ACKNOWLEDGEMENT

I, Tej Naik, an MBA student of Cardiff University, Wales would like to acknowledge the
company and all the employees of the organization for their kind guidance, co-operation and
support given to me.
I, sincerely thank New Millennium Bakers India ltd for allowing me to be a part of their
renowned firm for my training program.
I, express my gratitude towards all the employees of the stores, H.O.Ds, and the Chairman of
the plant Mr. Datta Naik for their support during my training period. I thank the workers of the
plant for their co-operation given to me.
I would also like to thank Professor Kevin Stagg, for being ever ready to resolve any of my
doubts and queries on mail and in person.
It was because of their support, knowledge and information that my project was a success. I
express my sincere thanks for all that the company has done for me.

Abstract
In todays economic climate, reduction of costs and improvisation of supply chain has been the
major focus for most of the enterprises. Hence proper management of inventory has been the key
to the success of many businesses. This study was conducted to find out and investigate the
issues in the New Millennium Bakers inventory management and how could it be resolved.
The study was carried out in the form of case analysis and data was collected using primary and
secondary sources. In depth interviews of managers and other store and purchase personnel were
taken. The findings in the research revealed that New Millennium Bakers had stored excess of
inventory and used old outdated techniques to manage it. Based on the findings the appropriate

solutions were discussed and an inventory management tool was developed to help the company
in further management of inventory.

Chapter 1 - Introduction
Today due to increasing competition and volatility in external factors, companies have majorly
shifted their attention towards reduction in costs. Reduction of costs and meeting customer
demands has been every organizations dream to fulfill, Companies have tried and implemented
a number of different techniques to minimize wastes, reduce costs and meet the demands of the
customer. Proper supply chain management is the key to success of business today (sri 5,10,11).
Its seen that today competition is just not within individual companies but their supply chains as
well (Christopher 2009). A supply chain consists of a number of elements such as logistics
management, procurement, distribution and inventory management. Proper management of
inventory within the players among the chain is considered to be the last resort of any supply
chain (Liyanage 2010).
Inventory management consists of different processes like keeping a track of goods, handling
and managing the goods held in stock (Chay 2006). Effective management of inventory will give
the company competitive an edge in its business (Chay 2006). Efficient management of stock,
accurate visibility and fast efficient fulfillments can help the company in executing comparative
pricing strategy towards its customers and build relationship with them (Chay 2006). Hence
companies like Apple and Dell focus majorly on Supply Chain management which is one of the
major contributors to their revenues and more share in the market (Dignan 2009). A study done
by AMR ranked Apple as No.1 and Dell as No.2 in managing their supply chain in 2009 (Dignan
2009). It was seen that Apple kept only 5 days of inventory in store as compared to Dell and
Lenovo with 7 and 15 days respectively during the holiday season (Berka 2009).
In my project here I am going to do a study on inventory management in a food processing firm
called Millennium Bakers in Goa, India. Inventory management is a key to achieving success in
the food industry as both the raw materials and the finished goods inventory is perishable and
customers lay a major focus on quality while purchasing the product. Hence the worlds largest
fast food firm- McDonalds- uses a system called Just In Time, where they begin to cook their

burgers only after the customer have placed their order (Atkinson 2005). This helps McDonalds
reduce their inventory and supply customers with fresh food, as compared to earlier where
McDonald used to pre-cook a batch of burgers and eventually discard those that wouldnt be sold
(Atkinson 2005).
1.2 Objectives and Aims of the project
Reducing inventory and maximizing service levels of its functional departments and companys
customers has been the main objective of managing the inventory (Narayan et al. 2008). Study
done by Silver (1981) found a number of objectives behind managing inventory. These include
maximizing rate of return on stock investments, cost minimization, profit maximization and
ensuring flexibility in operation.
The objectives of my project aim at a similar motive. The first phase of the project which will be
discussed in chapter 3, it focuses on inventory management system adopted by New Millennium
Bakers and methods used to track inventory. Later in chapter 5 the focus would be on finding the
costs incurred by New Millennium Bakers in managing inventory in Goa. Here a sample of few
raw materials would be taken based on raw materials consumed most frequently and a further
study would be carried out on holding of inventory in proportion with the sales trends, the level
of safety stock maintained for the products, the lead time taken and the shelf life of the raw
materials. All these studies would be carried out by interviewing the managers and employees of
the organization.
The final part of the project, chapter 6 focuses on developing an inventory management model
which will help the organization to reduce overhead expenses and working capital losses
resulting from excessive dead stock, improve the accuracy of managing inventory and avoid
wastage due to stocking of perishable goods on shelves (major cause of high overheads) for New
Millennium Bakers.
However, this project will start in chapter 2 with a literature review which will highlight on the
importance of inventory management and the benefits a firm gets from implementing it. The 2 nd
part of this chapter focuses on the views of different the authors regarding managing of inventory
and why inventory management plays a key role in New Millennium Bakers operations. The
final part of the chapter focuses on different tools of inventory management that exists, how they
would help the company in minimising costs and despite technological advancements today, still

some small and medium manufacturers cant use tools like barcode scanners because of huge
investment.

Chapter 2- Literature Review

2.1 Importance of Inventory Management

Today supply chain has gained a lot of attention and yet many companies are struggling with
their processes of supply chain (Croxton et.al 2002). As already mentioned above inventory
management is a major component of supply chain, it helps in matching the supply and demand
among supply chain partners and helps to cope up by providing flexibility in the uncertain
globalized business environment (Croxton et.al 2002). As per the 17th annual logistics report of
supply chain management, United States economy has already paid a huge price for holding
excessive inventory, the country has spent over $1 trillion on logistics, out of which 33% is said
to be incurred just on holding inventory and its believed that the logistics cost has grown to 9.5%
as a part of the U.S gross domestic product (Wilson 2006). Inventory Management plays a
pivotal role in the functioning of an efficient organization (Adeyemi et al 2010). The goal of
inventory management is to reduce the holding of stock as to have a balance between conflicting
economies and there by tying up capital as a lead against different costs like storage,
obsolescence and spoilage incurred(Adeyemi et al 2010). The firms also desire to make items
readily available, whenever required to exempt the costs of not meeting demand (Adeyemi et al
2010). Business failures can be caused by inventory problems (Adeyemi et al 2010). If an item is
not available on shelf when the customer requires, the firm will lose the customers not only that
time but also on many occasions in the future (Adeyemi et al 2010). As per the studies done in
the past its found that most of the managers lacked professional expertise and tended to take
decisions of managing inventory based intuition which leads to inventory not being analyzed
properly, decisions of inventory not being integrated with strategic organizational needs and in
all results in improper practices of managing inventory in the organization (Liyanage 2010).The
conclusion which we can draw from this is that inventory management helps in making a
significant contribution to firms assets as well as increase the profitability of the organization.

