An – Najah National University
Faculty of Engineering
Industrial Engineering Department
Production planning & inventory management at
Arab Eastern Company for health diaper
Project Group Members:
Nour Abu Sharkh
Tahani Yousuf
Mohammad Qubbaj
Tamara Dwaikat
Supervised by:
Dr. Yahya Saleh
AGENDA

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introduction
About the company
Literature Review
Problem Statement
Methodology
ABC Classification
Demand Forecasting
Inventory Costs
Inventory Management Models
Model Formation
Results and discussion
Conclusion
Recommendation
INTRODUCTION

Planning is a success key to any business throughout its
existence.

Every successful business regularly reviews its business
plans to ensure meeting customer demand. It is sensible
to review current performance on a regular basis and
identify the most likely strategies for growth and
improvement.
CONT…

Inventory management is primarily concerned about
specifying the size and placement of stocked goods.

Inventory management is required at different locations
within a facility or within multiple locations of a supply
chain network to protect the regular and planned course
of production against the random disturbance of running
out of materials or goods.
CONT…

Inventory types can be grouped into three classifications:-
1- Raw materials - materials and components scheduled for
use in making a product.
2- Work in process (WIP) - materials and components that
have begun their transformation to finished goods.
3- Finished goods - goods ready for sale to customers.
ABOUT THE COMPANY

Lucky Baby Company for health diapers was established
in 1990 for the purpose of manufacturing products of
diapers and marketing of health products.

1990The company has installed the first productive line
of diapers and earning experience and the ability to
compete.

At the beginning of the year 1999 the company got the
international quality system certification ISO 9002.
CONT…

At the end of 2012 it has successfully run the new
production line that works with the latest international
technology in the manufacture of diapers.

At the beginning of 2013 the company began to supply
the Palestinian market known varieties such as Lucky
Baby Primo, stretch, and Super Chic Shack of the
production of this machine.
LITERATURE REVIEW
Author
year
search
Feeney and Sherbrooke
1966
Studied theoretical inventory policies: the
so-called (S - 1, S) model with an
underlying Poisson demand distribution.
It’s well studied and suitable for slowmoving items, this type of policy requires
continuous review of the inventory system.
Orlicky
1975
Advocated to the potentials and benefits
material requirement planning (MRP).
Hariharan and Zipkin
1995
Said that advance demand information is
a substitute for supply lead-times and can
reduce safety stock levels and costs
significantly when used effectively.
CONT…
Van Hoek
1999
Identified that postponement is an important
characteristic of modern and competitive
supply chains.
Wanke and Zinn
2004
states that inventory management
approaches are a “function of product,
operational and demand related variables
such as delivery time, coefficient of
variation of sales and inventory turnover.
Alex J. Ruiz-Torresa and
Farzad Mahmoodi
2009
Said The amount of safety stock is a
function of five factors: average and
standard deviation of lead time, average and
standard deviation of demand, and the
desired service level.
PROBLEM STATEMENT

In this project we present a case study in inventory
management and production planning of diapers at lucky
baby company.

In this project we tackle a serious problem in production
planning department being encountered by (Arab
_Eastern Company) Lucky Baby Company. More
specifically we have problems an inefficient production
planning process, which negatively effect on customer
need, sales, production quantity and scheduling,
productivity, high and low inventory levels with
associated cost.
OBJECTIVES
1- Help the company to develop production planning
system which enables the company to:
Design a program to forecast the future demand.
 Estimate the required amount of raw material needed to
cover the expected demand.
 Determine the number of products that should be stored
in the company’s warehouses.

CONT…
2-Help the company to make cost reduction by reducing
the holding , ordering cost.
3-Increase the market share of the company as a
consequence of increasing the customer confidence.
METHODOLOGY

Determine and classify the diapers by using ABC analysis.

Forecasting the demand by analyzing the historical sales data
available.

Collecting Relevant Cost Data ( Holding Cost , Ordering Cost).

Building Inventory Models for each raw material in inventory.

Evaluate the previous conditions and compare them empirically
with the new results based on our inventory models.
Diapers
Primo
Chic Shack
XL
XL
XL
MAXI
MAXI
MAXI
MIDI
MIDI
MIDI
MINI
MINI
MINI
S.MINI
Stretch
S.MINI
ABC INVENTORY CLASSIFICATION

Is away to categorize/group products .

This method helps managers focus on the few significant
items that account for the bulk of investment in
inventory. Which leads to facilitate instant decisionmaking

It is also called (80/20 Rule).
 The
classification can be as under:

A items : these are the 20% of the items that tie up 80%
of the total inventory money.

