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Optimization of Effective Inventory NEW
Optimization of Effective Inventory NEW
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Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 5(4):265-276 (ISSN: 2141-7016)
aspects such as competitive behaviour, localised In every stocking point, the replenishment rule in
decision making, incentives or business cycles, and managing every item in inventory is practically
are largely ignored in most traditional models. common by application. Some of these procedures
includes the just-in-time (JIT) as in material
However, a lot of studies related to inventory is requirement planning (MRP), the option of pull and
focus on manufacturing and procurement related push system and economic order quantity (EOQ).
processes upstream of the original equipment Applying this method brings about a holistic
manufacturing (OEM), while few attention has been inventory level judge by top management as
paid to the management of finished goods from the inventory turnover, that is annual sales over average
assembly down to the customer (Cachon and inventory.
Olivaries, 2010)
To ascertain in general the performance of this
Despite the global acceptance of just- in -time (JIT) policies or foretelling the effect of a change in policy
and logistics concept in academia and industries from is difficult if there are numerous of items in inventory
the 1990s to date, a lot of empirical studies have not at several locations and item-level methods are used
been able to achieved any meaningful decrease in (Ballou, 2000).
finish goods inventory levels in many different
industries, which work in progress inventory and raw Ballou (2000) however confirm that inventory
material stocks have consistently decreased over time management performance auditing is possible using
(Leeuw et al, (2011), Rajagopalan and Malhotra the formula he first used in 1981 described as the
(2011), Hendricks and Singhal (2008). To be more turnover curve, generally given as:
precise, Chen et al (2005) reports that, inventory
finish goods (measured in number of day’s sales in
(i)
inventory) is seen to increase in different industries
including the manufacturing and service industries
between 1981 and 2000. “Only two industries; Where;
pharmaceuticals and electronics reportedly IT = is given as total network inventory, units or $
experienced a decline in finished goods inventory” Di = is annual stocking point throughput at
(Leeuw et al 2011). location i, unit or $
N = is the number of stocking point at
The flow of product and inventory control in supply which the product are held and,
chain is dependent on two matter, “When to W, m, a, b = constant to be determined from the
order/deliver” and “How much to order”. There have particular inventory being modelled can be used to
been different ways developed over the years in estimate the total amount of inventory in a multiple
handling this matter, which some are already in used stocking point network. The formula replicates the
in industries. Stig-Arne Mattsson (2007) however inventory policies used in practice.
argued that apart from the method build on Kanban
and the visual control signals a good majority of The interpretation of terms used in the equation has
those that are presently in used were developed in the the following general meaning:
beginning and middle of the twentieth century. W = the standard measure of promotional,
speculative, obsolete or production
Evaluating Performance of Existing Inventory overrun stock at a stocking unit.
Are we really getting the desired inventory turnover mDib = the sum of safety stock at stocking point i
in our inventory policies? How perfect and well is aDi = the sum of usual stock at stocking point i, but
our inventory management performance? If we may also represent some safety stock.
decide to add another warehouse, how much of that
inventory will it be? If we increase the inventory In view of the fact that the coefficient surrounded by
turns, what impact will it have in the total the model are determined by fitting the formula to the
investment? This and many more are the kind of inventory turnover ratios at the stocking points in the
questions top management ask them self concerning logistics network, the formula is referred to as
inventories. turnover curve.
