STOCKSTOCKSTOCKSTOCKMANAGEMENTMANAGEMENTMANAGEMENTMANAGEMENT SYSTEMSYSTEMSYSTEMSYSTEMWayWayWayWay ForwardForwardForwardForward –––– ProfitProfitProfitProfit MaximizingMaximizingMaximizingMaximizing ThroughThroughThroughThrough StreamliningStreamliningStreamliningStreamlining StockStockStockStock ManagementManagementManagementManagement ProcessProcessProcessProcess

ASSIGNMENTASSIGNMENTASSIGNMENTASSIGNMENT –––– OPERATIONSOPERATIONSOPERATIONSOPERATIONSMANAGEMENTMANAGEMENTMANAGEMENTMANAGEMENT

PresentedPresentedPresentedPresented ByByByBy

Sahan Perera (2010/PGDBM/046)

POST GRADUATE DIPLOMA IN BUSINESS MANAGEMENT

UNIVERSITYOF COLOMBO

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1.01.01.01.0 EXECUTIVEEXECUTIVEEXECUTIVEEXECUTIVE SUMMARYSUMMARYSUMMARYSUMMARY

This report underlines the need and importance of having proper inventory control system

for every firm in this kind of business, so as to increase its profitability, efficiency and

sustain the pressure given by competition. Further its stated high inventories are leading

to have aged products in the market where the ultimate results will be excessive market

returns due to expiries and damages.

The company selected for this study is Stassen Foods is incurring heavy losses due to

high inventories which are resulted in paying more interests to the bank for blocked

financial resources of the company. This high inventories are leading to have aged

products in the market where the ultimate results will be excessive market returns due to

expiries and damages. On the other hand Stassens experiencing sales losses due to

unavailability of fast moving products.

To overcome this situation new solution proposed understanding the time value of money

and utilized their financial resources to achieve maximize profits and minimize wastage.

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2.02.02.02.0 STASSENSTASSENSTASSENSTASSEN FOODSFOODSFOODSFOODS

In the subject matter of Operation Management, I have selected Stassen Foods which was

established in April 1991, recognizing the need to develop top quality international

consumer food products in Sri Lanka. Stassen Foods is pioneered in importing and

distributing wide range of world renowned brands in Sri Lanka. Stassen’s brand portfolio

comprises of well established consumer brands such as Happy Cow Cheese, Heinz range

of products, Kellogg’s breakfast cereal, Mars chocolates, Red bull energy drink, Pedigree

dog food etc.

Diversified product range of Stassen Food’s well supported by a visionary management

team and driven through dedicated team of front line field force enabled them to stand tall

in today’s modern trade market and their contribution is more over 25% as a single player

and holds market leadership in many a categories which simply meeting the company’s

mission that of achieving “excellence and leadership in all business ventures”

The Stassen Foods team includes 115 sales representatives and 85 distributors. The

distribution network extends to 46,500 retail and wholesale outlets throughout the island.

Stassen Foods sends representatives to each of their distribution outlets at least once

every ten days, the highest frequency of calls being twice a week to supermarkets.

Stassen Foods also boasts modern and efficient warehousing facilities including chillers,

freezers, air-conditioned and dry storage, stacking trucks and electrically operated

forklifts.

3.03.03.03.0 SELECTIONSELECTIONSELECTIONSELECTION OFOFOFOF INTERNATIONALINTERNATIONALINTERNATIONALINTERNATIONAL BRANDSBRANDSBRANDSBRANDS

4.04.04.04.0 CRITICALCRITICALCRITICALCRITICAL ASSESSMENTASSESSMENTASSESSMENTASSESSMENTOFOFOFOF STASSENSTASSENSTASSENSTASSEN FOODSFOODSFOODSFOODS STOCKSTOCKSTOCKSTOCKMANAGEMENTMANAGEMENTMANAGEMENTMANAGEMENT SYSTEMSYSTEMSYSTEMSYSTEM

Stassens being a company handles a wide range of high value consumer food products,

sometimes struggling with their bank facilities (Letter of Credit) to meet up with the

pipeline inventories from suppliers of various countries which will boiling down to high

interests paid to the banks. And also company does not have proper system to monitor

their dealers and supermarkets stock levels in real time which will result of losing sales

due to out of stock situation and also slow moving stocks will remain in the warehouse

resulting huge losses to the company.

