Computers in Industry 22 (1993) 71-79 71

Elsevier

Case Study

A computer system for inventory

management of lighting products:
A case study
S.O.E. Ng, E.C. Partington and D. Sculli
Department of Industrial and Manufacturing Systems Engineering, Unioersityof Hong Kong, Hong Kong

Received May 22, 1992; accepted July 17, 1992

This paper describes the problems and benefits involved in When all production processes have been com-
implementing a computer inventory control system in a partic- pleted, the finished products still need packaging
ular lighting products manufacturing company The paper is
directed at managers and analysts in small industries, and
materials before final shipment can take place.
should help them anticipate the likely problems that may arise The control and supply of materials in this
when implementing similar systems. The sub-system devel- industry is complicated further by the large vari-
oped to control sub-contracted work should also be of special ety of lighting end products. There are currently
interest. around 3,500 different stock items, requiring dif-
ferent combinations of materials, and over one
Keywords: Inventory; System; Control; Lighting; Sub-contract- half have quite an active turn-over rate. The
ing coding system used to control materials is very
important not just to the purchasing department,
but the entire operation of the factory. Other
1. Introduction departments that need to make use of the coding
system include the raw material store, the ac-
The principal function of the purchasing de- counts, and industrial engineering.
partment in virtually any industry is to ensure Materials requirements planning (MRP) is the
that the materials necessary for production responsibility of the purchasing department, and
a n d / o r distribution are available in the correct the practice in this organization is to prepare
quantities and at the right time. The company such plans at the end of each month for the
under discussion here is not an exception to this, forthcoming 2-4 months' period. The MRP is
because the manufacture of flashlights and produced from a four-month production pro-
lanterns involves many different kinds of mate- gramme which is issued monthly by the produc-
rial: plastics, metals, light bulbs, colorants, and tion planning department.
enamels. A host of other minor accessories are A certain amount of primary information [1] is
also needed: screws, eyelets, rivets and the like. required before any MRP can be prepared. A
proper and effective MRP is obviously highly
Correspondence to: Dr. D. Sculli, Department of Industrial dependent on the accuracy of the input informa-
and Manufacturing Systems Engineering, University of Hong tion. Computations also need to be accurate and
Kong, Pokfulam Road, Hong Kong. to be carried out in the right order. The large

0166-3615/93/$06.00 © 1993 - Elsevier Science Publishers B.V. All rights reserved

72 Case Study Computers in htdustrv

volume and complexity of the computations in- trol of inventories: whenever stock-out or
volved makes manual preparation of an M R P over-stock situations occur, the store will notify
virtually impossible, and M R P therefore is an purchasing personnel who will take the neces-
ideal computer application by necessity. sary corrective action;
- to update the inventory status and purchase
order mark-off.
2. G e n e r a l p o l i c i e s a p p l i e d to t h e c o n t r o l m a t e r i - The inventory control function in this company
als attempts, in a general sense, to maximize the
contribution to the overall company objectives
The raw material store (RMS) in this particu- factors [2]. There are several major secondary
lar company has general duties that can be sum- facets of inventory control in the company de-
marised as follows: scribed that follow from the general objective:
- to stock and take care of items received from minimize the balance of production and procure-
vendors; ment costs, minimize the inventory carrying costs,
- issuance of materials to the production shops provide an acceptable level of customer service,
and to other departments upon the receipt of and minimize losses resulting from pilferage,
material requisition forms, including the issue damage, unauthorized use, deterioration obsoles-
of materials for sub-contracting work to sub- cence, price declines, etc.
contractors as specified by the delivery orders; Inventory control is accomplished through
- to assist the purchasing d e p a r t m e n t in the con- comparison against a prescribed standard. The
company's standards are expressed as the periods
of time required for one turn-over of inventory.
Colin PartinlFton was born in 1938 in For example, when a raw material item is re-
London, England. He has been a
Chartered Engineer since 1969. He quired to take three months to complete one
received the MSc degree in Industrial turn-over, the standard inventory level is said to
Sociology from Imperial College Lon-
don University in 1976 where he also be three months of usage (MOU). For raw mate-
gained his PhD in Materials in 1988. rials, component parts, packing, and packaging
He joined the Department of Indus-
trial and Manufacturing Systems En- materials, the combined on-hand and in-transit
gineering of the University of Hong inventory ratio is usually set by m a n a g e m e n t at
Kong in 1979 where he teaches man-
agement. His research interests in- 2.5 to 3.5 M O U for items supplied for overseas,
clude mechatronics and organisation and at 0.5 to 2 M O U for items that are available
theory.
locally. The M O U ratio for finished products is
Erie S.O. Ng was born in Hong Kong usually based on volume, the target level being 3
in 1958. He graduated from Middle- to 4 months of sales. The ratios for individual
sex Polytechnic, UK (now London
Middlesex University) with an hon- models can vary considerably, from as low as one
ours degree in Mechanical Engineer-
ing in 1982. He also completed the month to as high as 9 or 10 months, depending on
MSc (Eng) degree programme in In- the balance of production and inventory-carrying
dustrial Engineering at the University
of Hong Kong in 1989. He has been costs.
working as a production engineer for The type of production system largely deter-
several years and at present holds the mines the best level of work-in-process. For ex-
position of Production and Material
Control Manager in a public company ample, the level will be very much less for a
manufacturing computer products.
job-lot or unit production system than it will be
Domenic Sculli is a senior lecturer in for large batch-type flow production systems. The
the Department of Industrial and work-in-process level for flashlings and lanterns
Manufacturing Systems Engineering
at the University of Hong Kong. He will not normally exceed two weeks' production.
was previously employed by Australia However, for machinery and building products
Consolidated Industries as an opera-
tions research/management science the work-in-process may be as high as 4 months.
analyst. His current research interests The amount of inventory to be kept is deter-
include the development of manage-
ment skills through the use of busi- mined for each item and depends on the nature
ness games, and the application of of the item. The standard for machine spare parts
stochastics and simulation techniques
to operations planning problems. is usually given or approved by the department
Computers in Industry S.O.E. Ng et al. / Computer system for inventory management 73

