21-09-2012, 03:30 PM
Determination of Inventory Control Policies at Urafiki Textile Mills Co Ltd in Dar-es-Salaam, Tanzania
1Determination of Inventory.pdf (Size: 223.78 KB / Downloads: 52)
Abstract
Many firms/industries, whether manufacturing or purchasing, face great challenges in managing inventories. Poor inventory management may
result in under-stocking, overstocking as well as high inventory total cost. This paper examines inventory situation at Urafiki Textile Mills Co Ltd in
Dar-es-Salaam, Tanzania. The objective of this paper is to develop the Economic Order Quantity (EOQ) model that will be used to determine
number of units of an item to order at a time and the re-order point ®, that is the level to which stocks of items are allowed to fall before ordering
other items, for raw materials. The resulting EOQ for each raw material is compared to the actual ordered quantities so as to see whether there is
any relationship between them in operational cost reduction. The study used cross section secondary data from Urafiki. The comparison of
operational cost reduction was done by using normal distribution test. Excel was used to find EOQ and the re-order point. The results show that the
relationship between the EOQs and the ordered quantities at Urafiki in terms of operational cost reduction was significant. Therefore, it was
concluded that the ordered quantities at Urafiki Textile Mills were not optimal. Therefore, it is recommended that in order to manage inventory
effectively, Urafiki needs to employ inventory control methods such as the EOQ model to obtain reasonable ordered quantities for its raw
materials. The inventory level to be maintained is given in the text.
Introduction
Inventories are idle stocks of goods stored and waiting to be used. Other writers define the term inventory as a physical resource
that a firm holds in stock with the aim of selling or transforming it into a more valuable state. For a manufacturing firm, there must
be some inventory of raw materials and work-in-process that are maintained in order to keep the factory running [1-3]. The purpose
of maintaining raw material inventory is to uncouple the production function from the purchasing function so that delays in
shipment of raw materials do not cause production delays. However, there are expenses associated with financing and maintaining
inventories which are a substantial part of the cost of doing business. Sometimes, a firm may keep larger inventory than is necessary
in order to meet demand and keep the factory running under current conditions of demand. If the firm exists in a volatile
environment where demand is dynamic (i.e., rises and falls quickly), an on-hand inventory could be maintained as a buffer against
unexpected changes in demand. This buffer inventory or safety stock can also serve to protect the firm if a supplier fails to deliver at
the required time, or if the supplier's quality were found to be substandard upon inspection, of which would otherwise leave the
firm without the necessary raw materials. Other reasons for maintaining an unnecessarily large inventory include buying to take
advantage of quantity discounts (i.e., the firm saves by buying in bulk), or ordering more in advance of an impending price increase.
Background to Urafiki Textile Mills Co Ltd
Urafiki Textile Mills Co Ltd, now called Tanzania–China Friendship Textile Company Ltd, is located along Morogoro Road at Ubungo
industrial area. It is one of the largest textile firms in Tanzania and it was established in 1968 with assistance from the Chinese
Government under their technical assistance programs. Its principal products include linen, kitenge (cotton-like covering attire),
drills, general prints, curtain, bandage materials and bed sheets for export and local consumption. In its production, the company
needs raw materials such as cotton, grey fabrics, chemicals and dyes.
Inventory position at Urafiki
Urafiki Textile Mills is amongst the largest textile industries in Tanzania. In this company, raw materials are ordered through
experience or when inventory levels become low in the warehouse. Sometimes, raw materials are ordered as a result of visual check
by the staff working in the warehouse. This implies that there is no proper way that the company employs to manage its inventory.
This can have two outcomes one being overstocking where unnecessary inventory accumulates and is kept in the warehouse at high
cost. The second outcome is understocking where there is not enough materials in stock which causes delay in production.
Therefore, a formalized and standardized inventory control system should be established to solve these problems and way of
solving these problems is to determine the EOQ which minimizes the total cost of inventory and to determine the level to which the
stock is allowed to fall before ordering more items i.e. the re-order point.
The Economic Order Quantity (EOQ) Model
This is the most fundamental inventory model. It is applicable when the demand for an item has a constant or nearly constant rate
and when the entire quantity ordered arrives in inventory at one point in time. We know for sure employment of the EOQ model for
Urafiki is a simplification. Given the nature of the data available at Urafiki, this simplification is justifiable. This is because there are
no records for orders placed but not honored and so on. Such records would pave ways of estimating probabilities of stock outs and
so forth. However, this can be regarded as a starting point for which more complex, realistic and probabilistic models can be
developed. However, even at this juncture, it can be shown that a significant amount of cost reduction to the firm can be enhanced
by the use of EOQ hence the usefulness of this paper.
Inventory for the various materials
Cotton is the major raw material used by the company in the production of different goods. It is used in producing most of the goods
in the company. It is ordered seasonally during harvest times. After the Urafiki Textile Mills Co. Ltd. has placed an order for cotton,
the material arrives in two weeks time. It is not necessary that the entire ordered amount arrive at the same time. Orders for this
raw material arrive at different times. The company uses cotton from Shinyanga, Mara and Mwanza, and therefore prices vary
according to where the material is bought. The most used chemicals at the Urafiki Textile Mills Co. Ltd. include Sodium Hydroxide,
Maize Starch, Sodium Bicarbonate, Ludigol (salt resistant), Sodium Alginate, Liquid Soap, Urea, Whitening Agent (VBL) and Designing
Agent, all of which are imported from China.