Chapter 1 Introduction

Chapter 1 Introduction 1.0 Introduction "Inventory”, to many small business owners is one of the more visible and tangible aspects of doing business. Raw materials, goods in process and finished goods all represent various forms of inventory. Each type represents money tied up until the inventory leaves the company as purchased products. Likewise, merchandise stocks in a retail store contribute to profits only when their sale puts money into the cash register. In a literal sense, inventory refers to stocks of anything necessary to do business. These stocks represent a large portion of the business investment and must be well managed in order to maximize profits. In fact, many small businesses cannot absorb the types of losses arising from poor inventory management. Unless inventories are controlled, they are unreliable, inefficient, and costly. Our motivation for this thesis was to find a way to being more efficient and effective in terms of taking inventory. We have introduced a system wherein the company’s employees will be able to do their products inventory in a simple manner but still getting the result they need. In this chapter, we first provided an introduction of what inventory is and its importance in a business, followed by the different ways and approaches of conducting an inventory. In the next chapters, the method used for the study and how the data are collected and processed are discussed. Next are the chapters discussing the proposed system of the researchers, and how it was done.

Chapter 1 Introduction

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1.1 Background of the study Personal Collection is a direct selling incorporation distributing homecare, personal care, fragrances, baby care, health care and apparel. Direct Selling is a retail channel for goods and services. At basic level, it may be defined as marketing and selling products, direct to consumers away from a fixed retail location. Direct selling provides important benefits to individuals who desire an opportunity to earn an income and build a business of their own; to consumers who enjoy an alternative to shopping centres, department stores or the like; and to the consumer products market. Personal Collection Direct Selling Inc. Sucat, Parañaque branch was established last 2006. As of this time, they carry almost all Personal Collection products in their warehouse, apart from apparels, which they order upon request. Personal Collection Direct Selling Inc. has one warehouse that supplies all their branches in Metro Manila. The warehouse is located at No. 72 M.H. Del Pilar Street, San Antonio, Quezon City. Personal Collection Direct Selling Inc. Sucat, Parañaque branch is currently using Microsoft Office Excel to keep track of their inventory. They receive deliveries twice every week most of the time and records it to the excel file they use. They also use the same program to input every sale they make. Personal Collection Direct Selling Inc. Sucat, Parañaque logs the incoming deliveries per piece of the items received and the date it was delivered. It is then saved and edited each time a sale is made. Every time a log is made to the “sales column”, the “existing quantity column” is automatically updated, thus, letting the person in charge of inventory and ordering know which items are on critical level and needs to be ordered. They do not follow a specific number of items to be kept in their warehouse in a given amount of time. They depend the number, and kind of products they order with what current promotions they offer or which products are more in demand. Apart from the sales column and existing quantity column, the excel file they use also indicates the name of the product, its size and color and its retail price. Items are arranged in alphabetical order and are not sorted per kind.


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Personal Collection Direct Selling Inc. Sucat, Parañaque branch’s existing dataflow diagram is as seen below:

Personal Collection Direct Selling Inc. Sucat, Parañaque have worries about how they keep track of their store’s inventory. Their main concern is about the confidentiality of the branch’s inventory information. Since they use Microsoft Excel as their inventory system, anybody can access their files without so much of a hassle, since the computer they have in the store is usually left opened and unlocked, in order for the other personnel staffing the store to update the file once sales are made. Being that the case, an accidental deletion of data is not uncommon, nor is illegal copying of the branch’s information. Incidents of accessing sheets that are not required for sales transaction by unauthorized staff and modifying information have been experienced as well. The files have also experienced several Macro Virus attacks that have caused inconvenience in their business.


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1.2 Statement of objective 1.2.1 General Objective their

The general objective of the study is to come up with a system that would help the branch of Personal Collection in Parañaque do inventory.

inventory in a

The researchers need to design, develop, and implement an inventory system that would help the subject monitor their more efficient and effective manner.