2.2 Definition and Concepts of Inventory Management

Different authors came with different views regarding managing of inventory. According to
Kotler (2002) proper management of raw materials, work in progress and finished goods
inventory level helps in achieving adequate supply and helps in reducing the costs of under or
over stocks. On the other side according to Rosenblatt (1977) The cost of maintaining inventory
is included in the final price paid by the consumer. Good in inventory represents a cost to their
owner. The manufacturer has the expense of materials and labour. The wholesaler also has funds
tied up. So as you can conclude the goal of both the researchers are similar and they believe in
maintaining inventory level that will give optimum stock and lowest cost (Adeyemi et al 2010).
According to Morris (1995), managing inventory helps in increasing the total value of all assets
in organization which includes material and human resources by keeping in the one kind of asset
which is most economical. While Keth et al. (1994) stated that the major objective of managing
and controlling the inventory is to inform managers when, how much and how frequently the reorders should be placed and also how to minimize stockouts by maintaining appropriate safety
stock levels. Thus to conclude the goal of inventory management is to minimize the stockouts
occurring and that the goods should be available on shelf when needed (Adeyemi et al 2010).
Silver (1981) highlighted that there are four relevant costs that play a decisive factor in making
decisions regarding inventory, namely Carrying costs, Replenishment costs, System control costs
and costs of insufficient supply in the short run. In my project here I am going to focus more on
carrying costs since I am trying to formulate strategies to reduce carrying costs and make optimal
use of inventory of New Millennium Bakers. Its important for all the firms to realize that having
excess of stock results in tying down money in maintaining warehouses, the cost of borrowing
the capital is tied hence cannot be made use for other investments, high insurance costs are
incurred for managing the huge pile of stock, and there are also chances of spoilage of goods
(Adeyemi et al 2010).
.
Planning and controlling are the two important factors of inventory management (Adeyemi et al
2010). Planning involves predicting the future and getting ready in advance (Adeyemi et al
2010). The firm needs to plan as to what type of items to order, how much quantity to order and
how often should the firm order as to maintain stock coordination in a economically effective
way (Adeyemi et al 2010). As said by Robinson, Logan and Salem (20) that the major cause for
small business failure is improper inventory planning (8,14).

The controlling of stock is about achieving the above objective by setting up at the planning
stage (Adeyemi et al 2010). It involves periodical monitoring of stocks and deciding the way to
act on the basis of information gathered (Adeyemi et al 2010).
2.3 Risks of improper Inventory Management
Already the researchers and financial analysts have spoken a lot about the continuity and the
long run profitability of business when inventories are managed improperly (Adeyemi et al
2010). If a management neglects its inventory management, the firm is unable to maintain low
costs as to maximize profits and there also chances of bottle necks in production (Adeyemi et al
2010). Second, goods not available to customers in time will create an irreparable loss in market
apart from the sale being affected due to the highly competitive world (Adeyemi et al 2010). As
mentioned earlier, a company keeping excess of inventory will tie down funds, there are chances
of goods getting obsolete and spoiled, however the company cant keep less stock as well
because it has to meet the demand of production and sales when required (Adeyemi et al 2010).
So to conclude improper inventory management affects the objectives of the organization and
hence is a key area which the companies need to focus on (Adeyemi et al 2010).
2.4 Inventory Management tools and techniques
In recent times majority of the companies have started implementing technologies like bar
coding systems and Radio Frequency Identification (RFID) scanners for accurate inventory
management (Piasecki 2011). These systems are called as Automated Data Collection (ADC)
and if implemented properly can help in reducing inventory errors (Piasecki 2011).
Bar code scanners- Here the companies normally use laser scanners to read the bar codes
(Piasecki 2011).

RFID- These are devices like hardware pieces or small devices attached to an object to transmit
data to RFID receiver (Piasecki 2011). They are more efficient than bar code system because
they can hold more data and change it during processing (Piasecki 2011).

http://www.inventoryops.com/ADC.htm
However many of the small scale and medium scale industries like New Millennium Bakers
cant use the Automated Data Collection systems because of the fear of six figure project costs
(Piasecki 2011). Also if this systems are poorly implemented can result in putting the company
in a more worst case scenario, hence its important for companies to focus on the basic inventory
models first.
My study here is going to be based on the Classical inventory models used by many small and
medium scale businesses and which can be used by New Millennium Bakers as well to manage
inventories of individual products (Roumiantsev and Netessine 2007). Economic Order Quantity
(EOQ) is one of the famous classical inventory model used to manage the inventory by a
majority of firms (Roumiantsev and Netessine 2007). The EOQ model focuses on choosing the
right amount of quantity to use in replenishing items of inventory by managing the tradeoffs
between storage costs and ordering costs (Schwarz 2008). Ordering a large quantity reduces the
frequency of ordering and hence reduces the ordering cost however this leads to holding a larger
inventory stock which increase the storage costs (Schwarz 2008). On the other hand ordering a
smaller quantity reduces the inventory holding costs but requires the items to be ordered more
frequently hence increases the ordering costs (Schwarz 2008). Hence companies use EOQ as it
helps minimizing the cost of order-quantity (Schwarz 2008).
Its important for the firms to realize that for implementing EOQ they first need to have
knowledge about how much does it cost the company to place an order and how much cost is
incurred for holding the items in stock (Schwarz 2008).

