Advanced Operations Research

Project report

by

Chamal Deepthaka (CPM 19322)

Gavesha Thathsarani (CPM 19426)
Jeewanga Thilakshana (CPM 19827)
U G I Sewwandi (CPM 20192)
Aditha Udara (CPM 20320)

Application of Inventory Management Tools and

Dynamic Programming in Lovely Kids (Pvt) Ltd.

A Project report submitted in partial fulfilment of requirements of the subject

Advanced Operations Research conducted by the
Department of Decision Sciences
Faculty of Management
Studies and Commerce
University of Sri Jayewardenepura

2022
Abstract
This project helps in applying advanced operations research techniques in solving the practical
problems in an organization in real world. After the organization we selected is visited, our
group came up with some critical issues. Among them, their major issues are relate with the
inventory warehouse management. Our group tried to apply EOQ models and dynamic
programming with the purpose of solving the issues identified. Eventually, our group could
come up with better applications of advanced operations techniques on these issues.

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Acknowledgment
We are really grateful because we managed to complete our DSC3346 – Advanced Operations
Research assignment within the time given by our lecturer Prof. Sudath Amarasena. This
assignment cannot be completed without the effort and co-operation from our group members,
Chamal, Gavesha, Jeewanga, Ishara, and Aditha. We also sincerely thank our tutor miss. Sajini
for the guidance and encouragement in finishing this assignment and also for teaching us in this
course. Last but not least, we would like to express our gratitude to or friends and the
management of Lovely Kids (Pvt) Ltd for the support and willingness to spend some time with
us to answering our questions.

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Table of Contents

1. Introduction ........................................................................................................................ 1

2. The functions and the problems in the organization .......................................................... 2

3. Literature ............................................................................................................................ 3

Inventory Management .......................................................................................................... 3

Economic Order Quantity ...................................................................................................... 3

Dynamic Programming .......................................................................................................... 4

4. Analysis of problems and application of advanced OR techniques ................................... 5

Issues in detail ........................................................................................................................ 5

Inventory wastage .............................................................................................................. 5

Employee dependency........................................................................................................ 5

Lack of theoretical knowledge and skills in inventory & warehouse management ........... 5

Top management issues ..................................................................................................... 5

Less motivation to use technologies................................................................................... 6

Application of Advanced OR techniques ............................................................................... 6

Use of classical EOQ.......................................................................................................... 6

Use of dynamic programming .......................................................................................... 10

5. Recommendation for the improvements .......................................................................... 13

6. Conclusion ........................................................................................................................ 15

7. References ........................................................................................................................ 16

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 1. Introduction

The scope of Operations Research (henceforth refers to as OR) always focus on applying
scientific methods, techniques, and tools for problem solving in order to come up with optimum
solutions. There are number of tools and techniques that an organization can apply for their
organizational decision making. Dynamic programming and inventory management tools are
few concepts that are under the scope of OR. This project shows the effort of applying above-
mentioned OR techniques in solving the problems identified in Lovely Kids (Pvt) Ltd.

Lovely Kids Private Limited Company is a large retail shop which mainly imports and sells
baby products. They sell more than fifteen thousand types of items imported from foreign
countries, catering the needs of children. When the business operations of Lovely Kids (Pvt)
Ltd were analyzed, we came up with number of inefficacies in their operations. High proportion
of inefficiencies are with their inventory handling.

Figure 1: Lovely Kids (Pvt) Ltd

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 2. The functions and the problems in the organization

Lovely Kids (Pvt) Ltd operates in Ragama, carrying out their daily operations with a staff of 20
employees. Their main store is in the top floor of a three-story building while having separated
small stores for each story. In the perspective of Sri Lanka Export Development Board, a
business organization who has less than 300 employees and 750 million LKR revenue, is
considered as a small and medium size organization (SMEs) (EDB, 2021). As Lovely Kids
(Pvt) Ltd aligns with the above criteria, it can be considered as a SME. When it comes to their
market offering, they sell products like baby diapers, tricycles, baby clothes, napkins, toys,
stationaries, baby care products, and so forth. When it comes to their technology adoption,
primarily they use a transaction processing system to carry out their day-to-day businesses.
However, they have only a cost accounting system which focus only on the cost and revenue
of the organization. Further, they use computerized systems as a part of their accounting system
which is not well developed.

