CHAPTER ONE:

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

A business or an industry usually maintains a reasonable inventory of goods to ensure smooth

operation. One of the most pressing problem in the manufacture and sales of goods is the control
of inventory.

No business can exist without carrying some items, and poor management of stocks can lead to
the collapse of a business due to capital redundancy resulting from over stocking of items, or
losses resulting from under-stocking of materials, (Muazu and Barma, 2007).

Thus, an inventory is defined as the idle stock of item for future use, (Bronson, 1997). Since
inventory in reality represent idle capital, it is natural that inventory control be exercised on
items that are significantly responsible for the increase in capital cost.

An industry or a company is usually established or formed with the ultimate aim of profit
making. Not just profit, but the maximum profit that could be feasible obtained. However
inventory management (control) is one of the decision making aspects that is neglected by the
management, which affects the growth of an industry to a large extend. It is evident that stock
involves money, and therefore worth giving attention.

An important factor in the formulation and solution of an inventory model is that the demand
(per unit time) of an item may be deterministic (known with certainty) or probabilistic (described
by a probability distribution) (Taha, 1997).

1The nature of the inventory problem consists of repeatedly placing and receiving orders of
giving size at set intervals. From this standpoint, inventory policy answer the following two
questions

i. How much to order?

ii. When to order?

The answer to the first question determines the economic order quantity (EOQ) by minimizing
the cost: purchasing cost, set up cost, holding cost, shortage cost. The answer to the second
question (when to order) depends on the types of inventory system. If the system requires
periodic review e.g. every week or month, the time for receiving a new order coincides with the
start of each period. Alternatively if the system is based on continuously review; new orders are
place when the inventory level drops to a prescribed level called reorder point.

Thus this study attempts to determine the multi item economic order quantity of the central store
of savannah Sugar Company, which is built to specified capacity.
1.2 STATEMENT OF THE PROBLEM

The central store of savannah Sugar Company is the custodian of spare and other consumable
procured in other to service all user departments. The store is divided in to thirteen (13) sections
in accordance with the machinery and equipment that consumes the parts as well as the nature of
the materials in stock.

This study is on using multi item economic order quantity (EOQ) model to determine an
optimum inventory policy associate with each of this items with a view to provide solution as to
how much of the item to order at a particular period of time.

1.3 OBJECTIVES OF THE STUDY

To determine how efficient an inventory control systems is used in an industry with reference to
savannah Sugar Company.

To determine an optimum quantities of the multi item.

To establish an inventory policy for the savannah sugar company, numan, scientifically

1.4 SIGNIFICANCE OF THE STUDY

This study will be significant to the management of savannah Sugar Company because it will
help the management toward maintaining proper and efficient inventory control system.

1.5 THE SCOPE OF THE STUDY

This study focused on the determination of optimum inventory policy of items (central store) of
Savannah Sugar Company, Adamawa state Nigeria.

1.6 LIMITATION OF THE STUDY

This study is limited to savannah Sugar Company, the central store alone. The data used were
data from the record of goods receive note (GRN) and the bin card

1.7 DEFINITIONS OF TERMS ASSOCIATE WITH INVENTORY CONTROL

i. Economic order quantity (EOQ): the appropriate amount to order at each time to
achieve the lowest total cost of ordering and holding cost.

ii. Demand: the quantity of goods or services purchase given the price and other
variables.

iii. Stock out: the demand for an item when it inventory level has falling to zero.

iv. Buffer stocks: inventory to protect against the uncertainties of unusual product
demand and uncertain lead time.
v. Inventory: stores of goods and stocks.

vi. Multi stage inventory: part stocked at more than one stage in the sequential
production inventory.

vii. Cost of product: the cost or value of a product is the sum paid to the supplier for the
item received. It is normally equal to the purchased price. viii. Maximum stock: a
stock level selected as the maximum desirable stock which is use as indicator to show
when stock have risen so high.

viii. Lead time: the time between ordering and receiving of goods or services.

ix. Reorder level: this is the level of stock at which replenishment order should be
placed.
 CHAPTERTWO:

LITERATURE REVIEW

2.1 BRIEF HISTORY OF SAVANNAH SUGAR COMPANY NUMAN, ADAMAWA

STATE.

Savannah sugar company come in to being as a result of joint decision by the military
government of Nigeria and Common wealth Development Corporation (CDC) London, in 1970
to investigate the possibility of large scale sugarcane cultivation and processing in Numan Local
Government of defunct Gongola State. After many experiment on soil sample (from the
proposed site) and cane varieties from many parts of the world and an extensive hydrological
study, the government approves the establishment of the company, (Savannah Sugar Company
corporate brief, 2005).

