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The application of web-based inventory management system for small and

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in Malaysia

Conference Paper · January 2009

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 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

The Application of Web-based Inventory Management System for

Small and Medium Enterprise (SME/SMI):
A Case Study for hardware and furniture industry in Malaysia
 

Ang Jun Chin

Faculty of Computer Science, University Technology Malaysia, Skudai,
Johor, Malaysia. Email: jun_chin2001@yahoo.com.sg

Chee Li Fang
Faculty of Computer Science, University Technology Malaysia, Skudai,
Johor, Malaysia. Email: lifang0627@hotmail.com

Hairudin Bin Abd Majid

Faculty of Computer Science, University Technology Malaysia, Skudai,
Johor, Malaysia. Email: hairudin@utm.my

Abstract
Inventory system is control management of items that being held by one organization especially in
industry sector. A good industry management whereby the organization has sufficient stock of the right
quality available at the right time is very important to ensure a well operation of an organization and to
avoid loss that might occur. This paper has been written to give a methodology of applying Periodic
Review System to analysis the optimal quantity of stock should be order. The aim is producing a web-
based inventory management system that able to reduce the cost of organization and also increase their
profit. A case study for few furniture and hardware company has been included to demonstrate the
proposed methodology.

Keywords: Inventory management system, Periodic Review System

1. INTRODUCTION

Recently SMEs in Malaysia tend to become the key suppliers and service providers to large
corporation. The 2005 Census of Establishment and Enterprise indicates that 99 per cent of
519,000 business establishments in Malaysia are small and medium enterprise, of which
412,000 are micro enterprises. It is important to develop a web-based inventory management
system which is suitable to use in all kind of small and medium enterprise. The definitions
SMEs are based on annual sales turnover and number of employees of the SMEs as shown in
Table 1.

In order to develop an efficiency web-based inventory management system, the approaches

of Periodic Review System Model have to apply in inventory management system. These
approaches are used to calculate the optimal quantity of stock to be order. The purpose of
applying the Periodic Review System Model is places the orders at specified quantity, fixed-
time intervals, and for an order size to bring on-hand inventory up to the target inventory.

 
 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

Table 1 SME definitions in terms of Annual Sales Turnover and full time employees

2. REVIEW OF THE INVENTORY MANAGEMENT SYSTEM

This web-based inventory management system is build for Small-and-Medium Enterprise

especially for hardware and furniture industry in Malaysia. Since long ago, each organization
has its own technique or method to manage the stock. A case study is gone through in the
range of Small-and-Medium Enterprise to be effect that a best web-based inventory
management system can be produced. This system mostly used for assist the Small-and-
Medium Enterprise in solving the problems that meet while management of inventory is
carrying through. The purpose of doing this system is to replace the old system and improve
the inventory management system so that achieve more efficiency and more effectiveness.

The criteria for inventory performance are average inventory level, frequency of
procurement orders, frequency of shortages and average inventory cost per year. Current
inventory system normally obtained an order system which entered and edited using a custom
data format with template. Moreover, current inventory system consist the data held in a
database, web access for queries, more complex queries require manual construction of SQL
queries and some checks done against data obtained directly from hosts. The strategy of an
inventory system creation includes estimation of uncertainty, fulfilling quality assurance and
quality control procedures, developing the list of industries and criteria for enterprises for
monitoring and regulation purposes forecasting economic development and creating the data
verification system.

The best inventory system should meet requirements for auditing value, location and
disposal of equipment. Besides, the inventory system can hold information so that complex
queries can be made of the data. An adequate authentication and authorization is a basic
requirement for a best inventory system. Moreover, user friendly of a system is very important
which includes easy to add data for multiples of the same item from a single order whilst
validation for data entry. All data should allocated in one database so that add, delete, edit or
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 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

update information can be easily access by user. Besides, well structured of a system is vital
because it is correlation with best and user friendly system. In section 6, it is clearly describe
the outline structure of the system.

Inventory model used to manage different type of demand can be classified into two types
which is dependent demand and independent demand. Dependent demand is the demand for
raw materials and components while Independent demand usually is the demand for finished
goods that comes from outside customers.

Independent Control Classification for items the demand for which has no relationship with
the demand for any other item (Heizer and Render, 2001). That means, an independent demand
is a demand that is not based on the demand for another item while a dependent demand is
based on the demand for another item. On this literature review, it only focuses on the
independent demand.

