would give better results than reality. It can also reveal if the model is correct. The drawback of using retrospective testing is that the results given from the data used to create the model (historical) do not necessarily give good results for the future. 3. 7. 2 Reliability: Reliability refers to the methods of measurements will give the correct or reliable methods or not. The reliability of this dissertation is very high and the whole information is collected by the researcher in a systematic way.

The data is collected through semi-structured interview surveys in a standardized form. The interview forms are already sent to the people so that they can well verse with the interview questions are prepare themselves before the interviews. (Mahoney, 2006) CHAPTER – 4 FINDINGS & ANALYSIS: 4. 1 Simulation model: Assumptions made in simulation model: The following assumptions are made for simulation model: • The demand that is not fulfilled due to lack of stock is considered as lost sales. • The continuous review of inventory is done. The orders are placed directly when the inventory reach to the level of reorder point. The time of transportation is taken as constant. The lead time can be variable when stock is not available at distribution centre. • The supplier has always has its stock. • If a retail store places an order that cannot be fulfilled immediately by the distribution center, the order is kept as a backorder and fulfilled when the products become available. • The distribution center never delivers partial orders to retail stores. Instead, it always waits for the entire order to be available before shipping the goods. • The order quantities at all levels are constant. 4. 1. 1 Demand distribution

In Extend, customer arrivals cannot be generated by simply entering the mean and standard deviation of the demand over time. Instead, the statistical distribution of the time between customer arrivals needs to be inserted. Also, in order to ensure that the mean and standard deviation of the demand over time are correct, the number of items one customer buys is not fixed. The relation between variation and mean value of the weekly demand is over 1. 1 for the vast majority of the articles and stores. According to the theory discussed earlier, this makes the Compound Poisson distribution suitable to estimate the customer pattern.

In the case of a variance mean relation of lower than 1. 1, a regular Poisson distribution is used. The reasoning above is based on the assumption that the arrivals of customers, and the number of products each customer wishes to purchase, are independent of each other. Based on the fact that the customers are end consumers of the products, this is a reasonable assumption. The compounding distribution chosen to use is the logarithmic distribution since it is a discrete distribution with available formulas for calculating the parameters needed given mean and variance of the demand. . 1. 2 Output parameters of the simulation The simulation model is built to store three types of data: mean inventory levels, SERV2 and SERVIKEA. The measurements chosen are enough to estimate the potential stock reductions as well as controlling that the service is kept at the

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