Introduction:

Now a days every organization focusing on reducing cost in every steps of its
product making. From all relevant cost parameter, inventory can play a vital role in
reducing production cost as well as can able to make efficient operation flow.
Inventory of raw materials, spare parts, packaging goods & finished goods leads the
business process from end to end to meet the desire of the manufacturer as well as
of end customer. Many experts worked well & still working for inventory management
all over the world. They have invented & developed different planning tools as well
enterprise resource planning solutions for inventory control. Thats why here the
analysis structured as the business part of inventory management for which
organization can be beneficial by means of cost reduction. There many tools &
philosophy like economic order quantity (EOQ), just in time method (JIT) which is
related to short lead time and supplier development, Material requirement planning
(MRP), defining re-order point, distribution requirement planning (DRP) etc which are
used for inventory management. Through this research a pinpoint directed in
reducing inventory cost for packaging material& raw materials which affect major
portion of total procurement cost for cement production.
There about 5000 stock keeping unit, among them by ABC analysis (based on
costing value) the raw material namely clinker, fly ash, gypsum slag in back end &
cement empty bag in front end of the product ( packaged cement) making process
taken in consideration for analyzing & optimizing in this thesis. The economic order
quantity model refers with how much to order & how will be replenishment quantity
during lead time of next order, concerns with cost effectiveness & discount pricing
while purchasing. And Just in Time philosophy, widely used as namely Toyota
production theory where considers zero inventory. For Cement manufacturing
industry it not feasible to make zero inventory at all but this philosophy can draw a
major impact on reducing packaging material of cement (empty cement bag-50kg)
which is dependable on relationship between supplier & manufacturer with better
information flow & strong logistic network.

Keywords: EOQ, JIT, Inventory control, Supply chain management, MRP- DRP,
Cost-Efficiency.
1

1.01 Background:
Inventory management deals with decisions regarding supply levels: the correct
amount of material and the correct time to reorder. There are many reasons for a
company to hold excess inventory; variation in demand and production; poor quality
and unreliable suppliers and shippers. However, there are also good reasons to cut
down the amount held in inventory carrying cost, holding cost, storage space and
material handling. Thus an exchange has to be considered between the two
situations Inventories perform a number of vital a function in the operations of a
system, which in turn makes them critical to the cement production. On the other
hand without inventories, organizations could not hope to achieve smooth production
flow.
There are a number of cost elements associated with producing packed cement
which are taken into consideration during cement manufacturing up to packaging of
each 50 KG cement bag.
Four major costs are associated with the production of cement (packaged cement)
and their average impact on production cost is as follows:
Cost Element
Power & Fuel cost
Raw Material cost
Empty Cement Bag cost
Transport Cost
Others Relevant Expense

% of cost in Production
10
60
15
5
10

*Source : Author study analysis

From the above figure it has been observed that the cement manufacturer should
focus on optimizing the cost on raw-material & empty cement bag. Here the carrying
cost refers the cost of sales (i.e distribution cost). This background guides the
research to be focus on working for raw-material & empty bag. And the inventory
associated with these two categories of items can lead the production cost.

Beside from the ABC analysis (ABC analysis is an inventory categorization method
which consists in dividing items into three categories (A, B, C): A being the most
2

valuable items, C being the least valuable ones) every organization can identify the
high value item & low value item in perception of manufacturing cost. And the ABC
analysis also indicates the raw-material & packaging item has a big portion of cost
engagement with the total cost of production.
Considering above scenario of cement production the research focused on
controlling the inventory cost of raw-material by determining how much to order how
frequency to place order with EOQ model & ensuring better logistic & information
sharing short lead time of supply can reduce holding cost of empty cement Bag
inventory (i.e. stock in store).

1.02 Objective & Goal:

I.

To identify and analyze the existing inventory control system in terms of cost
variables which are controllable.

II.

To investigate (for those industry who are already in practice) & show (for
those who are not in practice) the advantages of EOQ model for raw-material
inventory control & JIT philosophy for cement empty bag inventory control
respectively.

1.03 Research Questions:

The following research question will guide the study and analysis:
Q1-What is the nature of relationship between inventory management and holding
cost?
Q2- How the carrying cost affects the total ordering cost of raw-material of cement?
Q3-How much impact on inventory cost for raw material & packaging goods on the
production cost. Can the EOQ model & JIT philosophy able to minimize cost of
inventory for the achievement of operational cost cut by reducing or optimizing
inventory of raw material & packaging material (empty cement bag).

1.04 Problem Definition:

The inventory cost is not only interest on stocks but also cost building warehouse for
storage, carrying cost, insurance and obsolesce and movement of inputs from place
of storage to the factory where the materials have to be finally used to convert them
into finished goods. With the view of cost optimization inventory control is a concern
to the cement manufacturer to keep the stock in the desired level which will satisfy
the demand of production as well as the purchasing cost & safety inventory cost. For
cement industry inventory of raw materials and packaging materials i.e. cement bag
which is highly value added item for the production of finished goods i.e. cement bag
of 50 kg each. This thesis states the prime problem on inventory planning during
procuring of raw material (lacking in the implication of procuring economic quantity to
order) and empty cement bags (packaging materials) and managing the optimal
stock level. Beside decisions about how many of which products are to be stored in
the warehouse, when to place the next order, the quantities to be ordered for
optimizing cost etc are some of the problems encountered every day

1.05 Methodology:

Both quantitative and qualitative methods are used to conduct this thesis.
In term of quantitative method, the secondary data ( on sales, stock
quantity, re-order point, safety stock, lead time to procure material,
holding period unit price, supplier management, vendor development
program, logistic & information technology improvement etc) would be
used which mean the inventory record statements etc. And in term of
qualitative method, both primary data and secondary data should be
used. Here the survey approached with both structure and unstructured
interview to collect primary data, in particular structure interview is
preferred to use in order to collect quantifiable data ( on safety stock, lead
time, order quantity, carrying cost etc) in addition to in depth interview
need to carry out to obtain more specific information. In the perspective of
a formal research design through the definition of the study population,
the

incorporation

of

suitable

measuring

instrument

and

reliable

techniques for data analysis. Here the population considered as the all
cement industries in the Bangladesh where a ten cement industry
considered as sample of the study. To conduct the research study there 30
questions formulated & thrown to different cement industry to those
personnel who are involved with supply chain procurement, inventory,
production & distribution function. The questionnaire was designed in
likert scale format as well check list and MCQ There also kept free
comment option for the executives who answered to the survey. Weighted
mean and standard deviation of the variables like safety stock quantity,
lead time to procure, holding period, interest rate etc were used to answer
the research questions; Relationship between variables was tested using
the Excel program &SPSS program.