Through the company visit, we identified several business operations issues in Lovely Kids
(Pvt) Ltd. The major issue identified is with their inventories. According to our observations,
there is a huge inventory wastage in Lovely Kids. Further, there is a high employee
dependency within the organization. It is identified that the employees in the organization are
not skillful and lack of theoretical knowledge in terms of the inventory and other management
areas. Not only that but also, the top management is not visionary. They do not think
strategically, they just try to carry on their day-to-day business operations. Addition to that,
there is a less motivation to use technologies in the organization as well.

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 3. Literature

Inventory Management
Inventory management can be referred to as management of materials, achieving the customer
satisfaction and profitability, while maintaining a minimum inventory investment, with
maximum facility and manpower utilization (Lancioni & Howard, 1978). Inventory related
decisions should be viewed in both strategic and operational levels which highlights the
importance of having top management sensitivity regarding the inventories in the organization
(Lancioni & Howard, 1978).
When it comes to a retail shop, there are in-store material handlings. Most of the times, in-store
handling can become inefficient due to many reasons among which the inefficient backroom
operations such as inventory misplacement, inadequate labor requirements for in-store
replenishment or poorly designed in-store processes, take the supremacy (Chiralaksanakul &
Sukhotu, 2016). Nevertheless, backroom operations are hardly concerned by the organization
which may result number of disadvantages such as taking many man-hours for searching and
handling products, create dissatisfied customers and costs awaking (Raman, et al., 2001). As
the Prescence of backroom inefficiencies generate additional cost, the retail operations’ costs
increase significantly (Eroglu, et al., 2013). Finally, it increases the total cost of the company
as well.

Economic Order Quantity

Economic Order Quantity (henceforth refers to as EOQ) is the order quantity within an order
that minimizes the total inventory cost which basically includes the cost of ordering and
inventory holding (Min & Pheng, 2005). According to the previous studies of different scholars,
basic EOQ model can be re-modeled, considering different business practices. For instance,
Min and Pheng (2005) has re-modeled the basic EOQ model with Just-in-Time (JIT) practices,
specially considering about the fast-moving goods. Further, the classical EOQ model assumes
that the orders received are not comprise of defect items. Nevertheless, in practice, the suppliers
may process orders with defective items. Therefore, usually, there is an inspection process in
organizations after they receive their orders. Then, the EOQ can re-modeled, concerning on the
item inspection cost (Nakhaeinejad, 2022). Not only that but also, classical EOQ model has
been re-structured for the situations like ordering multiproduct, without placing separate orders
for each product (Pereira & Costa, 2017).

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Dynamic Programming
Dynamic programming is an Operations Research technique which focuses on optimization
(Swart, et al., 1972). Dynamic programming is a multi-stage decision making process,
providing systematic procedures. Further, this concept based on Bellman’s principle of
optimality as well. In practice, the organizations can use dynamic programming for inventory
controlling, production planning, production scheduling problems, luggage planning,
transportation route plan, and so forth.

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 4. Analysis of problems and application of advanced OR techniques

Issues in detail

Inventory wastage
As earlier mentioned, there is an inventory wastage. After they store their products in
warehouses, it is difficult to find their inventories without the person who placed the order in
the store. It has negative effects as well. For instance, when a customer asks a product and
imagine it is not in the selling area and then the employees have to visit the store, taking too
much time to search the product may lose the customer. Further, some items are hardly find and
no one knows what happen to that stock. Then it is a waste to the organization. This situation
may lead scams in the organization as well. Moreover, when Lovely Kids import products
because of their wrong ordering processes, it creates huge damages to the products, some
products directly go to scraps.