1.2.2 Specific Objectives • • • • •

To ascertain the respondents’ experience in using the current inventory system of Personal Collection. To establish a method used by the respondents in conducting the inventory. To determine the level of satisfaction of the respondents towards the inventory system of Personal Collection. To automate and/or enhance the existing system of Personal Collection. To create an inventory system with the use of Microsoft Access and Microsoft Visual Studio.


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1.3 Significance of the study Inventory is the total amount of goods and/or materials contained in a store or factory at any given time. Storeowners need to know the precise number of items on their shelves and storage areas in order to place orders or control losses. Factory managers need to know how many units of their products are available for customer orders. Restaurants need to order more food based on their current supplies and menu needs. All of these businesses rely on an inventory count to provide answers. The word 'inventory' can refer to both the total amount of goods and the act of counting them. Many companies take an inventory of their supplies on a regular basis in order to avoid running out of popular items. Others take an inventory to insure the number of items ordered matches the actual number of items counted physically. Shortages or overages after an inventory can indicate a problem with theft (called 'shrinkage' in retail circles) or inaccurate accounting practices. Restaurants and other retail businesses, which take frequent inventories, may use a 'par' system based on the results. The inventory itself may reveal 10 apples, 12 oranges and 8 bananas on the produce shelf, for example. The preferred number of each item is listed on a 'par sheet', a master list of all the items in the restaurant. If the par sheet calls for 20 apples, 15 oranges and 10 bananas, then the manager knows to place an order for 10 apples, 3 oranges, and 2 bananas to reach the par number. This same principle holds true for any other retail business with a number of different product lines. Companies also take an inventory every quarter in order to generate numbers for financial reports and tax records. Ideally, most companies want to have just enough inventories to meet current orders. Having too many products languishing in a warehouse can make a company look less appealing to investors and potential customers. Quite often, a company will offer significant discounts if the inventory numbers are high and sales are low. This is commonly seen in new car dealerships as the manufacturers release the next year's models before the current vehicles on the lot have been sold. Furniture companies may also offer 'inventory reduction sales' in order to clear out their showrooms for newer merchandise. Taking inventory is part of the basic process of responsible business management and control. By periodically conducting a physical count, it is possible to make sure that all relevant items are properly accounted for, and that current documents related to the value of the inventory is accurate. Here are a few of the different ways companies have managed this type of materials control over the years.


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Inventory Controller Inventory controllers are professionals who specialize in the management of the various types of inventories that are maintained by companies as part of the standard process of conducting business. In general, the inventory controller is charged with the task of keeping the level of the inventory within perimeters that are considered high enough to allow the company to function at optimum efficiency, but low enough to create the least amount of tax liability for the corporation. Often a large corporation will employ more than one inventory controller, with each member of the inventory controller staff assigned the task of overseeing the functions of one or more inventory types within the business. Since any given company, especially a manufacturing corporation will maintain inventories that range from raw stock to manufacturing supplies to finished goods, the task of efficient inventory control is often easier with several controllers working to ensure that all types of inventory are managed properly. One inventory controller may have the responsibility of managing the supplies inventory, often by tracking the daily issues and usage of machine parts and other materials essential to the operation of the plants that produce goods offered by the company. Generally, an inventory controller that is focused on supplies or maintenance inventories will employ an ordering process that is based on average usage. Essentially, this means utilizing history about the past usage patterns of an item combined with the average amount of time it takes a vendor to deliver an order of the item once it is placed. This strategy allows the inventory controller to place orders so that the plant never runs out of necessary parts and resources, but helps to prevent large amounts of parts running up the net worth of the inventory. An inventory controller may also be charged with the responsibility of maintaining the finished goods inventory for a single plant or the entire company. This will involve keeping a constant track of daily production that is added to the current inventory of sellable goods, less the goods that are shipped to fulfil orders. Sales departments often interact regularly with a finished goods inventory controller to determine if there are products in stock that can be used to fulfil a customer request.

Reasons for keeping an inventory Time The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amount of inventory to use in this "lead time" Chapter 1 Introduction

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Uncertainty Inventories are maintained as buffers to meet uncertainties in demand, supply, and movements of goods.