1.06 Sample Size and Sampling Technique:

Bangladesh cement industry is the 40th largest market in the world. More than
seventy cement manufacturer exists in this industry over the Bangladesh. Among
them Heidelberg, Holcim and Lafarge surma cement are the leaders among
multinational cement manufacturers and Shah and Meghna cement are the leading
domestic manufacturers. Shah cement is the market leader with close to 14.20% of
the market share, followed by Heidelberg with about 9.30% of the market share.
During the 2010, many small local manufacturers like Premier, Seven Circle, Crown,
Fresh and King cement increased their sales drastically riding on their benefits of
economies of scale, backward linkage and aggressive marketing effort.
Target Population: All cement companies (about 70 nos) situated in Bangladesh are
considered here as the population of this thesis study.
Sample: Ten renowned cement companies are considered as sample from the
population for this study.
Sources of Data: Primary data was collected through a structured questionnaire
survey and Secondary data was collected from past sales & purchase date sources
in the form of various financial statements, sales report, and also from research
report, papers and journals.

1.07 Sampling Technique

Quota sampling of non-probability sampling technique was used to collected data

since the technique enables to develop quota or category of population & sample
elements like respondent, stage, graphical boundaries, time period etc are selected
based on convenience or judgment.

QM D S P P P P
rr rr
No u o ao o o
d d cc
C mou u u
ul
cr
c
r e t
m te e i t e
o
i
e
o as s m n n t
n
t
Sp P i eP p
c
e ee n
r
r a e rc s s
t s o o
mo P n o r n
nn e n
nm l s r e e
es l l
o oi p
l
n
n nn a
e
g n n
l
Figure-1: Sampling flow for this research
ey
l

2. Literature Review
8

2.01 Introduction to theory of Inventory:

Stock in store is called inventory. To keep stock is not always a cost to the company
since to run the continuous operation keeping inventory of necessary material like
raw-material, empty cement bag to pack the loose cement in 50 kg each, is must for
every cement manufacturer but material planning should be economic & optimizing
since these bear a big portion of production cost. The basic function of inventories
whether they are raw materials, work-in-progress or finished goods are that of
decoupling the operations involved in converting inputs into outputs. This allows the
successive stages in the purchasing, manufacturing and distribution process to
operate reliance on the schedule of output, of prior activities in the production
process. Furthermore, the decoupling function allows both time and spatial
separation between production and consumption of products in the operating
system. Inventory was held for the facilitating the organization to achieve economies
of scale, to balance supply and demand, to enable speculation activities, to provide
protection from uncertainties in demand and order cycle & to act as a buffer between
critical and interfaces within the channel of distribution.
Inventories owned by a company can be divided into 3 types based on production
stages:
Raw materials: inventories which are used as input to a production process for
consecutive processes to transform into final goods. A typical example is the wood
which is used to make furniture. There are 2 kinds of raw materials: Direct materials
which form a product and indirect materials which are consumed during the
production line.
Work in process: are materials that has entered but not yet turned into completed
products. It represents all materials that are at production process before finalization,
or can be called partly-finished goods. This stage of production may require a huge
amount of investment in work in process.
Finished goods: are completed goods which havent been sold or distributed to
end-users, or can be referred as the amount of manufactured goods that can be sold
and available for consumers demand. They can be a piece of inventory that is stored
9

in the warehouse. These goods cannot generate profits until being sold to
customers, thats why they can be considered as an asset of the company.

2.02 Economic Order Quantity (EOQ)

Economic order quantity (EOQ) model the first was published in 1913 by Ford
Whitman Harris- an engineer, inventor, author and patent attorneys. Harris judged
that common issues is the most manufacturers find the most appropriate number for
the manufacturer to put through an order management therefore needs a formula,
such as check, mistake cots in place. This is the basis of forming models EOQ
inventory management.
Determining the exact amount that is needed to cover contingencies changes based
on the situation faced by the company. There is one model that is commonly used to
determine optimal order size. This is the Economic Order Quantity (EOQ) model.
Also, EOQ model was determined by minimizing the total annual cost incurred by the
company by virtue of its ordering cost and carrying cost. The expression for total
annual cost is:
TC = Q/2 *h + D/Q* S
Where
TC is total annual cost, Q is total order quantity ,H is annual carrying cost per unit ,
S- Ordering cost and D is for annual demand
The formula is written asillustrated in following equation:

Where,
Q= the EOQ order quantity. This is the variable we want to optimize. All the other
variables are fixed quantities.
D= the annual demand of product in quantity per unit time. This can also be known
as a rate.
S= the product order cost. This is the flat fee charged for making any order and is
independent of Q.
C=Unit cost.
10

H= Holding cost per unit as a fraction of product cost.

