A STUDY OF INVENTORY MANAGEMENT SYSTEM

IN SMALL MEDIUM ENTERPRISE (SME) : CONCEPTUAL APPROACH

Final Report

Danang Kisworo / 10074073

Outlines

1. Background2. Literature Review3. Methodology4. Investigate Inventory Management in SME5. Conceptual Model6. Guidelines for entrepreneur about inventory

management7. Conclusion8. References

Background

According to Dickinson (2008), small to medium-sized enterprises are considered as engines of growth in both developed and developing countries.

Jutla .et .al( 2002) point out that SMEs are contributing significantly to the economy and the economic growth of a country, thus many countries recognize the need to study as well as support SMEs.

Inventories are a significant portion of the current assets of any business enterprise and effective inventory policies in a supply chain should ensure that the right inventory levels are held in the right place at the right time, at the lowest costs possible (Brigham & Ehrhard, 2005).

Many SMEs lack professional expertise and generally take decisions based on intuition and elementary Inventory Management practices (Mohanty, 1985).

Therefore, it is important to investigate the models for inventory management in SMEs.

to investigate the inventory management in Small Medium Enterprise to figure out the weakness then used to help management in small to medium-sized enterprises in keeping costs down while still meeting customer service requirements.

to provide guidelines for entrepreneurs for implementing inventory management (IM) practices .

Objective

Definition of SME

Literature Review

The European Commission (EC)

Asia Pacific Economic Cooperation (APEC)

Category No of Employee Annual Sales Total AssetMicro < 10 ≤ USD 3 Million ≤ USD 3 Million

Small < 50 ≤ USD 13 Million

≤ USD 13 Million

Medium < 250 ≤ USD 67 Million

≤ USD 56 Million

Category No of Employee

Micro < 5

Small < 20

Medium < 100

(source : USAID Booklet of Standardized Small and Medium Enterprises definition

1/5

Definition of SME United Nations Industrial Development Organization (UNIDO)

Literature Review

Category SMEs Large Company

Management•Proprietor-Entrepreneurship•Function Linked to Personalities

•Manager Entrepreneurship•Division of Labor by Subject matters

Personnel •Lack of University graduates•All-round Knowledge

•Dominance of University graduates•Specialization

Organization Highly personalized contacts Highly formalized communication

Sales Competitive position not defined and uncertain Strong competitive position

Buyer’s Relationship Unstable Based on Long-term contracts

Production Labor incentive Capital intensive, economies of scale

Research Development

Following the market, intuitive approach Institutionalized

Finance Role of Family funds, self financing

Diversified ownership structure, access to anonymous capital market(source : USAID Booklet of Standardized Small and Medium Enterprises definition

2/42/5

Discovering Inventory Problem in SMEAuthor(s) Inventory Problem Causes Effects Journal

Meyer (1991) Inventory record inaccuracy • Loss of worker productivity,• Manufacturing and ordering of

unwanted items, • Broken customer

commitments, • Physical inventory,• Stock-outs, • Frustration

Production and Inventory Management Journal

Pirttila andVirolainen

(1992)

Management effectiveness of inventory decision

• Poor service level• High cost• Poor turn over ratio

International Journal of Production Economics

Quayle (2002).

Low purchasingeffectiveness

• Reduced competitive advantages and benefits of quantity discount

• Reduced bargaining power with suppliers and customers

• Lack of purchasing capabilities

European Journal of Purchasing and SupplyManagement

Rajeev (2008) Poor Inventory Management • Differences between physical stock and accounting system

Management Research News

Literature Review3/43/5

An analysis of issues involved in assessing inventory management systems reveals that inventory management often holds a process, planning, information and organizational dimension (e.g.Corbey and Jansen, 1993; Alfaro and Tribo, 2003).

An Inventory Management Concept is defined by Jan de Vries, (2007). as a blueprint of the inventory management system and includes the physical infrastructure, the planning and control structure, the management information architecture as well as the organizational embedding of the inventory system

Starting point for the inventory management concept in a specific situation are the overall internal and external objectives defined by the company. It is noticed here that the approach described strongly relates to the ideas developed by Jan de Vries, (2007).

Literature Review4/5

Literature Review

Source : Jan de Vries, (2007).

