IMPROVING INVENTORY MANAGEMENT IN SMALL BUSINESS

J?NK?PING INTERNATIONAL BUSINESS SCHOOL

J?NK?PING UNIVERSITY

IMPROVING INVENTORY MANAGEMENT IN SMALL

BUSINESS

A CASE STUDY

Master Project in International Logistics and Supply Chain Management

Authors:

Lining Bai

Ying Zhong

Tutor:

Jens Hultman

J?nk?ping

2008-01

Master Thesis in International Logistics and Supply Chain Management

Title: Authors: Tutor: Date: Subject terms:

Improving Inventory Management in Small Business: A Case Study Lining Bai and Ying Zhong Jens Hultman 2008-01 Supply Chain Management, Inventory Management, Purchasing, IT, Small Business.

Abstract

Introduction: The growth of small business is fast and their impact on the economy is becoming bigger. How to manage the inventory effectively and efficiently often is a challenge for these small businesses. The study took place at HEM-SOL FORSALJNINGS AB, a company involved in gym sports equipment wholesale. For HEM-SOL two inventory problems, stock-out and overstock occur frequently. The company wants to improve its efficiency and is considering a change in the inventory management. Purpose: The purpose of this study is to investigate the reasons behind the inventory management inefficiency in HEM-SOL, and then the proposed managerial suggestions will be presented to deal with the issues. Method: The study is considered as qualitative single-case study. Data collection is mainly through the interviews with the top manager and other staff involved in inventory control operations. Secondary data is retrieved from the information system to provide the annual purchasing and sales report about twenty items using a purposive sampling approach. Data analysis follows the theoretical framework. Conclusion: Small businesses have limited financial resources and bargaining power. Long-distance suppliers, big fluctuation of demand and lack of formalized inventory control system result in HEM-SOL bad performance on inventory management. The authors analyze the collected data and establish a formal inventory control system as the solution to improve the company's inventory management.

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Acknowledgement

We would like to give gratitude to the staff in HEM-SOL FORSALJNINGS AB, who spent time out of their busy schedules to take part in our research, especially: Jan ?stman, General Manager of HEL-SOL FORSALJNINGS AB; Helena Olsson Logistics & Purchasing Coordinator of HEL-SOL FORSALJNINGS AB. They kindly gave us the opportunity to do this thesis project and provided us with sufficient information. And we also appreciate our thesis supervisor Jens Hultman for his support, tips and guidance given to us during the whole process of research.

.......................................... Lining Bai

January 2008, J?nk?ping

.......................................... Ying Zhong

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Table of content

Acknowledgement ........................................................................... 2

1 Introduction................................................................................. 6

1.1 Background ....................................................................................... 6 1.2 Problem Discussion........................................................................... 7 1.3 Research Questions .......................................................................... 7 1.4 Purpose ............................................................................................. 7 1.5 Delimitation........................................................................................ 8 1.6 Disposition ......................................................................................... 8

2 Theoretical Framework.............................................................. 9

2.1 Supply Chain Management (SCM) .................................................... 9 2.1.1 Inventory Management............................................................... 9

2.1.1.1 Challenge of Inventory Management.......................................................9 2.1.1.2 Demand Management ..........................................................................10 Demand Forecast ...............................................................................................10 Stock-out ............................................................................................................11 Safety Stock........................................................................................................11 2.1.1.3 Inventory Turns.....................................................................................11 2.1.1.4 Tradeoffs of Inventory ...........................................................................12 2.1.1.5 Inventory Carrying Costs.......................................................................13 2.1.1.6 Classification of Inventory .....................................................................14 2.1.1.7 Inventory Control Systems ....................................................................15 ABC Analysis .....................................................................................................15 When to Order? ..................................................................................................17 How much to order? ...........................................................................................19 2.1.1.8 Warehousing ........................................................................................21 Three Basic Functions of Warehouse.................................................................21 Types of Warehouse ...........................................................................................21 Warehouse Layout .............................................................................................22 Warehouse Management System (WMS)...........................................................22

2.1.2 Purchasing Management ......................................................... 23

2.1.2.1 The major purchasing decision processes.............................................23 2.1.2.2 Supplier relationship management ........................................................24

2.1.3 IT Application in SCM............................................................... 24

2.1.3.1 The Role of IT in SCM ..........................................................................24 2.1.3.2 IT goals in SCM ....................................................................................25 2.1.3.3 Integrating Supply Chain IT...................................................................25 2.1.3.4 ERP Information System in Organizations.............................................26

2.2 Small Business and SCM ................................................................ 26 2.2.1 Definitions ................................................................................ 26 2.2.2 Characteristics, Strengths and Weaknesses of SMEs ............. 27 2.2.3 Small Business Embracing SCMPros and Cons .................. 28

3 Methodology ............................................................................. 30

3.1 Generating the Research Topic....................................................... 30 3.2 Deciding the Research Approach .................................................... 30 3.3 Choosing the Appropriate Research Strategies............................... 31

3.3.1 Case Study Strategy ................................................................ 31 3.3.2 Cross-Sectional Studies ........................................................... 32 3.3.3 Exploratory, Descriptive and Explanatory Studies.................... 32 3.4 Qualitative or Quantitative Research ............................................... 33

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3.5 Data Collection Methods.................................................................. 34 3.6 Analyzing Qualitative Data............................................................... 34 3.7 Credibility/ Reliability........................................................................ 35

4 Empirical findings .................................................................... 36

4.1 Company Profile .............................................................................. 36 4.2 Organizational structure................................................................... 36 4.3 Supplier ........................................................................................... 37 4.4 Business Operation Process ........................................................... 38

4.4.1 In-house business operations .................................................. 38 4.4.2 Outsourced business functions ................................................ 38

4.4.2.1 Inbound Logistics..................................................................................38 4.4.2.2 Out-bound logistics ...............................................................................38

4.5 Information System.......................................................................... 38 4.6 Perceived Problems......................................................................... 39

5 Analysis..................................................................................... 40

5.1 Inventory Turnover .......................................................................... 40 5.2 Inventory Trade-offs......................................................................... 40 5.3 Inventory Control Systems............................................................... 41

5.3.1 ABC Analysis ........................................................................... 41 5.3.2 When to order? ........................................................................ 43

5.3.2.1 Continuous Review...............................................................................44 5.3.2.2 Periodic Review....................................................................................46

5.3.3 How much to order? ................................................................. 48

5.3.3.1 EOQ .....................................................................................................48 5.3.3.2 Alternative Order Quantity approach .....................................................48

5.4 Inventory Carrying Cost ................................................................... 49 5.5 Warehouse ...................................................................................... 49

5.5.1 Warehouse Layout ................................................................... 49

5.5.1.1 Location labeling on the warehouse floor ..............................................49 5.5.1.2 Zone identification.................................................................................50 5.5.1.3 Rack identification.................................................................................51

5.5.2 Warehouse Management System (WMS) ................................ 52 5.6 Purchasing....................................................................................... 53 5.7 Information System.......................................................................... 53

6 Conclusion ................................................................................ 55

6.1 Theoretical Conclusions .................................................................. 55 6.2 Practical Conclusions ...................................................................... 55 6.3 Criticism to the Study....................................................................... 56

7 Reference .................................................................................. 57

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