Diagram below is shown the models which included in independent demand.

 
                         Independent Demand
 
 
 
  Deterministic model Probabilistic model
 
  Discrete demand model
 
Fixed order size model Fixed order interval model
 
Service level model
 
Economic order quantity
 
  Periodic review system model
  Economic production quantity
 
 
  Quantity Discount model

Figure 1 Model for Independent Demand

3. ARCHITECTURE WEB-BASED INVENTORY MANAGEMENT SYSTEM

Architecture system is a process of preparation a logical chart which shows the design
of future system. To build a complete architecture system, the chart must be including its
software, hardware and network. These hardware and network makes the implementation of
management and maintenance system can go through smoothly.

This architecture system is comprised from different platform which can be used in any
part of the system. User connects to internet and at the same time connects to database by

 
 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

using web browser software, Internet Explorer. Generally, user of this system can be
classifying as two category, which is headquarter and branch of company. Interface or design
of system allows staff of headquarter and branch company manipulate data or information
stock. They are also permitted to print or analyze the selected data. Moreover, MySQL is not
only a server to store the data but also as a processor to process the request from user which is
input data or output data. In short, Figure 2 is the architecture of inventory management system.

Figure 2 Architecture of Web-based Inventory Management System

4. FRAMEWORK TO SELECT THE INVENTORY MODEL

In order to develop a good web-based inventory management system, a methodology

play an important roles as it can be use as a guidelines to follow throughout the whole
development of system. Purpose of inventory management is to ensure that inventory is
sufficient anytime whenever demanded.

Flow chart below (refer to Figure 3) is used to determine what model should be used
due to some factors in one organization. Each company has their own pattern of business
management to ensure their business can carry through smoothly. To determine what kind of
model use in an organization, there are two main factors that need to take into consideration.
Two factors that influence the decision of choosing model are demand and lead time of item.
Basically, there are four types of demand which are low/medium demand, high demand,
constant demand and unknown demand. After determine the demand pattern of an organization,
the lead time of item is the second step to determine the module. There are zero lead time, lead
time change with supplier, uniform lead time and consistent lead time. Besides the
consideration of these two factors, the factors like operation costs and combination item of
ordering are also the additional factors in determine the module.
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 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

Base on the flow chart below, we can observe that Economic Order Quantity has the
characteristic of low or medium demand. Normally the lead time of EOQ is considering zero
and the operation cost is low, constant and no change with no combination item occurs.
Whereas the Quantity Discount model has high demand and size ordering is large. The unit
costs will changes due to the order quantity. The larger the order quantity, the lower the unit
cost. Model Constant Order Quantity will have the constant and small order quantity. The lead
time is uniform and no combination of item. Lastly, the Periodic Review System have
unknown demand and the ordering is changing base on demand. Although the demand is
unknown but the lead time for ordering is consistent and the cost and ordering will not affect
by new order quantity.

The Periodic Review System is suitable used in hardware organization. The explanation of
why the hardware organization use these approach will be discuss later.

Figure 3 Determination of suitable model

 
 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

5. INVENTORY MODEL APPROACH

Based on the demand of each organization, different models will be used in different
type of demands and different cases. The technical approach that chooses to apply in the
inventory management system is as below:
Periodic Review System Model

This model is making the order or purchase in a standard interval period. Safety stock
is compulsory and essential to tackle higher demands. When the stock is less than the target
stock level, the order will be made.

Figure 4 Uncertain demands with a Reorder Level and Safety Stock

Periodic Review System Model is used to calculate the time to order (T) and determine the
target stock level (TSL) for each item (Knod, E.M. and Schonberger, R.J., 2001). Assumptions
for this model are:

• Interval period of ordering is constant

• lead time is constant
• Demand is constant
• Quantity order is unknown

This system is allowed the time period between each ordering and target value of stock level is
known. The order quantity is relation with the current stock when order being make. Order
quantity is totally different between target stock level and current stock. Finally, the formula
with order quantity is produced as below:

Order Quantity = Target Stock Level (TSL) – Current Stock

 
 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

The calculation of TSL can be calculate using following equation :

Target Stock Level, TSL = Demand over ( T + LT ) + Safety Stock

= D × (T + LT) + SS

Safety Stock, SS = Z × Standard Deviation of demand over T + LT

= Z×σ ×

Where,

SS - Safety Stock
Z - The number of standard deviation from the mean that correspond to the
specified Service Level
σ - The standard deviation of demand
T - Cycle time = Order Interval
LT - Lead Time

The detail explanation about how to apply this approach into inventory management system
will be described in the following section.