Research undertaken by S. L. Adeyemi and A. O. Salami (2010) on inventory management

followed by Coco-cola plant in Nigeria and they found out that even Multinational Giants like
Coke always dont implement EOQ model for ordering raw materials. It was proved that out of
the 5 years of study for at least 3 years the expected value of each product was greater than the
value observed of each product which basically means that the coca-cola bottling company in
Nigeria was holding excess of inventory and had more money blocked in their systems (Adeyemi
et al. 2010). Therefore its important to understand that management of inventory is a must for
the survival and continuity of organizations that are focused on achieving their goals (Adeyemi
et al. 2010).
The second tool which I am going to highlight upon and implement is the ABC analysis used for
managing inventory. ABC analysis has evolved from the Pareto principle of the 80:20 rule, the
philosopher from Italy stated that a small proportion of population (20%) in Italy owned the
majority of wealth (80%) (Jessop, et al. 1994). Similarly in context to inventory systems it states
that most of the inventory costs (80%) is contributed by a few items(20%) and the costs of large
items (80%) are relatively low and account for around 20% of costs ( Tanwari, et al. 2000). It
means large interest and majority of the focus should be on 20% of the items and the rest 80%
should get moderate attention (Water 1992). Thus large amount of costs like inventory and
clerical are reduced by focusing and controlling few items (Carson, et al. 1972). Therefore
its important for firms to understand that ABC analysis helps in classification of inventory
according to their contributions to annual costs of entire system (Tanwari, et al. 2000).
Reid (1987) decided to carry out ABC analysis in hospital inventory systems. Here he had
decided to take a sample of 47 disposable respiratory therapy units and partition them on the
basis of their annual dollar usage value. The class A items consisted of 20% of stock keeping
units (SKUs) and accounted for 70% of total value, thus was given maximum importance and
helped in minor potential savings for the hospital.
The final tool which I would like to highlight upon is Just In Time (JIT) which also can be called
as pull based or made to order system (Yeh 2000). It was a system founded in 1980s to change
the manufacturing environment by Taichi Ohno and Shigeo Shingo (Bragg et al. 2005). JIT helps
the firm in minimizing its inventory by building a leaner manufacturing system and enhancing
productivity (Helo 2004) which in turn reduces the cost of manufacturing by minimizing risk

(Curry and Kenney 1999; Rahman 2004). Study done by Lieberman and Demeester (1995)
showed that implementation of JIT leads to immediate reduction of raw materials. The cost of
holding inventory reduces due to reduction in work in process and it helps in reducing the level
of finished goods due to reduced cycle times and improved process reliability ( Kros et al.
2006).

Majority of the companies still implement the traditional push system (e.g. Hewlett Packard and
Compaq) and are believed to face higher financial risks, as the positive cash to cash cycle and
decreasing product lifecycles lead to inventories to lose their value (Kros et al. (2006). In both
the systems location of suppliers is the key due to increasing transportation costs (Helo 2004).
For example Mercedes which is implementing the pull-based system for its M Class SUV in
Vanceboro have located their major component suppliers within 4 hours driving distance from
the manufacturing facility (Kros et al. (2006).
Various authors have done studies on JIT systems adopted in different industries. Billesbach and
Hayen (1994) had done a comparative study on 28 firms implementing JIT systems with regard
to average sales to inventory ratio for the period 1977-1979 and during 1987-1989 and concluded
that 25 firms showed increase in average sales to total inventory ratio at 0.05 level. Also as we
know, JIT has helped Toyota save money (Tokarev 2010). Thus from the various studies done
on JIT we can see that implementing it can help on average reducing costs of inventory,
improving productivity and shortening lead times for the purchasing organization ( Kros et al.
2006).

Chapter 3: New Millennium Bakers case study

3.1 Introduction
This section is going to focus on New Millennium Bakers. Here the background and the history
of the company will be highlighted followed by the methods the firm follows to manage
inventory, the roles of the purchase and stores department and later describing the importance of
inventory management for New Millennium Bakers. All this information was provided by Ms.

Nisha Chodankar the H.R Manager and a few other store and purchase department employees of
New Millennium Bakers.
3.2 Background of New Millennium Bakers in Goa and Monginis
New Millennium Bakers was founded in Verna, Goa, India in the year 2000 under the leadership
of an Goan entrepreneur Datta Naik (Kamat 2002). The company runs as a franchisee for
Monginis and was initially started with an investment of Rs. 1.5 crore ( 200,000) and continues
to invest more in the state of art technology bakery and expand (Kamat 2002). Presently the firm
has around 29 franchised outlets scattered all over Goa (GoaLive Blog 2010).
Monginis initially was founded in Mumbai in the year 1971 by HT Kharakhiwala (Kamat 2002).
Today Monginis has got the credentials as the number one cake brand in India with more than
480 cake shops an additional 15000 retailers selling Monginis products in 12 different cities
across India (Monginis 2011). In 1991 the company moved across international borders by
targeting Egypt as their new market, since than the company has got its presence in Cairo and
Alexandria with over 35 exclusive shops and acquired the tag of one of the leading bakery
brands in Egypt (Monginis 2011).
2.2 Background of the fast food Industry
Today due to customer sophistication and changing gender roles (working women), fast food is
one of the worlds largest growing food type (meri news 2011). Fast food industry in India is
growing at 30%-35% and all the major brands of the world have succeeded in the Indian market
and made their presence felt (Business Wire 2011). For examples Dominos plans to expand by
more than 60 outlets every year, while Yum brands Inc by 2015 plans to open 1000 fast food
outlets (Maheshwari 2009).
3.3 Background of Goa
Goa is a small state in India located in the konkan belt on the western coast of the Indian
peninsula (Maps of India 2011). Its said to be one of the most visited tourist destinations in India
(Goa India Tourism 2011) and Euromonitor ranked it among the top 150 leading tourist
destinations of the world (Bremner 2007). Tourism contributes to 15% of states gross
domestic product and is the primary industry of Goa (GVPedia.com 2011). Its closely followed

by Mining and Agriculture (GVPedia.com 2011). There are other pharmaceutical and
Multinational companies as well like Bosch and Siemens, who have setup they are operations in
Goa.
In the fiscal year 2009-2010, Goa recorded the highest per capita income among all the states
and union territories in India (The Hindu 2011), making it an attractive destination for all the
major brands on their calendar.

