University of Management and Technology (SBE) ProductionUniversity of Management and Technology (SBE) Production

 

University of Management and
Technology (SBE)

Production Planning and
Inventory Controlling

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MBA

Section: G

Semester:  3nd

 

Date of Submission:   27th
January, 2018

 

 

 

 

 

 

Deliverable Type  

Assignment                          WAC
                         Activity                   Final Project

 

Deliverable Title:   
Inventory management with demand uncertainty

 (Diamond
paints industries  )

Submitted By:

Full ID

Serial #
 

Full Name
 

Blank
(for Official Use)

Blank
(for Official Use)

F2016273-003

N/A

Shaheer Ahsan

 

 

15024034-007

N/A

Zeeshan Hashmi

 

 

F2016273-022

N/A

Tauqeer Khalid

 

 

F2016273-018

N/A

Sajid Mehmood

 

 

 

Executive Summary

In this project
report, we have selected topic about inventory and how to manage inventory when
demand is independent. The company which we have chosen for this project is
Diamond paints industries. My main reason to choose this company is because I
was familiar with the company as I once worked with them in Supply chain
department.

In this report
we have calculated EOQ and Re-order point to analyze the order which they
normally order from their factory to meet customer’s demand. After calculating
EOQ and revised re-order point we came to our debating point whether the
process and procedure adopted by them is worthwhile or not. If not, then what
are the setbacks or weaknesses in their current process and how this process
can be changed and what will be the implications of these changes.

All in all,
their process is appreciate able but not cost effective. In our opinion it can
be turned into one cost effective process if they start ordering more in small
quantity as compared to bulk ordering, because their ordering cost is quite
nominal and inventory carrying cost is heavy as compared to their ordering
cost.  

Introduction
Established in 1982, Diamond Paint Industries Pvt. Limited has come a long way
to enjoy the pleasure of being Pakistan’s “No. 1 Selling National Brand. “Through
our enthusiastic team of around 400 individuals and a system that distributes
to over 1500 attractive and industry dealers countrywide, beside that done
abroad, we are constantly succeeding and developing ourselves. With Diamond
Paints’ sheer determination, vision and the wish to be the finest industrial,
Powder Coating and Decorative paint producers in the industry, our customers
can rest assured that we are keeping up with their ever shifting needs. We are
in the business of carrying our customers’ imaginations to life…

Vision

Our aim at
Diamond paint’s is to be the market leader in the paint industry by being
sensitive to consumer needs and safeguarding complete customer satisfaction
through constant exponential progression in our products and practices

Mission

We fulfill the
aesthetic and coloring needs of our customers by manufacturing and marketing
high quality decorative and industrial paints in Pakistan and abroad by
utilizing modern machinery and innovative processes while abiding by
international standards. We ambition is to become the leading Pakistani brand
by constantly striving to achieve stable growth by capitalizing unmapped
markets and embracing Shariah Compliant best business practices. We contribute
to emancipate the underprivileged class particularly in the health and
education sector and are dedicated to professional and moral development of our
human assets.

 

Our Core values

Customer Satisfaction:

We remain dedicated
with professional integrity to care for and satisfy our internal and external
Customers in order to gain their devotion.

Visionary Approach:

We are devoted
to pursue a holistic long-term vision in the superior interest of the world at
large and company in general.

Innovation:

We strive to
remain abreast to absorb modern technologies, systems, and processes. Our team
will produce innovate solutions and quality products to meet customer demands.

Human assets:

We highly value
our human assets and continue to spend in their intellectual, professional, spiritual,
and physical growth. While promoting a culture of mutual respect, we
remain sensitive to them and their families’ well-being thus having their
affiliation and loyalty during and beyond their engagement with us. We
always appreciate and rejoice all moments of our victories and achievements
with our team.

Social Services:

We contribute a
significant amount of our incomes to help our underprivileged colleagues in the
health and education sectors.

Sharia Compliance:

We endeavor to
bring our business practices, internal processes, and products to comply with
Sharia requirements in the guideline of well-known Ulemas.

Patriotism:

We are a
patriotic national brand devoted to our country by fulfilling our obligations
towards the state of Pakistan.

