THE COPPERBELT UNIVERSITY
SCHOOL OF BUSINESS
Department of Operations and Supply Chain Management
DONIA BANDA 14324584
EMMANUEL KASONDE 14298923
CLAVICY MUSONDA 14336674
TITLE: OPTIMISATION OF SPARES INVENTORY MANAGEMENT IN AN ORGANISATION (A CASE STUDY OF KCM NCHANGA)
A Proposal Submitted in Partial Fulfilment for the Award of a Bachelor’s Degree in Production and Operations Management of the Copperbelt University.
INTRODUCTION AND BACKGROUND TO THE STUDY
This chapter starts with providing the reader with information on relevant theories regarding inventory management, the minimum and maximum inventory system and order as required which is usually referred to as just in time Inventory. Subsequently an introduction to the company that is considered in this thesis takes place along with the background information regarding its situation and positioning.
The satisfaction of customers in the Mining industry heavily depends on the availability of the product, which is connected to the quality of product characteristics and product Support (Gill, 2014). Generally due to economic and technical consideration, it is difficult to design a machine or product that is maintenance free (LIndman, 2008)
Controlling the level and positioning of inventory has been considered as the two main purposes of inventory management (Gill, 2014).The importance of inventory management is one of the most vital tasks for companies in this day and age (keshtelt M, 2011). Recent studies revealed that after-sales services and the selling of spare parts contribute roughly 25% to the revenues and 40% to 50% to the profits of manufacturing and engineering-driven firms (Cohen, 2005).
Inventory is defined as a stock or store of goods. These goods are maintained on hand at or near a business’s location so that the firm may meet demand and fulfill its reason for existence (Research for business, 2016).
Inventory management is one of the corner stones of supply chain management as inventory consist of a key contributor in all supply chains. Gosh & Kumar (2003) define inventory as a stock of goods that are maintained by a business in anticipation of some future demand. There are different types of inventory these are raw materials, partially completed goods called work in progress (WIP), finished goods or merchandise, replacement parts, tools, supplies, and goods-in 1. INTRODUCTION
transit to warehouse or customers (Chopra S. and Meindl, 2007). Inventory is important in every organization to enable the smooth running of production and operations. The inventory stocked must be reasonable, meaning it should be neither too much nor too little and should be readily available to the customer whenever they are needed, but this isn’t the case if the inventory is not managed appropriately, as this may inconvenience the customers and their operations, and increase the costs associated with inventory. This is the last thing any organization would want to experience, thus effective management of inventories is considered vital to the functioning of the organization and plays a crucial role in basic engineering management topics such as quality management and lean manufacturing. Therefore it is of prime importance that the management of inventory is given particular attention in order to meet customer satisfaction.
Due to the advancements in technology of the minning industry there has been major mechanizations and infusion of the latest technology in the mining operations at the Konkola Copper mines Nchanga asset. Due to this, maintenance spares have become a major factor of production and therefore are needed in the daily operations of the mine and at one end can be said to be an essential part of it. These maintenance spares should therefore be efficiently and effectively managed and controlled so as to bring to the company an increase in both operational and cost efficiency.
1.1.1 BRIEF PROFILE OF KONKOLA COPPER MINES
. The Zambian economy is heavily dependent on the copper mining industry for its survivor and development. 111Konkola Copper Mines abbreviated as K.C.M is Zambia’s largest integrated copper producer with an entire production value chain comprising of open pit and underground mines, concentrators, a state of the art smelter, a tailings leach plant and refinery (Vedanta Resources , 2015). Konkola Copper Mines plc (KCM) is the largest copper producer in Zambia, exporting copper and cobalt cathodes. The company was established to acquire assets as part of the privatization of Zambia Consolidated Copper Mines Ltd (ZCCM). Konkola Copper Mines largest mining asset, Nchanga is located 25 kilometers from Chingola. The mine has three operating shafts namely, Shaft No4, Shaft No3, Shaft No1 and comprises of open pit and underground mining operations (Vedanta Resources , 2015).It also comprises of two concentrators and a tailings leach plant which is one of the largest of its kind in the world. Konkola Copper Mines, mining operations have since in the recent past been heavily mechanized using surface drilling, electric shovel loading and dump trucks just to mention a few (Vedanta Resources , 2015)
The mines on the Copperbelt were initially established by Anglo American Corporation and Roan Selection Trust. In the early 1970s, the mines were nationalized and during the subsequent 20 year period, the government’s ownership of the mines was restructured several times. In 1991, Zambia became a multi-party state and the government embarked on an exercise to privatize parastatal companies, including the mining industry by March 2000, the privatization program of the largest mining assets was completed. Anglo American reacquired a 51% stake in Konkola Copper Mines, which comprised mining operations in Chingola and Konkola, and smelting/re mining operations at Nkana. In September 2002, Anglo American withdrew as shareholders of KCM, leaving a restructured company whose main shareholders were again government entities, the ZCCM-IH and ZCI. A majority stake in KCM was subsequently acquired by Vedanta Resources plc in November 2004, following an international bidding process led by Standard Bank with support from the World Bank.
The context of the purchase was a situation where much of the high-grade and easy-to-access ore had been taken out by Anglo American during their previous two-year ownership of the company in 2000 to 2002. During the subsequent two years (2002-04), with record low copper prices, falling ore grades and a high cost base, KCM was under threat of closure without urgent and significant investment to resuscitate the operations. Full commitment to re-capitalize the operations was embarked upon, KCM is committed to maintaining and increasing employment, provide local business development support and remain devoted to providing social services and support for the community, and Vedanta has continued to give support to KCM. During the tough global economic climate at the height of the global financial crisis KCM struggled to acquire third party funding for re-capitalizing its operations. Vedanta provided KCM with up to US$ 500 million in bridge funding which was to be drawn over a three year period from mid-2008 to early 2010. It was only since October 2012 that KCM has been able to borrow from third party sources without requiring a full bank guarantee from Vedanta.