Further this issue affect at the stage of product ordering due to no proper system to check

the stock balance of dealer warehouse at given time had to consider only the main

warehouse stock which will result of submitting wrong order quantity for the given

product. (Table 1)

Another drawback of current stock ordering system is that the people involve of product

ordering process do not capture sales return volume in previous months of each product

to identify actual movement will be given as a wrong forecast for future months.

It is recommended if there is a proper stock management system they can minimize the

monetary resources blocked on high inventories and utilize those financial resources on

the products that goes out of stock which will give immediate revenue for the

organization and slow moving products can be redistributed among high movement

locations before getting expire.

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5.05.05.05.0 STASSENSTASSENSTASSENSTASSEN FOODFOODFOODFOODDISTRIBUTIONDISTRIBUTIONDISTRIBUTIONDISTRIBUTION PROCESSPROCESSPROCESSPROCESS

5.15.15.15.1 SALESSALESSALESSALES FORECASTFORECASTFORECASTFORECASTMETHODMETHODMETHODMETHOD

Stassen Foods practices Moving Average Sales Forecast method to judge the base

quantity and increase sales volume by marginally considering various external factors

affect to the sale from each month. (Distribution expansion, Outlet upgrades, Season etc)

5.25.25.25.2 SETSETSETSETNORMSNORMSNORMSNORMS FORFORFORFORMANAGINGMANAGINGMANAGINGMANAGING STOCKSSTOCKSSTOCKSSTOCKSATATATAT STASSENSTASSENSTASSENSTASSEN FOODFOODFOODFOODSSSS

1. Stock holding period maximum 45 days at main warehouse

2. Dealers can hold maximum of 14 days stock

3. Retail shops will not purchase products less than 6 months from the expiry date

Manufacturer

Transit

Distribution

Distribution

StassenWarehouse

DistributorWarehouse

Retail Shop

Customer

6.06.06.06.0 PRODUCTPRODUCTPRODUCTPRODUCTORDERORDERORDERORDERDOCUMENTDOCUMENTDOCUMENTDOCUMENT ---- KELLOOG'SKELLOOG'SKELLOOG'SKELLOOG'S CORNCORNCORNCORN FLAKESFLAKESFLAKESFLAKES

TableTableTableTable 01010101

Table 01 shows sample product order sheet includes 3 months sales forecast for Kelllogg's breakfast cereal. Order 1 is already in the

pipe line and confirming order 2 based on last 6 months average sales. Stock balance mentioned only at Stassen warehouse and didn't

consider stocks at distributor point. And also previous months sales figures contained market reruns will misinterpret the forecast.

7.07.07.07.0 PROBLEMPROBLEMPROBLEMPROBLEM IDENTIFICATIONIDENTIFICATIONIDENTIFICATIONIDENTIFICATION

7.17.17.17.1 PlacingPlacingPlacingPlacing thethethethe ordersordersordersorders fromfromfromfrom distributordistributordistributordistributor endendendendStassen foods order placement process is having many loop falls due to poor

communication with main warehouse and the distributor point. And also it is time

consuming task for distributor when placing orders since they do not have any interface

to view available stocks at the warehouse. The current practice is distributor place orders

as per their requirement and products will be invoiced based on the availability at main

warehouse and no coordination will happen to keep inform distributor about non

available items at the warehouse for distributor to place alternative product instead.

7.27.27.27.2 PlacingPlacingPlacingPlacing newnewnewnew ordersordersordersorders fromfromfromfrom StassenStassenStassenStassen FoodsFoodsFoodsFoods endendendendProduct managers are facing difficulties to identify stock availability at distributor point

and also stocks in transit due to no system integrate with main stock management system

(AS400) at head office and distributor warehouse. This leads to place orders with out

considering stocks at distributor and transit, ended up with excess inventories at main

warehouse.

7.37.37.37.3 EliminateEliminateEliminateEliminate returnreturnreturnreturn salessalessalessales totototo dodododo aaaa correctcorrectcorrectcorrect forecastforecastforecastforecastMarket return happen due to many reason and it is not filtered when abstracting sales

history from the system and requires to deduct market returns manually by a human will

leads to poor productivity.