Fig-02: EOQ Process Graph

In determining the reorder point the following three factors need to be at hand:
1. Demand - Quantity of inventory used or sold each day
2. Lead Time - Time (in days) it takes for an order to arrive when an order is placed
3. Safety Stock - The quantity of inventory kept on hand in case there is a
unpredictable event like delays in lead time or unexpected demand.
If the demand is constant and the lead time is known, then the reorder point is
written as the following:
Reorder Point in days (lead time) = Daily usage*Lead time [in days]
When a safety stock is maintained, then the reorder point is written as the following:
Reorder Point= [Daily usage*Lead time (in days)] +safety stock [in quantity]

11

Fig-03: Re-order point

In this model, the researchers made assumptions and if the company decides to
apply this model must consider the company in accordance with these assumptions
or not. The assumptions in the EOQ model include:
1. Demand is known in advance and constant over time - the company that apply
EOQ model will use data from the past and formulate future plans. Under such
assumptions, this demand is almost constant each year
2. Sales at a constant rate - in this model we assume that the goods are sold at a
relatively stable rate throughout the years and are not influenced by external factors.
If a company has sales level fluctuates seasonally and cyclically it would require a
more complex model.
3. No shortage is allowed.
4. Lead time that receipted products from the orders is constant (known and constant
lead-time)
5. No quantity discounts
6. The orders quantity is received all at once.
7. All demand must be met quickly and dealt by instantaneous delivering. This
means that when using the EOQ model, do not consider the purchase quantity
discounts orders and re orders or inventory shortage costs.

2.03 Just-in-Time (JIT) philosophy:

12

Just-In-Time (JIT) manufacturing is a Japanese management philosophy applied in

manufacturing which involves having the right items of the right quality and quantity
in the right place and the right time. It has been widely reported that the proper use
of JIT manufacturing has resulted in increases in quality, productivity and efficiency,
improved communication and decreases in costs and wastes.
Just-in-time systems have become much more important in manufacturing and
logistics operations in recent years, also known as the Toyota Production Systems
(TPS), were developed by Toyota Motor Cooperation during the 1950s and
1960s.JIT is a philosophy based on the principle of getting the right materials to the
right place at the right time.

Manufacturers are moving towards lean manufacturing and JIT, so companies are
decreasing the amount of inventory being held. Retail stores are also applying the
philosophy of JIT to reduce inventories and in turn reduce the associated costs at the
store. The philosophy of JIT is different from the EOQ model. Instead of balancing
the two conflicting costs of ordering and holding inventories, the objective of JIT
systems is to minimize inventories to an extent which is just needed by the company.
This is mainly achieved by continuous improvement such as increasing efficiency
and eliminating waste.
The above philosophy is able to bring the company to a so-called lean operation
which has the following benefits:
(1) Financial benefits: Minimizing inventory levels reduces carrying costs which at
the same time frees up investment in working capital.
(2) Operational benefits: Overall operating efficiency is continuously improved
through better supply chain management (e.g. developing a long-term relationship
with suppliers and conduct careful supplier evaluation) and better product quality
(e.g. eliminating waste and reducing defects).

History and development of JIT approach:

13

JIT is a Japanese management philosophy which has been applied in practice since
the early 1970s in many Japanese manufacturing organizations. It was first
developed and perfected within the Toyota manufacturing plants by Taiichi Ohno as a
means of meeting consumer demands with minimum delays (Goddadrd, 1986). For
this reason, Taiichi Ohno is frequently referred to as the father of JIT. The Toyota
production plants were the first to introduction JIT. It gained extended support during
the 1973 oil embargo and was later adopted by many other organizations.
Toyota was able to meet the increasing challenges for survival through an approach
to management different from what was characteristic of the time. This approach
focused on people, plants and system. Toyota realized that JIT would only be
successful if every individual within the organization was involved and committed to
it, if the plant and processes were arranged for maximum output and efficiency, and if
quality and production programmes were scheduled to meet demands exactly. JIT
had its beginnings as a method of reducing inventory levels within Japanese
shipyards. Today, JIT has evolved into a management philosophy containing a body
of knowledge and encompassing a comprehensive set of manufacturing principles
and techniques.
However, JIT has the following risks and limitations:
# It places heavy reliance on suppliers. If suppliers are neither reliable nor willing to
promptly react to customer demand through frequent deliveries, JIT systems will fail.
# The JIT system is regarded as a pull-demand system. Inventories are pulled
through the system by present customer demand. The system works well only when
such demand is predictable with minimum fluctuations.
# Companies adopting JIT systems are exposed to high business risks as a single
mistake in the operating environment may easily lead to work stoppages.

2.03 Literature Review from Papers of JIT & EOQ:

14

Sunil Chopra & Peter Meindl (2005) in their text book Supply Chain Management
focuses the JIT Philosophy EOQ, Lead time & effectiveness of integrated supply
chain network in different view for opmization of inventory cost. From the study of
international paper it is observed that many researchers worked on inventory control
system for increasing organizations overall profit. From the paper of Shibamay et al.
(2013) summarizes the ABC analysis of material that are needed for production in
three classes where they assumed the 20% of items which are liable for 80% of
production cost.
In the paper of Chun-Jen Chung & Hui-Ming Wee(2006) stated that the model of JIT
in connection with inventory control as well as the distribution plant ( selling rate) for
which stock level is dependable. In their research they have developed a
replenishment policy for a single-buyer single-supplier integrated deteriorating model
with the stock dependent selling rate, a single setup and multiple JIT deliveries
(SSMD) strategy. They stated & formulated a model for the JIT delivery and the
relevant costs which provided a rigorous analysis using the time-weighted inventory
(TWI) method to analyze the inventory level and to derive the optimal solutions using
an optimization approach.
Scott Grant Eckert (2007) includes the customer satisfaction related to the inventory
control. Scott emphasizes on perfect order so that supplier can meet the demand
using customer survey. Priscila & Luiz (2011) describes in their paper about the
effect

of

integrated

supply chain

management

for

increasing

operational

performance. They stated supply chain network model by which the whole operation
from sourcing to distribution will be linked up & the overall l supply chain efficiency
will raise up.
Martin & Dariusz (2012) approaches for inventory control with maintain
safety stock for smooth operation & the total inventory controlling model.
Chung et al. (2005) stated about safety inventory problems and the service level for
production. To keep safety stock refers the holding cost & they investigate the cost
affects the production cost. Beside in this paper the authors suggest for
implementing modern method inventory control to optimize cost of inventory holding.