3.4 The market size and the major players in the Goan market:
Pastry Palace a local based company in Goa is the major competitor of Monginis with more than
30 outlets and was present long before Monginis entered in the year 2000 (Pastry Palace Goa
2010). There are other local brands like Pastry Cottage (2 outlets), Pastelaria (2 outlets), Bread
and more (4 outlets) and Great Oven (6 outlets) who are the principal competitors for Monginis
as well.

1
2
4
5
6
7

Name Of Pastry Shop

Pastry Palace
Pastry Cottage
Pastelaria
Bread and more
Cake walk
Great oven

Number Of Outlet In Goa

30
2
2
4
4
6

MAJOR PLAYERS (indirect competition)

a) Dominos pizza is present in around 7 locations (Just dial 2010).
b) Subways have established around 2 outlets.
c) Cafe Coffee Day at around 10 locations (Gifts to India 247.com 2011).

3.4 Monginis Inventory Purchase

In assessing the evidence relating to Monginis and its inventories, it will be appropriate to
consider the companys outsourcing policies. Initially the firm decides to take quotations from
two to three suppliers from whom a supplier is chosen based on negotiations with regard to the
price, availability of product and the terms of payment. Later the purchase department prepares a
purchase order, according to the quantity required and a payment is made within 15 days after
the goods are purchased.
A requisition is made and sent to the main suppliers in Mumbai, since transportation takes 7 days
and a safety stock of 7 days is always maintained to avoid shortage of supply. Sometimes
products are sourced from 3-4 different suppliers to guarantee delivery and add a competitive
element to the price paid for raw materials. For every order bought, the orders are sampled, lab
tested, approved and the production trial is taken. The same process is implied for daily and new
suppliers as well and if the results deviate from the standard, then the order is rejected. However
there is a permanent contract system followed only for eggs as it is based on comparative rate
studies. New Millennium Bakers generally buys vegetables twice and cherries and chocolate
once a month.
The company has its own store house at Verna, which stores the packing material (cartons)
bought from the suppliers (Shinde Packaging). Certain suppliers supply directly to the company
with the help of companies like Rajesh Road lines, Garge road lines.
The companies normally prefer to place orders of raw materials from outside Goa as excise duty
benefits prevail. During the seasons like Christmas the firm increases their orders of raw
materials from suppliers due to heavy demand.
The company has loyal suppliers throughout the country. For example the Vegetables are ordered
from the city of Belgaum 159 kilometers away from Goa, twice a month. Chocolate is ordered from
Mumbai and cherries from Jammu 579 kilometers and 2524 kilometers away from Goa ( distance
between cities.co.in. 2011).The local groceries are ordered from Goa itself. Eggs are the most

essential ingredients and hence are contracted. An advanced intimation is made and given to all the
suppliers. All contracts are valid for a year and payments are made in 15 to 30 days. The relations
with the suppliers are very flexible and if raw materials are of sub standard quality they are rejected.
Long term relations with Goan suppliers are not followed because they are often expensive and there

is inconsistency in supply. Hence its vital for the success of the company that good supply chains are
maintained outside the local area but this can make supervision more expensive or difficult but is also
subject to excise duty regulations.
3.5 Stores Department
Here all the materials are kept to the requirements of the production department. The store room
consists of both perishable and non perishable raw materials. The company follows a First In
First Out method of monitoring inventory materials. The entire department consists of nine
employees comprising of store in charge, store keepers and helpers.

STORE

PACKAGING

MAIDA
(SEIVING)

OTHER RAW
MATERIAL

The store forms a very important sub department of the production department. Since New
Millennium Bakers procure their raw materials from different parts of the country, for storing
perishables like vegetables, milk, curds etc the firm has a cold room, whereas for chicken,
prawns and other foods that need to be frozen there is a special freezer. Besides this there is a
separate storage area for flour, wheat, sugar and icing sugar. The items like colouring essence
and other materials are divided into batches and stored on racks. The division into batches helps
the company to consume products before the expiry date nears.

Process of raw material

Placing order

Raw material received from supplier

Checking the material Quantity

Inspection by QA

Lot label

Storage

Issuing

3.6 Reasons why New Millennium Bakers needs to focus on inventory management
The major international fast food franchisors have entered Indian and the Goan market and they
play a major part of the competition to Monginis, as today the customer sophistication has
increased, double income has lead to more disposable income and people have also started
becoming brand conscious (meri news 2011). This has made local Fast food franchisers like
Monginis increasingly cost and quality conscious.
Due to intensive competition in market and less differentiation among the competitors products
Monginis needs to focus on product quality, variety and price. In such case proper inventory
management is essential to ensure that a company has sufficient inventory on hand to meet the
needs of both its customers and its operations. However, an excessive amount of inventory on
hand or shipping the wrong goods to customers ties up cash and increases expenses such as
additional storage, transportation and labor costs (Accu-Dart 2009). In addition, excess inventory

cant be held too long due to perishable items in the food industry, this would significantly result
in reducing inventory value (White 2008).

Chapter 4- Research Methodology and Selection of Sample

4.1 This chapter is going to highlight the research methods used to carry out the study and reach
the conclusions. This project is based on a case study involving, interviews with employees of
the organization, my findings from my own research and data analysis. Secondary sources will
also be used to analyze the problems New Millennium Bakers is facing on inventory and help to
come up with some recommendations.
Saunders et. al. (2009) said that its always important to have a plan ready before carrying
forward with the research and its important to meet the standards of the examination board.
Saunders et. al (2009) defines research as a method used for collection of data and specifies that
its just not about reading articles and books but talking and taking interviews of people as well.
Becker (1998), Davies (2003), Creswell (2003) and many other say that in research both,
qualitative and quantitative data should be used or atleast one of them. Qualitative research is
when data is collected from participant observations, documents, interviews, direct observation,
physical artifacts and archival records (Yin 1989). On the other hand quantitative research deals
with statistical methods for analysis and is used to verify theories and identify variables to study
(Creswell 2003). This project uses both qualitative and quantitative research.
There are also other methods of research such as primary and secondary research.
Primary research As this project research uses interviews with employees as a method of
collecting primary data, I shall focus on interviews in this section. Interview is considered as a
dialogue or a conversation between two or more people (Saunders et. al 2009). It helps in
directly collecting information applicable to research and it can be carried through face to face
conversation, internet or telephone (Saunders et. al 2009).