Vedanta has continued to support KCM in recent months, KCM has gone through difficult financial circumstances as a result of the 20% decline in copper prices. Vedanta Resources has provided the company with an initial funding of US$ 100 million, this has been done in looking towards increasing production and efficiency at KCM, and to achieve this they have brought in the best expertise to enhance their capabilities. Their investment in KCM has been in the form of new assets, the revamp of existing infrastructure and an increase in reserves and resources to extend the life of the mine. They have already extended the life of various mines in Nchanga, which had 3 to 8 years left in 2004. Through exploration investment they have extended the life span of these mines by a further 10+ years at the Konkola Deep Mining Project (KDMP), vendata has also injected up to US$1.5 billion in investment. The infrastructure upgrade of the project is at the completion phase and KCM will now focus on mine development to support the ramp-up of production. They have also commissioned a state-of-the-art smelter, one of the largest in Africa and one of the top three in the world in terms of sulphur emission capture. The other investments include three new concentrators, an upgraded re finery and tailings leach plant, and significant upgrades across the mine to reduce its legacy environmental footprint. Over 5,000 jobs were created during the construction phase of this investment.
1.2 PROBLEM STATEMENT
With the high levels of Order as required (Just in time) spares inventory and min-max spares inventory that are not complying to standards at the Konkola Copper Mines Nchanga asset as shown in table 1. KCM has a target of zero order as required (just in time) spares inventory because order as required spares are supposed to be used once acquired but as shown in the table below ,there is excess of twenty eight thousand three hundred and ninety seven spares held in inventory, valued at twenty three million five hundred twenty three thousand three hundred and ninety eight dollars. . For the spares in inventory that have a minimum and maximum threshold (min-max) only 59% of them are compliant to their predetermined thresholds and are valued at three million two hundred ninety thousand two hundred and ninety two dollars.
spares Inventory type # of spares in Inventory Value of spares ($) Target
(just in time)
0 spares in inventory 23,523,398.69
Spares in inventory
Min-max 1142 3,290,292.64 100% compliant 59% compliant
Total 29539 26,813,691.33
Table 1: Summary of the KCM spares inventory list. Source: KCM inventory control department.
1.3 PURPOSE OF STUDY
The aim of this research is to optimize and analyze the inventory management system in place at the Konkola Copper Mines Nchanga asset and to ascertain as to why the order as required (just in time) spares inventory is as high as it is and why the min-max inventory is only 59% compliant as shown in table 1 and construct remedies to alleviate the problems being faced and eventually increase the companies operational and cost efficiency.
1.4 RESEARCH OBJECTIVES
• To examine the spares inventory management system in place at KCM.
• To examine the effect of logistics management on inventory management at KCM.
• To determine measures KCM can implement to improve management of inventory.
1.5 RESEARCH QUESTIONS
• What spares inventory management system is in use at KCM?
• What is the effect of logistics management on inventory management at KCM?
• What measures can KCM implement to improve management of inventory?
Inventory management is an important part of the organization, if not properly managed inventory can contribute to about 80% of an organizations costs which can result in the loss of expected profit for the company (Wise, 2010), therefore for any organization to increase its profit and lower costs inventories have to be managed efficiently and effectively.
This research will aim at helping the KCM Nchanga mine to improve the management of their spares inventory so as to reduce the costs they incur in holding and managing their spares inventory.
In this chapter a number of relevant literatures are presented in order to establish and shed some light on this research. It reviews work that has been done on how to improve inventory management in an organization. The review will focus on: Inventory management systems, Inventory optimization, Aims of inventory management, challenges of inventory management, minimum and maximum spares inventory management and Order as required (Just in time) inventory.
2.1 INVENTORY MANAGEMENT SYSTEMS
Lysons and Farrington (2006) define inventory as materials in a supply chain or in a segment of a supply chain expressed in quantities or values. Roy (2005) states that inventory is a list of items or goods. He went on to say that inventory and stock are used interchangeably in the business cycle, however wild (2014) stipulates that when it comes to inventory management there can be an essential distinction between the two. Inventory management refers primarily to the process and decision that should be made for specifying the size and placement of stock goods. According to Lin (2014) Spare parts inventory management differs from both work-in-process inventory management and finished product inventory management mainly because of its unique aspects in function with maintenance. Inventory management involves keeping track of a company’s stocked goods to ensure that it has enough stock on hand to meet customer demand. Inventory management is necessary at different locations within a firm or within multiple locations of a supply chain and aims at managing the production in a way that will not allow the running out of materials or goods. Regarding its definition, inventory management can be referred to as the “management of materials in motion and at rest.”(Coyle, et al, 2003)
The following activities all fall within the range of inventory management: control of lead time, carrying cost of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting.
According to Reid & Sanders (2007), Inventory management basically serves two main goals. The first goal is availability of goods, It is essential for all the operations in the process that the required materials and goods are present in the right quantities, quality and at the right time in order to deliver the required service level. The second goal is to achieve the aforementioned service level against the optimal costs. This leads to the inevitable challenge, that is, to find the suitable equilibrium between keeping sufficient inventory with the optimal costs with respect to the desired service level that one has to deliver. In that sense, not all items can be held in stock and therefore choices have to be made on whether to hold inventory or not.
2.1.1 REASONS FOR FOCUSING ON INVENTORY MANAGEMENT
According to Harrington (1997) inventory is related to the most significant costs an organization incurs. With regard to the literature, there are three reasons that explain the importance of focusing on inventory management. These are: cost, risk and the higher possibility to identify and to cope with those risks. Inventory plays an important role in the growth and survival of an organization.
Regarding costs, according to Goor &Weijers (1998) stocks are responsible for up to about one third of the working capital costs. Moreover, inventory costs represent a big part of the overall logistics costs (coyle, et al, 2003). As a result, there are important benefits that can be gained by reducing these costs. Generally cost reductions are required for firms to gain competitive advantage and by reducing the working capital cost through performing efficient inventory management, is one way to achieve that.