Economies of scale Ideal condition of "one unit at a time at a place where user needs it, when he needs it" principle tends to incur many costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory.

Types of Inventory Raw Materials The purchased items or extracted materials that are transformed into components or products.

Components Parts or subassemblies used in building the final product.

Work-In-Process (WIP) Any item that is in some stage of completion in the manufacturing process.

Finished Goods Completed products that will be delivered to customers.

Distribution Inventory Finished goods and spare parts that are at various points in the distribution system.

Maintenance, Repair, and Operational (MRO) Inventory These are often called “Supplies”. Items that are used in manufacturing but do not become part of the finished product.

Uses of Inventory Anticipation Inventory or Seasonal Inventory Inventory are often built in anticipation of future demand, planned promotional programs, seasonal demand fluctuations, plant shutdowns, vacations, etc.

Fluctuation Inventory or Safety Stock Inventory is sometimes carried to protect against unpredictable or unexpected variations in demand.


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Lot-Size Inventory or Cycle Stock Inventory is frequently bought or produced in excess of what is immediately needed in order to take advantage of lower unit costs or quantity discounts.

Transportation or Pipeline Inventory Inventory is used to fill the pipeline as products are in transit in the distribution network.

Speculative or Hedge Inventory Inventory can be carried to protect against some future event, such as a scarcity in supply, price increase, disruption in supply, strike, etc.

Maintenance, Repair, and Operating (MRO) Inventory general

Inventories of some items (such as maintenance supplies, spare parts, lubricants, cleaning compounds, and office supplies) are used to support operations and maintenance.

Different ways to take inventory Cycle Count This approach called for conducting regular physical inventories of a portion of the materials stored in plant level supply stores. This would identify a limited number of material codes to inventory each calendar month. The selected material codes would be subject to a physical count, with each unit of each item listed under those codes physically counted. The result of the cycle count is compared to records kept of the receipts and issues of those items, and any differences between the two are noted and reconciled. Cycle counts are usually structured to allow the entire inventory to be physically counted over the course of the year, and can often make the process of doing annual full store materials reconciliation much easier. Cycle counts are less disruptive to daily operations, provide an ongoing measure of inventory accuracy and procedure execution, and can be tailored to focus on items with higher value or higher movement.

FIFO (First In, First Out) and LIFO (Last In, First Out) This type of inventory management relies on accurately recorded when items arrive, and when they are disbursed to a given department within the company. With this approach, the remaining units of a given item are physically checked after the day’s receipts and issues have been entered into the supply chain database. This process often allows small businesses that need to keep inventories to a minimum for tax purposes to always know exactly what they have on hand, and to take action if a significant amount of a given item cannot be accounted for. Chapter 1 Introduction

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Thanks to the use of modern software, it is also possible to quickly take inventory of a selected group of items with great ease. For instance, generating a printout of the amount of office supplies that should be on hand is very simple. The printed report will reflect how much of each item should still be awaiting issue to a given department, as of the date the report is pulled. This approach does require that all receipts and issues be recorded in the database before the report is generated; otherwise, the count will be off. Inventory processes can be very elaborate or very simple, depending on the needs of the company. By choosing the right type of tracking system and software, and being diligent in physically counting units on a regular basis, it is possible to make sure that the materials records are kept accurate at all times. This makes valuing all types of inventories, ranging from raw materials to finished goods, much easier than it would be otherwise.

Physical inventory Is a process where a business physically counts its entire inventory. A physical inventory may be mandated by financial accounting rules or the tax regulations to place an accurate value on the inventory, or the business may need to count inventory so component parts or raw materials can be restocked. Physical inventory stops operation at a facility and all items are counted, audited, and recounted at one time. Businesses may use several different tactics to minimize the disruption caused by physical inventory.

Inventory Monitoring Approaches Continuous or Perpetual Inventory This approach maintains a constant order size, but allows the time between the placements of orders to vary. This method of monitoring inventory is sometimes referred to as a perpetual review method, a fixed quantity system, and a two-bin system. When the inventory is depleted to the reorder point, a replenishment order is placed. The size of that order is the economic order quantity for that item. This type of system provides closer control over inventory items since the inventory levels are under perpetual scrutiny.

