UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business ------------------------------ LU THI TAM HIEN INEFFICIENCY INVENTORY MANAGEMENT: CASE OF EXCESS INVENTORY OF THM COMPANY ID: 22130022 MASTER OF BUSINESS ADMINISTRATION SUPERVISOR: DR. PHAM PHU QUOC Ho Chi Minh City – March 2016 1|Page TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT This thesis becomes a reality with the kind support and help of many individuals. I would like to extend my truthful thanks to all of them. First of all , I would like to express my gratitude and sincere thanks to my advisor, PhD.
Pham Phu Quoc for hid guidance, imparting his knowledge and expertise my study. Special thanks to members of THM Company for cooperating, supporting and providing necessary information regarding this thesis. Besides, the contribution of my group mates who have cooperated with me to complete this thesis and classmates who have willingly helped me out with their abilities, play an important role for my thesis finishing. More interest, I would like to give my warmest thanks to my family who always support and encourage me in completion of this thesis.
2|Page TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT In every industry, every enterprise or business, operating and managing their organization are very important. The company will grow and make profit if they utilities their working capital including the inventory, debtors, loans and Advances, Gross working Cycle, Creditor and Net working Cycle. Therefore, inventory, account receivable, account payable, cash management are the factors that impacts on the profitability .The object of the research find the problems of working capital management of THM including the inventory management, account receivable management, account receivable, cash flow management. In segment of inventory management, the study also makes clear the factors that impacts on the inventory management including product samples and design, product feature differentiation, specific software request, objective of inventory, failure customer service, using too much working capital in inventory and low of control the market demand.
Beside the external factors such as market trends, customer‟s demand, competitive impact on the high inventory in the company directly. It is important to find the best solutions of excess inventory and effective inventory management. Exploring of methods of reducing the current inventory and enhance the Inventory Turnover (ITO), the best ratio to measure the inventory management. Additionally, it is necessary to find the properly inventory management models to apply for the company.
3|Page TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENT ACKNOWLEDGEMENT. PROBLEM IDENTIFICATION- CASE OF THM COMPANY .2 Perceived Problems from Financial Statement context .3 The first tentative problems- Inventory record inaccuracies.4 The second tentative problems- Product samples and differentiation, failure customer service……………………………………………………………………………………….5 The third tentative problems- The obsolescence .6 The four tentative problem- The inadequate planning and execution system .7 The fifth tentative problem- Low Expectations and forecasting .8 The sixth tentative problems- External factors economic growth, competitive .9 Cause- effect tree of real problems- Low Expectations and forecasting. POSSIBLE SOLUTIONS DESIGN. 32 4|Page TIEU LUAN MOI download : skknchat@gmail.1 Alternation 1- Using the proper Forecasting Methods .2 Alternative 2-Forecast as Close to the Customer as Possible- .3 Alternative 3-Communicate, Share, and Use the Data to Drive Your Sales and Operations Planning Process-.4 Alternative 4 -Consider Inventory planning , controlling inventory more efficiency Long- term Strategies .1 Methodology of collecting data- .2 The consequences of excess inventory .3 Forecasting demand models .4 Inventory Management models .5 Model for suitable purchasing.
79 5|Page TIEU LUAN MOI download : skknchat@gmail.com List of Chart Chart 1. Sales revenues of THMC from 2011- 2014 Chart 2. THMC‟S of sales and service Chart 3. ROA and ROE ratios of THMC from 2010-2014.
Lists of Tables Table 1. ROA Ratios Table 2: ROE ratios Table 3: Inventory Turnover Table 4: Day Sales of Inventory Table 5. Target of Increase ITO Table 6: Estimate the reducing in average inventory Table 7: Planning the Action Plan of THM Table 8: ABC Analysis of Items in Stock of THM Table 9 : Safety and Stock Level Table 10 : Estimate the Safety Stock and Order Quantity of A- items List of figures Figure 1: The THM Organization Chart 6|Page TIEU LUAN MOI download : skknchat@gmail.com Figure 2 : The cause-effect trees exploring from the analysis: Figure 3: PDCA Model Figure 4: Inventory management and Asset protection ( IMAP) 7|Page TIEU LUAN MOI download : skknchat@gmail. INTRODUCTION This study found the reasons of decline of revenues and profitability over the years 2011- 2014.