Secondary research Involves the data collected for a specific report by a particular person but
later used to solve the purpose of the other party (McQuarrie 2006). Its said to be the cheapest
and quickest source of market research and normally consist of past reports of market research,
sales report and customer databases (McQuarrie 2006).
With the help of the primary and secondary research the flaws in the inventory management of
New Millennium Bakers will be identified and suitable solution will be developed to benefit the
company in the long run.
4.2 There are 2 sampling decisions to be considered in this project.
1. Inventory- Monginis has got two types of inventory, raw materials and finished goods as
its a manufacturing unit. The inventory constitutes of perishable and non perishable
items. Raw materials constitute a major part of the inventory which are stored in
warehouse and supplied to the production department on the basis of the demand.
Selected as the project was based on studying the inventory model followed by Monginis Goa.
I decided to choose raw materials as they are ordered in bulk and stored in huge quantities.
2. Raw material- Raw material division itself holds an inventory of over a hundred products,
each classified under various tags like cocoa products, sweetener etc. This project is
based on a product sample of 9 products for which the data requirements for the
analysing instruments (ABC) will be done and from that a (sales trends, holding cost)
will be carried out on the 6 products chosen on basis of consumption value and which
constitute to 15% of the average inventory .
SELECTED PRODUCTS
Products
Maida
Eggs (NOS)
Sugar
Margrine
Fresh Cream
Icing Sugar

Characteristics of final sample

The use of inventory tools like ABC, Sales trend, etc requires a specific kind of input data, and
therefore it is essential that the sample should have the following characteristics.
Sales of the item should be known for the past few months. Its also necessary to know the
amount of stock in hand, the details of when the goods receipt note ( GRN) was made and its
important to know about the orders placed to avoid the dead stocks.

Chapter 5- Collection of data and findings

Primary Data
5.1 ABC analysis
As mentioned earlier in the chapter 2 of project, ABC analysis is an inventory tool which helps
the firm classifies their items on the basis of their importance with regards to the yearly cost of
the entire inventory system (Tanwari et al. 2000).
a) A items are important and expensive here normally 10% - 20% of the items value at
70% - 80% of the cost and require special attention and care (Tanwari et al. 2000). The
orders for these items should be placed with the help of Economic Order Quantity and
key attention should be placed on safety stock by specifying accurate service levels
(Tanwari et al. 2000). Here relationships with the vendors need to be explored, to reduce
the variance in lead times and the level of safety stock (Tanwari et al. 2000).
b) B items are of average importance and considered ordinary here 20% - 40% of all items
value at 15% - 20% of the total cost and require standard care (Tanwari et al. 2000).
Generally the approach followed here is to deviate from optimal EOQ and safety stock
level to reduce operating costs (Tanwari et al. 2000).
c) C items are considered of less importance and cheap here 40% - 70% of the items value
at 5% - 10% of the total cost and require little care (Tanwari et al. 2000). Since these
items are of low demand or low costs, strict control isnt required and as the items are
economic to stock in large quantities, it makes the possibility of stock out negligible.

Hence these items are ordered annually or semi-annually and not normally in EOQ
batches. Its too believed that the C items would not normally cause an expensive service
or production system to be stopped (Tanwari et al. 2000).
They are classified on the basis of annual dollar volumes ( World Academy Online 2011). Its
calculated using the formula
Annual dollar volume = annual demand unit cost (World Academy Online 2011)

Products
Eggs (NOS)
Sugar
Maida
Margrine
Fresh Cream
Icing Sugar
Cocoa Powder
Emgel
Powder Sugar

consumption in KGS
Annual dollar
volume
199060.34
910705.95
699850.8
535456.5
454281.75
224941.5
164738
81000
24477.2

Class
A
A
A
B
B
B
C
C
C

The C category items will be omitted for further analysis as they are of marginal value and are
less important.

5.2 Consumption Statistics

The consumption of each product included in the sample was studied over the period of three
months. These figures were obtained from production report and added to give total figures.
Product Wise Consumption

APRIL

MAY

JUNE

Break-up

Maida

11,250

10,118

12,800

Eggs

24,663

23,357

25,434

Sugar

7144.9

6841.6

9668.2

Margarine

3390

2880

4725

Fresh cream

1510

1470

2197

Icing sugar

2350

2117.6

2880.6

5.3 Consumption Trends

Its important to realize that the characteristics of managing a business are similar to that of
running a little ship. When youre the ships captain, its important that your eyes are wide open
and kept on the horizon to plan your next move. If there is a storm cloud gathering, its important
that you warn your deck mates to secure the ship's cargo and take cover below. Incase of rocky
waters ahead, its important that your deck mates are on your side and do what is necessary to
overcome the crisis and navigate safely to the other side. Finally if the journey is long, its
necessary that you start stocking up supplies before leaving the port (Roos 2011).
Its similar in business as well, where the captain is the entrepreneur or the CEO and its equally
important for him to plan the future and keep your eyes wide open on the horizon. Its said that
the best way of planning the future is achieved through proper analyzing of past trends (Roos
2011). Consumption forecasting is said to be one of the trickiest job as factors like turnover of
employees, changing customer trends, economic slowdown and increasing competiton can affect
the future sales of the firm (Roos 2011).

