Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)

_______________________________________________________________________ _ Introduction 1. Inventory is a quantity or store of goods that is held for some purpose or use. Inventory may be kept "in-house," meaning on the premises or nearby for immediate use; or it may be held in a distant warehouse or distribution center for future use. With the exception of firms utilizing just-in-time methods, more often than not, the term "inventory" implies a stored quantity of goods that exceeds what is needed for the firm to function at the current time (e.g., within the next few hours). Inventory management, or inventory control, is an attempt to balance inventory needs and requirements with the need to minimize costs resulting from obtaining and holding inventory. There are several schools of thought that view inventory and its function differently. Reduction of inventories is the main reason that companies have sought alternative inventory management methods. In a manufacturing company, the use of specific batches of production leads to the need for specific inventories at any particular point in the production process. Cash flow is improved due to less capital investment in inventory. Less inventory on hand leads to savings in other areas as well, such as smaller space requirements, decreased material handling costs, decreased record keeping costs, decreased insurance and tax obligations, and less scrap and obsolescence. Effective Inventory Management thus enables an organization to meet or exceed customers' expectations of product availability while maximizing net profits or minimizing costs. Objectives of the study 2 The main objective of the study is to discus about the Inventory management system of Bangladesh Machine tools Factory Ltd (BMTF Ltd), find out the limitations in terms of implantation of the System and finally draws the Recommendations to implement latest inventory system in the organization. Need for the study 3. Any renowned company must have a good Inventory Management system and Inventory Control activities. Inventory Management and Inventory Control system must be designed to meet the demands of the marketplace and support the company's strategic plan. Due to worldwide Rapid Technological development, many companies need to change their Inventory Management approach and 1 AK M Khabirul Islam (Student no: 0411082003) Dept of IPE,BUET

Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
_______________________________________________________________________ _ change the process for Inventory Control. As BMTF Ltd is a state owned organization, it is also needed to adjust its approach which warrant necessary study on Inventory Management system. Methodology 4. To study and prepare a report on Inventory management of BMTF Ltd needs various data which are collected through direct interview with assistants and telephone interview with DGM Store, DGM Purchase and Manager planning. Effective inventory management methods encompass the following: a. b. c. d. e. f. g. Item classification Demand planning and forecasting Reliability of supplier lead time Safety stock and min stock Optimum quantity to order Overstock reduction methods Performance indicators

Scope of the study 5. Inventory Management is very important for any company. It enables the business to meet or exceed expectations of the customer by making the product readily available. Scope of the study on Inventory management is a simple concept that is neither too much stock nor too little stock. Since there can be substantial costs involved in straying above and below the optimal range, careful inventory management can make a huge difference in the profitability of a business. Although the concept is simple, the process of getting the right balance can be quite a complex and time consuming task without the right technology. study is focusing on identifying the existing present system, potential of the companys inventory management, room of improvement, potential barriers to implement and recommendations. Limitations. 6. For carrying out the study I have encountered several limitations which are given below: a. Study is based on secondary data only. The analysis is based on figures present in the internal records only. 2 AK M Khabirul Islam (Student no: 0411082003) Dept of IPE,BUET

Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
_______________________________________________________________________ _ b. Detail study/report about the whole activities production process could not furnish due to limited time. and