As far as risks are concerned, according to (visser & Goor, 2004, Fawett et al 2007), keeping stock is related to risk as there are events that if occurred, could influence the business processes negatively. For instance, inventory could catch fire, be stolen or become obsolete. Such events could even block the production process and this could subsequently lead to late deliveries, lower service levels and customer dissatisfaction. Risks caused by keeping stock are interrelated with costs, in order to ensure that the stock is secure and prevent risky events from happening, firms invest in inventory management.
The third reason for focusing on inventory management is that inventory costs can be easily identified and encountered, compared to other costs that are not easy to identify and reduce in a supply chain (Johnson & pyke, 2001)
2.1.2 AIMS OF INVENTORY MANAGEMENT
The main and major aims of inventory management according to Lysons and Farrington (2012) are:
? Providing both internal and external customers with the required service levels in terms of quantity and order rate fill.
? To ascertain present and future requirements for all types of inventory and to avoid overstocking while avoiding bottlenecks in production.
? Keeping costs to a minimum by variety reduction, economical lot sizes and analysis of costs incurred in obtaining and carrying inventories
? Providing upstream and downstream inventory visibility In the supply chain
2.2 OPTIMISATION OF INVENTORY
Inventory optimization is the strategy for balancing the amount of working capital that’s tied up in inventory according to Cole (2008). The system of optimization involves continuously arranging receipts and issues to ensure that stock balances are adequate to support the current rate of consumption with due regard to the economy. It involves the related process of provisioning ,which are the means given for placing of orders, in some industrial concerns the production central department may take a large share in provisioning at least as far as production materials are concerned. Provisioning is the process of determining in advance the requirement of materials taking into consideration existing stock, delivery times and rates of consumption so that the amount of stock on hand at any time will be in accordance with the stock control policy. Inventory constitutes the most significant part of current assets in any organization and because of the relative largeness of inventories maintained by most organizations, a considerable sum of an organization’s fund is being committed to them.
According to Dimitrios (2008) inventory management practices have come to be recognized as a vital problem area needing top priority. For tangible results on a sustained basis, the basic root cause of the problem needs to be identified and tackled with efficiency. Inventory management practices thus deserve utmost attention. The reason for inventory management practices is to ensure the regular supply of materials as and when required. Insufficient inventories hamper production process and mitigate sales volume. On the other hand, Rajeev (Rajeev, 2010) denotes that excessive inventories tie up working capital and boost up carrying costs. Inventory control systems enable a business to determine and maintain an optimum level of investment in inventory, in order to achieve required operational performance. Srinivas et al (2006), expressed that the aim of inventory control is to meet customer demand. Further, Cooper et al (2006) argues that to meet customer demand, firms have to ensure that stock-outs are avoided without incurring high inventory costs. The Stocking level variability is caused by factors such as deficient information sharing and deficient forecasts. He found out that variability of inventory majorly results due to firms not applying the inventory control systems. He enumerated the effects of inventory variability as inaccurate forecasting leading to periods of not having enough capacity, inadequate customer service and high inventory costs.
Stock shortages are a headache for most organizations as expressed by Mazanai (2012) and it leads to customer dissatisfaction which eventually leads to low performance of an organisation. Organizations ought to ensure that their inventory is monitored from time to time to avoid stock outs. Due to the manual system of checking and validating, the stochastic nature of demand and lead time is not achieved. Also, lack of automated systems, stock outs are experienced often and replenishment is done hurriedly leading to costly inventory management and likewise low performance standards. Firms that have centralized stock holdings have an advantage because they are able to control the stocks and avoid stock duplication in their subsidiaries. Since high value stocks are held, there are instances where the organization will have too much stock in their warehouse, thus a huge part of their capital is tied down with stock. Mazanai (2012) did not address inventory management techniques that involve min-max that is out of range and that is what this study will discuss. A significant amount of investment can be saved when organizations have no obsolete and excessive inventory. Any decrease in these numbers can reduce the operational costs and most importantly taxes paid due to inventory stored in the warehouse (Van Weele & Van Raaij, 2014). Many business owners have difficulties disposing of inventory they paid good money for, holding on to obsolete inventory just burns up even more investments. Naude and Badenhorst-Weiss (2011) argues that once these items have diminished in value, the company must discount the product or discard them, which can cause large losses for the company. A number of organizations collapse due to poor planning which drives Firms to close down their operations. This can be stopped if proper inventory management is practiced and the technique thoroughly utilized for the benefit of the organization.
Liu et al, (2010) noted that management and staff have minimal knowledge on how to apply the economic order quantity which negates the success of an organization. Organizations buy their inventory as a result there always arises a balance at the end of the year which ought to be carried over to the next year. Once an organization realizes this, it can develop an online inventory management tool to monitor its inventory information.
2.3MINIMUM AND MAXIMUM INVENTORY LEVELS.
The minimum and maximum inventory system is an approach used to manage materials or goods in which an organization sets a minimum and a maximum threshold of inventory to stock at a particular time. Minimum and maximum inventory systems initiate an order when stock in inventory reaches a specified re-order point which in most instances is the minimum level of the stock in inventory. Lyson and Farrington (2006) elaborates that the maximum levels of stock is the level above which stock should not normally be allowed to exceed.
The maximum and minimum levels are influenced by the rate of consumption of material, lead-time or time necessary to obtain new deliveries, reorder level of the material, the capital available and the opportunity to acquire items at low prices, the cost of storage and the availability of space, the risk of obsolesce and deterioration and insurance costs (Gill, 2014).
Martin et al, (2007) highlights that the minimum stock level of an item is set so that, stock is not depleted during the lead-time required for the new order to be processed in manufacturing or with a vendor, as the case may be. Minimum level depicts a stock level that triggers an order and the maximum level depicts the new targeted stock level that follows the order. When the minimum is reached, sufficient material is generally ordered to bring the stock up to a level in between the maximum and minimum or up to the maximum based on the forecast demand.
Lyson and farrington(2006) also elaborate that min/max replenishment policy usually uses the EOQ model. The min/max policy is an inventory replenishment method that has been implemented in a variety of inventory management software due to its simplicity.
