INVENTORY SYSTEMS IN PIZZA HUT

Control system have grown up out of the need for management to avoid as far as possible having to take decision on purely routine matter such as what stores to order or the size and timing of a production order. In such a situations, there are usually many thousands of items to be attended to and a great deal of calculations to be done to decide what is the best policy to pursue at a particular time.

Development of inventory control policy involves the consideration and evaluation of numerous conflicting factors and in all aspects makes the same demand on a manager as most other types of decision-making. Whatever policy is adopted will represent a balance between opposing interests and the balancing of these interests, which compels a manager first to state and understand his objectives and then to try to analyze how they may best be achieved.

Before one can begin to consider what stocks and what items should be kept in what manner, it is necessary to consider the reasons for which stocks are held. Manufacturing operations are sheltered from influence and the uncertainties of the outside world by stocks. Within the company, one group of manufacturing operation is separated from another by further stocks, so that a breakdown in one part can be isolated.

 

THE PLACE OF STOCK IN A MANUFACTURING SYSTEM

The relationship between the stock carried and the percentage of occasions when a customer order cannot be met depends on the level of stock kept. Doubling the stocks will not have the chance of being out of the stock. Methods of statistical analysis can be used to calculate precisely how much stock is needed to be certain of meeting a given percentage of customers requirement. Clearly the precise figure, at which the ‘service level’ as it is termed is set, will depend on the cost of carrying stock against the penalty of not having it.

TOOLS USED FOR INVENTORY CONTROL:  INVENTORY LEVELS

The summarized description about the various control level is given below:

a)            Minimum Level: The minimum level is the level below which available supplies should never drop. The exact quantity which they represents is determined by the rate at which an items is used, its importance in the process, the normal procurement time and whether substitutes are available. Ideally, a new shipment should arrive just as stock reaches this minimum. Slight variations in usage or delivery time will prevent such exact operation practice. For this reason, minimum are not set at zero, the difference between zero and established quantity is a safety to guard against the shortages.

b)            Reorder point:  The reorder point is the quantity level at which a replenishment order should be issued to ensure that fresh supply arrive in sufficient time to keep the item from running out of stock. Thus a reorder point will logically consist of the following elements:

1.            The average volume of the use during the normal procurement time.

2.            An additional quantity or the safety factor to cover any unanticipated increase in the rate of war in procurement time.

c)          Standard Order Quantity: The standard order quantity is that amount of material which will be requisitioned each time available balance drop to the reorder point. The objective in setting reorder quantity should be to achieve the lowest overall inventory cost consistent with uninterrupted operation of the plant. Order quantity is determined by considering such things as vendors discounts, rate of use, price, storage and handling cost and the danger of deterioration and obsolesce. It may be pointed out here that the rate of use doesn’t mean the desired rate but the practical rate. When some component raw materials needed to manufacture an item at scarce, it is important that order of the other component raw material be geared to the one in shortest supply. Unless this is done, inventories become unbalanced and excessive.

d)       Maximum Level: When the system is working properly, the maximum level is the sum of the minimum level and standard order quantity. Having laid down these levels and quantities they should be reviewed periodically or occasionally because the assumption on which they are based, e.g. procurement time and rate of use may change.

e)         Economic Order Quantity: When we stock items, they take up space and since we have invested money on them, which could be used elsewhere, we loose interest on them so long as they lie with us. Space also means cost. Similarly, their custody means several other charges such as custody staff, handling, insurance, depreciation while in stock and possible wastage and obsolescence if the period of stock is long enough and custody ineffective. All these costs are known as inventory carrying costs. Logically it means that we should purchase as and when required. This ‘hand to mouth’ existence, it would be appreciated, is not possible in trade or industry, particularly the latter. Adhoc purchases also mean certain costs. Costs are incurred on processing of purchase orders, frequent transportation, handling, inspection etc. these are the known ordering costs. These two types of costs are opposed to one another in their economic effect on the business. One of the primary tasks of inventory management is to balance those costs. This is done by bringing in the concept of economic Order Quantity. It should avoid shortages as well as overstocking. Inventory carrying cost and ordering cost are opposed to each other. Conditions keep on changing and requirements also do not follow a set pattern. This requires the consideration of the policy of providing a cushion against stock out. This cushion is called safety stock.