6. OUTLINE STRUCTURE OF SYSTEM DEVELOPMENT

In general, an expert system is designed to use knowledge and inference procedures to

solve problems that are difficult enough to require significant human expertise for their
solutions (Khairy and Yansong, 1999). In order to develop a systematic and user friendly
inventory management system, the structure of system is outlined in Figure 5. The appearance
of user interface of inventory system is highly graphical. The File SMI and data manager
manipulates the historical demand data and other useful information. The operations of File
SMI and data manager are adding new item, modifying an existing item, deleting an existing
item and displaying an item. Instead of providing the earlier mention function in each record,
there is also short-cut key Create New on the user interface to convenience user. System also
provides a rewritable notice board to let administrator announce some important news.

 
 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

Figure 5 Structure of system

In addition, Module File SMI contains more private and confidential data like
information of company, administrator and employee. Only the administrator of the company
can modify these important data. Module Data display the details information of item, supplier,
branch and inventory. The specialty of this module is the data shown in sub module inventory.
Warning icon in sub module inventory will be shown when the stock level of inventory is
lower than the reorder point. This warning icon is to alert user about the critical item in
company and remain them it is time to replenish the item. Additional, user can click on the
analysis icon to analyze that item by using Periodic Review System Model. From that model,
advisement from the model like order quantity will be calculated (Figure 7). User can click on
the word “Order” to make a transaction immediately.

Warning
Icon

Figure 6 Warning icon which shown when the stock level is lower than reorder point

 
 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

Figure 7 Advisement from Analysis

The Module Transaction implement the operation daily of company like store in and
store out. The forms which involve in these daily operations include Invoice, Purchase Order,
Sales Order and Receiving. Module Analysis is also another important role in inventory
management system which it is use to calculate the amount of replenishment. Inventory is the
most expensive modal in a company. So, the analysis of the amount of replenishment plays an
important role in inventory management system as it can effectively control the inventory and
increase the profit of a company. Periodic Review system is the main analysis methods in
system.

Moreover, this inventory management system also generate reports to easier the
management of company. There are 4 categories report as state above. The more frequently
report that generated will be the reports in category Inventory and Sales. Branch A and B state
at above is a prototype in system, it demonstrate the operation between Head Quarter and
Branch of company. The Inventory report of Branch A and Branch B will shown the inventory
in these branches and according to the result shown in report, user will make a decision
whether to make an order from the branch or from the supplier. Another important report to
mention in this inventory system is the Annual Report for specified item. It will generate a
graph to graphically represent the data instead of just provides plain text information. The data
shown in graph represent the sales of item according to month in the year specified by user.
Before using the system, company did not interpret their sales or result into graphically
because it is too troublesome. But now, the system provides the graph to help user more easily
look at the result and compare the differences. From the graph, the demand for each month can
be see clearly, and the user can take notice on the month that is less sales and taking into
consider the quantity to be order on next order.

Example: Periodic Review System Model in Hong Aluminium Hardware Sdn Bhd

In addition, Hong Aluminium Hardware Sdn Bhd is a company that sells the products like
partition, cast window, sliding window, sliding door and the others. Their products not only
sells locally but also to other state and country. The aim of the company is opening a branch
and a factory that produce their own products. Whereas, the target of the company is extend
their business to the Southeast Asian market.

Products in Hong Aluminium Hardware also only involve in selling finished goods and
not related in production process. Demand for an item is independent of the demand for any
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 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

other items, so it also categories under the independent model. The demand of the company is
depend on the projects they accepted. When they are a lot of project to do, the demand will
increase accordingly to the projects needs or vice versus. But the availability of the project is
not consistent, and results in the inconsistent of the demand. The ordering of item is varying
each time because it depends on demand. The ordering interval for the company is fixing as
they check their stock regularly.