Ronald H.Ballou (2000), in evaluating inventory
Just- in Time
management performance affirm that inventories One fundamental technique use by companies is the
represent a significant investment by many just – in – time (JIT). “The Japanese manufacturing
organisations with a caring cost of about 20 – 40 % success with increased productivity, low product cost,
of inventory value annually, proper management of and often superior quality products can be very much
this inventory is therefore the priority of the top attributed to just-in-time manufacturing method JIT”
management. (Waller, 2003). JIT stands for;
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Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 5(4):265-276 (ISSN: 2141-7016)
Producing that quantity of units that is organisation of adopting this ideology. From the
needed no more and no less. microscopic idea of the term, JIT can be seen as a
Produce them at the date and time required system of stock or inventory control. “The necessary
not before and not after. consequence of producing, assembling and receiving
A supplier delivers the exact quantity goods just in time is that stock levels – whether held
demanded, at the scheduled time and date. as finished goods, work in progress or raw materials
– will be reduced, if not to zero, then to a bare
JIT focus directly on the reduction of lead time in minimum” (Procter, 2004). Base on “established”
production, it‘s advantages cannot be over study of stock holding as regards to the principle of
emphasised. For instance, “a short lead time relative the economic order quantity (EOQ) such an advance
to competitors in the market place allows sales makes minute sense: although the costs of holding
offices to quote shorter delivery time - an important stock are reduced to a minimum, any savings would
competitive advantage in today’s business be more than offset by much higher reorder costs.
environment” (Browne et al, 2006). From the
perspective of manufacturing planning, short lead Stephen J. Procter, (2004), on his part further argued
times reduce the manufacturing plant dependence on that for organisation to adopt JIT, therefore, implies
forecast and allow the plant to operate using a shorter that an increase in the total cost of holding stock is
planning horizon and consequently a more accurate more than compensated for by other, attendant
master schedule. benefits. For organisation to try to play down the
level of stock, rather than the cost of holding stock,
Garner (2012) observed that there are two distinctive implies that rather than being looked at in isolation,
ways in which JIT could be view: as a general the question of stock control is regarded as part of the
philosophy for the reduction of waste and the more general problem of the management of the firm
enhancement of throughput efficiency or as a means as a whole. Thus, JIT production is most often taken
of controlling work on the shop floor by means of a as being one of a set of practices which together are
pull system. The philosophy of JIT can be applied to considered to be characteristic of the most successful
whatever kind of manufacturing circumstances. But it parts of Japanese manufacturing industry. It can be
is worthy of note that, as an operational system, JIT is considered alongside cellular manufacture, total
most appropriate for the volume production of quality management (TQM), and the development of
relatively simple products. co-operative rather than adversarial buyer-supplier
relations. Cellular manufacture, for example, if
Wei Weng et al (2012) maintained that in terms of introduced as an alternative to a process layout, can
production processes, just-in-time (JIT) completion give rise to the simple work flows required by JIT.
of jobs helps reduce both the inventory and late Similarly, TQM is necessary once the comfort of the
delivery of finished products. Manufacturing buffer provided by stocks is removed, while
industries have their production processes normally adversarial supplier relations would render redundant
carried out in shops which are linked as a production any internal progress towards JIT.
chain. For every shop along the chain, temporary
inventory of finished products will be produced if It can be argued that, for effective just-in-time (JIT)
jobs are completed earlier than the time when they system, there are five pillars supporting it which is
can be delivered to the successor shop, and late then seen as a requirement to the implementation of
delivery of finished products will be caused if jobs any form of JIT. This requirement is represented as
are completed later than the time mentioned above. shown in figure 1.0 below
This indicates that only when each job is completed
on time can the inventory and late delivery of
finished products be minimized simultaneously. The
same applies to the flow of products between the
parties along a supply chain, as JIT job completion
can lead to zero inventory of finished products for the
manufacturer as well as timely delivery of products to
the downstream customer.
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Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 5(4):265-276 (ISSN: 2141-7016)
The unique aspect of just-in-time (JIT) is that it gets possible ways to compensate for this short coming on
rid of waste by organising operations to occur at the part of the customer. First, get the customer
precisely the time they are required (Waters, 2008). organise to always forward information in advance.