15

Laith et.al (2006) focus on supply chain cost specially the inventory cost through
modern planning tool like JIT & MRP. They also induced the simulation information
sharing for inventory control system. In their paper they have comprised the chain
cost between MRP & JIT.
Timothy et al. (2013) states in their paper of impact inventory management practices
in manufacturing about the various inventory control technique like EOQ & JIT to
investigate the impact on return on investment, return on equity, profitability &
volume of sales.
Another research of Musara Mazanai (2012) indicates some hypothesis to control
the inventory for small & medium enterprises of South Africa. Here the author
investigates the impact of application of Just-In-Time (JIT) inventory management
system in the manufacturing sector of SME. The author statistically found significant
positive correlations between the application of JIT inventory management principles
and cost efficiency, quality and flexibility and also draws some challenges in the
implication of JIT approach.

3.00 Data Collection & investigation:

3.01 Introduction of Sample Manufacturers:

To conduct the research the past data & the data of the current year has been
collected from national & multinational cement manufacturer of Bangladesh. From
them Holcim Cement, Lafarge Surma Cement, Meghna Cement (Bashundhora),
Mongla Cement (Elephant Brand), Seven Circle Cement, Dubai Bangladesh Cement
(Five Ring), Akij Cement, Shah Cement, Premier Cement were the sample from the
population of all cement manufacturer in Bangladesh. The personnel of these
companies who are involved with supply chain function, production function &
distribution/ sales were the respondent of the survey.

3.02 Quantitative Data Analysis:

16

Here analyzed some past data of purchasing cost and holding of packaging material
(empty cement bag) of some local & multinational Cement Manufacturer in
Bangladesh relevant to JIT Philosophy. To show the details calculation here taken 4
numbers of cement industries where two multinational cement companies & two
domestic companies taken under focus & rest are in the summary view.

Table-1: Holding cost calculated for empty bag reference to Lafarge Surma
Cement. (Data considering interest rate fixed 15% annually.)

Year

Demand in
TON

Required
Bag Qty
(Pcs)

Unit
Price
of BAG

Total Bag
costing
(BDT)

(000)

(Million)

(BDT)

(Million)

Average
Lead
Time To
Procure
for each
order
Days

Holding
Period
(HP)for
Bag

Interest
Rate

Effective
Interest
rate on
HP

in days

Interest
Cost
(BDT)
(Millio
n)

Avg %
of HP
cost
from
total
cost

3
2015

1,320

26.40

20

528.00

120

0.15

0.05

26.03

150

0.15

0.06

35.38

130

0.15

0.05

27.67

140

0.15

0.06

29.00

135

0.15

0.06

27.07

4
2014

1,435,

28.70

20

574.00
3

2013

1,295

25.90

20

518.00
5

2012

1,260

25.20

20

504.00
3

2011

1,220

24.40

20

488.00

Total

2612.00

145.15

*Source: Author calculation from the survey

17

5.56

Total Bag Purchase cost Vs Holding cost

Total Bag Cost

Holding costCost

6%

94%

Figure-04: Purchase cost Vs Holding cost for Lafarge Surma Cement

18

Table -02: Holding cost calculated for empty bag holding reference to Holcim
cement Data

Year
Recen
t

Demand
in TON

Required
Bag Qty
(Pcs)

Unit
Price
of
BAG

Total
Bag
costing
(BDT)

(000)

(Million)

(BDT)

Million

Average
Lead
time to
Procure
Bag per
Order
Days

Yearly
Holding
period
for
safety
stock

Interest
rate

Actual
effective
Interest
for
holding
material

Holding
cost
Amount(
BDT)

Avg %
of HP
cost
from
total
cost

(Million)
5

2015

1028

20.57

20

411.45

180

0.15

0.07

30.46

195

0.15

0.08

34.21

190

0.15

0.09

31.53

192

0.15

0.08

31.61

185

0.15

0.09

31.54
159.35

7
2014

1067

21.34

20

426.89
7

2013

1009

20.18

20

403.72
7

2012

1001

20.02

20

400.49
7

2011

1036

20.74

20
Total

414.76
2057.3

*Source: Author calculation from the survey data

19

7.75%

Total Bag Purchase cost Vs Holding cost

Holding costCost; 8%

Total Bag Cost; 92%

Figure-05: Purchase cost Vs Holding cost for Holcim Cement

Table-3 Holding cost calculated for Shah Cement who has own bag manufacturing
plant as follows:
20

Year
2015
2014
2013
2012
2011
Total

Demand
in TON

Required
Bag Qty
(Pcs)

Unit
Price of
BAG

(000)
2,832
3,010
2,925
2,875
2,755

( Million)
56.64
60.20
58.50
57.50
55.10

(BDT)
20
20
20
20
20

Total
Amount
of bag
cost
(BDT)

(million)
1,132
1,204
1,170
1,150
1,102
5758

Average
Lead
Time to
Procure

Days
4
5
3
3
6

Holding
Time for
Bag in
days

Interest
Rate

175
180
150
160
185

*Source: Author calculation from the survey data

21

0.15
0.15
0.15
0.15
0.15

Effective
rate on
HP

0.07
0.07
0.06
0.07
0.08

Holding
Cost
(BDT)

(Million)
67.50
74.21
76.93
77.97
76.98
373.59

Avg
% of
HP
cost
from
total
cost

6.48

Total Bag Purchase cost Vs Holding cost

Total Bag Cost

Holding costCost

6%

94%

Figure-06: Purchase cost Vs Holding cost for Shah Cement

Table-4: Data Collected from Bashundhora Cement (Meghna Cement-King Brand)

for calculating Holding cost
22

Year

Demand
in TON

Bag
required
Qty
(Pcs)

Unit
Price
of Bag

(000)

Million

(BDT)

Total
Bag
Costing
(BDT)
(Million
)

Average
Lead
Time to
Procure

Holding
Time
for Bag
in days

Interest
Rate

Effective
Interest
Rate

Holding
Cost
(BDT)
(Million)