In fast food industry, short term forecasting is normally used as there are perishable items,
customers tastes keep on changing and its really difficult to predict the future trend, hence one
of the options commonly used to predict the future is the past consumption trend (Roos 2011).
30,000
25,000
20,000
15,000

April

10,000

May

5,000

June

5.4 Consumption Volumes

The monthly consumption volumes for the products included in the sample are as follows: These
volumes have been computed by adding figures from the outward consumption register to first
come up with the monthly consumption and later were added up to arrive at a quarterly
consumption figure.
Products

Total

Maida

36168

Icing Sugar

4998.7

Sugar

23654.7

Margarine

10995

Eggs (NOS)

74454

Fresh Cream

5177

80000
70000
60000
50000
40000
30000
20000
10000
0

Note- all items consumption are in kg except for eggs the consumption is in number of pieces.

5.5 Carrying Costs of per unit of inventory per month

Carrying Cost refers to the over heads an organization carries to aid its inventory. Its the money
spent on holding the inventory in addition to the money spent originally on purchasing it
(Harding 2004). Carrying cost consists of both, fixed and variable cost factors (Harding
2004). Fixed costs include the cost of personnel and the space. For example if an organization

operates a warehouse, there are significant costs incurred to establish and maintain the premises.
There also costs incurred on staff in stores which is dependent on the level of inventory
(Harding 2004). On the other hand there are variable costs like taxes, cost of capital, insurance,
taxes and reserve for obsolescence which the organization incurs for holding excessive inventory
(Harding 2004).
There are other factors as well which the organizations need to look into depending on their
inventory. These include cost of re-inspection, for example an inventory which is fragile or has a
shorter shelf life would require a inspection once again before use (Harding 2004).

To study the carrying costs, the warehousing procedures and technicalities were studied, later with the
help of cost accounting techniques all warehousing components were quantified and a cost was allocated
to them.
Fixed costs
I.

Storage cost per unit :

Normally companies calculate storage costs of the firm by taking the total cost and dividing it by the
average inventory (Piasecki 2011). However this consist of costs which are not affected by inventory
levels (Piasecki 2011). To calculate the storage cost per unit the following costing formula was devised
keeping in mind the nature of the calculation. This formula calculates the total surface area of the
distributors workspace and divides it with the renting cost to find the rent per unit of space. This unit is
further broken down to the size of each unit of product and thus we can find out the cost of storage space
per unit.
Storage Area = Area of the Warehouse
= 30m2

Rent per month = Rs. 15,000

Cost per square meter per month = Rent per year / Total Area m2
= Rs.15,000 / 30m2
=Rs. 500per m2
For convenience of the distributor a Microsoft office excel tool has been developed by me,
which automatically asks for all required variables and does the required calculations. This tool
is on the CD pasted at the End of the report copy.

Avg Cost of storage per kg

Product

space
(m2)

Storage cost per month

total number of
KGS

total storage cost

per kg

Maida

4000

12000

0.333333333

Eggs (NOS)

1000

24,000

0.041666667

Sugar

3500

7000

0.5

Margarine

2500

3,000

0.833333333

Fresh cream

1500

1,500

icing sugar

2000

2,100

0.952380952

II. Labour cost:

Labour is an input in the storage process. It includes people who handle the inventory such as store
keepers, inventory managers and material handlers (Harding 2004). Its calculated by adding the total cost
of labour upon the number of kgs.
i.
ii.
iii.
iv.

Cost of Labour (store handler) = Rs. 4000 / month

Number of workers= 4
Total labour cost per month = Rs.16000
Storage cost of labour per kg= avg cost of labour per month/ Number of kgs(nos)
= 16000/132000
= 0.121

Therefore the average cost of labour per kg is 0.121 per month.

Product
Maida
Eggs (NOS)
Sugar
Margarine
Fresh cream
icing sugar

labour cost per product

cost of labour per
total no. of
kg
kgs
0.121
12000
0.121
24,000
0.121
7000
0.121
3,000
0.121
1,500
0.121
2,100

total cost of labour per

product
1452
2904
847
363
181.5
254.1

Variable Costs
I.

Cost of capital per unit.

The cost of capital is the rate of interest the firm can earn on the invested money in the inventory, if it
were to be invested somewhere else, or its also could be the interest rate the firm pays for the business
loan taken (Harding 2004). Normally in the food industry cost of capital is taken at around 14 % to 17%
(Omran and Pointon 2004), hence to be on the safer side an average rate of 16 % is taken as cost of
capital. This cost is applied on the distributor cost price for each unit.

Products
Maida

monthly cost of
capital

19.35

3.096

0.258

Eggs (NOS)

2.71

0.4336

0.036133333

Sugar

38.5

6.16

0.513333333

Margrine

48.7

7.792

0.649333333

87.75

14.04

1.17

45

7.2

0.6

Fresh Cream
Icing Sugar

II.

cost price

cost of capital per

kg
yearly cost of
capital

Taxes per unit.

In some jurisdictions inventory is taxed (Harding 2004). However in New Millennium Bakers tax paid is
included directly in the cost price of items purchased. Therefore there is no direct tax that could be
applied to the product storage. Taxes on revenue paid by the company are not allocated to storage costs as
it varies with quantum of consumption. Irrespective of consumption, the storage cost remains constant.

5.6 Ordering Costs

It includes all the costs such as salaries of purchase clerks, telephone usage and purchase invoice which
help in preparing a purchase order (Siegel and Shim 2006). The ordering costs in this case were found by
first making a study of the ordering process. How long and how many times a call is made to place the
order?

On an average it was found that all phone calls last for around 5minutes and are made only once to place
each order. The manpower costs were calculated at Rs. 0.52 per minute based on the salary of Rs. 6000
month.
Ordering Process
Ordering Process
Activity
Sequence
Compile Order
1
Fax Order
2
Make Demand Draft
3
Confirm order over
4
phone and follow up
Calculation of Ordering Costs

Activity
Compile Order
Fax Order
Make Demand Draft
Confirm order over

Medium
HR
Telephone/Fax
HR
Telephone + HR

Ordering Costs
Time
10 min.
--30 min.
5 min.