Employee dependency
Like before mentioned when an item needs to be retrieved from the stores, the organization has
to depend on the employee placed the order in the stores. Not only that but also, when the orders
are placed, order placement is done by the manager in the retail without any mathematical
calculations but with his experience. Only the manager knows when to order and at what
quantity to be ordered. Hence, there may have delays in order placing.

Lack of theoretical knowledge and skills in inventory & warehouse management

The employees in the organization have less awareness about the inventory and warehouse
management. Most of inventory wastages could have minimized if their warehouse is
systematically managed, using different concepts and techniques.

Top management issues

Lovely Kids (Pvt) Ltd mainly concern on their profit. Nevertheless, they do not pay attention
on the way how they achieved that profit, what they sacrifice to gain that profit. For instance,
the inventory waste in the organization. A proper stock counting has not been carried out in this
organization in five years till 2022 which resulted that there is over one million inventory waste.
However, based on our observation, it is concluded that top management is not strategic.

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Less motivation to use technologies
Except the basic transaction processing system, this organization does not tend to apply
technologies to their operations. For instance, even there is no basic accounting software like
QuickBook. Even though, there is an intranet, it is not that much developed, and they do not
make use of these available systems optimally.

Application of Advanced OR techniques

When it comes to the issue identified in Lovely Kids, some issues can be solved using advanced
OR techniques, but some cannot using quantitative techniques like OR. The issue of inventory
waste and the employee dependency is to be solved using EOQ and dynamic programming.
Though Lovely Kids sells number of various items, we have selected only three items for the
analysis such as baby diapers, napkins, and tricycles, considering their fastest moving
products and high profit contribution.

Figure 2: Tricycles

Figure 3: Napkins

Figure 4: Baby diapers

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Use of classical EOQ
When Lovely Kids calculate EOQ, they only place orders when they require, not for the
managers requirement. Further, the organization does not have to depend on persons in ordering
their quantities. This EOQ calculation will help them to solve the aforesaid problems coming
from 2023.

Assumptions for the EOQ analysis

01. The demand for year 2023 were forecasted using exponential smoothing technique at
𝛼 = 0.6.
02. If we proportionate their warehouse, only 1/8 from the whole company is their
warehouse. Sum of organization’s annual averaged electricity bill and annual averaged
salary of one employee were considered in calculating the holding costing cost per unit.
03. We assume baby diapers, napkins, and tricycles are stored in the warehouse at below
proportion
a. Baby diapers – 10%
b. Napkins – 10%
c. Tricycles – 50%
04. We assume that baby diaper has 200/- Rs, napkin has 150/- Rs, and tricycle has 1000/-
Rs of ordering cost approximately.
Demand forecasting
Baby Diapers Napkins Tricycles
2022 2023(Ft, 2022 2023(Ft, 2022 2023(Ft,
(At) w=06) (At) w=06) (At) w=06)
35 35 40 40 19 19
28 31 39 39 15 17
19 24 36 37 10 13
35 30 40 39 19 16
32 31 38 38 10 13
25 28 35 36 12 12
30 29 28 31 15 14
25 27 26 28 13 13
30 29 20 23 10 11
30 29 29 27 14 13
32 31 24 25 14 14
33 32 30 28 28 22
354 356 385 393 179 177

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Holding cost per unit
Per month Annual
AVG electricity bill for the last
82,325 987,900 =82325*12
month
AVG employee salary 30,000 360,000 =30000*12
1,347,900
Cost allocation for the warehouse 168,488 =1347900/8

Product Storing Warehouse cost

proportion allocation for Forecasted Holding
each product demand cost p.u
Baby Diaper 10% 16,849 356 47
Napkins 10% 16,849 393 43
Tricycles 50% 84,244 177 476

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 Baby Diapers Napkins Tricycles