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8.08.08.08.0 SUMMARYSUMMARYSUMMARYSUMMARYOFOFOFOFCURRENTCURRENTCURRENTCURRENT PROBLEMPROBLEMPROBLEMPROBLEMAFFECTSAFFECTSAFFECTSAFFECTS INTERNALLYINTERNALLYINTERNALLYINTERNALLYANDANDANDAND EXTERNALLYEXTERNALLYEXTERNALLYEXTERNALLY

TableTableTableTable 02020202

ProblemProblemProblemProblem TheTheTheThe waywaywayway itsitsitsits affectaffectaffectaffect totototo thethethethe businessbusinessbusinessbusiness

InabilityInabilityInabilityInability totototo monitormonitormonitormonitor availableavailableavailableavailable stockstockstockstockatatatat warehousewarehousewarehousewarehouse

1. Distributor cannot schedule monthly salestargets results losing sale opportunities affect tomarket demand2. Stassen Foods will lose their sales revenue andmarket share3. Competitors will capitalisze their productavailability in the market

InabilityInabilityInabilityInability totototo monitormonitormonitormonitor availableavailableavailableavailable stocksstocksstocksstocksatatatat distributordistributordistributordistributor pointpointpointpoint andandandand transittransittransittransit

1. Unable to place orders as per the requirementand high inventories resulting stock holding cost.2. Unable to rotate slow moving items or excessstock available at distributor point resulting expireproducts which is a cost to the comapny

SalesSalesSalesSales returnreturnreturnreturn 1. Incorrect sales forecast and placing orders fornon moving items make company losses

9.09.09.09.0WAYWAYWAYWAY FORWARDFORWARDFORWARDFORWARD TOTOTOTOOVERCOMEOVERCOMEOVERCOMEOVERCOME THETHETHETHE PROBLEMPROBLEMPROBLEMPROBLEM

In terms of minimizing the Stassen problem of high inventories and stock out situations

by way of linking the stock level at distributor’s warehouse and the eliminating market

returns in order to have a better understanding of optimal level of stocks required to run a

smooth operation. Instead of stick into set targets, Stassen should adjust there orders in

accordance with the stock holding of the distributors and set monthly targets with real

potential considering current sales trends and keep on adjusting the pipeline inline with

the stock on hand to meet up the real demand of the market.

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10.010.010.010.0 PROPOSEDPROPOSEDPROPOSEDPROPOSED SOLUTIONSOLUTIONSOLUTIONSOLUTION

Stassens already posses a system to maintain their own stocks in their head office (AS400)

and proposed to link the distributors stock levels with the system to understand more

actual situations of stocks. Therefore Stassen will have to provide the system facility to

the distributors to link with main system.

In the event of implementing this project company needs to provide electronic

equipments such as computers, wireless conectivity and well trained staff who are

friendly with the system while setting pipe line forecast in a more realistic manner by

understanding the current trends.

SystemSystemSystemSystem DiagramDiagramDiagramDiagram

Information requested by dealer from Head Office

Information received from Head office to dealer

DistributorDistributorDistributorDistributor@@@@ColomboColomboColomboColombo DistributorDistributorDistributorDistributor@@@@GalleGalleGalleGalle

DistributorDistributorDistributorDistributor@@@@ JaffnaJaffnaJaffnaJaffna DistributorDistributorDistributorDistributor@@@@MannarMannarMannarMannar

StassenStassenStassenStassen HeadHeadHeadHead OfficeOfficeOfficeOffice

AS400 ServerGSMGSMGSMGSM

NetworkNetworkNetworkNetwork

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10.110.110.110.1 ConnectivityConnectivityConnectivityConnectivity - GSM wireless modems provide the connectivity at distributor points

to accsess head office warehouse through AS 400 system to view main warehouse stock

level in real time. And also in the AS 400 system each distributor has their own

warehouse (virtually) and all product orders, delivery of goods will be updated in real

time. This will always match with physical stock at distributor warehouse.

01.201.201.201.2 InterfaceInterfaceInterfaceInterface totototo distributordistributordistributordistributor - Distributor will receive a web based software to view

his stocks, option to place orders, and report sales returns in real time.