 

 

Distribution Network

Diamond Paints’ products are available
countrywide. Our company growth has consistently increased over three decade to
cover the farthest places in Pakistan with warehouses in metro cities like
Karachi, Lahore, and Islamabad. Our efficient sales and distribution network
has given the company a competitive edge over other players in the industry.
Diamond Paints’ distribution network has now reached across the border to
Afghanistan.

Manufacturing

The Company updates its production structure,
which must respond to the continuous development in the company’s operations.
As the industry witnesses surge in the accumulation of industrial products,
Diamond Paints will enhance its manufacturing capabilities when Pakistan’s
biggest paint production facility in Sundar Industrial Estate becomes operative
in 2016. The in-house facility to produce resin for PVA and acrylic consumption
is built over 12,000 sq. yards.

Quality Control

The Company maintains a strict Quality
Control Department to ensure that manufactured products maintain a consistent
quality and conform stringent standards laid down  for each individual
product. Our Quality Control Department has input these procedures facilities
us in the standardization of product and optimization of production resources.
The health and safety of our people is of course always at the forefront of all
policies and procedures and we never compromise on one for the other. Our ISO
9001: 2008 status is testament to our commitment for providing our client very
best. 

 

Inventory system for independent demand & distribution channel.

The ways to
understand inventory through dividing into two broad categories, dependent
& independent demand. Independent demand is with regard to a finished
product, such as electric heater, cellular devices, and burgers. While
dependent demand is demand for components or sub-assemblies of that completed
product.

The
two-inventory systems are being used to determine order quantity for
independent demand. However, how do we compute quantities for dependent demand?
Quantities for dependent demand are produced from independent demand, which we
call the “parent”. For instance, we can forecast the number of automobiles
we expect to sell, then we can derive the quantities needed of tires, braking
systems, and other component parts. Intended for example, if a company plans to
produce two hundred cars in one day, it would need 800 wheels, four hundred
windshield wipers, and two hundred braking systems. The amount of tires,
windshield wipers, braking systems, and other component parts is dependent
after the amount of the independent demand item from where it is derived.

Paint Production Raw material

The main paint
ingredients include binders, solvents, pigments, extenders and additives, and
antimicrobials.  

Binders or resins are nonvolatile film
formers that bind the pigment particles together.  They can be synthetic resins, drying oils, or
natural resins. Currently, 95% of all film formers are synthetic resins.
Acrylics are the predominant type, followed by alkyds and vinyl; other common
coating resins include urethanes, polyesters, epoxies, amines, and cellulosic.

Pigments are finely ground, insoluble,
dispersed particles that provide a coating formulation with color and opacity.
They also can function as fillers, reinforcements, and property modifiers.
Pigments can be either natural or synthetic and inorganic or organic.

Solvents are volatile liquids used to
dissolve or disperse the film-forming constituents. Paint solvents are either
organic liquids or water.

·        
Hydrocarbons are the most
common solvents used in paint and are divided into two categories; aliphatic
and aromatic. The most commonly used aliphatic solvent is mineral spirits.
Aromatic solvents provide stronger solvency, but with a greater odor. The most
common are toluene, xylene, and naphtha. 

·        
Oxygenated solvents include
ketenes, esters, glycol esters, and alcohols and are widely used with synthetic
binders. Ketenes are characterized by their strong odor, range of water
solubility and evaporation rate. Esters provide solvency nearly equal to
ketenes but with more pleasing odors. Glycol ethers, used in low levels in
water-borne paints, are milder in odor and display water miscibility, strong
solvency, and slow evaporation. 

Extenders and
additives facilitate the production, application, and performance properties of
paint. Plasticizers, which are added to increase flexibility, account for
almost one-quarter of the additives. Surface-active agents function as
emulsifiers, pigment suspension aids, and wetting agents. Other additives
include thickeners (such as cellulose ethers), dryers, anti-skinning agents,
anti-flooding agents, mar proofing aids, sanding aids, ultraviolet light (UV)
absorbers, and corrosion inhibitors.

Antimicrobials
(bactericides, fungicides, and algaecides) are used in both oil-based and
water-based paints, and are required more in regions with high humidity. In-can
preservatives, which keep the paint from spoiling, include isothiazolinone and
amine adduct. Dry-film preservatives, which fight fungi and algae once the
paint is applied.