Periodic or Just – In – Time Inventory This approach maintains a constant time between the placements of orders, but allows the order size to vary. This method of monitoring inventory is sometimes referred to as a fixed interval system or fixed period system. It only requires that inventory levels be checked at fixed periods. The amount that is ordered at a particular time point is the difference between the current inventory level and a predetermined target inventory level (also called an order up to level). If demand has been low during the prior time interval, inventory levels will be relatively high, and the amount to be ordered will be relatively low. If demand has been high during the prior time interval, inventory levels will have been depleted to low levels, and the amount to be ordered will be higher. Chapter 1 Introduction

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Min-Max System This approach allows both the order size and the time between the placements of orders to vary. This method of monitoring inventory is sometimes referred to as an optional replenishment system. A hybrid system combines elements of both the continuous review system and the periodic review system. It is similar to the periodic review system in that it only checks inventory levels at fixed intervals of time, and it has a target inventory level. However, when one of those review periods arises the system does not automatically place an order. An order is only placed if the size of the order would be sufficient to warrant placing the order. This determination is made by incorporating the reorder point concept from the continuous review system. At the review period the inventory level on hand is compared to a reorder point for the item. If inventory has not fallen below the reorder point, no order is placed. However, if the inventory level has dropped below the reorder point, an order is placed. The size of the order is the difference between the inventory on hand and the target inventory level.

For Personal Collection The result of the study can provide the management a view of their current product inventory system. Personal Collection can adopt the recommendations to be done by the researchers to improve the efficiency and effectiveness of their inventory system.

For Other Similar Organizations The study can provide insights and basics for other similar institutions to improve their system.

Educators and Students The study can provide basis and reference for future studies related to inventories.

Researchers of this study The researchers, being the main participants will gain knowledge and experience to improve their skills.


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1.4 Scopes and Limitations of the study 1.4.1 Scopes The study intends to upgrade the current product inventory system of Personal Collection Parañaque. The results of the study will be based on the interviews, observations, cooperation, and answers given by the employees involved in the inventory at Personal Collection Parañaque. Facts, concepts, and related theories will be the basis of recommendations of the researchers. A. Create User Account • The user must have a user account created by an administrator before he/she can access the system. The admin account is a default account and its user name and password may be changed once the system is given to the end user. B. Log-in • Once a user has an account, he/she may log in to access the system. C. Main Window • Also known as Multiple Document Interface (MDI). This window has the menu bar where a user can choose which window to access. •

File o o o

•


Print – lets the end user print out the current status of the branch’s inventory. Log-out – ends the current user’s session. Exit – ends the current user’s session and quits the program.

Option o User - used by the administrator to add, edit or delete an account. This includes the username and password required for the user to log on and the user’s access rights. o All fields are required to be filled out. o Product Line – shows the category of products the branch has.

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o Products – shows the entire branch’s

o

o

•

View

o Inventory – shows the current and up to

o

o

•


stocks, critical level, and supplier. When adding a new product or editing an existing one, the product’s name, size, colour, price, critical level and supplier needs to be indicated. Purchase and Orders – used to define number of products received and sold. Numbers of items automatically adjust depending on transactions made. Suppliers – lists the branch’s supplier, its address, contact person and contact number. All fields are required to be filled out.

Help o

date status of the products. Filter incoming and outgoing per product, can be sorted by month and year. It also has the option to filter the products if they are in critical numbers or not. Archive – shows the history of transactions made, both purchases and orders that have been deleted from the inventory form. Both administrators and users with limited access can view the archive. Audit Trails - shows who logged in and out of the inventory system. It states the date, time and the user who logged in and out of the system. Information cannot be deleted nor modified manually. About – gives additional information about the system.