10.310.310.310.3 DistributorDistributorDistributorDistributor webwebwebweb interfaceinterfaceinterfaceinterface totototo viewviewviewview stockstockstockstock levellevellevellevel atatatat everyeveryeveryevery locationlocationlocationlocation ----

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11.011.011.011.0 NEWNEWNEWNEWPROCESSPROCESSPROCESSPROCESS AFTERAFTERAFTERAFTER IMPLEMENTINGIMPLEMENTINGIMPLEMENTINGIMPLEMENTING SALESSALESSALESSALESAUTOMATIONAUTOMATIONAUTOMATIONAUTOMATION SYSTEMSYSTEMSYSTEMSYSTEM

DistributorDistributorDistributorDistributor orderorderorderorder processingprocessingprocessingprocessing PlacingPlacingPlacingPlacing newnewnewnew ordersordersordersorders

Check head office warehousestock balance prior to place theorder

Generate the order from thesystem itself

Purchase order will beautomatically send through an email to head office

Stocks will be transferred torelevant distributor'swarehouse from the mainwarehouse and start loading

Once distributor receive thestock, inventory will beregistered to his warehouse formthe system

Distributor needs to update hisdaily sales, market returns andbalance stock end of the dayand on hand stock will becalculated automatically

Generate sales report excludesales return from the system

Download main warehouse anddistributor stocks separately(includes transit stock)

Consider pending shipments,market returns , entire stockbalance and set forecastaccordingly.(Moving avg method)

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12.012.012.012.0 OBSTACLESOBSTACLESOBSTACLESOBSTACLES ANDANDANDAND RISKSRISKSRISKSRISKS

01.01.01.01. AdjustingAdjustingAdjustingAdjusting pipelinepipelinepipelinepipeline ordersordersordersorders accordingaccordingaccordingaccording totototo currentcurrentcurrentcurrent trendstrendstrendstrends VsVsVsVs setsetsetset targetstargetstargetstargets agreedagreedagreedagreed

withwithwithwith thethethethe principalprincipalprincipalprincipal suppliers.suppliers.suppliers.suppliers. (There(There(There(There cancancancan bebebebe aaaa mismatch)mismatch)mismatch)mismatch)

02.02.02.02. ResistanceResistanceResistanceResistance totototo thethethethe behavioralbehavioralbehavioralbehavioral changeschangeschangeschanges ofofofof currentcurrentcurrentcurrent practice.practice.practice.practice.

03.03.03.03. AdaptabilityAdaptabilityAdaptabilityAdaptability totototo thethethethe newnewnewnew system.system.system.system.

Company will have to face a problem in implementing the proposed system in terms of adjusting

pipeline forecast since the pipeline is set in agreement with the suppliers and therefore the

management will have to convince the suppliers on the new system which will help both parties

avoiding aging products in the market.

People resist for changes since they feel their used system gives much comfortable

lifestyle. Therefore the staff involved in the new system should be given a behavioral

change by making them understand that the new system will improve their competencies

and comforts.

Company will have to face an initial challenge of making the sales force adapting to the

new system since they also have to play a roll in the new stock management system by

updating with distributor stock balances through the network provided at the stockiest.

13.013.013.013.0 NEWNEWNEWNEWPRODUCTPRODUCTPRODUCTPRODUCT ORDERORDERORDERORDER DOCUMENTDOCUMENTDOCUMENTDOCUMENT ---- KELLOOG'SKELLOOG'SKELLOOG'SKELLOOG'S CORNCORNCORNCORN FLAKESFLAKESFLAKESFLAKES

Warehouse andDistributor Market returnsStock Balance

14.014.014.014.0 BENEFITBENEFITBENEFITBENEFIT OFOFOFOF IMPLEMENTINGIMPLEMENTINGIMPLEMENTINGIMPLEMENTING THETHETHETHE NEWNEWNEWNEW SYSTEMSYSTEMSYSTEMSYSTEM

The objective of proposing this solution is to best used the organizational financial

resources efficient and effective manner which achieves the optimal level of revenue

through proper management of inventories by understanding ever changing market trends

and meet-up with the market demand all the time and avoid wastage, damage, and

expiries due to high inventories. Further this will provide correct answers to following

operational issues in inventory management.

• What is selling

• What is not selling

• Which items are slow moving

• Which items are obsolete

• What the trends/seasons are