2.4 CHALLENGES OF INVENTORY MANAGEMENT
Every organization has constraints that complicate successful inventory management: these are uncertain demand, costs, lead times and production prices (Gunus and Guneri, 2007). Inventory management however comes with its own challenges such as escalating inventory costs, untrained personnel, inaccurate record keeping and demand variability. These challenges are discussed below.
? Inventory costs
Sople (2010) indicated that a lot of working capital is tied to inventory. Similarly, Chase et al (2004) showed that inventory control is vital as it holds up money. Calculating and balancing costs of inventory with the appropriate level of responsiveness is very difficult, so companies tend to limit costs. This cost may lead to low service levels thereby compromising on the competitive ability of an organization. Inventory costs could emanate from holding costs, costs of stock outs and acquisition costs. Acquisition costs include preliminary costs for preparing requisition, vendor selection and negotiation costs; placement costs such as order preparation and stationery costs. Holding costs are storage costs, rates, light, power costs and labour costs that relate to handling, clerical, inspection and insurance cost. Stock out costs associated with lack of inventory are loss of production, costs of idle time, loss of customer goodwill and costs of rectifying the stock out.
? Demand variability;
It is assumed that change in demand or demand distortion directly affects the management of inventory. The demand variations affect inventory levels and costs and ultimately the profits. When the demand forecast was low but the demand in actuality is high, stock outs will be realized therefore compromising on customer responsiveness (Hamisi, 2010). Inversely, high stock levels during low demand period results in high inventory costs. Demand distortion is basically due to inaccurate information on supplies, inaccurate demand forecasts, batch ordering, price variations and promotions which stimulate forward buying. Lack of coordination among supply chain members through information sharing creates demand variation throughout the supply chain, which is often referred to as the bullwhip effect. Generally, high demand variability leads to deterioration of inventory management and performance.
? Lack of information sharing
Chopra et al. (2007) states that “The lack of information sharing between stages of the supply chain magnifies the bullwhip effect.” Accurate information on orders, stock levels and customer feedback is vital in decision-making. In addition, Hamisi (2010) indicated that information flows allow the various partners to coordinate both their long-term and short-term plans. This therefore means that inadequate information sharing among the supply chain network members on the demand patterns, anticipated shortages, price variations and government policies was assumed to create a major challenge in the management of inventory. Information-sharing is the key to supply chain coordination and integration which maximizes supply chain profitability through cost containment and responsiveness. Effective inventory management depends heavily on accurate information sharing on stock levels, shipment, customer preferences and costs across suppliers, manufacturers, distributors, wholesalers, retailers and customers
? Stock levels
Sople (2010) stated that appropriate levels of stock are necessary to ensure high levels of customer services. However, there need to be a trade -off between inventory levels and customer responsiveness since the higher the inventory level the higher the costs. According to Chopra et al. (2007) stock levels include cycle inventory and safety inventory carried to satisfy demand for a period. Organisations set replenishment policies regarding when and how much to reorder depending on uncertainty of both demand and supply and level of Service desired.
2.5 ORDER AS REQUIRED (JUST IN TIME)
The basic premise of just in time (JIT) is to have just the right amount of inventory, which is raw materials or finished goods, available to meet the demands of the production process and the demands of the end customers at the right time. The widespread adoption of just-in-time (JIT) inventory principles undoubtedly makes production operations more efficient, cost effective and customer responsive. Agrawal (2007) stipulates Companies effectively implementing JIT principles have substantial competitive advantages over competitors that have not. The trick is figuring out how to apply JIT principles to gain competitive advantages in your specific industry and business situation to satisfy end customers. Just in time in relation to order as required, is where an organization orders only what is required to meet the demand at that particular time. The closer you get to operating in a true JIT situation, the more responsive you are to your customers ,the less capital you have tied up in raw materials and inventory, the less you spend to store and carry inventory, the less obsolescence you have to write off, and the better you can optimize your transportation and logistics operations.
A Garrai (2006) stipulates that when operations are just in time based, the demand planners and manager still focus on the same operational performance measures mentioned above, equipment utilization, labor efficiency, throughput and uptime but not exclusively; there are other equally important goals that support JIT operations. These include: changeover times, changeovers per shift, establishing other measures of process flexibility and finished goods inventory targets that support short-term customer demand and manage them; this all translates into saving your company real money. In the JIT-based operation, day-to-day activities are driven by continuously replenishing the customer-demand-driven finished goods inventory targets. These targets “pull” or drive the production plan, the use of production assets, labor and even the reordering of raw materials from suppliers or warehousing/distribution operations.
In essence, JIT requires production to be tied more directly to short term customer demand patterns. The sourcing manager remains focused on the lowest cost, too, but in the context of the bigger picture. In the absence of JIT, the best price may result in buying materials in bulk quantities and taking delivery all at once. This may not be a problem in terms of implementing JIT principles, but it causes big potential pitfalls. First, bulk quantities of raw materials must be handled and stored. This can tie up a great deal of capital, in addition to devouring assets and labor. Second, what happens if there is a problem with the material? The long lead time means you cannot get more for weeks or months, leaving you with a large quantity of suspect materials.
Production planning in a lean JIT environment means doing things differently. Since there is less margin for error, the planner needs to be very familiar with the process capability in terms of changeover times, changeover patterns (the relative difficulty of switching from one specific product to another) and the true lead times of each product. Having a good handle on the actual demand patterns for products is essential. These are just some of the key inputs to developing the production plan in a JIT environment. By using empirical methods to better understand and define acceptable parameters, a consulting expert can develop effective production plans that support a JIT environment. Inherently inflexible production processes often run large batches of one product before switching to another product. In a lean JIT environment, a cross-section of all products is made every day. Doing this effectively requires a production process that is flexible enough to change readily from one product to another. Unfortunately, experience in achieving this` level of flexibility requires a company to put as much focus, analysis and effort into changing over its processes as designing the work process being completed.
