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Inventory Aging: An Impediment to the Value Chain - A Case Related to the

Automotive Industry

Research · April 2017

DOI: 10.13140/RG.2.2.11095.06563

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Abstract:
The main focus of this paper is to reduce the inventory aging in an automotive parts industry which
directly reduces the cost, the reduction in cost will be a great competitive advantage for the company to
have in this competitive market arena.
To achieve the objective the inventory management systems have been designed and integrated with
the relevant information systems such as (warehouse management system) in order to keep accurate
and most current information on to the computer screens for better traceability of the variants. The ABC
analysis have been done to categorized the different variants according to which the economic order
quantity have been identified for each category of variants to get optimum inventory level.

Keywords: Inventory aging, cost reduction, competitive market, inventory management system.

Introduction: The American Production and Inventory Control

By entering into the 21​st century, companies
have become more customers oriented because
of the drastic change in needs and demands of
each and every customer. Companies are
focusing on two major parts i.e. to reduce cost
and generate additional value to the final
product for the customer to get the competitive
edge over their competitors, this case is
Revolving around the first phase i.e. cost
reduction.
“One of the great responsibilities that I have is
to manage my assets wisely, so that they
create value.” -- Alice Walton
Society (APICS) define inventory management
as the branch of business management
concerned with planning and controlling
inventories (Toomey, 2000). Inventory
management is a critical management issue for
most companies – large companies,
medium-sized companies, and small companies.
For the manufacturing companies, carrying an
inventory of wide spread variants is a huge task
because it has direct link with the cost factor,
additionally inventory turnover has the great
impact on companies revenues, which finally
positioned the company’s overall financial
health and working capital management.
Niranjan Mandal and Dutta Smriti