LEAD TIME

When material is obtained either from an outside source or from an internal manufacturing department there is always a finite interval of time between deciding to place an order and its subsequent fulfillment. This is the interval defined as ‘Lead Time’. The lead-time can be assumed to be made up of two points:

a.            An internal part

b.            An external part

The internal part of lead-time may also be divided into two parts:

a.            Serving time or administrative time which consists of the time taken to place the order and

b.            Receiving and inspection lead-time, which consists of time taken to receive and inspect the goods and pass them into the appropriate store.

The external part of the lead-time consists of the time taken to execute the order. This includes the time required by the supplier to get the material ready if they are not in stock and for shipping or transporting them from supplier godown to buyers receiving section.

INVENTORY CONTROL SYSTEMS

In many cases the decision maker may have no idea whatever of variation to expect between the two variables of demand and lead-time. If this is the case we are confronted with decision making under uncertainty.

The problem of inventory control varies because of uncertainty about the rate of demand and the length of procurement lead-time. If certainty exist i.e. these two factors viz. demand and lead time are relatively constant and predictable in advance, a fixed quantity of an item would be recorded at fixed intervals. As soon as one shipment is exhausted, another would arrive. The lead-time can also vary from favorable to unfavorable due to the suppliers and/or the transportation carriers. If inventory is not available when needed due to any internal or external factors, a stockout occurs. The situation can lead to noticeable decrease in profits and possible losses.

DETERMINATION OF SAFETY STOCK AND ORDER LEVEL

In many practical situation, it is observed that neither the consumption rate of material (commodity) is constant throughout the year nor is the lead-time. The variation in demand and lead-time cause both shortages and surpluses.

To face these uncertainties in consumption rate and lead-time, extra stock is maintained to meet out the demand if any. This extra stock is termed as Safety Stock. For determining the safety stock we approximate the estimated maximum and normal lead-time. If ‘S’ denotes the safety stock, ‘l’ is the difference of the maximum and normal lead time, ‘r’ is the consumption rate during the lead time than S=LR

For example, suppose for an item the monthly consumption is 200 units and normal lead time is 15 days and the maximum lead time is estimated as 2 months then the safety stock is given by

S= (2-1/2)*200

300 units

Now if we don’t maintain a safety stock then the total requirement for inventory during the lead-time will be LR.

This consumption implies that as soon as the stock reaches a level LR we place an order for Q quantity. This policy of ROL results in shortages about half the time. To avoid this we add a safety stock and place an order when stock reaches S+LR

i.e. ROL= S+LR

for example suppose that for an item the monthly consumption is 100 units, normal lead time is 15 days and the safety stock is of 150 units then

ROL= 150+(1/2*100)

= 200 units

 

c.             It does not depend upon the importance of the item and

d.            The limits of ABC categorization are not uniform but will depend upon the size of the under taking, its inventory as well as the number of items controlled.

CODIFICATION FOR BETTER CONTROL RESULTS

Codification is one of the best methods for unique identifications of stores. A code is then employed to identify each stores item exactly.  There are many different types of such codes in use, and most of them are specially designed to suit the need of the business they serve. They may be based upon the nature of the items, the purpose for which the items are employed, or on any other basis which is regarded as suitable according to local circumstances.

COMPUTERS AND INVENTORY CONTROL

The previous sections have dealt mainly with the theoretical methods which are available to help with the problem of inventory control. Theoretical methods, to be of any real help, have to be put in to practice and it must be recognized that some of these methods could not easily be applied by hand in the environment of a busy store, ware house or manufacturing units. For instance a certain amount of historical information is required to operate such methods as exponential smoothing and by and large the more sophisticated the approach used the more information must be kept.

This information must be accurate. An error in the recording of a figure usually appears as an abrupt discontinuity in what may otherwise be a steady trend, and the forecasting methods discussed will take action to allow for this, either by recommending excessive orders or none at all.

The methods also involve a fair amount of arithmetic, which must be carried through accurately, or the same type of trouble will occur. If as can easily happen, the same type of error is made repeatedly, a systematic error will be introduced into the ordering pattern, which may be difficult to detect until it becomes blatantly obvious an error of this type could waste thousands of rupees in stock, holding costs or loss of sales.