The federal government of Nigeria in 1975 appointed the CDC as its managing agent to
implement the project. But because of the CDC's poor performance and other related matters, the
federal government of Nigeria terminated the technical management agreement with CDC
London in 1982. Since then the company had different administration regimes. Just of resent the
company was privatized and bought by some group of individuals, (Savannah Sugar Company
corporate brief, 2005).

Principal activities of savannah Sugar Company as enunciated in its memorandum and articles of
association include;

i. Carry out the business of cane cultivation

ii. Milling and manufacturing of sugar

iii. Refining, importing and exporting sugar, molasses and its bi – products

iv. Marketing of refined sugar, molasses, and its bi - products.

2.2 HISTORICAL BACKGROUND OF INVENTORY CONTROL THEORY

The management of resources which are important for system survival has been of great concern
to man since the down of creation. Clearly it took primitive man no time to realize that it is no
wise for him to consume the fruits he gather or the games he killed all at once, (Idama, 1999).

Since the 1940's the study of inventory management has assumed new dimensions. Operational
research scientist whose primary concern is the application of scientific methodology to problem
solving have shown considerable interest in finding solutions to the problems of inventory
management , (Idama, 1999).
In the earliest days of man inventory was a process of balancing gains from holding additional
stock against their marginal cost. During the 19m century, many theorists tried to focus their
attention on inventory control system to evaluate the problem of under stocking and over
stocking, (international encyclopedia of social science, vol. 7and 8).

As a result to improve inventory control system, the concept of economic order quantity (EOQ)
was introduced by harris (1951), as a tool for solving inventory problems.

During the World War II there were some advances in the sciences, particularly in operations
research. A lot of research works have been done in business for a better understanding of the
functions of inventory control. Though the advancement in science and technology, some
computers have been installed to

aid in solving inventory control problems and software like Taha operations research algorithm
(TORA) were produced.

Pandy (1999) has argued that inventory constitute the most significant part in current assets of a
large majority of companies in India. On an average, inventories constituted approximately 60%
current assets in public limited companies in India.

2.3 REASONS FOR MAINTAINING INVENTORIES

The need of the management to make decisions regarding the inventory arises because of the
various alternative causes of action available with the enterprise. It is essential for enterprise to
have inventory due to the following reasons.

i. It helps in smooth and efficient running of the business

ii. It provide adequate service to the customers

iii. It act as a buffer stock where raw materials are receive late and shop rejection are too
many

iv. Takes advantages of price discount by bulk purchasing

v. Meet possible shortage in the future

vi. Ensue that sufficient goods are available to meet anticipated demand

2.4 PROBLEMS WITH INVENTORIES

Inventories are neither totally good nor totally bad. Many of the problems running out of
materials and product are obvious, although many of the problems of having too much
inventories are less obvious. Too much inventory causes excessive holding cost, extra space
requirement and produce obsolescence and it hide other problems the company should find and
solve. Therefore excessive
Inventory are on desirable. Also too little of it causes costly interruptions; our problem is to
balance between the advantages of having inventories and cost of carrying them to arrive at an
optimum level of inventories to minimize inventory cost. The basic objective of inventory
control is to release capital for more production use.

2.5 TYPES OF INVENTORY

There are different several types of inventories but the few ones are listed below, these are;

i. Transportations inventory

ii. Buffer inventory

iii. Anticipated inventory

iv. Decoupling inventory

v. Lot-size inventory

Transportations inventory:

These arises due to the transportations of inventory items to the various distributions centers and
customers to the various productions centers. The amount of transportations inventory depend on
the time consume on transportations and the nature of the demand.

Buffer inventory:

These are maintaining to meet the uncertainty of demand and supply.

Anticipated inventory:

These are building in advance by anticipating or for the future demand.

Decoupling inventory:

The inventory use to reduce the interdependence of various stages of production system.

Lot-size inventory:

Generally the rate of consumption is different from the rate of production or purchasing.
Therefore items are produce in large quantities which result in lot-size, also known as circle
inventory.

2.6 COST ASSOCIATED WITH INVENTORIES

The effective control of inventory reduces the cost of materials held. Inventory cost can be
grouped as follows:
Ordering or set-up cost; these costs include the fixed cost associated with obtaining the goods
through placing of an order or purchasing or setting-up machinery before stating the production.
They include the cost of purchase, requisition, receiving the goods, quality control etc.

Holding cost; the cost associated with carrying or holding the goods in stock is known as holding
cost.