Economic Order Quantity

2𝐷𝐶𝑜 2𝐷𝐶𝑜 2𝐷𝐶𝑜
𝐸𝑂𝑄 = ඨ 𝐸𝑂𝑄 = ඨ 𝐸𝑂𝑄 = ඨ
𝐶ℎ 𝐶ℎ 𝐶ℎ

2 ∗ 393 ∗ 150
2 ∗ 365 ∗ 200 𝐸𝑂𝑄 = ඨ 2 ∗ 177 ∗ 1000
𝐸𝑂𝑄 = ඨ 42.88 𝐸𝑂𝑄 = ඨ
47.32 476

Units= 55 Units= 52 Units= 27

Purchasing Cost 993,952.00 Purchasing Cost 326,976.00 Purchasing Cost 1,416,000.00

2792*356 832*393 8000*177
Cost Calculation

Total Ordering Cost 1,298.03 Total Ordering Cost 1,124.13 Total Ordering Cost 6,490.14
(200*356)/55 (393*150)/52 (177*1000)/27

Holding Cost 462,097.74 Holding Cost 441,780.99 Holding Cost 6,490.13

(16848.75*55)/2 (16848.75*52)/2 (475*27)/2

Total Cost 1,457,347.76 Total Cost 769,881.12 Total Cost 1,428,980.27

Baby Napkins Tricycles

Diapers
Inventory Cycle
56 ((55/356)*365) 49 ((52*393)*365) 56 ((27/177)*365)
time (days)

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Use of dynamic programming
We developed the dynamic programming to each product we selected to come up with the
number of items should be ordered while maximizing the profit gain from the particular
product.

Baby Diapers
As baby diapers are fast-moving product and has an expiring date, it is better not maintain an
inventory in the warehouse which can be a threat to the quality of the product and can minimize
the inventory cost of the organization as well. The dynamic program was developed for the next
year first quarter considering that the organization should not maintain any inventory. As per
the forecasting, there is demand of 35, 31, and 24 respective for January, February, and March.
Then the unit profit for a baby diaper is 698/- Rs (price =3,490 – 2,792=purchasing cost). The
model answered that ordering 35 units in January, 31 units in February, and 24 units in March
will maximize the profit which is 62,220 Rs. relate to baby diapers in the organization. If the
organization can apply JIT concept to nullify the inventory cost, they can use this dynamic
programing output while maximizing the profit

Figure 5: Dynamic programming for baby diapers

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Napkins
Napkins are also a fast-moving product in Lovely Kids. Hence, we recommend not to maintain
inventories for napkins. The dynamic program was developed the next year first quarter
considering that the organization should not maintain any inventory. As per the forecasting,
there is demand of 40, 39, and 37 respectively for January, February, and March. Then the unit
profit for a napkin is 208/- Rs. (price=1040-832=purchasing cost). The answered that ordering
40, 39, and 37 units can be order respectively for Jan, February, and March. If the organization
can apply JIT concept to nullify the inventory cost, they can use this dynamic programing output
while maximizing the profit

Figure 6: Dynamic programming for napkins

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 Tricycles
Tricycles contribute to the company profit in a higher proportion. The dynamic program was
developed for the next year first quarter considering that the organization has a beginning
inventory of 10units. As per the forecasting, there is demand of 19, 17, and 13 respective for
January, February, and March. Then the unit profit for a tricycle is 9,000/- Rs (price =17,000 –
8,000=purchasing cost). The model answered that ordering 26 units in January, 0 units in
February, and 13 units in March will maximize the profit which is 439,320 Rs. relate to tricycles
in the organization. If the organization can apply JIT concept to nullify the inventory cost, they
can use this dynamic programing output while maximizing the profit

Figure 7: Dynamic programming for tricycles

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5. Recommendation for the improvements