Cost of Activity(Rs.)
5.2
35
15.6
5 + 2.6= 7.6

phone and follow up

Total

58.4

Therefore it is observed that the average cost of placing an order is Rs. 58.4. This cost is irrespective of
the order quantity and has to be incurred every time an order is placed.

5.7 Lead time.

Lead time is the time taken between the order of the customer and delivery of the
final product . Its normally dependant on the complexity of the product, a custom

made product might have a lead time of few weeks while a readily available product
will have only a few hours of lead time(Wise Geek 2011).The lead time was
computed by taking lead times for the past 3 orders and computing their average
Product
Maida
Eggs
Sugar

Ordered
Goa
Goa
Goa

Lead Time
3 days
3days
3days

Margarine

Goa

3days

Fresh cream

Goa

3days

Icing

Goa

3 days

5.8 Inventory Ordering Point

It is the Minimum appropriate level of Inventory at which the stock is replenished
(all business 2005). The reorder point takes into consideration the average rate of
inventory consumption, the cost of stock out and the delay of time in arrival of new
inventory (all business 2005).
These figures were computed by taking averages of inventory and inventory levels
over a period of three months.
Product

Maida
Eggs (nos)
Sugar
Margarine
Fresh cream
Icing sugar

Average

Reorder

Number of

Avg Reorder

Inventory (kgs)

level(kgs)

times

Level(kgs)per

ordered in a

month

month
3
4
4
3
4
4

1500
6,000
1,000
630
240
480

1,950
8,544
1,225
650
400
550

500
1,500
250
210
60
120

Secondary Data
5.9 Economic Order Quantity (EOQ)
Underlying assumptions that need to be made:

In order to find out the EOQ model, there are certain assumptions that need to be made such as
the demand rate is constant and known, the cost of ordering should be fixed and constant, the
price of the goods remains constant, the lead time is said to be zero which basically means the
goods are delivered instantaneously and finally the demand is said to be forever hence the
horizon of planning is infinite (Schwarz 2008).
The derivation of the EOQ formula:
The basic formula of EOQ is TC = PD + HQ/2 + SD/Q (eNotes 2006).
Where TC stands for the total cost of inventory for the year, PD stands for price into the demand
which gives the firm the inventory purchase cost, H stands for the holding cost, Q stands for the
quantity ordered and S is the cost of ordering in Rupees. The formula is further broken down
where the average number of units Q/2 of inventory is multiplied by the holding cost and the
ordering cost S is multiplied by the total number of orders taken for that year, which states the
annual demand D and is further divided by the total number of orders Q, giving D/Q. Finally, its
PD that stays constant regardless of the quantity ordered (eNotes 2006).

http://2point8.blogspot.com/2007/07/management-lite-ezy-38-inventory.html
Hence considering the above factors following conclusion is derived.
HQ/2 = SD/Q (eNotes 2006), or

http://bp2.blogger.com/_bjw0MlcPlg/RkqsKBca9gI/AAAAAAAAAa8/8bw3z0kSHro/s1600-h/eoq_formula.jpg

5.10 Inventory Re-ordering point

It is the point of inventory at which a purchase requisition is given out and a new order is placed.
The order points are dependent upon the consumption, the allowance of safety stock and the lead
time taken (all business 2005).
Normally the firms calculate the re-order point using the following two formulas:
Re-order point = maximum monthly or weekly or daily usage lead time (Accounting For
Management 2011).

When the lead time is constant and certain the above formula is used. However in case there is
uncertainty in lead time, safety stock is added and following formula is used (Accounting For
Management 2011).

Re- order point = maximum monthly or weekly or daily usage lead time + safety stock
(Accounting For Management 2011).

Chapter -6
Analysis of Data
The analysis of the data will be structured in the following format.
i.
ii.
iii.
iv.
v.
vi.

Calculation of carrying cost per kg.

Calculation of ordering cost.
Calculation of Economic order quantity.
Calculation of reorder point.
Calculation of carrying cost before and after the model implementation.
Calculation of Annual Inventory cost before and after the model implementation

6.1 Calculation of carrying cost per kg.

The Carrying cost was calculated by adding the final results of storage costs, tax, cost of capital and
labour cost of each product. This analysis plays a vital role in calculating the economic ordering quantity.
carrying cost per
cost

kg
total storage cost

Product

price

per kg

Tax

capital

per kg

Total

Maida

19.35

0.33

0.26

0.121

20.061

Eggs (NOS)

2.71

0.04

0.03

0.121

2.901

Sugar

38.5

0.5

0.51

0.121

39.631

Margarine

48.7

0.83

0.65

0.121

50.301

Fresh cream

87.75

1.17

0.121

90.041

icing sugar

45

0.95

0.6

0.121

46.671

cost

of

cost of labour

6.2 Calculation of Ordering Costs

The ordering cost is an essential input while calculating economic order quantity.

Ordering Costs
Activity
Compile Order
Fax Order
Make Demand Draft
Confirm order over

Medium
HR
Telephone/Fax
HR
Telephone + HR

Time
10 min.
--30 min.
5 min.

phone and follow up

Total

Cost of Activity(Rs.)
5.2
35
15.6
5 + 2.6= 7.6
58.4

6.3 Calculation of Economic Reorder Quantity (EOQ)

With the help of Economic Order Quantity (EOQ) the total costs of inventory, such as shortage costs,
holding costs and ordering costs are minimized (eNotes 2006) .
The EOQ for each product was arrived to by using the Formula:

http://bp2.blogger.com/_bjw0MlcPlg/RkqsKBca9gI/AAAAAAAAAa8/8bw3z0kSHro/s1600-h/eoq_formula.jpg
Where S is the ordering cost, D is the demand and H is the holding cost (eNotes 2006).