5/5

External Performance

PerformanceObjectives

Inventory Management

Concept

Organizational Embedding

Information Architecture

Planning Structure

Physical Infrastructure

Internal Performance

Structure of An Inventory Management Concept

Considered by the companyas being crucial for internal operations and do not directly link to customer requirements

Slack et al. (1998), quality, speed, dependability, flexibility and cost objectives are taken as a major input

The decision-making structure regarding inventory planning and control is closely related to information.

(Rabinovich and Evers, 2002)

Relates to grouping planning control activities intoorganizational units and establishing positions (structure of positions).

Relates to the inventoryplanning and control structure. In general, includes twomain decision areas often referred to as ‘thevolume decision area’ and the ‘when to orderdecision area’

Relates to the way organizations producegoods and to the way goods and materials are distributed from supplier to the manufacturerand from manufacturer to the customers

Related to market requirements and are derived from strategic goals as well as marketing objectives

Methodology

A literature study was conducted with the aid of a computer-based search, using the keywords identified, databases and search engines.

Diagnosing SME Inventory ProblemInvestigate SME Inventory SystemDevelop Conceptual ModelDevelop Guideline for the enterpreneur

Large Enterprise Small - Medium EnterpriseExternal Performance Well managed and control the

environtment [7]•Less control over key environmental elements (i.e., customers, suppliers, competitors, and government) [7]•Bad marketing strategy [13]

Internal Performance High Degree of ExpertiseStrong commitment of Senior [8]

•Lack of Internal Regulation [11]•Lack/Low level Strategic Planning [9]

Physical Infrastructure Well define statement how the physical infrastructure going to accomplish the goal [8]

•Lack of regulation for storing and counting [11]•Lack of coordination , transportation/logistic[14]

Planning Structure Well define planning procedure [8]

•Lack of Theoretical Knowledge about inventory . [10]•Low importance given to forecasting [7]

Investigate Inventory Management System in SME

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Investigate Inventory Management System in SME

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Large Enterprise Small - Medium Enterprise

Information Architecture Well define Administration procedure. [8]Well define Information system. [8]

•Low computer uses [10]•Lack Administration procedure [11]•Inaccurate record [12]•Lack of technology upgrading [14][16]

Organizational Embedding

Well organized [8] •Organized by functions. Decision-making is centralized at the top. [12]•Lack of Internal Communication [11]

Another finding :The factors related to financial shortcomings are lack of capital, followed by lack of control over cash, lack of cash flow analysis and lack of budgets or forecasts. It seems that financial mismanagement is seen as largely responsible for the demise of SMEs. (Theng and Boon, 1996)

Lack of Financial [10], Lack of Capital [13] [14][16] ,Lack of Control Over Cash [13]

Conceptual Model

External Performance

PerformanceObjectives

Inventory Management

Concept

Organizational Embedding

Information Architecture

Planning Structure

Physical Infrastructure

Internal Performance

Structure

Job Description

Information Technology

Information Management

Inventory Planning

Inventory Control

Production

Logistic

Financial Capability

Financial management

Business Plan

Initial stage

Current stage

Future stage Operation Objectives

Financial Objectives

1/6

Conceptual Model

External Performance

Business Plan There are two primary objectives :1.To obtain funding that is essential for the development and growth of the business. 2.To provide a plan for early strategic and corporate development[17]

Internal Performance

Operation Objectives

Financial Objectives

Financial objectives focus on achieving acceptable profitability in a company’s pursuit of its mission/vision, long-term health, and ultimate survival. Financial objectives signal commitment to such outcomes as good cash flow, creditworthiness, earnings growth, an acceptable return on investment, dividend growth, and stock price appreciation. [16]

Operation objectives focus on maintaining the firm’s core competencies, and focus on running a major functional activity or process within a business, such as, research and development, production, marketing, customer service, distribution, finance, human resources, and other.[16]

2/6

Physical Infrastructure

Production

Logistic

Logistics involves planning, implementing, and controlling the efficient, cost effective flow and storage of raw materials, in-process inventory , finished goods and related information from point of origin to point of consumption so as to meet customer requirements. It includes procurement, maintenance, distribution, and replacement of personnel and materiel. In simple terms, it is all that goes into ensuring that the right material reaches the right place at the right time.