The decrease of Return on Asset ( ROA) and Return on Equity ( ROE) exhibited many tentative problems of the THM company. The declines of sales, increase of holding costs effect to the low of revenues and low of profitability. The costs from increasing of COGS, renting more warehouses, labors, cash investment in payments, short-term loans, or called working Capital Management impact on the company performances. The primary findings of measurement of Inventory Turnover Ratios (ITO) , Days sales of Inventory (DSI) and internal, external factors that impact on Inventory Management of the company.
The ineffective Inventory Management of THM‟s presented through the low of ITO and declines over the years. In addition, factors of internal like Capital management of THM the product sample and design, product feature differentiation, specific software request, objective of working management play an important role in effective of Inventory Management of the company. The too much slow moving or obsolete inventory, customer service failures and back orders due to lack of the correct inventory, product type, inventory size, are listed as reasons for inefficiency inventory management. The changes in product design, excessive purchasing and forecasting errors are reasons for overstocking.
Among, forecasting errors, mismatching the demand- supply, or un-predicting customer‟s demand are substantial factors to excess inventory. 8|Page TIEU LUAN MOI download : skknchat@gmail.com External environment factors like economic growth, market demands, competitive, customer behavior, recession periods contribute to the management of inventory. Theories of inventory management will prove for those variables. The analysis will analyze the most influenced factors to high or excess inventories, correlation between the variables.
Finally, base on the analysis, we found the possible solution to solve the excess inventory and manage the inventory effectively. The improvement of ITO should be done by most of the Directors by reducing the average inventory and reducing the number of merchandises. Applying the accurate forecasting method, qualitative or quantitative methods likes Times Series, Exponential Smoothing (ES), liner regression will make the company reduce the un- expectation inventory ( R. To a SMEs, as THM, applying the suitable inventory management, PDCA inventory management methods, which categories the inventory by ABC analysis, calculating the EOQ, Alternative Order Quantity Approach (Mathur, Kamlesh, et al.697; Morales, Sierra, Lopez 2015) which used for SMEs, and setting target depending on the Manager‟ Experiences.
Alternative Order Quantity Approach, establish purchasing review criteria to the inventory characteristics, collaboration with vendors to improve the purchasing practice. 9|Page TIEU LUAN MOI download : skknchat@gmail. PROBLEMS IDENTIFICATION -CASE OF THM COMPANY 2.2 Overview of THM Name : THE HE MOI TRADING AND CONSTRUCTION LTD. TAX CODE: 0302696827 ADDRESS: 299, TAN KY TAN QUY STREET, TAN SON NHI WARD, TAN PHU DISTRICT, HO CHI MINH CITY.38472838 Since 1996, THM is a shop, which sold construction materials like stone, steel, paints, civil tools…Since then THM have been developing, creating many good relationships with other constructions; materials agencies.
Moreover, the company have been catching the market conditions, customer behaviors. Therefore, the THE HE MOI TRADING AND CONSTRUCTION LTD., CO has been established, specialized in paintings and painting tools. Until now, the company has created the prestige and determined the its strong in the market. Amount of orders has substantial increased, and expanded the market segment whole the country.
10 | P a g e TIEU LUAN MOI download : skknchat@gmail.com About the labor force, the company has the senior sales teams, which trained carefully. Human resources department set up to treat management, contribute to the development of the company.2 Scale and organization Chart of THM Company - Capital : VND 4.000 - Human resource: 1 Director, 1 vice- director, 1 chief accountant, 1 warehouse manager, 1 sales manager, and 20 employees in department. - Infrastructure: Representative in 299, Tan Ky Tan Quy Street, Tan Son Nhi ward, Tan Phu district, Ho chi Minh. Warehouse is in 259 Tan Ky Tan Quy, Tan Son Nhi ward, Tan Phu District, Ho Chi Minh City DIRECTOR VICE-DIRECTOR ACCOUNTING DEPT WAREHOUSE DEPT SALES DEPT TAX Accountant Sales accountant employees employees Figure 1.