Shortage cost; the penalty cost that are incurred as a result of running out of stock. It includes
loss of profit due to loss of sales, loss of customer's good will and causes cost of back ordering.
(S. Kalavathy, 2002)

2.7 INVENTORY MODELS

Inventory control models are models which are for solving inventory problems. An inventory
problem is concern with making optimal decisions on how much of the commodity to order and
when to order. Unfortunately, no unique model can be developed to handle this problem, instead
a wide variety of models have been design to solve unique cases.

An important factor in the design of an inventory is the nature of the demand. The simplest
models are models whose demand is known, and those whose demands are not known are known
as complex models. Therefore inventory can be classified in to:

Deterministic inventory models: Under these models both demand and lead time are known.

ii. Probalistic inventory model: under this model, demand and lead time are unknown. Any
system having probabilistic demand and lead time involve uncertainty and risk for management.

2.8 METHOD OF RECORDING INVENTORY

Record card: stock items are handled and issued on demand. These items are covered separately
by an inventory record card giving full detail of the identity and activity of each item and its
resend status. To have a complete record of the activity of an item, management of an
organization should d arrange for the following information:

i. Receiving information

ii. Issuance information

Bin card: quantity stock record of each item could be maintained using a bin card. The bin card
provides running record of the purchases and sales in the simplest form. An entry will be made at
the time of each purchase (receive in to the store) or issuance (give out to the user department),
and the new balance will normally be shown on the bin card together with the recorder level and
quantity. The management most makes a note whenever a stock reaches reorder level so that they
can prepare the necessary purchase requisition as soon as there is available time to do so.
To have a complete record of activities of an item, management of savannah sugar company
limited numan should arrange for the following information on record card;

 Description (name) of the product.

 Code number for each product.

 Location of the product in store

 Unit of measurement of the product

 The establish ordering point (ordering level)

 The establish ordering quantity

 The maximum stock level or capacity (maximum stock)

 The minimum stock level (minimum stock)

The card used for recording the measurement of stock should include the following information;

i. Receiving information (on order)

 Ordering quantity

 Receiving production in to stock

 Ordered quantity balance

 Reference number of product (code)

ii. Issuance information's (on hand)

 Issued quantity

 Receiving item in stock

 Balance after issued

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 INTRODUCTION

The main focus of this chapter is the research methodology employed in this study.

In this project work, we shall make use of multi-item economic order quantity (EOQ) model base
on the following assumptions:

 The annual demand rate of each item is known

 Shortage are not allowed

 Replenishment is instantaneous

 There is a limited storage space for each item

 There is a maximum available storage space for all the items

3.2 SOURCE OF DATA

Data were collected from two sources:

I. Primary source and

II. Secondary source

Both the primary and the secondary source of the data is the central store of savannah sugar
company limited Numan, Adamawa State.

3.3 METHODS OF DATA COLLECTION

Data were collected from the record of master GRN (Goods Receive Note), which shows the
record of all items supplied per annum. Data were also collected from the Bin card, which shows
the record of available number of items that are presently in stock.

To obtain the store capacity, the length and the breath of the store were measured and multiplied.

3.4 DATA ANALYSIS TECHNIQUE

For the purpose of this study the operations research model employed is known as multi-item
economic order quantity. This will enable the researcher to determine the EOQ for each item
under study with respect to the storage space available for all the items.

The model is given as;

Yi* = ˅ [2KiDi/ (h; [] 2*a,)], <0

Where

Di = demand rate per unit item

Ki = set-up cost

Hi = unit holding cost/ unit time

yi = order quantity a, = storage area requirement

ai = maximum available storage space for all the items in stock

h= langrage multiplier

i = 1, 2, - - -, n.

The mathematical model representing the inventory situation is as

Minimize (kiDi/hi, + hiyi/2)

Subject to aiyi ≤ A

Where yi > 0, i= 1, 2, ---, n.

3.5 DATA COLLECTION

The central store of savannah Sugar Company is divided in 13 sections, they are as follows:

Store 1- tires and tubes

Store 2- Electrical items

Store 3- general mechanical

Store 4- factory, chemical and mechanical items

Store 5- caterpillar spare part

Store 6 and 7- light vehicles

Store 8- engineering and plough harvester

Store 9- agro-chemicals and fertilizers

Store 10- scania and tuft harvester spares Store 11- tractors (new Holland dorma)

CHAPTER FOUR: DATA ANALYSIS AND PRESENTATION OF RESULT

4.1 DATA COLLECTED

The data below was collected from savannah Sugar Company limited; the store department from the
record of Master Goods Receive Note (GRN).