Economic
order

Product

quantity
Third

no.

of

Avg

quarter

times

its

per month

ordered

in

consumpti

ordering

carrying

on
34,168

costs

cost

Maida

446.02
58.4

20.061

72,454

Eggs
(NOS)

2.901

23,654

Margarin

39.631

10,995

58.4

50.301

5,177

Fresh
cream

90.041

7,348

icing
sugar

58.4

46.671

71

1056.1271
17

479.34917
41

327.79350
22

38
135.60

6831.8564
38

31
81.948

58.4

18
159.78

1338.0617
82

64
264.03

58.4

a month
3

06
1707.9

58.4

Sugar

EOQ

EOQ

542.42841
68

For convenience of the distributor a Microsoft office excel tool has been
developed by me, which automatically asks for all required variables and does
the required calculations. This tool is on the CD pasted at the End of the report
copy.
6.4

Calculation of Inventory Reorder point

The lead time taken to deliver the goods is constant in New Millennium Bakers, hence the
following formula is used to calculate the reorder point:
Re-order point = daily usage lead time (Accounting For Management 2011).

Inventory Reorder point

Avg

reorder

point
Product

approx daily usage(kgs)

lead time

month

Maida

480

1440

Eggs (NOS)

900

2700

Sugar

230

690

Margarine

105

315

Fresh cream

50

150

icing sugar

71

213

per

6.5 Comparison of reorder point

Average Reorder Level(kgs)per

month old

Average Reorder Level(kgs) per

month optimized

1500

1440

6,000

2700

1,000

690

630

315

240

150

480

213

From the above table it can be seen that New Millennium Bakers can reduce the level of safety stock
for each of the above 6 products which in turn will help the firm in reducing costs.
6.5 Calculation of carrying cost before and after the model implementation.
The total carrying costs for the sample are calculated before and after the EOQ model implementation to
compare the costs and to determine the effectiveness of the model. The results are calculated both in
rupee terms and percentage terms.

Carrying cost before and after the model implementation

Carryi

Carryi

Carryi

Produ

ng

Invent Invent ng

ng

Savin

Savin

ct

cost

ory

cost

gs

gs

ory

cost

Optimiz
per kg

old

ed

Old

39118.

26841.

12277

31.38

1,338

95
24786.

62
19819.

.33
4966.

462
20.03

6,832

14
48547.

63
41850.

512
6697.

745
13.79

1056

98
32695.

34
24094.

639
8601.

592
26.30

479

6
36016.

18
29443.

471
6572.

769

327

4
25669.

41
25295.

993
373.3

18.25
1.454

542

05

68
167344

68

545

206834

.8

1,950
Maida
Eggs

20.061

(NOS)

2.901

8,544
1,225

Sugar
Margar

39.631

ine
Fresh

50.301

cream
icing

90.041

sugar

46.671

Optimize

650
400
550

Total

Rupee

(%)

39489
Total Rupee Savings

.32

The comparative analysis shows that the optimized inventory model resulted in savings up to 31.4%
per product and a total rupee savings of Rs. 39489.32 (. 550). Therefore the effectiveness of the
model is confirmed.
From this table the savings can be calculated by subtracting the optimized inventory cost from the old
inventory cost.
Savings
Avg per month Inventory Cost(old)
Avg per month Inventory Cost(optimum)
Total Savings

206834
167344.8
39489.2

Chapter -7
Conclusion
In todays economic climate cost cutting is a new method for survival of effective and optimal inventory
management and is a definite way of sustaining profitable operations. The study clearly indicates that the
inventory management system followed by New Millennium Bakers is inefficient and that there is
potential for it to be optimized to a great extent.
The comparative analysis shows that the optimized inventory model resulted in savings up to 31.4% per
product and a total rupee savings of Rs. 39489.32. Therefore the effectiveness of the model is confirmed.
It is to be noted that the sample consists of only 6 of around 100 products in the inventory. Therefore
there is immense potential for savings if this model is applied on the whole inventory.
Applying sophisticated tools requires a lot of expertise and therefore for convenience and easy use of the
distributor, a Microsoft office excel tool has been developed by me, which automatically asks for all
required variables and does the required calculations. This tool is on the CD pasted at the End of the
report copy.

Chapter- 8

Recommendations

Inventory management is an important function in a business. In order to run a profitable venture

efficient inventory management is of prime importance.
I recommend that Millenium Bakers should implement a Scientific Inventory management
system like ABC Analysis, Economic order quantity procedure and Inventory order level
procedure to gain the following benefits.
1. Reduce overheads and working capital losses resulting from excessive inventory
and dead stock.
The study indicated that the firm was incurring additional costs due to
over stocking; this overstocking was due to the fact that the company was
using a speculative inventory technique where the firm determined the
inventory levels solely based on gut feelings.
2. Provide optimal inventory levels which ensure a continuous and uninterrupted
supply of raw materials to the production department.
The EOQ model used in the study ensures a steady supply of products as it
keeps in account the lead time ().
3. Leads to efficient utilization of space.
On Implementing The model there will be a creation of a large amount of
space, this space could be used to stock more products (in efficient
quantities) which could further increase the profitability of the firm.
4. Avoid wastage due to expiry of Goods on shelf.
The EOQ model as seen above helps in reducing wastage.
The firm could also implement the pull system which will help them in
buying the approximate number of raw materials that they are going to
use, based on the sales trend (IMEC 2011).

Chapter- 9

Limitations

In the above research conducted on New Millennium Bakers Goa, there are certain limitations
which I would like to highlight. Firstly the research was only done on a sample of 6 out of the
100 raw materials due to time constraints. This limits my findings and analysis of data.
This research also lays its emphasis heavily on Economic Order Quantity and there are certain
problems and limitations of EOQ that exist while implementation. As mentioned above EOQ is
derived with the help of carrying and ordering cost (), and normally there are chances of
miscalculation or mis-interpretations occurring when finding out these parameters (). EOQ
formula is also said to use plenty of unrealistic assumptions such as the demand rate is constant,
lead time is zero, the ordering cost and the price of the goods are constant ().However in reality
thats not the case, today due to the external factors such as worldwide recession and increasing
crude oil prices there is high variability in the demand and the price of goods. Also due to the
external factors, there are chances of scarcity of some products and possibilities of inflation in
the prices, in such cases lot of firms prefer to buy and keep excess of stock to stay competitive in
the market. All this factors could affect the research analysis and show inaccurate results.