Organization Chart 11 | P a g e TIEU LUAN MOI download : skknchat@gmail.3 Main products: Since establishment, THM specialized in trading paints and supporting materials, as followings: - Dulux interior paint: Inspire, Easyclean, 5 in 1 - Maxilite interior paints - DULUX base interior paints: inspire BA( BB), Easyclean P1( p2,p3,p4), 5 in 1 PA( BB, BC, BD). - Maxilite Base interior base: BA, BB - Dulux standards interior paint: Inspire, Wheathershield ( solid surface-anti-water - PowerFlexx) - Maxilite outside paints - Dulux Base outside paints: Inspire BA (BB), Wheathershield BA (BB, BC, BD) - Maxilite Base outside paints: BA, BB - Dulux Indoor cover paints - Dulux Outdoor cover paint - Maxilite outside cover layer - Dulux inside and outdoor power - Maxilite, Expo Lucky.anticorrosive - Joton, Jotun, Expo, Nippon, Apollo, Maltcoat, USA…powers - Anti-heat, anti fade color, anti- - Supporting tools….4 Competitors information According to VPIA ( Vietnam Paint and Printing Ink Association), there are over 600 enterprises which product and trade painting. Most of big painting firm are presenting in Vietnam. In the next period, the competitive in the market will be more aggressive.
Foreign 12 | P a g e TIEU LUAN MOI download : skknchat@gmail.com brand occur 65%.while, the biggest productivity is Akzo Nobel Vietnam ( 30,000 tons/ year) and Expo ( 40,000 tons/ year). However, there are remaining a lot of opportunities for Vietnam enterprises. It is dividend into 4 segments, high- quality brands from Japan, America or English AKZO NOBEL, NIPPON, JOTUN, occur 35% market. The second segment is Asia brand likes 4 Organges, TOA, SeaMaster, occur 25%.
And the last is domestic brands Joton, Kova, Tison…occur 15% market and others is 25%.2 Perceived Problem from the Financial Statement context It is proven that THM were the leader about the amount of sales and revenues in 2011. In the period of 2002- 2011, the growth ratio was increased over the year both markets, volumes of customers and volume of sales. However, since 2012, the situation has changed rapidly, the volume of sales, revenues and profitability have declined sharply. Findings are that there are many reasons for this reduction.
With increasing of warehouse costs, managing costs, low sales caused by excess inventories. It is considered one of the reasons for low profit. The proven for the low of revenues and profitability over the years through the financial statements from 2010 to 2014. Due to high inventory, the sales revenues of THM also decreased accordingly from 2011 to 2014.
Chart 1 below show the declines of the sales revenue. Sales revenues of THMC from 2011- 2014 13 | P a g e TIEU LUAN MOI download : skknchat@gmail.com 100,000,000,000 80,000,000,000 83,873,256,871 60,000,000,000 50,348,740,377 40,000,000,000 34,229,467,209 26,441,898,754 20,000,000,000 0 2014 2013 2012 2011 Source: Financial Statement of THMC from 2011- 2014( Appendix 2) The declines of sales revenues has an affect on the profit of THMC, it leads the profits go down over the years, eventually some years the profits are minus. THMC’S of sales and service NET INCOME 1,400,000,000 1,200,000,000 1,185,546,709 1,000,000,000 800,000,000 600,000,000 400,000,000 200,000,000 26,389,069 - 2014 -252,311,429 -45,377,948 2013 2012 2011 -200,000,000 -400,000,000 Source: Financial Statement of THMC from 2011- 2014 14 | P a g e TIEU LUAN MOI download : skknchat@gmail.com Return on Assets The Return on Asset (ROA), and Return on Equity ( ROE) have also gone down, in the low level from the findings from the Financial Statements.