Evaluating and assessing the flexibility of your production process and developing specific methods and processes for improving changeover capability can be difficult and time consuming when looking from the inside. This type of expertise usually does not exist in most companies. Mukutash (2006) states that JIT systems often also referred to as demand-pull systems a demand signal is the trigger for material to move or be reordered. Pull systems should be deployed throughout the plant to manage both material flow and work-in-process inventory levels. Pull systems also are used to manage the flow of raw materials into the process from outside plants and suppliers. Implementing a pull system designed for your specific application requires extensive experience in Kanban systems and other demand-based methods and technologies. Larson (2005) Inventories that are stored in large amount of quantities will result in waste and space usage. One effective solution is using Just in Time (JIT) concept as a method to reduce costs, improve quality and meet the ever-changing customer needs.
The adoption of Just in Time (JIT) concepts seems to be the most effective way to overcome these circumstances. JIT is management philosophy that emphasizes on eliminating waste and increase productivity. Most of the organizations nowadays only focus on two main elements that can influence the global market, which is customer satisfaction and also the product and services quality. Chase et al (2001) Organizations all around the world need to take the initiative to increase the product quality to satisfy the needs and customer demand that always change besides minimizing the production cost. This initiative is needed to keep the challenge at the market, Canel et al. (2000). One of the most effective solutions is with the application of Just in Time (JIT). Application of JIT could involve few important elements at an organization such as production level, marketing level, engineering level and purchasing level. The application of JIT focuses more on the management process. Therefore, JIT can be applied at varying process. Canel, et al (2000) states that JIT is the concept of management that was invented specially to avoid waste. This is in order to minimize the waste and increase the productivity (Zhu and Meredith, 1995). JIT is one type of Lean Manufacturing (Yen, 2003).
Lean manufacturing is the process to control the production which depends on the demand by the customers. It is also an act to reduce waste. Forza, (1996) the lean manufacturing philosophy can maximize production. JIT has been applied by national automotive firm as a transitory JIT. Transitory of JIT is one of the ad hoc inventory models. The application of JIT has a lot of benefits to the producer such as increase the quality to fulfill the customer demands and reduce the inventories and build a good relationship with the supplier (Salaheldin, 2005). The benefits of JIT include, reduction in inventories and time waiting for the inventories, increase the quality and technical support, increase productivity, reduce waste and machine maintenance (Wafa, et al., 1996). JIT actually help to reduce machine maintenance and at the same time, to make sure the suppliers can produce the inventories on time (Yasin, et al., 2001).
2.6 LOGISTICS MANAGEMENT
Logistics Management is defined as the process of planning, implementing and controlling the efficient flow and storage of goods, services and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.
The following are some of the key activities required to facilitate the flow of a product from point of origin to point of consumption, they include:
? Customer service
? Demand forecasting
? Inventory Management
? Logistics Communication
? Materials Handling
Push system is referred when raw materials are stored before production and products are produced to stock before orders are placed. The action is stimulated by demand estimation or demand forecast. Products and information flow the same way, from seller to buyer. Communication carried out in the supply chain of this approach can be either interactive or non-interactive since customers or buyers do not always response to messages sent by producer or sellers. For example, there is no direct feedback from customers after message in advertisement was sent by vendors through media channels. Push system, typical and traditional, is still widely utilized by many firms in different industries
Pull system, on the other hand, is used in response to confirmed orders. Products are produced after or at production planning stage. Therefore, stock does not contain finished goods, but semi-finished materials. Customers send their requirements and place orders to producers or sellers. The requested product is pulled through the delivery channel. Communication carried out in pull system is usually interactive. Pull model is also widely used inside the same firm, for instance, a department sends an internal order to the other department to manufacturer an item that is needed in their work process.
Pull system includes just-in-time (JIT) which is an inventory strategy to improve to improve business? inventory turnover by bringing inventory to a minimum. JIT strategy considers inventory as waste, its emphasis therefore is ensure that supplies are delivered at when and to where they are needed.
THEORETICAL AND CONCEPTUAL FRAMEWORK
This chapter describes the theoretical framework for this thesis and gives the reader a fundamental base in order to understand the analysis. It covers the areas of inventory control in terms of demand pattern determination and replenishment systems.
3.1.2 INVENTORY CONTROL
Supply chain management is for more or less all companies an important part of the business. All companies have a lot of capital tied up in raw material, work in progress and finished goods, which gives a great opportunity for improvements.
The techniques and knowledge of how to control this tied up capital has been around for decades, but has been hard to control since it creates a massive amount of data. Advanced technology has lately changed the possibilities to apply inventory control systems since more and more processes can be controlled automatically.
Inventory control cannot be totally separated from other functions and units in a company like for example production, purchasing and marketing. There is often even a conflict between these different functions, just because of the fact that their objectives differs a lot. For example one goal is, from an inventory point of view, to keep the stock level low in order to tie up as little capital as possible. The purchasing unit on the other hand has often a goal of buying large batches from suppliers to get a discount, which will result in higher stock levels. This makes inventory control a difficult thing to handle, since there are a lot of different factors and especially human factors that affects the system. One of the important activities in an inventory control system is a clear mapping of the flow of material, goods and information. Another is to determine the demand pattern in order to decide on a proper forecast model and replenishment system
3.1.3 DETERMINING DEMAND PATTERN
Determining the demand pattern for products in a company has many reasons. The main reason is always to get a good understanding of the products in order to control them in different ways. Some of the most common patterns to look for are; seasons, Lumpy, positive or negative trend, slow-, medium- and fast moving products and deviations in the demand pattern, see figure 13.
Source; journal of supply chain management
All these can be identified with different tools and be further analyzed for potential actions. Some of the tools are; pearson correlation, autocorrelation, standard deviation, frequency and coefficient of variance.
3.1.4 PEARSON CORRELATION
Correlation is a technique for investigating the relationship between two quantitative ,continuous variables for example age and blood pressure , Pearson’s correlation coefficient ( r) is a measure of the strength of the association between the two variables .Pearson’s correlation coefficients for continuous (interval level) data ranges from -1 to +1.
Autocorrelation is a method used to determine any seasonality in the demand pattern. This is determined by an autocorrelation coefficient, there is a need of at least two years of data and the coefficient can then be calculated.