This operations are finished too early so that the Second, hold enough stock at hand to cope with
product and materials are not kept hanging for a long excess or unexpected demand.
period before there are needed and there are not done
too late as to give rise to poor customer service. According to Wild (2008) and Hadley (2004) “safety
or buffer stock are the extra inventory kept as a
An effect of just-in-time (JIT) could be seen when cushion against stockout due to random perturbations
you call a cab driver to pick you up for an occasion of the nature or the environment”. There are use to
you are to attend by 4.00 pm. If the cab driver arrives protect the inability to predict demand. In respect to
at 3.30 pm you are yet to be ready, it is a waste of this therefore, it can be put across that “safety” is the
time as he is waiting for you; if it comes beyond 4.00 quantity of inventory that has to be reserved in order
pm you are not happy and will not use the service to guard the system from random variables such as
again. But when the cab driver arrives at 4.00 pm stockout, arising as a result of error in forecasting or
just-in-time to pick you, there is no time wasting or deviation from normal demand during lead times
waiting, which makes you very happy that the cab (Zizka2005). The task before us now, is how to
arrives at exactly just-in-time. In terms of stock for establish the least possible quantity of safety
instance, JIT automatically view stock as a waste of inventory needed to accomplish all of the service
resources that has a waste of resources that has no level targets in line with the objective of this study.
effect as the materials are just sitting and waiting to The calculation of safety inventory is invariably the
be used. Therefore it searches for ways of eliminating same with that of reorder point, the merely difference
this waste. is that, in over- time planning and most time in MRP
safety inventory is express as safety time and
Benefit of Just-in-Time (JIT) calculated by dividing the inventory by demand per
We have enumerated the role played by just-in-time period, while the reorder point, the following formula
in the reduction of work in progress (WIP) and stocks is used.
of raw materials. (Waters, 2008) maintain that a good
number of organisations have reduced these by 90%, R = -dL + ZσL (ii)
giving it a related benefits such as space reduction to Inventory level is continuously monitored by a fixed
about 40%, lower procurement cost to about 15%, a order quantity system which places a new order once
smaller amount stocks investment etc. To get a the inventory attains the reorder point (R). In lead
working system, there are other benefits of JIT that time (L) deviations (-dL) occur, thus this deviation
come from reorganisation which includes the (σL) is calculated using the formula:
following:
(iii)
Shorter leads time; σL =
Less scrap and wastage;
Lower stock of raw materials and work in
Dumas (2008) and Hadley (2004) in clarity point out
progress
that the amount of standard deviation of safety stock
Shorter time needed to make a product
(z) is related with the likelihood of not running out of
Better relationship with suppliers;
inventory in the lead time, however in calculating the
Improve quality of materials and product
safety of inventory level, the following question
Higher productivity;
should be before hand:
Simplified planning and scheduling;
“How much inventory is required so that at least z%
Emphasis on solving problems in the
of the demand is met in y% of the time periods? For
process;
instance, how much inventory is required to meet
Less paper work;
95% of monthly demand 99% of the time?”
Better morale and participation of the
workforce;
To compute the required inventory amount in other to
Higher equipment capacity and utilization.
shut the gap between coverage and the desired
service level, the coverage (z) is mathematically
It is apparent that JIT has all-inclusive advantages for
express as:
businesses, but that strong interactions with suppliers
are required to guarantee the effectiveness of the Coverage (z) =
system.
In view of the aforementioned, safety inventory can
Safety Inventory (stock) thus be calculated according to Chase et el. (2006)
Investigation has shown that often time customers using this formula thus:
fail to provide information of their demand in
advance. As a measure therefore, there are two SS = (iv)
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Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 5(4):265-276 (ISSN: 2141-7016)
For example, in calculating the safety of inventory right percentage of safety inventory at the right time
value, let us assume that: and places in the supply chain because it is
Lead time in days (L) = 5 unarguably an integral part of effective inventory
Forecast average daily demand (d) = 114 control and management.