Production strategy as a reference to choose the type of inventory in an organization. The production strategy may be any one or a combination of the following :•Make finished product to stock (maintain and sell from finished product inventory.•Assemble finished products to order (maintain an inventory of components, subassemblies and options).•Custom design and make finished products to order (maintain a stock of commonly used material. [19]

Conceptual Model3/6

Planning Structure

Inventory Planning

Inventory Control

Inventory planning are related to analyze demand and deciding when to order and how much to order new inventories. Traditional inventory management approach consists of two models namely [19]:•EOQ - Economic Order Quantity •Continuous Ordering •Periodic Ordering

Inventory Control are the supervision of supply, storage and accessibility of items in order to ensure that the business has the right goods on hand to avoid stock-outs, to prevent shrinkage (spoilage/theft), and to provide proper accounting. [19]

Conceptual Model4/6

Information Architecture

Information Technology

Information Management

Organizational Embedding

Structure

Job Description

The organization chart describes in diagrammatic form the structure of the organization. It helps to explain the communication patterns, operational processes, reporting lines, and the linking mechanisms between the roles. The essential purposes of an organizational structure are: • To have the right people making the right decisions at the right time. • To establish who is accountable for what and who reports to whom. • To facilitate the easy flow of information through the organization. • To provide a working environment that encourages efficiency and the acceptance of change. [17]IT is the area of managing technology and spans a wide variety of areas that include computer software, information systems, computer hardware, programming languages but are not limited to things such as processes, and data constructs.

Information management (IM) is the collection and management of information from one or more sources and the distribution of that information to one or more audiences. This sometimes involves those who have a stake in, or a right to that information

Conceptual Model5/6

Internal PerformanceFinancial

Capability

Financial management

Operation Objectives

Financial Objectives

From the actual situation, SMEs, mostly ignore the central position of financial management, the rigid thoughts make enterprise administration to be limited the manufacture; Financial management system, financial policy and process are not perfect; Financial management method fall behind, management efficiency is low. [18]The Financial has direct correlation with internal performance, especially with Financial Objectives due to Financial management method used inline with financial objectives. For Example : SMEs financial persons lack of modern financial management ideas, knowledge not promptly update, to the financial management know only stay in counting and booking, it is difficult to utilize the value of financial reports. Then translate the report into the result whether the operation can achieve the objectives or not.

Conceptual Model6/6

Guidelines for entrepreneur about Inventory Management

Factor Process

External Performanc

eBusiness Plan

The information here should describe briefly the business, vision, mission, business goals and objectives [17].•Vision statement should be a precise, well-drafted statement indicating where the business wants to go.•A mission statement is a broad statement of the organization’s purpose or intent, specifying the fundamental reasons for its existence.•Business Goal are typically stated in terms of general business intentions.•Objective is a specific step, a milestone, which enables you to accomplish a goal

Internal Performanc

e

Financial Objectives

The following are examples of financial objectives [16]:•Growth in revenues•Growth in earnings•Wider profit margins

Operational Objectives

Focus on :1. how a company manages frontline organizational units with a business (plants, sales districts, distribution centers) .2. how to perform strategically significant operating tasks (materials purchasing, inventory control, maintenance, shipping, advertising campaigns) . [16]

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Factor Process

Physical Infrastructur

e

Production

• Define the production type. Such as Make to stock, Assemble to Order, or Make to order.

• Define the production planning , based on : - Product and sales plan - Capacity - Resources

Logistic -Transportation- Warehouse

Guidelines for entrepreneur about Inventory Management

Factor Process

Planning Structure

Inventory Planning

1. Designing master schedule are consider bill of material,

2. Forecast Method• Qualitative Method : such as Delphi, panel

discussion, intuition.• Quantitative Method : use time-sequenced

history of activity for a particular item as source data, commonly referred to as time series.

Inventory Control

Control System• ABC Analysis, principles involves classifying

inventory, different classification with the ranked importance of each classification.

• Physical counting• Periodically

4

Factor Process

Information Architecture

Information Technology • Computerized Method• Investment in small ERP system

Information Management

• Strengthen the communication in each department and clear the responsibility each department.

• Define administration in detail related to the flow reporting inventory (stock)

• Appropriate attitude, specific person who responsible to for maintaining accuracy.• Provide tools.• Instruction and training• Established measuring performance• Auditing

Guidelines for entrepreneur about Inventory Management

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Factor Process

Organizational Embedding

Organization StructureTOP management should determine the organization structure especially for the person who responsible with inventory.