It is always an important start when determining the demand pattern to measure the frequency of how often and in which volumes a product is handled. Frequency can be measured either by volume per time unit, where the time can vary from each observation to volume per year, or regardless of the volume per time unit. The choice depends on what the further analysis will be. A problem when choosing volume per time unit is to find a proper time unit that will describe the pattern in the best possible way and be useful for the next analysis. Regardless of type or time unit this is often the start for most analysis in inventory control.
3.1.7 STANDARD DEVIATION
Standard deviation is used to describe how predictable something is. It is a measurement of how much a number of observations are deviating from each other
3.1.8 COEFFICIENT OF VARIANCE
Coefficient of variance is a method to study the demand pattern and it is similar to the standard deviation. The difference is that the volume is taken into consideration in the coefficient of variance.
3.1.9 REPLENISHMENT SYSTEMS
To be able to have the right amount of goods at the right time and the right place, and also optimize the cost of handling, ordering and deciding volume for transport, the majority of companies use some kind of replenishment system. This is used to order new goods at the right time and size but also to minimize the cost. There are several different replenishment systems and there are many factors that influence the choice of a proper system for the specific situation where the demand pattern plays an essential role.
3.1.10 REORDERING SYSTEMS
There are two different types of inspections in inventory control systems, which are continuous or periodical inspection. The main difference between them is that in continuous inspection the same order size is ordered whenever the stock level reaches the reordering point level. In periodical inspection the order sizes can vary between the ordering occasions, but they are ordered at predetermined times. This implies that a larger safety stock is required in order to meet a good service level. If the inspection period is really short, for example one day, the two systems become very similar.
3.1.11 ECONOMIC ORDER QUANTITY – EOQ
Economic order quantity or the Wilson formula is the most common used formula for determining order quantities. The formula is based on two parameters, the carrying cost, and the fixed cost for replenishment. The Wilson formula is based on the following assumptions.
? Constant and continuous demand.
? The carrying cost and fixed cost for replenishment is constant.
? The order quantity does not have to be an integer.
? The whole order quantity is delivered at the same time.
? No shortages are allowed.
3.1.11 SAFETY STOCK AND REORDERING POINT
If it is assumed that if the proper order quantity is established the next important step is to decide at what level an order should be created. In a reordering point system, the problem is to find the accurate level of the reorder point. The purpose is to find the level where the reordering point at a specific certainty will cover the demand during the lead time.
3.2 CONCEPTUAL FRAMEWORK
From the literature review in chapter two it was reviewed that inventory may be the most important asset in a business and that inefficient inventory management will increase costs and reduce profitability, while efficient and effective inventory management can only be achieved with the cooperation of efficient and effective suppliers.
Selection of suppliers and negotiation of all aspects of relating inventory are activities in which purchasing professionals should expect to play a leading role and for supplier quality assurance to be most effective, it should be handled in conjunction with other company departments, not just purchasing. If, for example, the manufacturing division (end user) runs into an issue with a certain suppliers parts during production, there should be a direct way for that information to be conveyed to the inventory control unit and purchasing unit. Similar conduits should exist with inventory control units and other critical departments.
The conceptual framework tries to illustrate this relationship between inventory management systems, inventory challenges, logistics management and how dependent the three are in achieving inventory optimization
The visual representation of the conceptual framework is as shown below.
Source : Author (2018)
3.1 HYPOTHESIS TESTING
This gives an insight into how the researcher derived the hypothesis for this research, two major hypotheses will be tested in this research which will help to answer the research questions highlighted in chapter one. The hypothesis development is divided into two parts, namely: inventory management systems and logistics management. The relationship between these two parts and inventory optimization will be hypothesized as follows:
Ho1: There is no relationship between inventory management systems and inventory optimization.
Ha1: There is a positive relationship between inventory management systems and inventory optimization.
Ho2: There is no relationship between logistics management and inventory optimization.
Ha2: There is a positive relationship between logistics management and inventory optimization.
According to a study that was conducted by Ngubane N et al, (2015) in the journal entitled inventory management systems used by manufacturing small, medium and micro enterprise, he states that inventory management can either make or break a business from a profitability or liquidity point of view Flynn et al, (2005). In relation to this study we are going to use, just in time (order as required), min-max inventory, and inventory systems as measures for inventory management systems. While customer service, and warehousing as measures for logistics management.
CHAPTERFOUR 4.0 RESEARCH METHODOLOGY
This chapter presents the research design, methodology and procedures that the researcher used when assessing the findings of the study. It spells out the techniques and methods of data sampling, collection, processing and analysis as well as the limitations and problems encountered while carrying out the study were also highlighted.
4.2 Research Design
The study was a case study of Konkola Copper Mines (KCM) Nchanga asset. A survey was carried out to seek the opinion of different workers of the organization on the optimization of spares inventory management at KCM in the operations and procurement department.
3.3 Sample size
The sample was made up of end user departments that acquire spares inventory from the stores to enhance their operation
3. 4 Data Source
• Primary Data
Primary data can be defined as data or information collected under the management of a person carrying out the research. Primary data was collected using structured questionnaires, open-ended and closed ended questions. It is therefore data that originates from the researcher; this data is collected for the purpose of meeting the research objective.
3.5 Data Collection Instruments
A structured questionnaire was used. This involved both closed and open ended questions. Group discussion and interviews were also used to clarify and get more information on responses that were not clear. The advantages of using this method include versatility, flexibility, and allows for adjustment to the situation by both the interviewer and respondent (Lowe, 2004).
3.6 Data Analysis
The data collected was analyzed using a computer Statistical Package for Social Scientist (SPSS). Data was also arranged in a meaningful form, into tables of frequencies, percentages and Charts.
3.7 Problems Encountered
The following are the challenges that were encountered during the data collection period at KCM, the questionnaires took approximately 2 weeks in the legal department due to bureaucracy issues, and an added 2 weeks for the respondents to answer the questionnaires, this reduced on our required time for analysis. Another challenge was that 5 questionnaires were lost which reduced our sample size to 35.