using or requesting the item. This standard is 3. The old system and problem areas
subject to periodic reviews with a maximum pe-
riod of a year. In the case of miscellaneous and Newly industrialized economies such as that of
minor items, the manager in charge of the store Hong Kong are often in a state of rapid expan-
has the authority to determine the inventory lev- sion. The company's business has consequently
els in line with expected consumption rates. increased rather quickly over the past several
There are two phases of inventory control, and years. The daily operational tasks and customer
they differ in both the time and the organiza- outward activities also become more complex as
tional level at which they are performed. The first expansion takes place.
phase of control is the front-line operating con- The old inventory control system was a bin-card
trol, exercised on individual items on a unit trans- system, which had been adopted by the raw mate-
action basis. This phase is also concerned with rial store some ten or more years earlier. The
the re-order points or trigger levels, when a re- characteristics of the old bin-card system are,
plenishment order must be placed. This, in turn, briefly, as follows. Each bin card signified one
is governed by the lead time for delivery and stock item with the stock code ranging from
fluctuations in usage or requirements. Long lead 100.XXXX to 109.XXXX. The bin card con-
times and large usage fluctuation call for higher tained six columns: date, receipt, issue, balance,
re-order stock levels and vice versa. The probable M / R or invoice number, and location of goods.
rate of usage is either assessed by analyzing past The store keepers were solely responsible for the
performance or from a forecast of future require- accurate recording of information on the bin card.
ments, or both. Future requirements are estab- The material location column of the bin card
lished by the 4-month forward production pro- designated the actual storage location of the par-
gramme which is available at the end of each ticular stock item. However, the store keepers
month. This will enable the computation of a could very often remember locations, and at times
range of possible economic lot sizes or replenish- did not bother to fill this column. Checking in-
ment quantities. The company policy is to make ventory levels of particular materials required
some effort to adhere-to the economical lot quan- reference to the bin card; daily stock status fig-
tities whenever possible. ures were not available until the monthly stock
The second phase of control is the summary or status report was released by the computer ser-
overall reviewing, exercised by the higher levels vices department.
of management. This is achieved through the Coping with increasing demand has always
monthly inventory/usage ratio report. The actual been a difficulty, and the practice of sub-contract-
results are compared with prescribed standards ing some production operations is well estab-
for both the individual items and the overall lished, sub-contracted work usually covers the
inventory level for all items. Appropriate action is initial or early operations such as plastic mould-
taken when necessary. ing and other related sub-assembly work. Often
It is important to note that not all the inven- cost savings can also be achieved by sub-contract-
tory items carry the same weight or importance. ing activities, depending on the cost of labour and
There are always a few items which are major overheads and the price quoted by the contractor.
and make up most of the inventory by value. Sub-contracted work can be divided into two
Other items will be of lesser importance, and broad categories. The first is plastic moulding,
many other minor items will account for a small which includes both injection moulding and blow
fraction of the total inventory value. Limited re- moulding. Even though the company has always
sources and facilities dictate that more effort been well equipped in terms of injection mould-
must be put into the control of important and ing machines, labour shortages commonly neces-
high-value items and less effort on minor items. sitate the use of sub-contractors. The second is
The well known approach of "ABC inventory the more labour-intensive sub-assembly work. The
analysis" helps to achieve maximum degree of sub-contractors factories are mostly located in the
control with the resources available [3]. The nearby areas of Mainland China, where there is
"ABC" inventory analysis in this company is car- an adequate and cheap supply of labour, [4,5].
ried out at least once a year. Sub-contracting to, what is in effect, another
74 Case Study Computers m lndust,3