Standard deviation of demand (σL) = 4
Current inventory level (I) = 196 METHODOLOGY
Therefore, substituting the values into the formula This study relied on data collection; hence it is more
stated earlier, we have thus: objective than qualitative. The research method used
was the quantitative method which is systematic and
based on a positivism perspective as described by
(v)
σL = Swetnam (2010) to mean observation. This method
was selected because it is possible for the same data
σL = to be collected elsewhere and results would be
σL = directly comparable.The researcher employs the use
σL = 8.94 of structured questionnaire which is a form of data
Similarly; collection where each respondent is asked to respond
to a set of same questions in a predetermined order
Coverage (z) = (Saunders et al. 2007). Some of the motivations for
the use of questionnaires included cost, because it is
Coverage (z) =
more affordable and convenient and respondents can
Coverage (z) = 1.71 complete it in their own time. The fact that the
Therefore; researcher was absent, lead to the respondents feeling
SS = unrestricted and free to answer honestly and without
SS = (1.71) (8.94) any pressure
SS = 15
From the example above, it can be shown that DATA ANALYSIS AND DISCUSSIONS
inventory safety value is 15 units. The method employ by the researcher is the
qualitative technique, using descriptive statistics
The company’s inventory carrying cost will increase method by quantifying the level of frequency and
when holding safety inventory, although Langfield- determining the percentages of respondents and
Smith et al (2006) maintained that it potentially weighted mean scores calculated. This method was
reduces cost due to shortage. “Business's safety considered more appropriate and convenient by the
inventory policy will increase revenue through author because it helps to establish the objectives of
improved service levels while simultaneously the research.
reducing inventory carrying costs” (Dumas 2008). It
will therefore be of immense advantage to have the
Table 1:
What are types of inventory handle by Niger Frequency Valid Percent Cumulative Percent Weighted mean
Mills? score
All of the above 7 11.7 11.7 3.4500
Finished good 3 5.0 16.7
Maintenance, repairs, operating
6 10.0 26.7
supplies
Production inventories 44 73.3 100.0
Total 60 100.0
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Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 5(4):265-276 (ISSN: 2141-7016)
Investigations show that 73.3% representing the locally or imported. Therefore effective production
highest respondents are of the view that Niger Mills could not have been possible without breakdown of
handle production inventory only. But verbal equipment’s and machineries which are bound to
interview reveal that Flour Mills Company handle be repaired or maintained, hence giving raise to
various forms of inventory to include: Production, inventories, or that finish product could be delayed
Maintenance, Repairs, Operating and In-Process in the warehouse due to customers inability to
inventories. The reason adduce is that, the company purchase on time, making it possible to hold this
is involved in a range of production of different entire inventory by the company.
brands of product with it raw materials source
Table 2:
What are the sources of inventory kept? Frequency Valid Percent Cumulative Percent Weighted mean score
All of the above 27 45.0 45.0 2.3167
Control Depot 7 11.7 56.7
Local Source 6 10.0 66.7
Director Imports 20 33.3 100.0
Total 60 100.0
The view of 33.3% respondent is base on the fact of the above can be said to be correct because
that, raw materials which are imported for inadequacy in local sources as well as human
production are on the waiting list or may be factors in the control deport are all strong
delayed on shipment, giving raise to inventory, indications that can lead to generation of
while 45.0% of respondent whose opinion is on all inventories.
Table 3:
Is there any form of inventory Frequency Valid Percent Cumulative Percent Weighted mean score
forecast?
No 18 30.0 30.0 1.7000
Yes 42 70.0 100.0
Total 60 100.0
The overwhelming response of 70.0% shows that to cost, effectiveness within the production system
the company embarks on a measure of inventory while 30.0% argue that there is no forms of
forecast, perhaps what had inform this great inventory forecast embark upon by the company;
response is born from the fact that forecasting hence the will not have been inventories in the
support the company in making decisions relating process.
Table 4:
What system of inventory control do you Frequency Valid Percent Cumulative Weighted mean
operate Percent score
None of the above 16 26.7 26.7 2.3167
All of the above 25 41.7 68.3
Cyclical Ordering system 3 5.0 73.3
Fixed Order system 16 26.7 100.0
Total 60 100.0
63
In view of the above result, it can be said that the cannot be possible especially if there is an ongoing
26.7% respondent may have drawn their conclusion work at hand. However, it has been established
base on economic order quantity (EOQ) which according to hierarchical statistical response shown
demands the knowledge of the order size (Q) and by the 25 respondent that represent 41.7% that the
the minimal stock level that signals the placing of company has a control system and is possibly the
an order. The reason why they could been a low both. But 27.7% argued that there is none in
response to cyclical ordering system as the only existence. Further verbal investigation shows that
two system listed as represented by the 5.0% is the company lacks a strategic operating system for
perhaps the difficulty in this system, which requires inventory control. The different shades of opinion
a continues taking of physical inventory in the are as a result of this fact.