B items : these are the 30% of the items the tie up 15%
of the total inventory money.

C items : these are 50% of the items that tie up 5% of the
total inventory money.

Class A deserve the most attention, with less attention
justified for class B and class C items.
product
name
Rank
CONT1…
Max.Str
percentage
of
Cumulative cumulative
Annual sales Product % annual sales Category
%
%
Annual Unit price
Demand
$
usage
value $
150592
27
4065984
22.69
7.14
22.69
A
Xl.Str
2
71027
39
2770053
15.46
14.29
38.15
A
Max.Sh
3
107342
24
2576208
14.38
21.43
52.53
A
Mid.Str
4
84525
27
2282175
12.74
28.57
65.27
A
Mid.Sh
5
59993
24
1439832
8.04
35.71
73.30
B
Xl.Sh
6
56499
24
1355976
7.57
42.86
80.87
B
Min.Str
7
27356
27
738612
4.12
50.00
84.99
B
Max.P
8
15749
40
629960
3.52
57.14
88.51
B
S.Min.Str
9
51192
10
511920
2.86
64.29
91.37
B
Min.Sh
10
21746
23
500158
2.79
71.43
94.16
B
Mid.P
11
9270
40
370800
2.07
78.57
96.23
C
Xl.P
12
8694
40
347760
1.94
85.71
98.17
C
Min.p
13
4843
40
193720
1.08
92.86
99.25
C
S.Min.P
14
11203
12
134436
0.75
100.00
100.00
C
CONT…
CONT…
DEMAND FORECASTING

Demand forecasting is often the first critical step in any planning
activity especially inventory planning.

The purpose of demand forecasting is for companies to determine
the required quantity of parts that need to be ordered.


Forecasts can be made for various timeframes
Short-term
Mid-term
Long-term

We have 3 years data of demand divided in 36 months, for 14 items


FORECASTING METHODS

Naïve Approach

Moving Averages

Simple moving average

Exponential Smoothing
CRITERIA FOR CHOOSING TIME SERIES METHODS

Mean absolute deviation (MAD)

Mean absolute percent error (MAPE)
Excel sheet
product
ABC
Max. Str
A
XL. Str
A
Max. Sh
A
Mid. Str
A
Mid.Sh
B
Xl. Sh
B
Min. Str
B
Max. Pre
B
S. Min. Str
B
Min. Sh
B
Mid. Pre
C
Xl. Pre
C
Min. Pre
C
S. Min. pre
C
Chosen Type of Forecasting
5 Simple Moving Average
5 Simple Moving Average
5 Simple Moving Average
5 Simple Moving Average
5 Simple Moving Average
3 Simple Moving Average
Exponential Smoothing α=0.1
5 Simple Moving Average
3 Simple Moving Average
5 Simple Moving Average
5 Simple Moving Average
3 Simple Moving Average
3 Simple Moving Average
3 Simple Moving Average
Item Classes
Best Forecasting Method
Accuracy
Forecasting Method
Percentage of the
Accuracy
total
Measures
Items
A: 4 items
A: 100%
A items
simple moving average
MAD
A”: 0 items
A”: 0%
4 items
exponential smoothing
MAPE
E : 0 items
E : 0%
E”: 0 items
E”: 0%
N: 0 items
N: 0%
A: 3 items
A: 50%
B items
Simple moving avarage
MAD
A”: 2 items
A”: 33.33%
6 items
Exponential Smoothing
MAPE
E : 1 item
E : 16.66%
E”: 0 items
E”: 0%
N: 0 items
N: 0%
A: 1 item
A: 25%
MAD
A”: 3 items
A”: 75%
MAPE
E : 0 item
E : 0%
E”: 0 item
E”: 0%
N: 0 item
N:
C items
4 items
simple moving average
0%
CONT…
Where;
A : 5 simple moving average method.
 A” :3 simple moving average method.
 E : Exponential Smoothing Method α=0.1
 E” : Exponential Smoothing Method α=0.2
 N : Naïve Method.

INVENTORY COSTS

inventory is an important role in the organization and
requires careful management in terms of cost and
performance.

Too much inventory will incur storage charges, burden
cash flow, and run a risk of obsolescence.

Too little inventory may result in a loss of sales and
opportunities. Thus it’s necessary to measure the
performance of the inventory control process.
CONT…

Calculating cost of holding inventory and ordering cost.

Inventory cost is generally regarded by the company in
terms of annual cost.