The rate at which such calculations could be done is also relevant. In cases where a large number of stock movements occur in a short time it might well be impossible to carry out calculations by hand in the time available. Even in less dynamic environments a sudden surge of activity can give rise to an increase in the number of mistakes made.

Nevertheless, a good forecasting technique coupled with accurate calculations of the correct ordering levels can save tens of thousands of rupees per annum in even quite small concerns and this is a powerful reason for trying to overcome the difficulties. This is where a computer can help.

The intelligent use of a computer or visible record machine can overcome all of these difficulties and provide much more information and more comprehensive checks than a manual system could provide.

Where other aspects of business activity such as production scheduling, accounting and invoicing are carried out on computer stock, control by computer brings further advantages. These other systems are able to make use of the file of information about products which the stock control systems must have as its basis and take over a correspondingly larger part of the clerical work of the company.

COMPUTER HARDWARE INFORMATION, STORAGE AND PROCESSING

It is not proposed to discuss in depth how computers work but it is relevant for a moment to consider some of their principal properties and limitations.

A typical computer configuration on which stock control can be performed consists of the following items of hardware:

a.            A central processor capable of between 5000 and 50000 multiplication’s per second which performs calculations and controls all other units by reference to a program stored in the immediate access memory.

b.            An immediate access memory (core store) holding between 32000 and 200000 characters of information typically, the program and workspace areas for a stock file-updating program would occupy 60000 characters.

c.             A number of peripheral units, in configuration used for stock control the following peripherals would be necessary, providing long term (for backing) storage and means of entering information and recording results.

 

AUTOMATION - REQUIREMENT OF STOCK CONTROL SYSTEM

Whatever hardware is used there is a trade off between cost and speed of response. A large premium has to be paid for instant response. Of course if the computer facilities for immediate access already exist and marginal costing is used. It is much easier to justify online processing.

There are two largely independent aspects of data processing in connection with inventory control. The first involves the keeping up of up to date records of stocks and this performs a similar function to bin cards or a cardex file. For this purpose the storekeeper needs either instant response or if the stocks are slow moving can afford to use a stock list produced some time earlier say daily. In this case stock transactions are keyed in and processed by the computer in a daily or weekly cycle.

The other aspect concerns the frequency with which re-ordering and analysis are required. One of the most convenient methods of recording, and one which lends itself well to batch processing on a computer, is the fixed review period method. In this method the length of the review period must be added to the safety stock in calculating the quantity to order and this means that review period should not be too great to avoid an unacceptable increase in stock levels over the ROL method. Nevertheless, it is perfectly possible to maintain acceptable stock levels in many industries with a review period as long as two weeks. In the company under study this period is of one week.

Clearly if batch processing is to be employed a strict control must be kept on the way in which each stock movement is booked into and out of the stores. If some movements are not recorded, the reports generated by the computer will become less and less accurate.

This is the main reason why some computer based stock control systems have fallen into dispute in the past and forms the best illustration of why it is necessary for the stock keeper to feel that the system is for help to him rather than being a hindrance. This can only be achieved by involving him in the system at the design stage and once the system has been implemented, insist on strict application of the rules embodied in the system by everyone in senior management who may occasionally be tempted to cut corners to please customers.

It is possible to build certain safeguards into stock recording and control systems to prevent this progressive deterioration occurring. Frequent stock checks are one method. It will normally be possible to carry out stock checks much more frequently when a computer system is used since most of the day-to-day arithmetic is being done by the computer. The computer can be made to print stock check lists on a cyclic basis, the frequency depending on turnover of the item concerned, and once the stock check has been done, to print the discrepancies found. This helps to encourage accuracy and discourage pilferage.

In certain environment, such as retail stock control it is even possible to dispense with direct recording of movements out of stock altogether and instead perform a daily or weekly stock check as just described. In this case the computer can both replenish stocks and if it also does accounts, check the invoices entered, providing a useful check against pilferage.