country requires clearance by government bodies manual effort, and its deficiencies were con-
such as the Department of Trade and Industries, stantly being exposed as business increased. It
and the respective customs officials. The purchas- was apparent that, as activities increased, the old
ing manager was, and is still, responsible for system would face the following problems with
notifying the relevant company and government increasing severity:
departments of work that falls into this category. Clerical requirements will increase, especially
Outgoing materials and semi-finished products as the number of products and associated materi-
for sub-contracting work must be supported by als increase. The purchasing group needed to
formal delivery orders that are issued by the spend considerable effort in calculating the mate-
purchasing department. rials requirement for sub-contracted work.
The preparation of delivery orders for sub- Low efficiency as a result of errors in recording
contracting work is done using the bill of materi- and computations. Mistakes due to human error
als (BOM) and standard reject rates. The store is could easily be made and propagated, and this
authorized to issue the necessary materials to could lead to the occurrences of stockout situa-
sub-contractors according to sub-contracting pur- tions or over stocking.
chase orders or delivery orders approved by the Bin-card storage problems occurred whenever
purchasing manager. An exception is the use of new models or new product lines were launched.
sheet window glasses for flashlight lenses. As Each new stock item would require the assign-
these are heavy and fragile, they must be for- ment of and additional stock code number.
warded to sub-contractors directly from incoming Insufficient and slow information flow, which,
shipments. Issuing records for sheet window of course, could only come from the physical card
glasses are controlled by the purchasing depart- system. Each stock card had to be checked in
ment. order to obtain inventory status information. Daily
The store keeps detailed records for all the transactions reports from the store were not im-
sub-contracting materials (except sheet window mediately available.
glass) issued and processed components returned Material location problems occurred. The loca-
by various sub-contractors. The processed compo- tion of each stock item should have been clearly
nents returned must be consistent with the stan- stated in the column of the particular stock card.
dard usage rates, and any discrepancies are re- In practice, the location column was often left
ported to the purchasing department for investi- blank, with locations being memorized by the
gation. The store will also ask the quality control store keepers.
department or other concerned departments to Difficulty in controlling transactions related to
inspect the incoming goods as soon after arrival subcontracted work. Transactions related to sub-
as possible as possible. Any deviations from stipu- contracted work became more frequent and com-
lated standard specifications will be referred im- plex, thus requiring greater effort. This would
mediately to the purchasing department for ac- lead to over-issue or under-issue of materials, the
tion. referencing of the wrong bill of materials, and
A few more characteristics of sub-contracting numerous other accounting errors. After comple-
work are worth mentioning. The sub-contractors tion, sub-contracted work was often delivered in
provide labour only; all the materials required more than one lot over different-accounting peri-
are supplied by the company. Materials for plas- ods, and the accounts department had difficulties
tic moulding include plastic resin, and colorants in reconciling the costs of materials with each lot
or masterbatch pigments. Materials for sub-as- [6]. Often all the costs of materials were allocated
sembly work can include bought-out parts such as to the lot delivered first, giving the first lot a high
screws, rivets, sealings etc. Sub-contractors often unit cost; while the second and later lots were
come to take delivery of the necessary materials accounted as having no elements of material cost!
from the RMS and they are also responsible for
the delivery of completed products or sub-assem-
4. The new inventory system
blies.
The old inventory system was too "conserva- The implementation of the new inventory sys-
tive" and relied on a considerable amount of tem can be divided into three stages. First, the
Computers in Industry S.O.E. Ng et al. / Computer system for inventory management 75