event that there is a replenishment cycles, and this
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Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 5(4):265-276 (ISSN: 2141-7016)
Table 5:
What ordering cost do you encounter? Frequency Valid Percent Cumulative Percent Weighted mean
score
Others 14 23.3 23.3 3.0667
Administrative costs 3 5.0 28.3
Import duties 8 13.3 41.7
Transportation 35 58.3 100.0
Total 60 100.0
The transportation cost in inventory management as be seen as a result of the delay experience from
encountered by Flour Mills indicated by 58.3% can bulk or unit purchase made from suppliers which
adversely affects the lead time
.
Table 6:
Tools used in maintaining effective Frequency Valid Percent Cumulative Percent Weighted mean score
inventory records?
All of the above 41 68.3 68.3 1.4000
Computer 16 26.7 95.0
Inventory models 1 1.7 96.7
Inventory records 2 3.3 100.0
Total 60 100.0
It can be deduced from the degree of different the entire population believes that Flour Mills
responses as indicated in the table that above, there maintain effective inventory with all the tools as
is actually an existence of inventory model adopted indicated. However, what matters hear is the ability
by the company for effective inventory records, to reduced discrepancies to the beeriest minimum
although 26.7% argued that the computer is what and the level of technical know-how applied by the
the company uses for record purposes, but the users that will determine the effectiveness to the
overwhelming majority that represents 68.3% of company
.
Table 7:
What method of stock taking is engage by the Frequency Valid Percent Cumulative Percent Weighted mean
company? score
All of the above 16 26.7 26.7 2.1167
The degree of respondent here is so closely related However, for the purpose of clarity and avoidance
to each other indicated by their valid percentage of doubt, until records are set to be accurate, no
response, hence it goes on to show that the actually inventory system can work effectively.
exist a method of stock taking in the company.
Table 8:
Nature of store keeping practice engaged Frequency Valid Percent Cumulative Percent Weighted mean score
by your company?
Decentralized 3 5.0 5.0 1.9500
Centralized 57 95.0 100.0
Total 60 100.0
The nature of store keeping practice engage by practice is beneficial to the company because it
Niger Mills Company is centralized according allows it to effectively employ it bargaining powers
95.0% of the total respondents. The centralized and resources as well as discount considerations.
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Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 5(4):265-276 (ISSN: 2141-7016)
Other reason induced from these overwhelming of activities and create uniformity in terms of
respondents is that, the discrepancies of records purchase with standard costing. Proper usage of
duplication, cost of inspection, purchasing and materials, lead time and transportation cost can all
receiving are all reduced to bearable minimum. be achieved by centralized store keeping.
Centralized store keeping ensures a better control
Table 9:
What Purchasing policy is adopted by Frequency Valid Percent Cumulative Percent Weighted mean score
your company?
All of the above 10 16.7 16.7 2.9500
Piece purchase 11 18.3 35.0
Unit purchase 11 18.3 53.3
Bulk purchase 28 46.7 100.0
Total 60 100.0
Statistical analysis from the table above shows that could be adopted depending on the needs at hand,
Flour Mills purchasing policy cut across piece, unit provided immediate satisfaction will be achieved.
or bulk purchasing. Any of this purchasing policy
Table 10:
Evaluation of inventory performance? Frequency Valid Percent Cumulative Percent Weighted mean score
Not at all 17 28.3 28.3 3.1167
Once a year 10 16.7 45.0
Once a month 5 8.3 53.3
Once a week 5 8.3 61.7
Once a day 23 38.3 100.0
Total 60 100.0
There has been different opinion on the time frame inconsistency and poor customer relationship.
for which inventory is evaluated and the standard Going by these claims, the unprecedented
lead time for receiving inventory from suppliers. A inventories that will be experience by the company
specific opinion on this issue cannot be drawn; will affect customer relationship as well as tight
however, analysis shows that there will be no down capitals.
reliable target on stock levels arising due to the
Table 11:
Standard lead time for receiving inventory Frequency Valid Percent Cumulative Percent Weighted mean score
from suppliers?