Paint
manufacturing process

 

 

Paint formation

Oil-based paint
includes 20% additives, 20% TiO2 pigment, 20% hydrocarbon solvent, and 40%
alkyd binder.

Water-based
paint includes 10% additives, 15% TiO2 pigment, 25% acrylic binder, and 50%
water.

 

Process of getting inventories from vendor

ERP system

Diamond paints
have relied on their ERP to update them about inventory levels. They have
specified a particular limit, so when that limit is breached system gave an
update regarding purchase of inventory. The specified limit varies according to
seasons but the stock is always bought to accommodate sales for 15 days.

Placing an order

When that
specified limit reached, the company places an order. Normally company buys
stock for 15 days, but if there is only one source then they buy stocks for at
least a month.

Vendor dispatches order

After receiving
order from Diamond paints vendor dispatches the order. It takes normally 1-2
days for stock to reach factory.

Gate inward pass is generated

Delivery challan is prepared

Testing of Inward inventory

Diamond paints
believes in maintaining high quality so every inventory that is brought from
vendors goes through from intensive testing then a decision is taken to approve
or disapprove inventory.

Goods receipt note are generated

Vendor’s invoice is prepared after approval
regarding raw material quality

System payable

After generating
gate inward pass and testing inward inventories payment is made to respective
suppliers according to their respective credit terms.

This entire
procedure takes 5 days. After placing an order, it, take 2 days for raw
material to reach factory. Procedures related to converting raw material to
finished goods, testing and approving of inward stock takes further 2-3 days.

 

Following values were receive by our visit
to their factory

Amongst plenty
of Diamond paints products, we have selected only one of their product variant,
which is “weather defender.” This product has 50 color shades in which the
company operates.

Monthly delivery
orders were 3000

Each day some
115 order are processed

Amongst these
115 orders Weather defender’s demand is of 17.39 drums (0.39 signifies smaller
measurement like gallon and quarter)

In paint
industry units are normally sold in liters.

One Drum equates
to 208 liters.

Daily demand:
3618 liters

Monthly demand:
94079 liters

Yearly demand:
1128948 liters

 

Months

Monthly demand

12 periods mean

Deviation

Deviation squared

12 period of deviation squared

Standard deviation

1

84,690.00

94,079.00

(9,389.00)

88,153,321.00

 

 

2

81,452.00

94,079.00

(12,627.00)

159,441,129.00

 

 

3

93,780.00

94,079.00

(299.00)

89,401.00

 

 

4

96,896.00

94,079.00

2,817.00

7,935,489.00

 

 

5

98,952.00

94,079.00

4,873.00

23,746,129.00

 

 

6

105,620.00

94,079.00

11,541.00

133,194,681.00

 

 

7

107,530.00

94,079.00

13,451.00

180,929,401.00

 

 

8

101,596.00

94,079.00

7,517.00

56,505,289.00

 

 

9

99,511.00

94,079.00

5,432.00

29,506,624.00

 

 

10

89,544.00

94,079.00

(4,535.00)

20,566,225.00

 

 

11

86,111.00

94,079.00

(7,968.00)

63,489,024.00

 

 

12

83,266.00

94,079.00

(10,813.00)

116,920,969.00

73,373,140.17

8,565.81

Total

1,128,948.00

 

 

880,477,682.00

 

 

Standard
deviation of forecasted demand is 8565.81

1-liter paint is
delivered to dealers at 25% amounting to Rs. 422

So, the actual
price of paint is Rs. 563.

Cost of
producing 1-liter of paint is Rs. 141.

Profit margin
amounts to Rs. 281 when selling it to dealers.

Further 25%
margin is for dealers.

Inventory
holding cost weren’t specified to us, they provided a range of 18%-22% as their
Holding cost. So, for this project we assumed 20% as their carrying cost.

Lead-time is of 5 days

Ordering cost: 4421.71

Demand: 94079/month

Standard deviation of demand: 8565

Inventory holding cost: 20%

 Customer
satisfaction: 92% (based on assumptions)

Cost:
Rs. 141

 

 

 

Current Process

The process of
Diamond paints regarding inventory is quite perplexed considering that there
are almost 12 to 13 different variants of paints amongst these variants we have
decided to pursue our project on “Weather defender”.