introduction of personal computers (PCs) into the reserving/adjustment transaction can be entered
company several years earlier meant that a com- into to in order to correct the stock.
prehensive materials management systems could (b) The physical count adjustment unit accepts
eventually be introduced. Second, a computerized the actual quantities counted as the true record.
MRP for the purchasing department was in- (c) The display adjusted transactions unit lists a
stalled one year after the introduction of PCs. summary of transactions adjusted on the screen
Third, the bin-card system was discontinued some sorted by item number. This allows a quick scan
six months after the MRP system was introduced. on what has been entered to ensure accuracy.
It was replaced by a new inventory system that (d) The print transaction edit-list section allows
was limited to processing sub-contracting transac- checking of data entered before posting. A batch
tions only. total is also provided at the end of report.
From the point of view of the purchasing de- (e) The post to update files unit updates the
partment, the original manual work involved the actual quantities to the item file. It also creates a
issuing of purchase orders, delivery orders, and historical record in the transaction history file.
monthly reports. These activities were quickly This can be printed out through the "print daily
transferred to the newly acquired PCs using pack- transaction list" function of the reports menu.
ages such as "Wordstar" and "Super-cal". The The system will also automatically backup the
computer printer thus became the main piece of current data before proceeding. In case of inter-
office equipment that served to introduce office ruption, the transaction can be recovered using
automation to the purchasing department. the "restore" function of the system utility op-
Books by Bentley [7] and Nordbotten [8] pro- tion.
vided some useful information and direction with (2) The file maintenance module deals with the
design and system analysis. The new inventory maintenance of the item master file, password
system is designed around the needs of the RMS, file, and the maintenance of the control file.
and generates updated Stock status reports with There is no need to enter the quantity and loca-
the use of PCs, [9]. It consists of the six modules tion of an item since this is shown on the screen
as shown in Table 1, with the following specific and is equal to the distribution quantity of the
functions. item in the different locations. Up to sixteen
(1) Transaction processing. This handles the locations are shown on any one screen, and addi-
daily transactions and physical count adjustments tional locations are displayed on appropriate
and can be sub-divided into the following units. prompting.
(a) The daily transaction processing unit. This (3) The reporting module prints daily and
accepts all types of transactions, such as purchase monthly reports. The daily transaction list pro-
receipts, material requisitions, and returns from gram prints all transactions within a day of opera-
the shop. The on-line updating of data to other tion, sorted by item number. It also includes
files immediately after entry of a transaction. If reports on the current stock status of all items
data entry errors are found on updating, the requested.

Table 1
Modules of the system
Module Function
Transactions processing Entry of daily transactions and physical count adjustments transactions
File maintenance Allows user to set-up basic item information and passwords
Reporting Prints daily and monthly reports
Inquiry Displays item stock status and history of transactions
End period and closing Clears all transactions and updates internal item usage tables
System utility Saves data from hard disk on to floppy disk and organizes data files
76 Case Study Computers in Industo'

Vendor
It-

j I yVDe
r d.o c u m e n- t

LJ R.M.S.

Production - , m - - -
+
Fig. 1. Operational flow for sub-contracting transactions: Manual inventory system.

I Production
I control ]
I Prodoctioo I

Material ~.~(Bill of (
kca culation J - X~materials
I'~oter!o,
I elivery {
I
Mot'l
I Delivery

l
" IMot'eriol ~'~

i
lL oe,~very
~ ~
I ', IM=e,~o'
I Iconsumptlon I
I I Ve°do,
I ;.,,^:.~I
I!--LOUOUr
i Lreport/ L. .... ~ I cost
k. ............ J

I NCR C o m p u t e r L.

Fig. 2. Operational flow for sub-contracting transactions: Computerized inventory system.

Computers in Industry S.O.E. Ng et al. / Computer system for inventory management 77