5 days

2015

1920

38.40

20

768

150

0.15

0.06

47.34

2014

1875

37.50

20

750

4 days

130

0.15

0.05

40.06

740

3 days

100

0.15

0.04

30.41

724

4 days

140

0.15

0.06

41.65

716

5 days

155

0.15

0.06

45.60

2013
2012
2011
Total

1850
1810
1790

37.00
36.20
35.80

20
20
20

Avg. % of
HP cost
from total
cost

3698

205.06

*Source: Author calculation from the survey data

23

5.56%

Total Bag Purchase cost Vs Holding cost

Total Bag Cost

Holding costCost

6%

94%

Figure-07: Purchase cost Vs Holding cost for Meghna Cement

24

To summarize the Holding cost vs required bag inventory of all selected cement
industries the following graphs has been formulated from the respondents answer &
data interpretation:

70000000
60000000
50000000
40000000

2015 required Bag Qty

30000000

2014 required Bag Qty

2013 required Bag Qty

20000000

2012 required Bag Qty

10000000

2011 required Bag Qty

Figure-08: Required Bag quantity to meet annual sales demand

With the statistical data & quantitative research the following graph shows the annual
Holding cost on bag to hold as for safety stock to avoid production risk.

25

Holding cost (Million BDT)

100
90
80
70
60
50
40
30
20
10
0

2015
2014
2013
2012
2011

Cement Company names

Graph-09: Cost of Bag Holding as inventory

26

Table-5: Data interpretation of different cement manufacturer in Bangladesh in term

of holding cost for holding material (cement empty bags) as inventory cost;
Holding cost for Holding empty bag round the year ( All figures are in Million BDT)

Year

Holcim
cemen
t (M.
BDT)

Lafarge
surma
cement
(M.
BDT)

Bashundhor
a cement (M.
BDT)

Shah
Cement
(M.
BDT)

Akij
cemen
t (M.
BDT)

Premier
cement
(M.
BDT)

Seven
Circle
cemen
t (M.
BDT)

Five
Ring
cemen
t (M.
BDT)

2015

30.43

26.03

56.81

81.46

29.49

16.10

28.10

86.63

15.38

2014

35.08

35.38

61.64

89.06

35.50

20.12

27.10

10.50

19.33

2013

34.84

27.67

57.78

72.12

27.02

16.81

26.85

93.61

23.79

2012

31.27

28.99

52.06

75.61

37.28

26.48

44.08

80.87

16.63

2011

39.20

27.07

48.55

83.78

34.52

28.27

57.92

67.89

18.08

*Source: Author Calculation from Survey Data

27

Elephant
Brand
cement (M.
BDT)

3.03 Findings & Result on JIT approach:

After the quantitative study of interest cost on holding period due to different lead
time of procuring cement empty bag almost every company has to bear about 5-8 %
of the total bag purchasing cost.
Now the concern is how the manufacturer can reduce the holding cost & to make
plan on keeping inventory of safety stock. It is not only the interest cost rather
sometimes requiring extra warehouse to rent or to make new one (fixed cost) for
keeping safety stock of Bag.
To mitigate this inventory cost control JIT approach may play vital role on improving
suppliers performance, reducing lead time & keeping very small quantity as safety
stock.
Here the mathematical scenario that JIT approach can reduce inventory cost:
Existing Lead Mode
time

of Proposed

on Transportation Time

be Result

Effective

Average
3 to 6 days

Lead Would
Interest

By Road- Truck

2-3 days

Rate
2% to
4%

2 Effective
interest
will
since

rate
reduce
total

holding period
reducing from
the
time.

28

existing

*Source :( Author supposition from the study)

Although JIT approach is a philosophy of zero inventory but in the perspective of

Bangladesh cement industry it is quite difficult without all own source (integrated bag
manufacturing plant with cement manufacturing plant which is costly & incur capital
expenditure which may affect company financial balance of cash inflow & outflow)
keeping zero stock is infeasible. Form Bangladesh perspective following approach
may take in the connection of JIT philosophy performance.
To show the recommended JIT approach a sample calculation of cost saving in bag
inventory is given below. The data interpreted for Holcim Cement (Bangladesh) Ltd.
Table-06: Existing Holding cost & recommended approach

Existing
Bag
Cost
( million
BDT)

Lead
Time
( Day
s)

411.45

Yearly
Holding
period for
safety
stock
( Days)

180

Total Savings (Million,

BDT)
Saving Percentage (%)
on Holding cost

Actual
effectiv
e
Interest
for
holding
material

0.07

Holding
Cost

Reco
mmen
ded
Lead
Time
(days)

Recommended
Holding Period
per year
( Days

30.46

96

16.23
53.28

*Source: Author Calculation from survey

29

Would
Be
effective
interest
rate

Recomme
nded
Holding
Cost
( Million
BDT

0.04

16.23

Cast
Saving
Amount
( Million
BDT)

14.23

35
30
25
20
Lead Time Vs Holding Cost

15
10
5
0

Lead Time ( Days)

Holding Cost

Figure-10: Existing System of lead time Vs Holding cost (Mill. BDT)

Recommended Method
18
16
14
12
10
8
6
4
2
0

Figure-11: Recommended System on Lead Vs Holding cost

30

6
5
4
3
2
1
0
Existing
Proposed

Graph -12: Effect of Lead time & holding cost (inventory cost)
**Source: Author Calculation from survey
The above graph shows the relationship between lead & holding cost of inventory for
empty cement bag.

3.04 Data Collection for Raw-material Inventory Analysis:

Another data collected from those cement manufacturer regarding the raw-material
which are bulk item (namely clinker, gypsum, Flay-ash and Slag) & mostly procured
from abroad. Here the study focused on how much to order how frequency to order
placed & the correlation of EOQ with their existing process of material planning. Also
the main focus given to carrying cost for the raw-material purchasing decision since
the cost is fixed for in a lot. Carrying cost (fixed cost) can make up to 37% of the
logistics costs of a cement manufacturing company.