On our visit to
their factory, we inquired about their daily, monthly and yearly demand of
weather defender. In paint industry units are normally measured in liters.
Their daily demand is 3618 liters and annual demand is close to 1.1 million. We
asked them to provide us any data related to monthly demand approximately.

Months

 Monthly demand

1

                84,690.00

2

                81,452.00

3

                93,780.00

4

                96,896.00

5

                98,952.00

6

              105,620.00

7

              107,530.00

8

              101,596.00

9

                99,511.00

10

                89,544.00

11

                86,111.00

12

                83,266.00

Total

          1,128,948.00

  

On further
questioning regarding, cost of producing 1 liter of weather defender is Rs.
141. Their profit margin while selling it to their respective dealers is 25%.
Hence selling it at price of Rs. 422 per liter. Then its upto dealers to
attract end consumers by providing further discounts ranging upto 25%. The
maximum price at which the paint can be sell is Rs. 563. The profit margin of
Diamond paints is 50% which amounts to Rs. 281.

The demand is
uncertain, but they have ascertain particular ways to forecast demand normal
criteria is based on historical data. Based on these forecasted demands Diamond
paints normally buys inventory which equates to 15 days sale. It takes 5 days
to receive stock from factory. The entire procedure includes purchasing of raw
material, receiving from vendors, processing of raw material using various
chemicals to produce paints, and then sending it to their factory. The holding
cost or carrying cost to inventory is assumed 20%. They provided us a range of
18-22%  because carrying cost varies
according to inventory more inventory more cost. Level of inventory changes in
winter and summers. Summers are normally on-season particularly in paints
industry. While it takes 5 days to reach inventory, the cost of ordering
inventory is Rs. 4421.71.  The cost of
producing 1 liter of paint is Rs. 141, while stock out cost is Rs. 281.

On the basis of
these numbers. We have calculated Economic order quantity which is 223425.2458
liters. They have ascertained re-order point of 18090 liters. So whenever
inventory reaches that level a new order is placed.

Standard
deviation is 8565.81, while standard deviation of compound distribution is
19151.92223.

Revised Re-order
point using Standard deviation and Z  from table is 45094.21034. Which means that
when ever inventory reaches this level (45094.21034) we need to order
223425.2458 liters.

In normal
situation they place an order for inventory after every couple of months, but
in winters the duration increases as demand is little slow.

 

Weaknesses

While collecting
information regarding their ordering cost which is way lower, then majority of
players in the market, because they don’t have to send their product to
warehouse. They have designed their warehouse and factories in a way that both
of them are functional side by side, which helps them to reduce their
transporting cost significantly which have an incredible impact on their
ordering cost which is Rs. 4421.71.

As far as my
understanding is concern, regarding low ordering cost and relatively higher
inventory carrying cost. Further claiming that in Japan inventory is considered
as evil it would be more appropriate for Diamond paints to order more
frequently instead of maintaining large inventory. But there are certain
problems if Diamond paints focuses on ordering more in small quantities as
compared to bulk buying. Firstly, vendors are often short on raw material hence
making it difficult for the company to place an order in small quantities. But
even in this situation company can manage to buy raw material in bulk quantity
and only supply handful of quantity to fulfil demand, as ordering cost is quite
nominal.

 

Recommendations

If we order according
to Current EOQ and re-order point our cost which incudes ordering cost and
carrying cost will be doubled as we will be carrying double the inventory
required in a month, so as a subsequent to this it would more cost beneficial
if we can order more but less quantity in this case our ordering cost will
increase but our carrying cost will decrease. We need to remember that our
percentage of ordering cost is lower as compared to carrying cost. Hence their
current process is not cost beneficial. 

We should also
look at a realistic angle, that we are only viewing data available of one of
their 12 variants. One whose demand is minimum. There is a hundred percent chance
that while combining all the demand of all the variants their process might be
spot on. Because in most paints raw material is almost same. All oil based are
made form almost identical raw material and same goes for water based too. Raw
material to produce other variants only vary 10 to 15%.

So, in order to
know properly regarding their current inventory process or to comment on it
while only investigating one variant would be unfair. But on the assumption of
only one variant, it would be better for the company to start ordering more
frequently but in half the quantity or should consider ordering average demand
plus 5% to 10% growth each year.