35 days and more 18 30.0 30.0 3.4333
21-35 Days 3 5.0 35.0
14-21 Days 4 6.7 41.7
7-14 Days 5 8.3 50.0
1-7 Days 30 50.0 100.0
Total 60 100.0
The statistical findings relating to the above cannot be guaranteed. But when the supply lead
statement shows that, the inconsistency in lead time time is shorter as observed by 50% respondents,
experience in the company will make it very there is that likelihood of forecasting more correct
difficult to set a reliable target on stock levels “or and errors will be minimize.
to provide good customer services if times are not
known accurately” (Wild 2008). Therefore, going Nowadays, the rate of customers sensitivity to
by the 30% respondents whose opinion is that the reliability supply is high, so changing suppliers in
company leads time is 35 days and above, the this circumstance is not even a guaranteed, instead
implication of this longer lead time is that, it will a strategy should be put in place to guide against
be very difficult to forecast demand that will cover any supply that the delivery is not consistent so as
the supply period and the reliability of the supplier to enhance customer’s satisfaction and retention in
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Journal of Emerging Trends in Engineering and Applied Sciences (JETEAS) 5(4):265-276 (ISSN: 2141-7016)
Figure 1.1(a): Chart of average mean score versus variables of total respondents
Figure 1.1(b): Chart showing plotted degree of weighted mean scores versus Variable.
manufacturers is to slowly alter the supply chain A ledger comprising all items of stock held in
and introduce changes at the moment of launching different units located from physical stock
new products itself should be kept. The detailed entries of all
issues should be reflected in such ledgers.
RECOMMENDATIONS They serve as check and balances on all the
In view of the findings made from the research, it sub-units and as a good source for audit
has become imperative to make the following purposes.
recommendations. Acquire and install the latest time and money
saving software’s and technologies from
There should be an aggressive and mass vendors such as ERP and MRPII that will
training of personnel’s on the theoretical and incorporate all departments of the company for
practical ethics of inventory management effective for effective inventory management
theories in order to reduce the possible and and optimization.
avoidable human errors that occur during
records, documentation and reporting system. If in the event that the aforementioned
A systematic purchasing method should be recommendation of inventory management and
adopted to avoid the issue of shortage between control project is implemented very successfully by
ordering and delivery. Order for materials organisations, it can go a long way to reduce
should be place on due time beforehand. operational cost, thereby generating more accurate
Ensure that you maintain a relatively low demand forecasts, speed production/turn over
inventory before placing a reorder, but hold cycles, and greatly enhance customer service- all of
enough on hand that will satisfy immediate which can serve a company millions of naira over
needs. There is cost associated with large the long run.
inventories as well as if stock is depleted.
Make someone responsible for checking the FUTURE RESEARCH
inventory. Delegate the responsibility for In continuation for the quest in finding a lasting
specific parts of the total inventory effort to the solution for effective inventory control and
persons in the organization who are best management especially in Nigeria SMES, it is very
qualified to do the job. Be sure those to whom important that the findings of this empirical
you delegate responsibility know exactly what research be evaluated in the light of certain
they are supposed to do. limitations since acknowledgement of these
Be aware of inventory turnovers. Know what limitations could suggest new directions for future
the turnover of each commodity is and if studies. Future research should be tailored or focus
possible compare this with the turnover of the on a broader sector of Nigerian economy since this
same items by other similar firms. research was limited only to a particular
In other not to keep duplicate records as a manufacturing company (Niger Mills Plc) in
result of the variation in price, first in -first-out Calabar, Nigeria.
(FIFO) and last in-last out (LIFO) method
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