(4) The inquiry module includes: stock general work and data entering. The new system is, as
status inquiries, daily transactions, and monthly expected, much faster than the old one. Time can
transactions inquiries. Information is retrieved therefore be saved and the work load in the
using the stock item number. It can also be ac- supply department will be correspondingly re-
cessed by using part or all of the description. The duced.
number of locations can also be more than the The accuracy of figures required for materials
screen view block of fifteen. Daily transactions issuing and receiving has improved because arith-
inquiries are initiated by entering the reference metical calculations are now performed by com-
date, a calendar date at the time of entry of the puter. This also applies to the issuing of materials
transactions, not the document date. For the item required for sub-contracted work. It also follows
monthly transactions inquiries, the item number that the chances of stock-out or over-purchase
forms the basis for the search through all relevant have been virtually eliminated.
transactions entered during the current period. Timely and more current information is now
(5) The period end closing module is run at end readily available. The new system can also serve
of each fiscal period and before the starting of the function of updating and reporting the daily
transactions of the next period. The processing transactions, stock status, and buffer stock levels.
involves the closing of accounts for the old period These reports can be generated at any time,
and the initialising of accounts for the new pe- eliminating the need to wait for the monthly
riod. stock status report that used to be generated be
(6) The system utilities used have two basic the central computer services department. The
functions. First, the backing-up of data files from supply department is also better informed of the
hard disk to floppy disk(s), and the restoring data latest position on supplies.
files from floppy disk(s) to hard disk. Second, is More efficient storage of information, solving
the re-organization of data files including sorting the filing problem of space required by bin cards,
and the insertion of new records. which are no longer required. Provided the rele-
The a new inventory system for the control of vant data is entered into the new system, the
subcontracting work was designed to maintain problem of missing of information should no
accurate records of sub-contracted work, the bill longer arise. The problem of materials assumed
of materials involved, and the sub-contracted lost because of a missing or incorrect location will
purchase orders. The new inventory system is no longer exist.
much more capable of dealing with the tedious Better control of sub-contracted work. It was an
paper work involved. A computer print-out called arduous task under the old system to control
the material delivery registration replaces the tra- transactions related to the sub-contracted work.
ditional delivery order. The differences between The control of material issues is now computer-
the old and new system represent a significant ized and controlled by separate delivery orders to
change of operational flow as illustrated in Figs. 1 the sub-contractors. The outstanding balance of
and 2. materials required for each sub-contracted item
is now immediately available from the system,
and the problem of over or under issuing of
materials has been virtually eliminated. The new
5. Benefits and concluding comments system also maintains records of vendors, BOM
and purchase orders, and there should no longer
The initial feedback from the store personnel be any confusion concerning the BOM and the
indicates that the overall effects of the new sys- actual materials required for sub-contracted work.
tem are satisfactory and that the new system is The marking-off of purchase orders is now done
much superior to the old bin card system. After by the computer system, and when an order has
discussion with the staff of the supply department been completed, no further transactions are al-
and observations made during the period of im- lowed to take place on that completed order.
plementation, the principal advantages of the new Overlapping or wrong marking-off of purchase
inventory system appear be as follows. orders were a major concern under the old sys-
Time saving in the handling of related paper tem.
78 Case Study Computers in Industo'

Improvements in the accounting for fluctua- enthusiasm of the particular employee. For ju-
tions in costs of sub-contracted work. The new niors without a good academic background, the
system re-arranges accounting purchases as shown learning process may prove long and difficult, and
in Figure 2, and the cost of transfer is handled it will take two to three months. And there is
separately for delivery orders and vendor's in- always the risk that the new staff misuse the new
voices. An intermediate stage in the new system system and corrupt its data files.
will transfer the accumulated cost of materials Senior personnel from the store are responsi-
into new records using new codes, and in process- ble for the training of juniors and new staff.
ing the vendor's invoice, the cost summation will However, supervisors in the store are not com-
be added to the labour cost, producing a correct puter experts and may find it difficult to monitor
final cost for the product. the work of their subordinates. Training pro-
The initial conversion to the new system proved grammes to accelerate the pace of computeriza-
more difficult than expected. It was found that tion for the organization as a whole must also be
the BOM information, the outstanding balances introduced. The company must provide more op-
of purchase orders, the lead time and buffer portunities for training to all staff. This must
stock level, and other basic data often had many include both internal and external computer fa-
entry errors. Remedial action was required to miliarization training programmes.
tidy up all the relevant information for a second The new inventory system has been imple-
start-up attempt. However, there was never any mented for nearly one year, and the feedback
doubt that the system would be implemented from all parties concerned is positive and the
since it had the support of management, and it results are reported to be much better than the
was also well recognised that the old bin card old system. Some deficiencies and minor prob-
system had severe limitations that would bring it lems were discovered, as is always the case with
to a halt at some future date. the implementation of large systems. Minor de-
Posting work in the material store is now done sign modifications and fine tuning may still need
by personal computers (PCs). However, at pre- to be carried out as and when necessary, The
sent, there are only two sets of PCs in the ware- establishment of local area network of PCs is now
house, and these needed to be shared by six the objective, and this will enable the implemen-
groups of people, each representing a different tation of more sophisticated computer applica-
material category. The approach taken is to allo- tions.
cate the PCs to the various materials codes: one Inventories form a significant portion of the
for the packing and packaging material group, current assets of any business enterprise. The
and the other for the rest. A shortage of time for management of inventories has an important
processing is very apparent, and several more bearing on the financial strength and competitive
PCs will need to be added in future. position of a manufacturing organization, because
At present there is no link-up whatsoever it directly affects the working capital and the
amongst the individual PCs installed in the vari- production and customer services.
ous departments. It is inconvenient when one
department wishes to check some information in
another department. For example, the PC in the
References
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