S/No Items Unit Ordered Ordering Holding

(stores) Qtity(D) cost(K) (Nm) cost(H)
(000)/year (N m)

1 Tire and tubes Store 1 2.20 1.80 0.0162

2 Electrical items Store 2 1.89 3.50 0.0054

3 General mechanical Store 3 0.05 2.00 0.0921

4 Factory, chemical and Store 4 1.50 3.50 0.5000

mechanical

5 Caterpillar spare parts Store 5 2.10 4.40 0.0120

6 Light vehicles Store 6 1.90 2.50 0.0320

and 7

7 Engineering and plough Store 8 0.005 6.00 0.0105

Harvester
8 Agro-chemical and Store 9 105 15.75 0.0805
fertilizer

9 Scania and tuft harvester Store 10 2.30 2.80 0.0941

 spares

10 Tractors (New Holland) Store 11 0.003 9.00 0.0090

11 All office items Store 12 1.65 4.50 0.0975

(stationeries)

12 ADB (all items supplied Store 13 2.50 6.00 0.0873

by

African Development
Bank)

Also the length and the breadth of the central store of savannah Sugar Company limited was
measured

Length = 300 ft

Breadth = 200ft

And the area was obtained as length x breadth i.e. 300 × 200 = 60,000ft² = A. which represent
the total storage capacity of the store.

4.2 COMPUTATIONAL DETAILS

Multi-item EOQ model with storage limitation deals with n >1 item and the items are competing
for a limited storage space.

Under the assumption of no shortage, the mathematical model representing the inventory
situation is giving as

Minimize 2 (KiDi/h, + hiyi/2)

Subject to: aiyi ≤ A

Where y, > 0, i =1, 2, ---, n. Steps to the solutions

Step 1:

Compute the unconstrained value to see i.e. y = v (2kiDi/hi), i = 1, 2 ,---, n.

If the unconstraint optimal values of Y, satisfy the storage constraint then we are ok, otherwise
go to step 2.

Step2:

The storage constraint must be satisfied in an equations form.

By using langrage multiplier to determine the constraint optimal values of EOQ's Step3: follows
as

L (A, V1, Y2, ---, Yn) = TCU(y1,12, ---, Yn ) - ?( Za,vi - A)

= >( K/D/y: + h,y/2) - ? (Xajyi - A)

Where ? < 0.

The optimal value of y and are obtained as

6L/6y = - KID/y2 + h/2 - 1a, = 0.

6L/6X = - aly + A = 0-- 2

From the first equation y,2 = K,D,/(h;/2 - Aa; ) or = K,D,/(h; - 27a,)

There fore

y* = V[K;D; /(h; - 27a, )]-3 y* depends on the values of 1 *, if * = 0 the, yi gives unconstrained
solution. From the second equation, it shows that the storage constraint must be satisfied in
equation form at the optimum.

By definition > < 0 for the minimization case, we therefore decrement ? by a reasonable small
amount and use it in our equation 3 to determined y *. The desired ? yields y ,* 's that satisfy the
storage constraints in equation form.

4.3 DATA ANALYSIS

Items Qtity ordered Orderin Holding Storage area

per year (D) g cost cost (H)(N requirement
(000) (K) (N m) (ai) ft²(000)
m)

Tire and tubes 2.2 1.8 0.0162 5

Electrical items 1.89 3.5 0.0054 5

General mechanical 0.05 2.0 0.0921 5

Factory, chemical, and mechanical 1.5 3.5 0.5000 5

Caterpillar spare parts 2.10 4.4 0.0120 5

Light vehicles 1.90 2.5 0.0320 5

Engineering and plough harvester 0.005 6.0 0.0105 5

Agro-chemicals and fertilizer 105 15.75 0.0805 5

Scania and tuft harvester 2.3 2.8 0.0941 5

Tractors 0.003 9.0 0.0090 5

All office items 1.65 4.5 0.0975 5

ADB (all items supplied by African 2.5 6.0 0.0873 5

Development Bank)

The total storage requirement A = 60000ft².

Each storage requirement above is on the assumption that they are the same.

We can now compute y* as follows

Let y1* = tire and tubes, y2* = Electrical items, ..., V12* = ADB.