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1.4.2 Limitations The system focuses primarily on the incoming products for retail that the branch receives and not on the inventory of the organization as a whole. It will cover products for retail and promotional offers. It will not involve equipments and other supplies maintained by the organization. The study will be done at Unit E-9 2nd Floor Evacom Plaza Building San Dionisio, Parañaque City during the academic year 2009 to 2010.

A. Creating a User Account •

• • •

The username should have a minimum of 5- and maximum of 32 characters. Only letters are accepted. The password should have a minimum of 4- and maximum of 16 characters. Letters, numbers, and special characters are accepted. Only accounts with Admin rights have the right to add, delete, and edit users’ information. Admin accounts have the rights to add, edit and delete any information on the system except for the logs. Limited User Access can only view and print out current results.

B. Product Line • Numerical values are not accepted. C. Supplier • Ordering is done manually. This sub-menu will serve as a reference as to who the supplier/s is/are and their contact numbers. The system won’t automatically send orders for stocks in critical level to suppliers. D. Inventory • When transactions made are deleted, the number of stocks left won’t be automatically updated. Current total numbers of stocks are to be re-entered manually. E. Archive • Cannot be printed. F. Audit Trails • Only the time, date and the user is specified. Activities done are not stated. The time stamp will appear only when the user logs in and out of the system. If the user exits the system without logging out, time stamp won’t appear on the log out field. Chapter 1 Introduction

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1.5 Definition of Terms Book Inventory What stock on hand should be according to the accounting records.

Cost-flow assumption and

Is the beginning point used to determine the value of the ending inventory the cost assigned to the cost of goods sold (Eisen, 2007).

Economic Order Quantity (EOQ) level

It is the optimum amount of goods to be ordered each time the inventory drops at the pre-determined reorder point.

First-In, First-Out (FIFO) Method It is a cost-flow assumption generally use by business entities in assigning cost to their inventories. This method assumes that the first units brought are the first units sold.

Internal control It is a system of procedures and forms established in a business to safeguard its assets and help ensure the accuracy of the information provided by its accounting system.

Inventory sale

It is an asset acquired and maintained by an entity, which are held for or as supplies in the business operations.

Inventory control system It is a set of policies and controls that monitors level of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be.

Inventory turnover Refers to the amount of times inventory is sold and replaced within a given period, such as a year. Low turnover rates can suggest that stores are acquiring a surplus of inventory, which can mean that they are experiencing problems, while a high turnover rate indicates that a store is doing brisk business. Inventory turnover is one of the many metrics used to gauge the financial health of companies large and small, and business owners may periodically assess their inventory turnover to see how they are doing.

Lead-time the

It is the period between placing an order and receiving delivery used in computation for economic order quantity (EOQ).


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Last-In, First-Out (LIFO) Method This method assumes that the most recent cost of goods acquired should be charged at the most recent sales made

New old stock (sometimes abbreviated NOS) Is a term used in business to refer to merchandise being offered for sale which was manufactured long ago but that has never been used. Such merchandise may not be produced any more, and the new old stock may represent the only market source of a particular item at the present time.

Periodic system It is an inventory tracking system that determines inventory levels only at fixed points in time through the use of physical inventory counts (Bragg, 2004).

Perpetual system It is an inventory tracking system that determines inventory levels on an ongoing basis by making incremental adjustments to inventory records based on individual production transactions (Bragg, 2004).

Reorder Point (ROP) It is the designated inventory level at which it is appropriate to replenish stock (Siegel, Shim, and Hartman, 1997). It is set such that the inventory level will reach zero at about the time the replenishment is expected to arrive.

Safety stock outs

It is the buffers or reserve stock kept on hand to protect against stock caused by delayed deliveries or increased demand.

Stock Keeping Unit (SKU) Is a unique combination of all the components that are assembled into the purchasable item. Therefore, any change in the packaging or product is a new SKU. This level of detailed specification assists in managing inventory.

Stock out Means

running

out

of

the

inventory

of

an

SKU.

Weighted average method It is a cost-flow assumption that yields a cost that is representative of the cost of the product over the entire accounting period. The average cost is weighted by the number of units purchased at each cost (Carroll, 2006).


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Chapter 1 Introduction

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