c. All data included are collected through personal meeting and telephone, all provided data are verbal and there is no eventual prove of this data. d. Some of the data they did not provide as these were confidential as per their policy e. Though some information have been collected from website but not sufficient. Company profile 7. Bangladesh Machine Tools Factory (BMTF) Ltd. is one of the largest enterprises of its kind in Bangladesh. It is located at Gazipur about 40 km away from Dhaka. The factory has an area of 247.66 acres with a covered area of 60310sq meter. It was commissioned on 11th February 1979. It was a state enterprise of Bangladesh Steel and Engineering Corporation (BSEC) up to 14 July 1994, later on BMTF remains as a state owned limited company but it comes under the management of Bangladesh Army in the year of 2000. BMTF is well equipped with variety of high production machineries and equipments for various engineering products. It has basic production facilities like casting, forging, machining, heat and surface treatment etc. It has a unique vehicle assembly plant where jeep/pickup/truck used by Bangladesh Armed forces is assembled. It has thirteen large production shops along with administrative building, training school, residential area etc. This factory has enormous prospects to open up new avenues with products and services for local and foreign markets. Under the management of Bangladesh Army, BMTF is now reshaping itself to respond to the new challenges. Introduction to BMTFs Inventory management 8. Like all other factory inventories of BMTF also have raw material, under processed materials, semi finished and finished items though it does not follow the standard classification of Inventory. BMTF is capable and already produce Manhole cover for WASA, Swing hanger, SGCI Insert for Bangladesh railway, Earthing rod, pole fittings, Side/top mount bracket etc for Rural electrification Board(REB)/DESA. 3 AK M Khabirul Islam (Student no: 0411082003) Dept of IPE,BUET

Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
_______________________________________________________________________ _ Production of Fuel browser/water browser, Assembly works of army Jeep/pickup, truck, mobile workshop vehicle are also done by BMTF. Besides these there is also maintenance, repair and operational supplies (MROS) items that are used in production for ensuring the serviceability of the machine but do not become part of the product.It has main four division namely, Budget-procurement-marketing (BPM) division, Production-Planning-Control division (PPC), Production division and finally Quality control and Quality Assurance division. Activities of various divisions are given below: a. PPC division is responsible for yearly production planning and control. As mentioned earlier that at present it works only basing on the work order of customer. PPC div also prepare the tender documents for participate in the various national and international tender. b. Whenever BMTF win a tender then PPC prepare a final production plan consultation with Production department. It prepare a inventory of raw materials including some semi finished goods which will be require for completing the scheduled jobs. Normally it does not follow any conventional method or model for planning, adding some allowance of the material it plan to purchase as require basis. During this stage PPC div take the market data from purchase BPM div and little market survey. c. After preparing the inventory of raw material and semi finished good s with financial effect in consultation with BPM div forward to Managing Director (MD) for his financial approval up to a specific limit beyond the limit MD has to forward to the board of directors for chairmans approval. d. After the MD/Chairmans approval BPM div start working, the release the Budget as per the priority set by the PPC, they purchase the raw material and semi finished goods as per PPR2003 consultation with the respective production shop. e. BPM div purchase the stores in the form of raw materials and semi finished goods then Central store hose include in its inventory and prepare material received requisition (MRR) for issuing into the respective shop for productions. 4 AK M Khabirul Islam (Student no: 0411082003) Dept of IPE,BUET

Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
_______________________________________________________________________ _ f. While PPC is preparing the inventory of raw material and semi finished goods with financial effect in consultation with BPM div they also prepare the maintenance and repair materials inventory and select the actual process for production. g. Finally Production div receive the stores from the Central store house and start manufacturing as per the specification and drawing, during the various stage of process they use semi finished goods for getting the finished goods. h. After completing the production intimate the store, Quality control div as well as BPM div about the completion of the job. i. Finally production shop prepare Scrap return memo(SRM) and intimate to Central store house in turn central store house intimate to BPM for annual stock balance and prepare the annual balance sheet of the factory. ABC analysis 9. Based on Paretos classification categorize into three groups such as: all inventory items are

a. Class A items are those, about 5-10% of the items account for about 50% or more of the dollar usage. Class A items should receive the most expert attention b. Class B items are those, about 50% or more of the items account for most of the remaining 50% of the dollar usage. Class B items have significant usage and number of skus; they can be managed with computer software; with personalized intervention using exception rules c. Class C about 40% of the items account for small % of the dollar usage. Class C items must be managed with the simplest decision systems, with minimal managerial attention.