Lucky baby storage includes both raw material and
finished goods that remains unsold.
CALCULATE THE INVENTORY HOLDING COST
Item
no.
Item name
The amount
in inventory
Unit
unit
price
Total
value(NIS)
weight
Hi
‫قطن بلب‬
250352.4226
Kg
4
1001409.69
0.0081
0.0325
‫بودره‬
78424.99238
Kg
12
941099.91
0.0076
0.0916
‫صمغ ابيض‬
18951.34
Kg
30
568540.2
0.0046
0.1384
1
2
3
Inv HC = unit price for R.M * weight
where;
Wi =
Wi: the weight of each R.M in the inventory
Excel sheet
INVENTORY MANAGEMENT MODELS

Good management of inventory is required to manage
the supply of product and satisfy the customer’s needs.
The inventory management is to meet the customer’s
demands and requirements at a minimum cost to the
supplier.
We discusses the inventory review process in order to
build an inventory management system. The system
should determine how much stock to order and when it
should be ordered.
CONT…

There are two basic types of inventory system that we
used:
I. Continuous review
 II. Periodic review


In our project we will be using the continuous review
system for all raw materials to insure that we find the
most optimal feasible solution.
MODEL FORMATION

Finding The Optimal ordering quantity : The EOQ
formula was used to determine the optimal Q to be
ordered.
Where:
Q = order quantity
EOQ = optimal order quantity
D = annual demand quantity
S = ordering cost
H = annual holding cost per unit
CONT…

Assumptions using this formula:
1. Demand is known, constant, and independent.
2. Lead time is known and constant.
3. Quantity discounts are not possible.
Excel sheet
This table shows how to calculate EOQ
Raw
material
‫قطن‬
‫بودره‬
‫صمغ ابيض‬
‫صمغ احمر‬
‫صمغ تثبيت‬
‫القطن‬
Annual
Demand
6457142.4
3874285.2
322857.12
161428.56
322857.12
ordering
cost(S)
15
9.9
9.9
9.9
9.9
holding
cost(H)
0.0325
0.0916
0.1384
0.0257
0.0097
cost/kg or
EOQ
Q current
4
38602
10000
8354
6000
1241
500
2036
850
4687
2000
12
30
30
30
CONT…
 Continuous
Review System
1-Reorder point = Average demand during lead time + Safety Stock.
2-Choosing an Appropriate Service -Level Policy (z) :95 percent service
level
3-Finding the Safety Stock assuming the demand is normally distributed
(Safety stock is the stock which is used when there are delayed deliveries to
the organizations).
Where:
σt= standard deviation of monthly demand.
L = Lead time.
MODEL FORMATION
raw
Avg
materials demand(d)
σL
Z
SS
Reorder
point
4366.95 26407
1.65
7206
33613
1.1
2035.95
9566
1.65
3360
12927
164.27
1.2
179.95
897
1.65
297
1194
82.14
1.2
89.98
448
1.65
149
598
SD
L(month)
14947
3285.49
1.8
‫بودره‬
8968
1971.30
‫صمغ ابيض‬
747
‫صمغ احمر‬
374
dL
‫قطن‬
TOTAL COST

Calculating the total costs for the new ordering quantity and
current one for the systems.

Total Cost = Annual holding cost + Setup Cost + Safety stock
holding cost.
Where
C = Total cost per year.
Q = Lot size, in units for the new and current quantity.
H = cost of holding one unit is inventory for a year.
D = Annual demand, in units per year.
S = ordering cost.
CONT…
Raw
material
EOQ
Total
Total
cost
cost
Q/2 * D/Q *
Q
Q/2 *
SS
H
S SS new new current H
D/Q * S current current savings
‫قطن‬
38602
2509
2509
7206
5955
10000 650.0 9685.71
40000
15536
9581
‫بودره‬
8354
4591
4591
3360
12876
6000 3297.6 6392.57
14000
25079
12203
‫صمغ ابيض‬
1241
2576
2576
297
6385
500
1038.0 6392.57
2000
15735
9350
‫صمغ احمر‬
2036
785
785
149
1685
850
327.7 1880.17
800
2825
1140
Excel sheet

The results clearly show that the chosen continuous review system
model has marked improvement over the existing method; the
inventory cost savings are 155264 NIS.
Current model
New inventory model
(Continuous Review
System)
Total Parts(raw
materials)
19
19
Inventory cost per
year, NIS
276,260
120,996

The company in this study lacks of expertise in the area
of inventory management. This has resulted in severe
shortcomings in the business process of their company.

By implementing an inventory management system,
Lucky baby Company in this study will be able to save a
lot of money.

•
•
•

Applying the inventory model successfully depends on
the effective implementation of every stage of the
framework of inventory management which includes
ABC analysis
demand forecasting
implementation development of an inventory model.
Inaccurate data going into a perfect model will give
inaccurate results.