Electronic copy available at: https://ssrn.com/abstract=2951897

Mahavidyalaya, (2010) ​in their study makes an
attempt to provide an insight into the
conceptual side of working capital and to assess
the impact of working capital management on
liquidity, profitability and non-insurable risk of
ONGC, a leading public sector enterprise in
India over a 9 year period (i.e. from 1998-99 to
2006-07). It also makes an endeavor to observe
and test the liquidity and profitability position
of the enterprise and to study the correlation
between liquidity and profitability as well as
between profitability and risk. They may be
concluded that working capital management is
very much useful to ensure better productive
capacity, good profitability and sound liquidity
of an enterprise, specifically the PSE in India, for
managerial decision making regarding the
creation of sufficient surplus for its growth and
survival stability in the present competitive and
complex environment.
Pradeep Singh (2008) ​in his study made an
attempt to examine the inventory and working
capital management of Indian Farmers Fertilizer
Cooperative Limited (IFFCO) and National
Fertilizer Limited (NFL). He concluded that the
overall position of the working capital of IFFCO
and NFL is satisfactory. But there is a need for
improvement in inventory in case of IFFCO.
However inventory was not properly utilized
and maintained by IFFCO during study period.
The management of NFL must try to properly
utilize the inventory and try to maintain the
inventory as per the requirements, so that
liquidity will not interrupt.
Inventory is basically categorized in three
broad categories; raw material inventory, work
in process inventory, and finished good
inventory. An automotive part manufacturing
company has wide variety of finished good
variants due to which work in process and raw
material inventory multiply in numbers. The
ABC analysis approach is basically used to
classify the big chunk of the above discussed
Electronic copy available at: https://ssrn.com/abstract=2951897
inventory by its priority and dollar amount as
shown in figure 1.
According to ​ISSN: 2278-9359 (Volume-3,
Issue-3)
“​An effective inventory management should:
➢ Ensure a continuous supply of raw
materials to facilitate uninterrupted
production.
➢ Maintain sufficient finished goods
inventory for smooth sales operation
and efficient customer services.
➢ Minimize the carrying cost and time.
➢ Control investment in inventories and
keep it at an optimum level.
➢ It permits a better utilization of
available stocks by facilitating
interdepartmental transfers with in a
company.
➢ Maintain sufficient stocks of raw
materials in periods of short supply and
anticipated price changes.”
The another essential thing which we cover in
inventory management is economic order
quantity, however it is vary item to item and
calculate on individual basis but it has the great
impact on reducing the cost. To calculate EOQ,
certain assumptions are necessary:
(i) That there is a known, constant,
stock holding cost
(ii) That there is a known, constant
ordering cost
 (iii) That the rates of demand are
known
(iv) That there is a known constant
price per unit
(v) That replenishment is made
instantaneously, that is the whole
batch is delivered at once
(vi) No stock-outs are allowed
Problem:
As a National player in automotive industry
from last 15 years company has strategic
business partnership (TAA) with some global
giant of the automobile industry. Subject to the
case the specific problem area which was
observed by the management of the company
was the increasing inventory aging,
obsolescence and phase out due to inefficiency
in inventory management. Some important
reasons observed such as:
● Inventory hides problem: The actual
(physical) count of the inventory and
what SAP system is showing has a great
discrepancy. The stock count for the
company held each quarter but it never
matches the systems quantity which
was the alarming situation for the
management because it directly has the
solid impact on balance sheet and P&L
of the company.
● Fluctuations in demand usually cause
the forecasting error.
● High ordering costs in terms of low
quantity.
● SAP (ERP Tool) is not utilized the way it
should have to avoid such issues faced
by management.
● Inventory carrying cost has increasing
trend.
● Capital cost, Taxes, Insurance and
obsolescence costs impact negatively
on financials of organization.
● Independent vs dependent demand
gap.
All above challenges faced by management and
catering all these issues in our case has been
our priority; following this the fishbone analysis
was made for analyzing the business process
and its effectiveness so that we reach at a root
cause. It is also commonly referred as “Ishikawa
Diagram” because it was invented and
incorporated by Mr. Kaoru Ishikawa, a Japanese
quality control statistician. It is defined as a
fishbone because of its structural outlook and
appearance. In normal stature it looks like a
skeleton of a fish. The fishbone diagram and
analysis typically evaluates the causes and
sub-causes of one particular problem and
therefore assists to uncover all the symptoms of
any business problem (Gunter and Ishikawa
384).
Literature review:
According to Dumas (2008), Redshaw (2010)
being effective in terms of organizational set up
can be viewed by effective internal processes of
an organization. Therefore the degree to which
target can be achieved by an organization is
defined as being effective. ‘‘Accountants and
senior managers tend to want to measure
results of most, if not all, organizational
activities in monetary terms so it is no surprise
that many organizations rely on financial
measures of effectiveness such as ROI or ROA’’
(Dumas 2008).
The BTOSC facilitates manufacturers in
eliminating the excess inventory, reducing the
vehicle discounted dealerships that can demand
a premium price for the customized vehicle and
deliver according to the customer choice. On
the other hand, this raises the importance of
running system to execute order efficiently with
help of integrated information flow, where IT
infrastructure of the firm still reflects the
hierarchical, function-oriented nature of
communication in many corporations (Sharif et
al., 2007).
As stated by Tubino (1999), in long term plans,
it is formulated a strategic production planning
as an estimate of sales, financial and productive
availability. Usually this strategic planning is
done by marketing and finance sectors, giving
information on resources and targeted markets.
The medium term plans are carried out by PPC
(planning and production control) department,
which develops the production master plan
based on medium term demand forecasts and
orders already confirmed. Yet in the short term
plans, at operational level, the PPC develops the
production schedule comprising inventory
management, release of purchase orders,
manufacturing orders, and, finally, monitoring