Job DescriptionAfter determine the person, enterprise should define their job in details to avoid misunderstanding.

Financial Capability Financial Management

1.Set up suitable financial goal2.Perfect the financial management and

internal control system3.Training a good skillful and professional

financial team4. Investment have to face the market5.Practicing skills, strengthen the asset

management

Guidelines for entrepreneur about Inventory Management

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Conclusion

The study in some literature about the inventory management is SMEs indicated that inventory practices are poor. Poor Inventory Management practices are characterized by a lack of an integrated approach in the inventory management itself.

The investigation helped by framework from Jan de Vries, (2007), which have some dimension such as internal performance, external performance, physical infrastructure, planning structure, information structure, organization embedding. And define this framework as initial stage.

In the current stage, researchers found that the financial should consider when the enterprise defines their inventory management. Then future stage can be define as the literature study, with added some factor that can influence the each dimension, this factor should consider by top management in the enterprise.

Due to the lack expertise in SMEs, Guidelines for the entrepreneur are made based on the literature study.

[1] Dickinson, P.G. (2008). “Company formation and regulation compliance for SMEs”. International journal of law and management, 50(3): 136-148.

[2] Jutla, D., Bodorik, P. & Dhaliwal, J. (2002). “Supporting the e-business readiness of small and medium-sized enterprises: approaches and metrics”. Electronic networking applications and policy, 12:139-164, Apr.

[3] Brigham, E.F. & Ehrhardt, M.E. (2005). “Financial management theory and practice”. 11th ed. Mason, OH: Thomson/South-Western.

[4] Mohanty, R.P (1985), ‘‘Inventory problems under multiple constraints: some studies’’,Engineering Costs and Production Economics, Vol. 9, pp. 355-67.

[5] USAID,2007, “Booklet of Standardized Small and Medium Enterprises

definition.”

Key References1/3

[6] N. Rajeev, (2008),"Inventory management in small and medium enterprises: A study of machine tool enterprises in Bangalore", Management Research News, Vol. 31 Iss: 9 pp. 659 – 669

[7] Gerald .S, Karen .J, and Judd .M, (2006). “Innovation and Change Management in Small and Medium-Sized Manufacturing Companies.” The National Institute of Standards and Technology Manufacturing Extension Partnership.

[8] Jan de Vries, (2007), “Diagnosing inventory management systems: An empirical evaluation of a conceptual approach”. International Journal of Production Economic.

[9] Wang, Walker & Redmond. (2008) “Explaining the Lack of Strategic Planning in SMEs: The Importance of Owner Motivation.” International Journal of Organizational Behaviour, Volume 12 (1), 1-16.

[10] Charl Dumas,(2008), “Effective Inventory Management In Small To Medium-sized Enterprises”, Dissertation - North-West University.

Key References

[11] Inventory management problems of SMEs and countermeasures. From : http://www.tastecate.com/ freepages342486_Inventory-management-problems-of-SMEs-and-countermeasures#

[12] N. Rajeev, (2008),"Inventory management in small and medium enterprises: A study of machine tool enterprises in Bangalore", Management Research News, Vol. 31 Iss: 9 pp. 659 – 669

[13] Theng, .L .G and Boon, .J .L .W. (1996). “An Exploratory study of factors affecting the failure of local Small and medium enterprises.” Asia Pacific Journal Of Management, Vol 13, NO 2:47-61

[14] Asian Productivity Organization. (2002) “Asian Cases on Supply Chain Management for SMEs.” Report of the Symposium on Supply Chain Management for Small and Medium Enterprises held in Taipei, Taiwan.

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Key References1/3

[15] Chilipunde, R. L. (2010). “Constraints And Challenges Faced By Small, Medium And Micro Enterprise Contractors In Malawi”. Thesis, Nelson Mandela Metropolitan University.

[16] Objectives and Goal Setting http://mystrategicplan.com/resources/objectives-and-goal-setting/

[17] Professional Accountants in Business Committee, (2006). “ Business Planning Guide:Practical Application for SMEs”.

[18] ZHU Aizhen and LIU Lianying. “SMEs Financial Management Problems and Countermeasures”. M and D Forum. Available on www.seiofbluemountain.com/ search /detail.php?id=7631

[19] Fogarty, Blackstone and Hoffman (1991), “Production and Inventory Management”, Thomson Information/Publishing Group, 2nd Edition.

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Key References