5. 0 Research findings and data analysis
This chapter’s sole purpose is of drawing conclusion and recommendation on the research findings and data analysis. The analysis is based on the answered questionnaires (see appendix) and the application of statistical package for social science (SPSS) version 16.0 helped to analyze the data in tables and charts for easy understanding. This chapter presents the research findings and interpretation. The research findings and analysis will be presented in three parts each dealing with the objective of the study. The objectives were to examine the spares inventory management system in place at KCM, to examine the effect of logistics management on inventory management at KCM and to determine measures KCM can implement to improve management of inventory. The last part of this chapter will try to interpret these research findings, this part will be more quantitative and analytical in nature, as this part will try to accept or reject the hypothesis of study.
5.2 Objective one: Spares inventory management system in place at KCM
This section presents findings on the first objective that was to examine the spares inventory management system in place at KCM. This objective was studied by examining inventory control, order as required (just in time) inventory and min-max inventory.
The question was asked as to which inventory techniques are used at KCM. Their responses are illustrated in the table below:
Inventory technique used Frequency Percent Valid Percent Cumulative Percent
min-max 9 25.7 25.7 25.7
order as required 5 14.3 14.3 40.0
material requirement planning 8 22.9 22.9 62.9
min-max and order as required 2 5.7 5.7 68.6
min-max and material requirement planning 8 22.9 22.9 91.4
min-max, order as required and material requirement planning 3 8.6 8.6 100.0
Total 35 100.0 100.0
Table 1: techniques that are used to manage or control inventory source compiled by author, 2018.
The table above illustrates techniques that are used to control or manage inventory at KCM these techniques are min-max, order as required (JIT) and material requirements planning, 25.7% said they use min max, 14.3% said they use order as required 22.9% said materials requirements planning.5.7% said they use both min max and order as required, 22.9% said they use min max and order as required while 8.6% said they use all 3 techniques. From the table it can be concluded that the most utilized technique in managing or controlling inventory is order as required (JIT).
Another question was asked on how to measure the effectiveness of the above mentioned techniques. The measures and responses are illustrated in the table below.
Frequency Percent Valid Percent Cumulative Percent
waste minimization 8 22.9 22.9 22.9
Reduced inventory costs 10 28.6 28.6 51.4
No inventory stocks outs 6 17.1 17.1 68.6
waste minimization and reduced inventory stock outs 3 8.6 8.6 77.1
reduced inventory costs and no inventory stock outs 2 5.7 5.7 82.9
waste minimization, reduced inventory costs and no inventory stock outs 6 17.1 17.1 100.0
Total 35 100.0 100.0
Table 2. Measures of effectiveness of the inventory techniques. Source: Author 2017
The table above illustrates the measures of the effectiveness of the techniques that are used to control or manage inventory at KCM. These techniques are min-max, order as required (JIT) and material requirements planning and the measures are waste minimization, reduced inventory costs and no stock outs. From the table the responses of the surveyed employees are as follows. 22.9% said waste minimization, 28.6% said reduced inventory costs, 17.1% said no inventory stock outs, 8.6% waste minimization and reduced inventory stock outs, 5.7% said reduced inventory costs and no inventory stock outs while 17.1% said they use all 3 measures. From the table it can be concluded that the most utilized measure is reduced inventory costs.
Holding order as required (just in time) spares.
To analyze this objective further the question was asked as to why order as required inventory is held. Their responses are illustrated in the table below.
causes of holding order as required (JIT) Frequency Percent Valid Percent Cumulative Percent
long lead times 12 34.3 34.3 34.3
poor planning 6 17.1 17.1 51.4
obsolete spares 7 20.0 20.0 71.4
long lead times and poor planning 8 22.9 22.9 94.3
poor planning and obsolete spares 1 2.9 2.9 97.1
long lead times, poor planning and obsolete spares 1 2.9 2.9 100.0
Total 35 100.0 100.0
Table 2: causes of holding order as required (JIT) spares in inventory. Source: compiled by author, 2017.
The table above illustrates the causes of holding order as required inventory, 34.3% said long lead times are what causes the holding of order as required (JIT) inventory, 17.1% said poor planning is the cause, 20.0% said obsolete spares, 22.9 said long lead times and poor planning, 2.9% said poor planning and obsolete spares while 2.9% said long lead times, poor planning and obsolete spares. From the data above it can be concluded that the main causes of holding order as required inventory is long lead times.
The question was asked to find out why min-max inventory is non-compliant. The surveyed employee’s responses are illustrated in the table below:
Frequency Percent Valid Percent Cumulative Percent
long lead times 4 11.4 11.4 11.4
obsolete spares 14 40.0 40.0 51.4
poor purchasing procedure 7 20.0 20.0 71.4
Long lead times and poor purchasing procedure 10 28.6 28.6 100.0
Total 35 100.0 100.0
Table 3: Reasons why min-max is non-compliant Source: compiled by author, 2018.
The above data can be expressed in the pie chart given below so as to show the overall picture of what was obtained from the respondents in this research
From the above data it can be observed that 11.4% said long lead times, 40% said obsolete spares, 20% said poor purchasing procedure and 28.6% said long lead times and poor purchasing procedure. Therefore it can be concluded that the main cause of the non-compliance of min-max inventory is obsolete spares.
5.3 Objective two: The effect of logistics management on inventory management at KCM
The second objective was to examine the effect of logistics management on inventory management at KCM. To analyze this objective purchasing procedures and customer service was used.
The question was asked as to how the respondents would rate the current spares purchasing procedure used by KCM (Nchanga). Their responses are illustrated in the table below
Frequency Percent Valid Percent Cumulative Percent
Bad 1 2.9 2.9 2.9
Poor 6 17.1 17.1 20.0
Fair 15 42.9 42.9 62.9
Good 13 37.1 37.1 100.0
Total 35 100.0 100.0
Table 4: rating for the current spares purchasing procedure. Source: compiled by author, 2018.