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Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
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ABC Classification Graph-1

ABC Classification Graph-2 ABC Analysis is a basic analytical management tool which enables top management to place the effort where the result will be greatest. This technique, popularly known as always better control or the alphabetical approach, has universal applications in many areas of managing the inventory. The technique tries to analyze the distribution 6 AK M Khabirul Islam (Student no: 0411082003) Dept of IPE,BUET

Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
_______________________________________________________________________ _ of any characteristic by money value of importance in order to determine its priority. From the above description and different graphs it seems that A items are a relatively small number of items that generate a large percent of a companys unit or sales volume and typically, account for a large percent of the companys inventory investment. B items are the next largest group and the next largest investment. C items typically represent a small volume of sales dollars or volume but the greatest number in terms of number of items. Every year BMTF purchase different type of raw material for different project. Following table-1 show the sample raw material requirement for its Manhole cover manufacturing for WASA project in the FY of 20082009: Table-2 below classify the items basing on the total % of taka usage only and % of items usage is difficult to find out as various items are account in various accounting units as all units are assigned with SKU then easily % of item usage could be find out.

Ser No 1 2 3 4 5 6. 7 8 9

Name of the raw material Pig Iron Ingot Flux Fine Sand Coarse sand Wood Binder M S Rod Molding items Furnace items

A/u Ton kg Ton Ton Cft Ltr ton pcs pcs

Quantity 100 100 50 40 100 1500 2 10 8 Table-1

Unit cost taka 30000 200 15000 12000 2500 30 40000 1600 4000

Total cost taka 3000000 20000 750000 480000 25000 45000 80000 16000 32000

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Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
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Table-2 Need for inventory control 10 Successful, well-organized businesses rely heavily on inventory management systems to make certain that adequate inventory levels are on hand to satisfy their customer demand. The Inventory Control offers the level of control by serial number tracking, and multiwarehouse support. Inventory Control even features an image library that allows you to assign a picture to each sis part. Improved customer service leads to increased profitability. And, when integrated with the Accounts Receivable and Order Entry modules, Inventory Control can significantly boost the customer service levels while operating as the cornerstone of an effective manufacturing or distribution solution. For more complex project management, Inventory Control can be coupled with the Job Cost module to help track all inventory-related expenses for a project. Inventory tracking is enhanced even more when Items Pig Iron MS Rod Fine sand Coars sand Binder Annual Ind deman l % d 100 ton 2 Ton 50 Ton 40 ton Cumulati ve % Unit cost tk 3000 0 4000 0 1500 0 1200 0 30 4000 2500 200 1600 Total cost tk 300000 0 80000 75000 48000 45000 32000 25000 20000 16000 Indl % 89. 8 2.3 2.2 1.4 3 1.4 2 1.3 1.2 .5 .4 Cumulati ve % Classifi cation A B B C C C C C C

1500 ltr Furnac 8 Pcs e items Wood 100 cft Flux 100 kg Moldin 10 pcs g items Total

334100 0 AK M Khabirul Islam (Student no: 0411082003) Dept of IPE,BUET

Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
_______________________________________________________________________ _ integrated with the Custom Office module, which creates detailed spreadsheets to provide further analysis of inventory performance. The Inventory Control system offers comprehensive reporting capabilities to keep on at the top of inventory status. It helps to create new or improved purchasing policies, sales policies, pricing methods, and even enhanced customer service. For the profitability of the factory there is no denying fact of inventory control though BMTF at present are not used to with this controlling system. Following chart showing how controlling will be effective:

Inventory control Graph-3

Use different forecasting technique 11. Forecasting is a prediction of what will occur in the future. It is an uncertain process that is vital to survival in todays international business environment. Rapid technological advances have given consumers greater product diversity as well as more information on which they make their product choices. Managers try to forecast with as much accuracy as possible, but that is becoming increasingly difficult in todays fast-paced business world. There are two types of forecasting methods one Qualitative methods are based on judgment, opinion, past experience and best guesses. These methods help to provide reliable guidelines for decision making, but cannot provide totally accurate results. Another one, Quantitative methods which are based on 9 AK M Khabirul Islam (Student no: 0411082003) Dept of IPE,BUET

Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
_______________________________________________________________________ _ mathematical methods, time series and regression. Besides these Simple Exponential Smoothing Widely used forecasting technique where newer data are given more weight than older one .It is applicable both for Level demand forecasting and trend demand forecasting. Double Exponential Smoothing used when the demand has an underlying trend model. At present BMTF carry out mostly contractual jobs, after receiving work order they start work, for this reason there are very little scope to use various forecasting technique. Select best forecasting method 12. Quantitative methods of forecasting are the best method as it involves calculative figures and which are based on mathematical methods, time series and regression. But in BMTF no forecasting are practice normally, Qualitative methods which are based on judgment, opinion, past experience and best guesses are used rarely. Apply the different inventory models 13. Demand sometimes behaves in random and irregular ways. Other times it exhibits predictable behavior. There are three main types of predictable behavior are :(a) trends, (2) cycles, and (3)seasonal patterns. A trend is a gradual, long-term, upward or downward movement in demand A seasonal pattern is a repetitive movement in demand that occurs periodically. Some other model also can be applied for finding out the best forecasting price like, Lot for Lot model easiest amongst all Simply order the exact amount needed for each time period Thus inventory holding cost is zero for lot for lot. Periodic Order Quantity rounds up the EOQ expressed in time units and then order periodically similarly Fixed Order Quantity, Least Unit Cost and Part Period Balancing are the important model can be apply also. In BMTF as job is un predictable thats why no particular models is applied at this time. Calculate economic order quantity 14. For various project trough out the year, BMTF is buying raw materials, from the local as well as international market. One of the prime job of any factory is to determine the optimum or economic order quantity (or economic lot size). Determining an optimum inventory level involves two types of costs: (a) ordering costs and (b) 10 AK M Khabirul Islam (Student no: 0411082003) Dept of IPE,BUET

Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
_______________________________________________________________________ _ carrying costs: The economic order quantity is that inventory level that minimizes the total of ordering and carrying costs. EOQ = [2(annual usage in unit) (order cost)] 1/2 which has been describe in the following graph:

EOQ Graph-4

There are many variations on the basic EOQ model. Most useful and common variations are given below: a. Quantity discount logic can be programmed to work in conjunction with the EOQ formula to determine optimum order quantities. Most systems will require this additional programming. 11 AK M Khabirul Islam (Student no: 0411082003) Dept of IPE,BUET

Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
_______________________________________________________________________ _ b. Additional logic can be programmed to determine max quantities for items subject to spoilage or to prevent obsolescence on items reaching the end of their product life cycle. c. When used in manufacturing to determine lot sizes where production runs are very long (weeks or months) and finished product is being released to stock and consumed/sold throughout the production run you may need to take into account the ratio of production to consumption to more accurately represent the average inventory level. BMTF normally collect almost all sorts of raw material from the enlisted supplier and that to as per open tender basis thats why very limited scope to find out an optimum EOQ. The re-order level 15. At the beginning of any project BMTF select the contractor for supplying various raw materials related to the project. If the quantity is motion time more then raw material may be supplied in 2/3 interval. As raw material is available initially thats why reorder level are not maintained as per procedure. The following graph and two formulas are used for the calculation of reorder level or point with or without safety stock: a. Ordering point or re-order level = Maximum daily or weekly or monthly usage Lead timea b. Ordering point or re-order level = Maximum daily or weekly or monthly usage Lead time + Safety stock

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Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
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Reorder point Graph-5