and control of production.
According to Love (1979), demand forecasts are
absolutely necessary for the inventory levels
planning. Although forecasts are subject to
errors, the knowledge of these errors enables
the definition of the necessary safety stocks.
Makridakis, Wheelwright and Hyndman (1998)
constitute a classical reference in demand
forecasting. A review of the past 50 years of the
demand forecasting literature on inventory
management can be found in Syntetos, Boylan e
Disney (2009).
Krishna, L Sivarama; Janardhan, G Ranga; Rao, C
S P (2009) in their article “Web Integrated
Decision Support System for Machine
Scheduling and Inventory Management”, was
published in IUP Journal of Operations
Management tells about stock management
symbolizes the process of managing stocks of
completed products, semi-finished products
and raw elements by a company so as to reduce
the total stock cost. The first level contains the
development of an organizing program with
make span minimization as the primary
objective. The second level contains the
development of the stock management
program and creating it with the organizing
program. The third level contains creating the
program web permitted, so that it provides the
flexibility of assigned creating choices to your
selection makers.
Research Methodology:
To find solutions of problems we divided this
case in two phases, first is to review the
literature and second one is the research
questions which we developed to analyze the
situation of the company with the help of
expert opinions and senior executives.
Observations:
The idea is to use fish bone analysis to identify
core problem areas which instantly raising the
inventory aging and hurts the P&L statement
badly, below figure shows the root cause
analysis;
Q. Why Physical and systems data discrepancy
occur and how can it be countered?
This factor is pretty unusual for the company
which deployed the SAP system, but with this
company the discrepancy is occurring since the
deployment because of the problem at ground
staff level. Officer level employees are not
entering the data into the systems as requested
by the management, instead; they stored goods
received notes and gate passes for weeks or
sometimes for months and then they enter it
into the SAP system, for this reason system
never showing the updated data,
Implementation of SOP mentioning the lead
time of entering GR can avoid such issues.
Q. What is the impact of wrong forecasting on
inventory aging?
As we discussed above that management do
not have the clear picture of inventory levels,
for this reason the planning get hurts and
forecasting error occurs time to time. The
system also have the limitations of ordering
more stocks that’s why company facing the
stock outs as well.
Q. How essential it is to keep your inventory
Transparent and Traceable?
Company deployed the SAP system to manage
the inventory efficiently as this ERP enables
management to make smart decisions based on
data extracted from SAP in real time but if you
do not focus on the integration between the
intra department systems and SAP for better
visibility of the variants of different
components, then no good of such tools.
Q. How much ethics are involved in better
supply chain management?
Ethics is concerned with the moral principles
and values which govern our beliefs, actions
and decisions. (Sims, Fineman and Gabriel,
1993). The right information at the right time at
the right place is the key for a team, efficiency
of an information system is based on the
information flow, some bottlenecks blocks the
flow of information between the departments
which leads towards the inefficiency of the SAP
system deployed by the company due to which
the main purpose of this ERP is not achieved.
Q. The impact of absence of Warehouse
Management system?
In today’s digital era companies are using more
advanced systems to manage particularly
warehouses and their logistics functions but this
company is lacking in that sort of an advanced
warehouse management system.
Q. The importance of RFID for complex
inventory’s?
As an automotive parts industry which carrying
a huge inventory due to the various variants of
the components or parts they are
manufacturing, RFID would be the right choice
for them to implement in their warehouses for
better traceability and due to this barcode
technology the matter of issuance of material
and receiving of it might easily be resolved.
Q. How ABC analyses help company to reduce
inventory aging?
The other area which we discussed in
methodology is ABC analysis of the inventory,
i.e. Classification of the items by percentage of
the dollar amount.
Category A: 5% of the items fall into this
category section because of the 70% of the
dollar amount.
Category B: 10% of the components fall into this
category because of the 15% of the dollar
amount.
Category C: 85% of the inventory falls into the
3​rd category because of the 15% of the dollar
amount as well.
The ABC analysis helps company to identify
their most running variants and also its
classification shows the exact value of that
inventory.
CONCLUSION:
To overcome the problems faced by the
company with respect to inventory aging, this
case study has been developed and in this case
study we have identified each loophole that lies
under the internal processes of the company.
Key issues have been highlighted like
transparency, traceability, and errors in
forecasting due to poor information sharing
within the departments.
A large number of available literature has been
reviewed, on the basis of the reviewed
literature we have compiled a set of key
questions addressing the issues faced by the
automotive parts industry.
Fishbone analysis was performed, experts’
opinions have been taken to support this case,
and involved automotive supply chain
executives to help us better understand the
problems occurring in the automotive parts
industry related to inventory aging. That
inversely proportional to the profitability and
directly proportional to the cost.
To counter these problems an efficient business
model has been developed which reduces the
inventory level in a manner which helps the
company to improve their profitability.
Ultimately, the vision behind this case study is
to implement emerging and new technologies
in the business supply chains to help them
minimize the cost and risk levels.
In response to the traceability factor we
recommended the Warehouse management
system (WMS) and Radio Frequency
Identification (RFID), which enables efficient
warehouse management by enhancing the
visibility of assets i. e. inventory, vehicles,
equipment and right data to be transferred to
the right department at the right time to reduce
communication gaps between the departments.
In order to synchronize all departments
Enterprise resource planning (ERP) systems is
essential to enhance information sharing on to
the next level.
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