Analysis of inventories on the example of selected enterprises (pt.1)

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Most often several dozen percent of products stored in warehouses are characterized by sales with an exponential distribution of probability or a distribution close to that of exponential. This text presents the results of the empirical research in this area, supported by the presentation of demand distributions for selected products. The results of inventory analysis will be presented on the basis of the methodology developed by the author of the analysis of inventory management processes in enterprises.

In order to generalize and make the applications more independent from specific sectors of the economy and product types, the results of the research will be presented for three companies operating in different sectors:

  • papermaking,
  • interior trim (sale of wall and floor tiles and carpets),
  • pharmacy.1

The first stage of the analysis of demand and inventory, according to the method proposed by the author, is a self-assessment of the company in the field of logistics processes, which is carried out in the following areas:

  1. Planning methodology – the examined criteria are
    • demand forecasting,
    • management of promotions,
    • management of unplanned large orders or temporary shortages of materials,
    • inventory management,
  2. Portfolio management – the examined criteria are
    • introduction of products into the portfolio,
    • getting products out of your portfolio,
    • management of slow-moving materials,
    • management of basic data and product categorization,
  3. Product characterization – the criteria examined are
    • supplier selection process,
    • production management process,
    • the process of monitoring the timeliness of availability,
    • improving logistics processes.

Within each of the above criteria, the management of the company assesses, on a scale from 1 to 10, the significance of the criterion for the company and the state of processes within this criterion. Conducting a self-assessment allows for directing further analyses to processes that meet the criteria in which the difference between the significance and the state is the greatest.

Figure 1 shows the results of the self-assessment for a papermaking company. The company had the biggest differences between the relevance and the state of the processes for the criteria:

  • production management process,
  • management of basic data and product categorization,
  • management of slow-moving materials,
  • introduction of products to the portfolio.

The results of the self-assessment were confirmed by the audit of logistics processes. It turned out that the biggest challenges for the company in the area of logistics were:

  • the process of forecasting demand for products and goods introduced to the market,
  • developing methods of stock management and product categorization aimed at minimizing stock levels, with particular emphasis on products with a different than normal distribution of sales,
  • linking production planning processes to supply planning processes.
The results of the self-assessment of the papermaking enterprise. Demand forecasting.
Figure 1. The results of the self-assessment of the papermaking enterprise.

The results of the self-assessment for the interior trim company are shown in Figure 2. The biggest differences between the relevance and the state of the processes concerned in this case the following criteria:

  • demand forecasting,
  • introduction of products to the portfolio,
  • getting products out of portfolio,
  • management of slow-moving materials,
  • management of basic data and product categorization.

Again, the results of the self-assessment were in line with the results of the audit. For this company, the biggest challenges in the logistics area were:

  • development of dedicated inventory management methods including slow-moving products,
  • control of inventory levels for an established portfolio,
  • linking the process of portfolio development to inventory management.
The results of the self-assessment of the interior trim company.
Figure 2. The results of the self-assessment of the interior trim company.

Figure 3 shows the results of the self-assessment of a pharmaceutical company. The biggest differences between the significance and the state of processes concerned the criteria:

  • demand forecasting,
  • management of promotions,
  • management of unplanned large orders or temporary shortages of materials,
  • supplier selection process.

The audit of logistic processes in this company confirmed that the biggest logistic problems of the company were:

  • demand forecasting and its impact on the level of inventories,
  • planning and preparing stocks for promotion,
  • management of inventories of products with a different than normal distribution of sales, for which there were large, unplanned orders and periodical shortages,
  • selection of suppliers and development of a method of cooperation with suppliers ensuring the level of raw materials necessary for production.
Results of the self-assessment of the pharmaceutical company. Demand forecasting.
Figure 3. Results of the self-assessment of the pharmaceutical company.

Analyzing the results of the self-assessment for the three companies, it is possible to generalize that the management of stocks of products selling regularly  is not currently a problem for logisticians. The real challenge is forecasting demand and inventory management for slow-moving products and products with large, unplanned orders.

The next step in the methodology of inventory management analysis is to compare sales, inventory levels and determine days on hand based on historical data. Days on hand (DOH) is understood as the level of coverage of sales with inventories and is expressed in days. The ratio is calculated according to the formula:

 Formula.

The research was carried out on the basis of the results of the research:

  • value of inventories – value of inventories in currency at the end of the analyzed period,
  • sales value – the level of sales in currency in the audited period.

The research was conducted on a monthly basis. Its results in the papermaking, interior trim and pharmaceutical industries are shown in Figures 4, 5 and 6 respectively.

Sales level, inventory value and days on hand for a papermaking enterprise. Sales level, inventory value and days on hand for a papermaking enterprise.  Demand forecasting.
Figure 4. Sales level, inventory value and days on hand for a papermaking enterprise.
Sales level, inventory value and days on hand for an interior trim enterprise.
Figure 5. Sales level, inventory value and days on hand for an interior trim enterprise.
Sales level, inventory value and days on hand for a pharmaceutical enterprise. Demand forecasting.
Figure 6. Sales level, inventory value and days on hand for a pharmaceutical enterprise.

As can be seen from Figures 13, 14 and 15, for all companies the level of stocks held is significantly higher than the level of sales. For a paper company, days on hand were in the range of 65-76, whereas the delivery time was in the range of 21-42 days. The value of the stocks of the interior trim company exceeded three months' demand, which was also not justified by the lead time of the order. In the case of a pharmaceutical company, the days on hand were in the range of 61-118. Due to technological secrecy, the author cannot disclose the lead time of the order for products from this industry. It may be, however, pointed out that, in this case too, there was an excess of stock.

Referent:

  1. For reasons of confidentiality, the author is not allowed to disclose the names of the companies involved in the survey.

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Author of the article: Radosław Śliwka

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