Safety stock 16. Safety stock (also called buffer stock) is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stock outs (shortfall in raw material or packaging) due to uncertainties in supply and demand. Adequate safety stock levels permit business operations to proceed according to their plans Safety stock is held when there is uncertainty in the demand level or lead time for the product; it serves as an insurance against stock outs. With a new product, safety stock can be utilized as a strategic tool until the company can judge how accurate their forecast is after the first few years, especially when used with a material requirements planning worksheet. The less accurate the forecast, the more safety stock is required. With a material requirements planning (MRP) worksheet a company can judge how much they will need to produce to meet their forecasted sales demand without relying on safety stock. However, a common strategy is to try and reduce the level of safety stock to help keep inventory costs low once the product demand becomes more predictable. The amount of safety stock an organization chooses to keep on hand can dramatically affect their business. Too much safety stock can result in high holding costs of inventory. In addition, products 13 AK M Khabirul Islam (Student no: 0411082003) Dept of IPE,BUET

Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
_______________________________________________________________________ _ which are stored for too long a time can spoil, expire, or break during the warehousing process. Too little safety stock can result in lost sales and, thus, a higher rate of customer turnover. As a result, finding the right balance between too much and too little safety stock is essential. As already mentioned earlier that BMTF collect raw material from its enlisted contractor and beginning of any project almost all raw material are made available at the production shop so it is difficult to find a safety stock for certain items. Following graph explain the safety stock:

Safety stock Graph-6 Findings 17. BMTF is concentrating on domestic market and every financial year they achieve a reasonable amount of profit ranging from 4 crores to 10 corores Taka, where as yearly turnover ranging from 20 crores to 40 crores taka. It has enormous potentiality but hardly 40% of its capability has been explored so far.Inventory Management system provides information to efficiently manage the flow of materials, effectively utilize people and equipment, coordinate internal activities and 14 AK M Khabirul Islam (Student no: 0411082003) Dept of IPE,BUET

Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
_______________________________________________________________________ _ communicate with customers. Inventory Management does not make decisions or manage operations; they provide the information to managers who make more accurate and timely decisions to manage their operations. Basing on the existing production process and management system, the accumulated data, personnel interview with the BMTF management and comparing with the laid down procedure of inventory management following findings can be derived from the above description: a. At present, BMTF does not classify its raw material/products as per the ABC analysis or any other recognizes method. They does not control its inventory as per the procedure and for placing any demand basing on as require basis they are ordering from the fixed farm. Forecasting method and models are not practice at present. Optimum order quantity, reorder point, safety stock etc are not vogue in the organization. Still it has around 60% potentiality underutilized.

b.

c. d. e.

Recommendations 18. For more profitability, consistency in production, exposure in the national and international market and more remarkable contribution in the national economy I recommend the following points to implement: a. There should be a system where in periodical review (once in a month or quarterly) of inventory could be carried out so that the inventory can be kept under control. b. There should be strong interdepartmental coordination because scrap of one production shop can be used as raw material of other shop. 15 AK M Khabirul Islam (Student no: 0411082003) Dept of IPE,BUET

Inventory Management Report on Bangladesh Machine Tools Factory Limited (BMTF Ltd)
_______________________________________________________________________ _ c. Basing on previous record some of the essential raw material can be purchase well before the commencement of the job, during purchase EOQ, Optimum order quantity, discounted order quantity, ordering cost, carrying cost, complete backordering, complete lost order, cost of lost order etc should be given due importance. d. Various types of forecasting methods and inventor model can be followed for purchasing raw materials and semi finished goods. Proper classification of raw materials also an important aspect which can be implement immediately. e. Reorder point ,safety stock, lead time , replenishment demand in the various steps of operations can be followed so that three is no stuck up in production process at the same time holding cost will be reduced.

Bibliography

Lecture sheets on IPE-6211 By Ms Sudipa,Asst prof,IPE,BUET Manufacturing Planning and Control System-T E Vollmann WWW.INVESTOPEDIA.COM WWW.WISEGEEK.COM www.mbaguys.net

16 AK M Khabirul Islam (Student no: 0411082003) Dept of IPE,BUET