INPUT

The movements which must be input to the computer for stock control are precisely those which are required to be recorded in a manual system. The principal ones are:

a.            Receipts into stock.

b.            Issues

c.             Physical stock values as found from check

d.            Purchase or works orders placed

 

In addition, information must be given to the computers to enable it to set up and maintain the files holding details for the parts which can be stocked. This enables the computer to check that movements don’t refer to non existent parts, and to supply details such as descriptions of parts on output documents. Examples of this type of information are:

a.            Part number and description

b.            Cost, wholesale and retail price

c.             Reorder quantity (if relevant)

d.            Reorder lead time

e.            Safety stock

f.             Preferred and alternative suppliers

g.            Lost sale history

OUTPUT

A wide variety of information can be obtained from a computer based stock control system, and care is needed in selecting the way it is to be presented. It may be quite feasible to produce a complete listing every day of every part stocked showing all outstanding orders, but it is more than probable that the information needed cannot be found quickly amongst the vast quantity of paper produced, only a tiny proportion of which will ever be used.

Some of reports which can be produced at various frequencies, in addition to the stock list are:

a.            Input rejection lists

b.            List of movements

c.             List of shortages

d.            List of orders to be placed

e.            Stocks to be checked

f.             Stock check discrepancies

g.            Price list

h.            Valuation list

BENEFITS OF COMPUTER BASED INVENTORY CONTROL SYSTEM

Despite the large amount of work that must go into the successful introduction of a computer based inventory control system, the computer can provide a number of stock benefits. The main benefits are:

a.            Reduction in stock holding costs for a given service level, often accompanied by an improvement in service level.

b.            Reduction of clerical work if the computer system is carefully designed.

c.             Stock check frequency can be increased, leading to reduction in pilferage and more accurate valuation of stocks.

d.            Exceptional cases can be highlighted and dealt with fast.

e.            If an on line system is used up to the minute information on stock availability can be combined with automatic verification of customer information and instant credit control.

f.             Forecasting procedures previously impractical can be applied to reordering.

g.            Better manual procedure.

The possession of an effective computer based inventory control system can not only save a considerable amount of money in stock holding costs, but also forms an essential part of more comprehensive system for order processing and production control.

 

RECORD MAINTAINING SYSTEM FOR PROPER ACCOUNTING

No issue should be made without supporting paper work and authorization. Some of the methods in common use for issue of stores are briefly discussed as follows:

a.            Issue on request: This is the simplest method and there are two variations.

b.            Immediate issue on presentation of an issue note: Immediate issue on presentation of an issue note or requisition slip, is a normal practice allowed in most of the stores.

 

LAYOUT OF STORES FOR SMOOTH RUNNING OF OPERATION

Layout means general arrangement of stores, storage equipment and space so as to provide for most efficient receipts, storage and issue of materials. In this way arrangement of store entrance, equipment passage and in general storage space forms pat of the store layout. A very well planned layout of a store of warehouse will have the following advantages:

a.            Ease of receive material receipts.

b.            Ease of storage.

c.             Ease of issue

d.            Gives better appearance.

e.            Reduce damage and wastage’s.

f.             Cuts down pilferage and accidents.

g.            Reduce operating expenses. Minimum transportation and handling of materials.

h.            Adequate capacity , provision of flexibility for future expansion.

i.              Efficient utilization of floor space and height.

j.             Clear identification of material, quick location of items in case of physical counting.

k.            Creates better impression.

 

BASIC PRINCIPALS OF LOCATION AND LAYOUT

Basic principals of good storehouses location and layout can be listed as under:

a.            Location and layout should reduces to minimum the total handling cost. Handling cost will be low if location and layout of store allow for easy access and quick receipt storage and issue of materials.

b.            It should provide needed protection to the stores against damage, breakage, misplacement, leakage, wastage, deterioration and pilferage.

c.             There should be easy identification or location of the store items.

d.            It should be flexible enough to allow for further expansion and changed conditions.

e.            It should reduce fire risk to the stores and rest of the establishment.

f.             It should allow for old or first received materials to be issued first i.e. first in first out.

 

HOUSING OF SCRAP

Normally the salvage bay is outside the main stores parameter. This has the following advantage:

a.            It will not intrude upon valuable storage space.

b.            It will avoid the possibility of scrap or reject materials getting back into the production line.

c.             It will permit the collection vehicles to pick up materials without entering the main goods receiving and dispatch bays, they are able to at will without congesting the main bays, and they can spend as long as necessary in sorting and loading.