▪ Basically, Lovely Kids can apply EOQ in ordering products. To minimize the inventory
related costs, managers can include 55 units in Baby diapers, 52 units in Napkins, and
27 units in Tricycles per order in next year. Further, the organization has to place their
orders for baby diapers for every 56 days, napkins for every 49 days, and tricycles for
every 56 days. Through that, the employee dependency can be eliminated, and managers
do not order as per their own measurements. Further, it may reduce the excess
inventories in the warehouse as well.
▪ However, Lovely Kids can apply some advanced re-structured EOQ models as their
next step because they are going to practice the classical EOQ model in the days to
come. For instance, they use EOQ+JIT model for their fast-moving products like diapers
and napkins. Further, they can use EOQ with quality inspection cost, with discounts and
so forth. They should try to minimize the backroom inefficiencies as much as possible.
▪ Next, Lovely Kids should systemize their warehouse operations. They should divide
their warehouse for each product and allocate sufficient space for them. The space
should be named as well. Then, they can use a bin card system. Then if there is a
difference in the inventory on-hand and the system, it can be clearly identified. As the
organization measures the deviations, eventually they can manage the deviations.
▪

Warehouse space

Space slot allocated

Space slot allocated
for napkins
for baby napkins

▪ Further, organization can apply JIT concept, using the output of dynamic programming
▪ As a solution for the lack of skills and theoretical knowledge of employees and first line
managers, the organization can organize guest lecturers, linking with industry expertise.

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Further, they can direct the employees to do short courses specially related to inventory
management and warehousing. The top management also can engaged in these sessions
to enhance their knowledge for a broader strategic view to the organization.

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 6. Conclusion

Lovely Kids as a large retailing organization located in Ragama faces some operational issues
within their organization. Their major issues are high inventory wastages, employee
dependency, lack of employee knowledge and skills relate to inventory and warehouse
management, top management attitude issues and less use of technologies in their business
processes. Through this project, we tried to answer the inventory waste and the employee
dependency in their business operations. Then we used some operations research techniques
like EOQ and dynamic programming. Using these techniques, we could come up with few
solutions under number of assumptions. All in all, the organization should try to practice
inventory and warehouse management concepts and techniques in their operations for an
expeditious and lucrative business operations.

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 7. References

Chiralaksanakul, A. & Sukhotu, V., 2016. An optimal order quantity with shelf-refill trips from
backroom for efficient store operations. Journal of Modelling in Management, 11(04), pp. 967-
984.
EDB, 2021. Sri Lanka Export Developemnt Board. [Online]
Available at: https://www.srilankabusiness.com/blog/role-of-smes-sri-
lanka.html#:~:text=In%20Sri%20Lanka%2C%20a%20business,not%20exceed%20750%20m
illion%20LKR.&text=SMEs%20play%20a%20key%20role,less%20capital%20than%20large
r%20firms.
[Accessed 13 December 2022].
Eroglu, C., Brent, D. & Matthew, A., 2013. The backroom effect in retail operations.
Production and Operations Management, 22(4), pp. 915-923.
Lancioni, R. A. & Howard, K., 1978. Inventory Management Techniques. International
Journal of Physical Distribution & Materials Management , 8(8), pp. 385-428.
Min, W. & Pheng, L. S., 2005. Re-modelling EOQ and JIT purchasing for performance
enhancement in the ready mixed concrete industries of Chogqing, China and Singapore.
International Journal of Productivity and Performance Management, 54(4), pp. 256-277.
Nakhaeinejad, M., 2022. The economic order quantity model with inspection policy of zero-
defect single sampling. International Journal of Quality & Reliability Management , 39(2), pp.
521-536.
Pereira, V. & Costa, H. G., 2017. A multiproduct economic order quantity model with simulated
annealing application. Journal of Modelling in Management , 12(1), pp. 119-142.
Raman, A., DeHaoratius, N. & Ton, Z., 2001. Execution: the missing link in retail operations.
California Manageemnt Review, 43(3), pp. 136-152.
Swart, W. W., C.E.Gearing & Var, a. T., 1972. A Dynamic Programming-integar programming
algorithm for allocating toristic investments. The Tourist Review, 27(2), pp. 52-61.

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