Development of an Optimal Inventory Management System in Khulna Shipyard Limited- A Case Study

Abstract

Inventory, the key component of any organization is the stock of any goods or asset that are required for manufacturing or assembly of the product to maintain the plant. The fundamental function of an inventory system is to keep track of and maintain the inventory levels, determine both the order size and replenishing period. Inventory is directly related with the manufacturing cost. As a result, Inventories influence the most essential portion of current resources of a greater numbers of companies. Thus, sufficient amount of capital is tied up due to maintaining the inventories in bulk by the organization. Poor inventory management may cause under-stocking or over-stocking including higher operating cost of the items. Thus, a firm ignoring the control and monitoring of inventories might be at risk of its ultimate profitability and may collapse in the long run. As a result, it is clearly necessary to manage inventories effectively and properly for the avoidance of unnecessary investment. In the study it was found that Khulna Shipyard Limited frequently fails to maintain inventory level/ stock for the regular consumption of raw materials to meet the lead time of the demand. Demand for replenishment of inventory items are placed when it is required. The shipyard follows the traditional method of purchasing the raw materials and other items. As a result, the shipyard is unable to maintain delivery schedule of the project due to shortages of required materials and also due to the late delivery of proper materials from the suppliers. On the contrary, the plant also faces over stocking of materials in the warehouse. Both these situations act as a catalyst to increase the total inventory expenditure of the shipyard. Besides, the workers have to work in extra time (overtime) to finish the job quickly. Ultimately, the shipyard can not maintain the desire quality of the finished product and production cost also increases. As the ship cannot undock within the schedule time and the construction yard is engaged, the shipyard cannot dock the ship under pipeline within predetermined schedule. As a result, customer dissatisfaction may raise due to inferior quality, late delivery, failure to dock and high production cost of ships/ product. Moreover, this shipyard may lose their customer day by day. Thus the above discussion stated that, there is a room for improvement to identify the procedure of managing and maintaining inventory at khulna shipyard limited. One of the most important goals in inventory management decision is how much inventory should be made and when to submit an order. If a firm procures higher quantities of inventory, carrying cost also increases. On the other hand, if the firm purchases less quantities, more orders to be placed which increases ordering cost. Therefore, the order quantity at a particular time should be controlled by balancing the ordering and carrying cost. Considering both the costs, EOQ model is applied to decide the optimal order quantity to be replenished at a specific order time for the optimization of carrying and ordering cost and also confirming the availability of material when required. In addition, ROP model provides information when to order the item. Safety stock policy can be adopted for providing protection against the variation and uncertainty in both lead time and demand. It was observed that managing inventory at ship construction and repairs industry is more complicated due to the distinctive and uncertainty nature of demand. In this thesis, a sample for inventory items from a major workshop of khulna shipyard limited was identified and demand data for these items was collected. Accordingly, required data for cost calculation was gathered to implement EOQ, ROP and safety stock for the selected inventory items. Finally, the thesis work has been completed with several specific recommendations for the management of Khulna Shipyard Limited and suggestions for carrying out future research.