31

Figure 13 gives a detailed breakdown of the components of carrying cost. A detailed

interpretation of the various components of carrying cost will follow.

Inventory
Investment

Capital Cost
(Interest)

Own Ware House

Cost

Carrying
cost

Property tax

Storage Cost

Rented Warehouse
Cost
Obsolesce Cost
Risk Cost
Damage Cost

Theft

Insurance cost
Figure-13: Components of carrying cost

32

To investigate carrying cost from different cement industry this is on average is about
16-17% of the material cost. Here the data of raw material cost & its carrying cost:

Table-07: Cement Raw material unit price & carrying cost

Unit price & carrying charges of Raw Material ( Per TON ) in BDT
Year
Carryin
g cost
for
Flyas
Gypsum h

(Recent
)

Clinker

carrying
cost for
clinker

2015

4000

600

1709

260

2100

364

2014

3800

600

1650

260

2000

364

2013

3650

600

1600

260

1800

364

2012

3700

600

1575

260

1900

364

2011

3500

600

1600

260

1850

364

Gypsu
m

carrying
cost for
Flyash

Slag
240
0
230
0
220
0
235
0
225
0

Carryin
g cost
for Slag

*Source: Author calculation from survey data (secondary data)

33

535
535
535
535
535

It has been observed unit price of the raw material may slightly vary where as the
carrying cost always constant round the year. Based on the production &
consumption rate of raw material a cement manufacturing company can fix their
economic order quantity per consignment to minimize the cost of carrying & other
govt. charges.

Graph-14: Monthly consumption of raw-materials (industry wise)

Table-08: Raw-material required meeting monthly production demand

Monthly
consum
ption
Clinker
Gypsum
Fly-ash
Slag

Holc
im
(MT Bashundh
)
ora(MT)
5743
2
87048
3429
3987
2143
0
37008
3450
5046

Duba
i
Bang
la(MT
)
38451
1578
4512
1200

Seve
n
Circl
e(M
T)
6014
5
4251
2845
1
4100

Shah
Ceme
nt
(MT)

Akij
(MT)
5043
95041
4
7089
3514
45891
12412

Source: Author calculation from survey data

34

0
3315

Premi
er(MT
)

Eleph
ant
Brand
(MT)

Lead
Time

65054
6221

45871
3051

45
45

35024
3584

25054
2500

15
45

3.05 Findings & Data Interpretation for EOQ model:

Since all the raw materials are having a lead time to procure from the source is about
45 days except fly ash so that management should follow the EOQ model &
determine the frequency of ordering to reduce carrying cost & ordering cost. In next
point there discussed the management existing practice & approaches for inventory
control.
Based on statistical primary data & marketing sales forecast production consumption
rate can determine the order frequency & economic order quantity as well re-order
point of raw-material from abroad based on lead time to procure & carrying cost. For
the cost benefit of controlling raw-material inventory a sample calculation given for
Boshundhora Cement Mills limited:
Table -09: Current Method of Rawmaterial inventory system of Bashundhora

Current Method of Raw-material Inventory Control

Clinker
Times Ordered (qtr)
Avg. Demand (Qtr1) ( K.
MT)

Gypsu
m

Fly-ash

Slag

26

12

18

261.15

11.97

111.03

15.15

4000

1709

2100

2400

0.3

0.3

0.3

0.3

600

260

364

535

Lead Time (days)

45

45

15

45

Quantity ( K. MT)

10.04

1.00

6.17

2.53

Unit Price ( per MT)

Holding Cost
Fix Order Cost(carrying)
BDT

Qtr Holding Cost ( BDT)

Qtr Order Cost (Thousand
BDT)
Total Qtr Cost (Thousand
BDT)

6,026.54
15600
21626.54
35

255.71
3120
3375.7
1

1,943.03
6552
8495.03

909.00
3210
4119.0
0

Table-10: Simulation EOQ model & Inventory control over the existing system

Recommended Method of Raw-material Inventory Control

Gypsu
m

Fly-ash

261.15
4000
0.3
600
45
13.13
130.58
20
7878.00

11.97
1709
0.3
260
45
3.22
5.99
4
825.45

111.03
2100
0.3
364
15
8.62
18.51
13
2715.30

15.15
2400
0.3
535
45
3.92
7.58
4
1411.20

11933.74

966.52

4688.51

19811.74

1791.97

7403.81

2067.67
3478.8
7

Clinker
Avg. Demand (Qtr) ( K. MT)
Unit Price ( per MT)
Holding Cost
Fix Order Cost(carrying) BDT
Lead Time (days)
Quantity=EOQ ( K. MT)
ROP ( K. MT)
Optimal Orders (n*) ( times)
Qtr Holding Cost ( BDT)
Qtr Order Cost (Thousand
BDT)
Total Qtr Cost (Thousand
BDT)

36

Slag

3.06 Results on EOQ Model Approach:

Table-11: Summary View of old system & new recommended system of inventory
control is given below to compare the cost:
Cost Estimate : Total Cost Analysis ( all figures are in 000, BDT)
Old Method

Raw-material
Name

Holdin
g cost

Clinker

6027

Gypsum
Fly-ash
Slag

Order
Cost

Recommended Mehtod

Total
Cost

Holdin
g cost

Order
Cost

Total
Cost

15600

21627

7878

11934

19812

256

3120

3376

825

967

1792

1943

6552

8495

2715

4689

7404

909

3210

4119

1411

2068

3479

Overall Cost
37616 Overall Cost
Total Savings (000,
BDT)
5130
Saving Percentage (%)