 

METHODS OF SALVAGE

a.            Materials: This is the most obvious and frequently mentioned salvage operation. It needs little outlay apart from suitable bags or containers to hold the materials. Operating costs are confined to the labor of sorting into appropriate bags or containers. Materials can with advantage be segregated at source and then stored in different compartments.

b.            Incineration: Some times it is more economical to destroy material by incineration. It however, costs money and the economics should be carefully studied before resorting to this method.

c.             Cable stripping: The economics of salvage clearly depends upon the value of the recovered materials. The stripping of waste cables can be highly rewarding where there is any significant copper and lead contents. The equipment however requires fairly high capital investment.

d.            Containers and Sacks: There is a good resale value of the containers specially large drums like 200 liters drum and jute sacking. It is worthwhile to ensure that least damage is caused to these items during handling.

e.           Fire Precautions:  Following fire precautions should be observed in all store houses for preventing outbreak of fire:

 

a.            Specially inflammable stores should be segregated in separate building or in separate stacks.

b.            Storehouse should be properly ventilated.

c.             Smoking in storehouses should be forbidden and notices may  be pasted to this effect.

d.            Appropriate fire preventive equipment should be provided. All such equipment should be regularly inspected and maintained.

e.            Drill to be observed in case of fire should be laid down and all personnel working in the storehouse should be adequately trained for fire fighting.

EVALUATION OF INVENTORIES

The main raw material used in Pizza Hut is Pizza Base and Chese.  Proper planning and handling is required for the purpose of achieving the right quality of output. The total inventory (material cost) for Pizza is between 70-80 % i.e. material to sale ratio is 70 to 80%. So inventory control is most important part for efficient running of the organization.

INVENTORY TO GROSS WORKING CAPITAL

Inventory to gross working capital ratio goes down in the year 2003-04 as compared to 2002-03. It increases in the year 2004-05, but there is an sharp increase in the year 2006-07. Keeping in view the above position, the firm should keep on going due importance to inventory as to reduce costs.

INVENTORY TURN OVER RATIO

This ratio has been decreased from 4.72 in 2002-03 to 3.81 in 2003-04 and then increased to 5.76 in 2004-05. Then it decreased to 5.69 in 2005-06 but it again decreased to 4.88 in 2006-07. On going through this ratio we observed that the firm was maintaining its inventory at most minimum level in the year 2004-05 and 2005-06 as the inventory turn over ratio was much high as compared to other years.

Steps should be taken to increase the inventory turn over ratio for better management of inventories and reduce the cost of inventory.

 

INVENTORY CONVERSION PERIOD

It refers to the period that manufacturing unit takes to clear a lot of stock. There has been increase in the inventory conversion period for the first year. It increases from 77 days in 2002-03 to 97 days in 2003-04, thus it remains constant in 2004-05. It is desirable to have short conversion period because it will help in reducing accumulation of inventories.

1.          RAW MATERIAL INVENTORY TURN OVER RATIO:

This ratio varies slightly from 3.05 in 2002-03 to 3.12 in 2003-04 and 1.0 in 2004-05. Again it increased to 2.4 in 2005-06. But in 2006-07 it sharply decreased to 1.57. It is better to have a greater raw material turn over ratio.

2.            WORK IN PROCESS INVENTORY TURN OVER RATIO:

Taking a general view of this ratio over a period of five years it does not seen stable and comparable to another year.

3.            FINISHED GOODS TURN OVER RATIO:

This ratio has decreased from 17.49 in 2002-03 to 12.6 in 2003-04. It showed a large amount of finished goods had remained idle for most of the period. The firm should device methods to improve this ratio because this ratio adversely affects the other ratios.

4.            AVERAGE AGE OF RAW MATRIALS IN INVENTORY

The analysis of five years does not reveal any bright picture of raw material in stock. Only in the year 2003-04 the average age of the raw material in the stock reduced drastically to 98 days. The firm should reduce the average age of raw material in stock for better utilization of material with less investment.

5.            AVERAGE AGE OF FINISHED GOODS INVENTORY:

The period for which the finished goods remain in stores is almost constant except in the year 2005-06. The decrease in that year was due to less realization of payments. Management should take steps to reduce this period.

On the whole the analysis shows that the inventories are not being managed as effectively as it should be. The organization should adopt various techniques like ABC analysis or other inventory models to reduce inventory. Proper care should be taken for handling raw materials and finished goods so that the losses are minimized. This will eventually result in higher inventory turnover. Special attention should be paid to finish goods lying in stores. More attention is required in the inventory control and general stores where raw material and consumable articles are often found continuously growing.

 

 

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