From the data above we note that 2.9% of the respondents rated the current procedure as bad, 17.1% of the respondents rated it as poor, 42.9% rated it as fair and 37.1% rated it as good. From the research findings it can be observed that the purchasing procedure used at KCM (Nchanga) is most commonly rated as fair meaning it is not good enough and therefore can be improved. It leads to the unavailability of spares requested from stores.
The surveyed employees were asked what the most common causes of the unavailability of the requested spares from stores were, their responses are expressed in the bar chart below:
Source: author 2018.
From the bar chart above it can be seen that 11.4% of the respondents attributed the unavailability of requested spares to delayed deliveries, 40% to poor planning, 20% to long lead times and 28.6% to both delayed delivery and poor planning. Among the factors above poor planning has the highest percentage, which shows that the most common cause of unavailability of spares in stores occurs due to poor planning.
5.4 Objective three: Measures KCM can implement to improve management of inventory
This section presents findings on the measures that can be implemented to improve management of inventory at KCM. Surveyed employees were requested to give their opinions on inventory management optimization. To achieve this objective improved purchasing procedures and reduced lead times was used.
Improved purchasing procedures
Questions were asked to find out from the surveyed employees which measures the department can implement to optimize their spares inventory management.
Frequency Percent Valid Percent Cumulative Percent
centralized purchasing 11 31.4 31.4 31.4
purchasing locally 11 31.4 31.4 62.9
plan for purchases 3 8.6 8.6 71.4
centralized purchasing and purchasing locally 3 8.6 8.6 80.0
centralized purchasing and plan for purchases 2 5.7 5.7 85.7
purchasing locally and plan for purchases 4 11.4 11.4 97.1
centralized purchasing, purchasing locally and plan for purchases 1 2.9 2.9 100.0
Total 35 100.0 100.0
Table 5: measures to improve the current purchasing procedures. Source: compiled by author, 2018
The table above illustrates measures that can be put in place to improve the current purchasing procedures, the measures are centralized purchasing, purchasing locally and plan for purchases. As can be observed from the table 31.4% of the respondents said centralized purchasing, 31.4% said purchasing locally, 8.6% said planning for purchases,8.6% said both centralized purchasing and purchasing locally, 5.7% both centralized purchasing and planning for purchases, 11.4% said purchasing locally and planning for purchases and 2.9% said centralized purchasing, purchasing locally and planning for purchases. From the table it can be concluded that most respondents selected centralized purchasing and purchasing locally.
Reduced lead time
Frequency Percent Valid Percent Cumulative Percent
purchase locally 3 8.6 8.6 8.6
plan for purchases 7 20.0 20.0 28.6
vendor managed inventory 2 5.7 5.7 34.3
purchase locally and plan for purchases 8 22.9 22.9 57.1
purchase locally and vendor managed inventory 8 22.9 22.9 80.0
plan for purchases and vendor managed inventory 3 8.6 8.6 88.6
purchase locally, plan for purchases and vendor managed inventory 4 11.4 11.4 100.0
Total 35 100.0 100.0
Table 6: measures to reduce long lead times. Source: compiled by author, 2018
The table above illustrates measures that can be put in place to reduce long lead times, these are purchase locally, plan for purchases and vendor managed inventory as can be observed from the table 8.6% of the respondents said purchase locally 20% said planning for purchases, 5.7% said vendor managed inventory, 22.9% said purchase locally and plan for purchases, 22.9% said purchase locally and vendor managed inventory, 8.6% said plan for purchases and vendor managed inventory while 11.4% said purchase locally, plan for purchases and vendor managed inventory.
5.5 The relationship between inventory management systems and inventory optimization
The relationship between inventory management system and inventory optimization will be deduced by using Pearson correlation coefficient which has been employed to determine the relationship between the study and determine whether it is positive or negative the correlation coefficient values (r) ranges from 0.1 to 0.29 which is considered weak from 0.3 to 0.49 is considered medium and 0.5 to 1 is considered strong Wong ettal (2005)
The impact of inventory management systems and inventory optimization
In order to ascertain the impact of inventory management system on inventory optimization, the following hypothesis was formulated;
Null hypothesis: Ho: There is no relationship between inventory management systems and
Alternative hypothesis Ha: There is a positive relationship between inventory management
systems and inventory optimization.
Inventory management systems Inventory optimization
Inventory management systems Pearson Correlation 1 .838**
Sig. (2-tailed) .000
N 35 35
Inventory optimization Pearson Correlation .838** 1
Sig. (2-tailed) .000
N 35 35
** Correlation is significant at 0.01 level (2-tailed).
Figure 3. Correlation of inventory management systems and inventory optimization.
In order to establish the relationship of inventory management systems on inventory optimization the qualitative findings of inventory optimization and quantitative findings of inventory management systems were cross tabulated and confirmed by Pearson’s correlation coefficient test. The test revealed that there is a positive relationship between inventor management systems and inventory optimization with r = +0.838, n = 35 and p = 0.01. This showed that inventory management systems has strong relationship on inventory optimization. Therefore with 99% confidence level we reject the null hypothesis and accept the alternative hypothesis.
5.6 Relationship between logistics management and inventory optimization
Null hypothesis Ho: There is no relationship between logistics management and
Alternative hypothesis Ha : There is a positive relationship between logistics management
And inventory optimization.
Below is the output from SPSS that shows the result from the correlation of logistics management and inventory optimization.
Logistics management Inventory optimization
Logistics management Pearson Correlation 1 .766**
Sig. (2-tailed) .000
N 35 35
Pearson Correlation .766** 1
Sig. (2-tailed) .000
N 35 35
**Correlation is significant at 0.01 level (2-tailed)
Figure 4. Correlation of logistics management and inventory optimization.
In order to establish the relationship of logistics management on inventory optimization the qualitative findings of inventory optimization and quantitative findings of logistics management were cross tabulated and confirmed by Pearson’s correlation coefficient test. The test revealed that there is a positive relationship between logistics management and inventory optimization with r = +0.766, n = 35 and p = 0.01. This showed that logistics management has strong relationship on inventory optimization. Therefore with 99% confidence level we reject the null hypothesis and accept the alternative hypothesis