*Source: Author calculation

37

14

32486

3.07 Implication of JIT for Empty cement Bag Inventory Control:

As it is studied that JIT approach deal with vendor responsiveness & reducing of
lead time thus manufacturer has to keep very low inventory of their process materials
like empty bag (work in process inventory).
Management Acceptance: JIT approach can be only applicable if Top management
agrees adopt it within the industry. For this every employee have to understand that
proper cooperation & tight information flow from the input level to output level that is
throughout the supply chain. Stock level will be updated in live data with the vendor
who supply empty bag so that can be prepared for next consignment.
Single Supplier: Developing single supplier for supplying bag can boost the JIT
approach. In this way a single supplier will be completely liable for supplying the
entire demanded materials so that the manufacturer can share & manipulate supply
decision within short time & ensure small lead time.
Long Term Relationship with Suppliers: To keep long term relationship with every
term like order volume, price, lead time may assist the manufacturer to adopt JIT
approach for inventory control. This business relation will boost the inventory of work
in progress to be less than the existing system. Vendor will be responsive to supply
in-time & no need to keep stock of 5 days or 7 days or etc.
Supply Contract (annual): A supply contract can be a part of JIT approach since
annual contract defined with terms like lead time, order frequency, volume etc with
mutually agreed paper for a defined period of time.
3.08 Limitation of JIT implication:
Although JIT approach can control the inventory system of a cement manufacturer
especially for empty bag but It has been observed that there exists some barriers in
implementing JIT.
Firstly the mode of transport which is presently by road only by Truck or covered
van. Since there exists political unrest even not all the districts of Bangladesh are
38

not well connected by highway so the logistic support may hamper and
consequently bag may not reach in the cement manufacturing plant in-time.
The distance between supplier & cement plant is another major barrier in
implementing JIT approach of Bag inventory control. Short distance may deliver intime but long distanced supplier may not even their vehicle movement frequency will
be high in numbers thus they may not appeal to be align with manufacturers
strategy.
Another thing that vendor may have the chance to dominate the manufacturer since
through JIT approach manufacturer developed fixed vendor with their desired
material sometime it become tough to change within shortest possible time with
another new one.
Unit Price is another vital parameter which has potential chance to change as the
competitor of suppliers increasing day by day. To be fixing with a single or limited
vendor may affect to the manufacturer with unplanned purchasing of their current
packaging material.
3.09 Implication of EOQ:
From the above data analysis & result it is obvious that cement manufacturer can be
benefited by applying EOQ model to control their raw-material inventory cost. The
process of implication should be adopted from the while the purchasing decision
been taken from the strategic level management. Purchasing economic order
quantity lessening the ordering cost, although there a chance of increasing holding
cost but the overall cost will be decreased which result a optimization in inventory
cost of raw-material inventory.

39

4.01 Discussion & Recommendation:

From above analysis & study to the selected cement manufacturing companies it is
obvious that JIT play vital role in inventory cost control with providing live information
to the supplier so that lead time can be reduced & the holding period of keeping bag
in store will be minimized. And ultimately the interest cost that is holding cost will be
reduced. And through JIT approach if the management develop supplier as well the
logistics pattern which can easily reduce the lead time to procure from local supplier,
consequently reduce inventory cost.
On the other hand EOQ model define the quantity & the frequency of order. Since
the cost needed for ordering is associated with fixed cost thus the cement
manufacturer will realize the benefit by implementing EOQ for raw-material inventory
control. From the outcome of this analysis of the mathematical optimal policy, the
carrying cost and holding cost has almost equal impact in inventory of raw material
as well packaging material. However, this could occur for every 45 days of ordering
for raw material, which practically could mean 1 or 1.5 months. In terms of periodical
pattern, 1 month is practically appealing because of the shipping pattern of the
manufacturer and could disrupt or defy normal shipping schedule.

Apart from the EOQ strategy if there any negotiation with supplier of raw-material &
the manufacturer about quantity discount then for economic order quantity the order
volume should be fixed lot in every time of ordering so that buyer will have the
discount in every order & maintain a fixed stock as inventory cost.
Thus it can be concluded that both JIT philosophy & EOQ model can play vital role to
the strategic management approach for material purchase planning & keeping the
stock in store (Inventory).

40

4.02 Study Limitation:

While conducting this research carefully, it is realized that there are limitations and
boundaries on implementing JIT & EOQ model. During the research, I tried to
investigate the nature of the inventory control and there are several respondents of
cement manufacturing company have been interviewed for opinions and past data
on inventory control through the parameters of lead time, holding cost, consumption
rate, demand & sales etc. Therefore, subjective matter is unavoidable due to
personal perceptions and views. Another issue is that the research depends a lot on
quantitative secondary data from the company. Given the limited time and resources,
it is a tough task to completely ensure the reliability and validity of these data
ourselves. Moreover, I have only investigated several segments which make up a
high proportion of revenue and it does not represent the overall picture of inventory
management of the whole company. Last but not least, due to limited resources, I
cannot gain access to more specific data from other sources inside and outside the
company to make a deeper and more comprehensive analysis.

41

5. Conclusion:
Inventory control is very vital to the success and growth of heavy manufacturing
industry like cement manufacturing industries. The entire profitability of an
organization is tied to the volume of products sold which has a direct relationship
with the quality of the product in every aspect like raw-material, packaging etc. This
study demonstrates how the EOQ-JIT cost indifference point function may affect the
purchasing approach of a material& finally control the inventory cost. It was found
that for a certain required service level, the ratio of the ordering cost to holding cost,
lead time are the main driver that could be utilized as a decision variable, while the
average demand level is the other main variable for identifying the inventory level.
EOQ model approach can provide the quantity to order for the cement manufacturer
in which frequency focusing on fixed costs like carrying cost & others. The target on
reducing holding period for packing material & the carrying cost of raw-material can
boost up the inventory cost to minimize & this theme carried on by both EOQ & JIT
philosophy which has been discussed in this thesis study.