According to the above situation, Hong Aluminium Hardware Company is suitable for
the Periodic Review System that the demand for an item is independent of the demand for any
other items and has a fixed order interval with uncertain demand. A demand is said to be
uncertain when its value is not known exactly (vary) but follows a known probability
distribution function. Taking the mean (average) value of demand and use the deterministic
model will give very poor results. So, we assume the demand follow normal distribution
(normally distributed) and take the mean of this distribution as the value of the demand by
using Periodic Review System.

∑ xi
i =1
Mean =
n

In order to cover the demand during the lead time, in case actual demand exceeds
expected demand, the safety stock is calculated. Safety Stock is the additional (extra) stock
kept as a cushion against stock out due to uncertainties in demand and lead time.

Safety Stock, SS =Z σ

The effect of safety stock is decreasing shortage cost but increase in holding cost.
Target stock level means the stock level that examined at a specified time, and the quantity
needed to bring this up to target level is ordered. The target stock level has to satisfy all the
demand over the period between the stock examination time and order take place until the time
of the next order arrival.

Target Stock Level, TSL = Demand on ( T + LT ) + Safety Stock

=

The following is the example of Periodic Review System model for Hong Aluminium
Hardware Company. It takes the example of Cast Window Center Frame.

The monthly demand of Cast Window Center Frame in Year 2007 is as follow:

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 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

Monthly Jan Feb Mac Apr May Jun Jul Aug Sep Oct Nov Dec
Demand
on Year 35 26 19 13 15 17 13 21 16 22 31 28
2007

Below is an example to calculate the order size for the specific month on Year 2008. Given the
demands on July 2007 are 13 units.

Demand, D = 13 units a month

Annual Demand = 256 unit per year
Unit Cost, UC = RM 47.80
Reorder Cost, RC = RM 47.80 per unit
Holding Cost, HC = RM 5.00 per unit
Cycle Time, T = 2 weeks = 0.5 month
Lead Time, LT = 2 weeks = 0.5 month

∑ xi
i =1
Mean =
n
= 256
12

= 21.33

n ∧2
∑ xi
i =1
2
−nx
Variance =
n −1

= 6031 – 12(21.332)
12-1

= 51.79

Standard Deviation (σ) =

= 7.2 ≈ 7 units

Safety Stock, SS = Z σ
= 1.64 x 7 x
= 11.48 ≈ 11 units

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 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

Target Stock Level, TSL = Demand on ( T + LT ) + Safety Stock

=
= 13 x (0.5+0.5) + 11
= 25 units

Lead time Cycle Time

Reorder Level (ROL) = LT x D

= 0.5 x (256/12)
= 10.67 unit ≈ 11 units

Order Size = TSL – Stock on hand

Order Size = 25 – Stock on hand

If stock on hand is 11 units,

Order Size = 25 – 10 = 14 units

We can conclude that, the order size for July 2008 is 14 units. If the stock on hand is greater
than reorder level in this week, replenishment of Cast Window Center Frame (N.A:Natural
Anodised) wouldn’t be carry out or vice versus.

Table below is the monthly order size for Year 2008 which calculate by using Periodic Review
System Model depends on the demands on Year 2007.

Table 2 Order Size for year 2008 calculated by Periodic Review System Model

Month Jan Feb Mac Apr May Jun Jul Aug Sep Oct Nov Dec
Order
Size for 35 27 20 14 16 18 14 22 17 23 32 29
Year 2008

Sensitivity Analysis of order quantity

System or technique to classify the order size or quantity order that used at an earlier
time in Hong Aluminium Hardware Sdn Bhd is making use of average of previous year
demands as the quantity order. This technique used has stable order size and cycle time for
reordering is unknown. It maybe will make the company in face of loss at any time. Moreover,
this method not only effect on total holding cost but also be confronted with some serious risks,
like insufficient of stock supply for customer and at the same time increasing the shortage cost.
Additional, the target stock level and reorder level is signifying especially to solve the problem
of stock insufficient. Table 3 below is shown the difference between order size and stock on
hand which without any model calculation and using Periodic Review System Model.