V12 = 18.54

To satisfy the constraint equation,

Eay? S A

(22.11?500)+(49.50x500)+(1.47?500)+(4.58?500)+(39.24x500)+(17.23?500)+(2.3

9?500)+(202.7?500)+(11.7x500)+(2.45x500)+(12.34x500)+(18.54x500) = 192125

Since Jay, = 192125 > A = 60000 ft2

We therefore move further to chose the value of ? arbitrary or by using the formula

**= h/2a - [n2a KD/A2]

Where h= Xh/n =1.0366/12 =0.08638 a= Ia/n =60000/12 =5000 KD = 1712.587/12 =142.72

Therefore
** = 0.08638/10000 - 122?5000?142.72/600002

* = - 0.028. which is now used to determine the values of y * Now having * = - 0.028, we can
now determine the values of y*

Y1 *= 2?1.8?2.2 = 5.17

0.0162- 2(-0.028?5)

y2 = 6.8

y3 =2.3

y4 = 3.67

y5 = 7.96

y6 = 5.52

y7 =1.44

y8 =95.78

y9 = 5.887

V10 =1.37

y11 =6.27

V12 =9.04

4.4 INTERPRETATION OF RESULT

Given the available storage space for each item in stock i.e. a1, a2, ---, 212 in relation to the total
storage space 'A' , the optimal for each of the store unit for the year are given below

i. Store unit 1, order 5.17 items instead of 22.11

ii. Store unit 2, order 6.8 items instead of 49.5

iii. Store unit 3, order 2.3 instead of 1.47

iv. Store unit 4, order 3.67 instead of 4.58

v. Store unit 5, order 7.96 instead of 39.24

 vi. Store unit 6 and 7, order 5.52 instead of 17.23

vii. Store unit 8, order 1.44 instead of 2.39

viii. Store unit 9, order 95.78 instead of 202.7

ix. Store unit 10, order 5.87 instead of 11.7

x. Store unit 11, order 1.37 instead of 2.45

xi. Store unit 12, order 6.27 instead of12.34

xii. Store unit 13, order 9.04 instead of instead of 18.54

CHAPTER FIVE: SUMMARY, RECOMMENDATION AND CONCLUSION

5.1 SUMMARY

Many organization or industry keep track of items for future use, some have little the knowledge
of inventory control while others have no knowledge of inventory. Inventory control is an
essential point in organization which the management has to look in to it with great concern.

This research or project work was carried out to cover the inventory system of Savannah Sugar
Company Numan, Adamawa State and to show the multi-item EOQ model can be used in
confronting the inventory system.

Chapter one of this project made an explanation on what inventory is all about, the statement of
the problem, objectives of the study, significance of the study, the scope, and limitation of the
study and definitions of some terms related to the study.

Chapter two contains the literature review, the brief history of the place of the study and the
historical background of inventory control theory.
Chapter three contains the method to be used in solving the research problem. This contains the
method of data collection and the method used for analyzing the collected data, and the type of
data collected. In this study an operations research model known as multi-item EOQ model is
used.

The analysis of this project work was carried out in chapter four. The relevant data was collected
and analyzed using the multi-item EOQ formula. The last chapter covers the summary,
recommendation and conclusion of this project work.

5.2 RECOMMENDATION

I wish to make the following recommendation for the management of Savannah Sugar
CompanyThe management of Savannah Sugar Company should try and keep away the olden
way of file record and try to adopt the scientific (computer) way of stock control. The Company
should make use of multi-item EOQ model for proper and efficient way of inventory control, so
that they can minimize unnecessary cost of inventory by ordering the quantity of each of the item
needed economically as desired considering the total available storage space.

I will also recommend that the management should employed an Operations Research specialist,
who have special knowledge scientifically on inventory control and to help them sort data and
analyze the data without difficulty whenever the need arises.

5.3 CONCLUSION

Management of Savannah Sugar Company could be able to make better decision if they have
appropriate and better knowledge of inventory control. However they do not practice scientific
based inventory policy, but they make decision base on mere observation and request made from
the user department.

It was clearly shown that the management would have arrived at the economic order quantity for
each of the item considering the space limitation if they had used the multi-item EOQ model as
one of their decision tool.

This shows that inventory control is an industrial decision making tool that could enable the
management to minimize cost and to help them determined the optimum quantity to order at a
particular period of time.
REFERENCES

Adamu Idama, (1999), "Operations Research Application for management decision making".
Paraclete Publishers, Jimeta Yola.

Fabrycky W. J, (1987), Applied Operations Research and Management Science

Hamdy A. Taha, (1997), "Operations Research: An Introduction". Wesley publishing company,

India

Hammandikko G. Muazu and M. Barma, (2007) Codification scheme of store items of Federal
University of Technology, Yola: Critical Review, Maiduguri journal of Arts and social sciences,
vol5.

Kalavathy S. (2000), Operations Research.

Rechard Bronson, (1997) "Schaum's outlines" Operations Research Second edition.

Savannah Sugar Company, (2005),Corperate Brief

Shiva S. Ramu, (2000), Operations management