42

6.01 References / Bibliography:

1. Sunil Chopra & Peter Meindl (2006) Supply Chain Management Published
by Dorling Kinderseley ( India) pvt, a licensee of Pearson Education in South
Asia.
2. Shibamay mitra, sujitkumar pattanayak & papaya bhowmik (2013). Inventory
control using ABC and hml analysis a case study on a manufacturing
industry. ISSN No. 2231-6477, Vol-3, Iss-1.
3. Chun-Jen Chung & Hui-Ming Wee (2006). Scheduling and replenishment plan
for an integrated deteriorating inventory model with stock-dependent selling
rate. Vol-5, PP-35-49.
4. Scott Grant Eckert (2007). Inventory Management and Its Effects on
Customer Satisfaction. (ISSN: 1936-9794) Volume 1, Number 3-11.
5. Priscila Laczynski de Souza Miguel &Luiz Artur Ledur Brito (2011). Supply
Chain

Management

measurement

and

its

influence

on

Operational

Performance. Journal of Operations and Supply Chain Management .No 4 (2),

pp 56 70.
6. Martin Krajcovic & Dariusz Plinta (2012). Comprehensive approach to
the inventory control system improvement. Volume 3,Number 3 ,September
2012 pp 3444

7. Shu-Hsing Chung, HeYau Kang, W.L. Pearn (2005). A service level model for
the control wafers safety inventory problem. International journal in advance
technology. No- 26, pp 591597.

8.

Laith Abuhilal, GhaithRabadi & Andres Sousa-Poza (2006). Supply

Chain Inventory Control: A Comparison among JIT, MRP, and MRP with
Information Sharing Using Simulation. Vol. 18, No. 2.

9.
and

Timothy Lwiki, Patrick Boniface Ojera, Nebat Galo Mugenda

Virginia

Management

Kirigo

(2013). The

Wachira

Practices

on

Financial

Impact

Performance

Manufacturing Firms in Kenya.Vol.3 No.5 ,(Page 75-84).

43

of

Inventory
of

Sugar

10.

Musara Mazanai. (2012). Impact of just-in-time (JIT) inventory system

on efficiency, quality and flexibility among manufacturing sector, small and

medium enterprise (SMEs) in SouthAfrica. Vol. 6(17), pp. 5786-5791.
11. Jose L. Gonzalez, Daniel Gonzlez (2010), Analysis of an Economic Order
Quantity and Reorder Point Inventory Control Model for Company XYZ,
California Polytechnic State University, San Luis Obispo, March 10, 2010.
12. Morne Eloff (2012), Optimizing maintenance inventory of a Cement
manufacturer, University of Johannesburg, October 2012.

44

Appendix- A;
6.02 Survey Questionnaires:
A. Demographic Information
1 Designation:
2 Department you work in:
3 Length of service in this company (years):
(

) Less than 2

( )25

) 5 10

) More than 10

B. General Information Regarding Your Company

C. Please tick the correct answer.

4. Does your organization thinks for long term relationship with suppliers?
a) Yes b) No
5. Does your organization think for developing single suppliers to reduce lead time?
a) Yes b) No
Q 06. Please tick mark on the estimated range you know

Safety stock for packaging

material per month ( holding
period & quantity)

10-15 days
15-17days

500,000-1000,000 pcs
400,000-500,000 pcs

17-20 days
20-25 days

300,000-500,000 pc s
100,000-300,000 pcs

Q 07.
Lead time to procure packaging Bag

15-30 days
10-15 days
7-10 days
3-5 days

Q08.Please tick mark on the estimated range you know

Yearly Demand in TON

1000,000-1500,000 TON
2000,000-2500,000 TON
45

2500,000-3000,000 TON
3000,000-4000,000 TON
Q 09.
2000,0000-2500,0000 Pcs
2500,0000-3000,0000 Pcs
3000,0000-3500,0000 Pcs
3500,0000-4000,0000 Pcs

Yearly BAG Required

Q 10.
1000,000-1500,000 TON
2000,000-2500,000 TON
2500,000-3000,000 TON
3000,000-4000,000 TON

Yearly raw material ( Clinker) Required

Q 11.
1000,000-1500,000 TON
2000,000-2500,000 TON
2500,000-3000,000 TON
3000,000-4000,000 TON

Yearly raw material ( Fly Ash) Required

Q 12.
1000,000-1500,000 TON
2000,000-2500,000 TON
2500,000-3000,000 TON
3000,000-4000,000 TON

Yearly raw material ( Slag) Required

Q 13.
15-30 days
30-45 days
45-60 days
60-90 days

Lead time to procure above raw material

Q 14.
Safety stock for raw material
of ( holding period &
quantity)

15-25 days
10-17 days

500,000-1000,000 TON
400,000-500,000 TON

10-15 days
10-12 days

300,000-500,000 TON
100,000-300,000 TON

D.MCQ: Please tick mark only

Q16 How many times ordered per quarter for procuring clinker
46

a) 4 times b) 8 times c) 12 times d) 16 times

Q17 How many times ordered per quarter for procuring Gypsum
a) 4 times b) 8 times c) 12 times d) 16 times
Q18 How many times ordered per quarter for procuring Fly-ash
a) 4 times b) 8 times c) 12 times d) 16 times
Q 19How many times ordered per quarter for procuring Slag
a) 4 times b) 8 times c) 12 times d) 16 times
Q20. What is the Inventory control process of packing material & raw
material?
a)Based on previous record b) Forecasting from Delivery/Sales c) Based on
production consumption d) EOQ & JIT Implication
e) Others : Please mention hereQ26. How does your organization procure packing material & raw-material?
a) By Open Bidding b) From Single Vendor c) From Dual Vendor c) Analyzing EOQ
d) Others : Please mention hereQ27. Does your organization follow MRP for material
segmentation?
a) YES
Others-

b) NO

c)

Q28. How is the minimum stock of packing Bags & raw materials settled?
a) Based on sales delivery b) Based on Production consumption c) OthersQ29. What are the Philosophy or basis does your org follow for ROP ( re-order point)
a) MRP b) Cycle counting c) Manual way/ previous experience d) Others-----------Q30. Is there any practice of JIT or
EOQ in your org?
a) YES b) NO c) Others-

INVENTORY PERFORMANCE:
Please indicate your companys inventory system performance on the following
statements over the last 5 years (Interest paid due to inventory, new warehouse cost,
employment cost etc):
47

Comments
If you have any additional comments, please share them below:

48