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 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

Table 3 Order Size and Stock on hand in the different condition

Year 2008
Month Jan Feb Mac Apr May Jun Jul Aug Sep Oct Nov Dec
Demands
30 23 26 13 19 18 16 24 13 20 30 32
Order Size
(without 22 22 22 22 22 22 22 22 22 22 22 22
model)
Stock on
11 3 2 -2(a) 7 10 14 20 18 27 29(b) 21 11
hand
Order Size
35 27 20 14 16 18 14 22 17 23 32 29
(with model)
Stock on
11 16 20 14 15 12 12 10 8 12 15 17 14
hand

(a) Insufficient of stock supply and cause the shortage cost increases
(b) Redundant stock and cause the holding cost increases

The range of order size (without model) which calculated manually is larger than the order
size calculated by Periodic Review System Model. It is very obviously shown that the
condition of stock on hand is more stable and it is more enough for supplying to customer
when the order size calculated by Periodic Review System Model.

Chi-Square Test

Chi-square test is used to determine whether there is a significant difference between the
expected frequencies and the observed frequencies in one or more categories. Use of this chi-
square procedure is equivalent to test the simple regression coefficient for a single set of data
or the pooled regression coefficient where there are several sets of data (Mantel, 1963).

The chi-square test is always testing null hypotheses, which states that there is no significant
difference between the expected (order quantity which calculated by Periodic Review System
model) and observed (real demands) result. In this case, the hypothesis being tested by gathers
the data which conduct the problem as below.

H0 : Periodic Review System Model is valid.

H1 : Periodic Review System Model is invalid.

The chi-square formula used on these data is

X2 = ∑ {(O – E)2 / E}

Where
O is the Observed Frequency (Real demands on year 2008) in each category
E is the Expected Frequency (Order quantity with model) in corresponding category

Table 4 below is the calculations of chi-square using the formula

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 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

Table 4 Calculation of Chi-Square

Category (Month) O E O-E (O-E)2 (O-E)2 / E

Jan 30 35 -5 25 0.71
Feb 23 27 -4 16 0.59
Mar 26 20 6 36 1.80
Apr 13 14 -1 1 0.07
May 19 16 3 9 0.56
Jun 18 18 0 0 0.00
July 16 14 2 4 0.29
Aug 24 22 2 4 0.18
Sep 13 17 -4 16 0.94
Oct 20 23 -3 9 0.39
Nov 30 32 -2 4 0.13
Dec 32 29 3 9 0.31
Total 264 267 5.98

After obtained the value of chi-square, degree of freedom (df) is determined. Degree of
freedom can be calculated as the number of categories minus 1. In this case, there are 12
categories, which is January until December; therefore, there is 11 degree of freedom. The
relative standard commonly used to serve as the basis for accepting or rejecting the hypothesis.
The p value is the probability that the deviation of the observed from that expected is due to
chance alone. In this case, using p>0.05, expect any deviation to be due to chance alone 5% of
the time or less. Refer to a chi-square distribution table, the level of significance of 11 df and
p=0.05 is 19.68. The calculated chi-square value for the set of data (5.98) is less than the table
value (19.68), null hypothesis is accepted as true and conclude that Periodic Review System
Model is valid.

7. CONCLUSION

This paper demonstrates the web-based inventory management system with Periodic Review
System Model. This system is produced to improve the systematic or efficiency of an
organization in business and management aspect. In real world problems are often too vague,
too ill-structured, or too complex for formal mathematical modeling (Kastner, 1984). In order
to solve the real world’s problem, this model provided for user to choose which user are able to
obtain the inventory information and help user in making decisions base on the result. Base on
the analysis of conventional method and inventory system, it is shown that the order quantity
that produced by inventory system is closer to real demand. That’s mean the optimal order
quantity can be obtained by using inventory system. The graph in inventory management
system also helps in control the inventory and helps in analysis the demand of item. It is hope
that the web-based inventory management system will help user to gain an efficient and
effective performance of inventory management.

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 3rd International Conference on Operations and Supply Chain Management, Malaysia, 2009

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Kastner, J.K. (1984), A review of expert systems”, European Journal of Operational Research,
Vol. 18, pp. 285-92.
Khairy A. H. Kobbacy, Yansong Liang (1999). Towards the development of an intelligent
inventory management system: Integrated Manufacturing Systems. 10/6: 354-366
Knod, E.M. dan Schonberger, R.J. (2001). Operation Management. 7th. Ed. New York: Mc
Graw Hill. 445-498
Mantel, N. (1963). "Chi-Square Tests with One Degree of Freedom; Extensions of the Mantel-
Haenszel Procedure." Journal of the American Statistical Association 58(303): 690-700.

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