Failure in inventory management at fashion department in khatoco trading co , ltd

Although the financial results of fashion section in the company still show some positive signals with an increase in sales and profits, non-financial aspects indicate some problems incl

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-PHAM THI PHUONG LINH

FAILURE IN INVENTORY MANAGEMENT

AT FASHION DEPARTMENT IN

KHATOCO TRADING CO., LTD

Ho Chi Minh City – Year 2019

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-PHAM THI PHUONG LINH

FAILURE IN INVENTORY MANAGEMENT

AT FASHION DEPARTMENT IN KHATOCO TRADING CO., LTD

MASTER OF BUSINESS ADMINISTRATION SUPERVISOR: DR NGUYEN PHONG NGUYEN

Ho Chi Minh City – Year 2019

LIST OF CONTENTS

EXECUTIVE SUMMARY 1

PART 1 – BACKGROUND 1

Company background 1

1.1.1 History of establishment and development 1

1.1.2 Mission of the company 1

1.1.3 Company’s size 2

1.1.4 Internal structure 2

1.1.5 Geographic distribution 2

1.1.6 Stakeholders 3

1.1.7 Current development and market analysis 3

1.1.8 Organizational performance 4

Symptoms 5

1.2.1 Complaints of clients about wrong shipping products 5

1.2.2 Differences between the stocks on count (floor) and stocks on system (sheet) 8

1.2.3 Differences between stocks quantity on accounting system and that on warehouse system 9

Initial cause-effect map 11

Updated cause-effect map 14

PART 2 – PROBLEM JUSTIFICATION 21

Problem definition 21

2.1.1 Definition of inventory management 21

2.1.2 Central problem: Failure in inventory management 22

Problem existence 24

Problem importance – consequences of the problems 24

PART 3 – CAUSE VALIDATION 26

Potential causes 26

3.1.1 Outdated and separated inventory control system 27

3.1.2 Insufficient inventory control procedures and regulations 27

3.1.3 Culture miss-match: No connection between relevance departments in inventory control 28

Cause existence 28

3.2.1 Insufficient inventory control procedures and regulations 29

3.2.2 Outdated and inconsistent inventory system 30

Cause importance 33

PART 4 – SOLUTION AND IMPLEMENTATION 34

Alternative solutions 34

4.1.1 Written working processes in inventory management 34

4.1.2 Setting up integrated system for inventory control 44

4.1.3 Solutions summary 48

Implementation 49

4.2.1 Objectives 49

4.2.2 Targeted outcomes 49

4.2.3 Project details and schedule 50

Conclusion 54

SUPPORTING INFORMATION 54

5.1.1 Methodology 54

5.1.2 Research tool 55

REFERENCES 58

APPENDIX 57

LIST OF FIGURES

Figure 1: Company structure 2

Figure 2: Sale and Profits of The Company and Fashion section from 2016 to 2018 4

Figure 3: Number of agency's complaints from 2016 to 2018 6

Figure 4: Portion of customer complaints in 2018 6

Figure 5: Fashion Sale, Cost of goods sold and GPM in 2016, 2017 and 2018 11

Figure 6: Initial cause-effect map 12

Figure 7: Updated cause-effect map 17

Figure 8: Amount of client’s orders during 2016-2018 26

Figure 9: Final cause-effect map 32

LIST OF TABLES Table 1: Fashion sale and profit growth rate from 2016 to 2018 5

Table 2: Transportation cost from 2016 to 2018 7

Table 3: Stock reconciliation at 31st December 2018 8

Table 4: Stock reconciliation between warehouse system and accounting system at 31st December 2018 9

Table 5: Stock clearance and normal sale in 2017 and 2018 10

Table 6: Participants of second in-depth interviews in March 2019 18

Table 7: Inventory turnover days of fashion products 25

Table 8: Participants of third in-depth interviews in April 2019 28

Table 9: ERP’s estimated costs 47

Table 10: ERP project schedule 51

LIST OF FLOWCHARTS Flowchart 1: Goods reception process 35

Flowchart 2: Goods delivery process 37

Flowchart 3: Inventory internal transfer 40

Flowchart 4: Goods return process 42

Flowchart 5: ERP implementation process 50

EXECUTIVE SUMMARY

Nowadays, cost management is more concentrated by many corporations over the world, especially in highly competitive market Hence, to maintain the growth in long term and achieve sustainable competitive advantages over rivals, any business line or any company needs to be effective and efficient in managing its internal activities and Fashion business line of Khatoco Trading Co., Ltd is also not an exception Although the financial results of fashion section in the company still show some positive signals with an increase in sales and profits, non-financial aspects indicate some problems include: increment in customer complaints, discrepancies in inventory information between accounting system and warehouse system as well as between stock counts and system records These are the significant symptoms which should be focused and analysed to find more inside problems Based on the deep interview technique of qualitative research, secondary data analysis and literatures review, some potential problems and central problem of failure in inventory management are identified This problem does exist because of some causes related to insufficient inventory management procedures and regulations as well as outdated and inconsistent inventory system Therefore, to solve those causes effectively and efficiently, the recommendations of compiling written working processes for all inventory activities and building ERP system for Khatoco Trading are raised in details These solutions will not only solve the main problem related to stocks control in short-term but also in the long-term of business life More than that, they also help Board of Directors in managing and controlling entire company’s processes and save costs for the company

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PART 1 – BACKGROUND Company background

1.1.1 History of establishment and development

Khatoco Trading Co., Ltd (Khatoco Trading), one of the subsidiaries of Khanh Viet Corporation with 100% owned by the Parent Company, was establish on 21st May, 2002 under the Decision No 77A/2002/QD-UB of the Chairman of Khanh Hoa Provincial People's Committee and officially wen to the business on 1st July, 2002 The company was operated on the basis of separation and re-arrangement from the rooms and branches

of Khanh Hoa Tobacco Import and Export Division, including: Textile and Garment Business Department; Cigarette Trading Department with 3 branches at Hai Phong, Ha Noi and Can Tho Upon the establishment, the number of Khatoco ’s employees were

108 people who were recruited and chosen from other members of Khanh Viet Corporation

The initial function of Khatoco Trading was to consume textile products of Tan Tien Textile Factory (one member of Khanh Viet Group) and men’s shirts produced by Khatoco Garment Factory with the fabric supplied by Tan Tien Textile Factory In May

2003, Khatoco Trading Company established a Cigarette Trading department on the basis of withdrawing the cigarette market staffs from Khatoco Khanh Hoa Cigarette Factory in Khanh Viet Group and recruiting new employees

From 2014, the company have had three following business activities, in which cigarette and men fashion are the two key business lines:

- Cigarette trading: Specialize in wholesale and retail trading domestic cigarettes that were produced and supplied by Khatoco Khanh Hoa Cigarette Factory

- Men Fashion trading: Design, process the textile products and distribution the men fashion products include shirts, T-shirts and trousers

- Ostrich and crocodile trading: Purchase and sell ostrich and crocodile meats, products from ostrich and crocodile meats, other food products (ostrich eggs)

1.1.2 Missions of the company

- Mastery over the nationwide 360-degree cigarettes trading chain including Distribution - Agency - Retail - Consumers

in 3 recent years was approximately VND173 billion and the total asset calculated as at

31st December 2018 was about VND1,777 billion

1.1.4 Internal structure

The internal structure of Khatoco Trading is shown in the following chart:

Source: Company structure Decision No 27/QD-CTTM

Figure 1: Company structure

- Ostrich and Crocodile meats are mainly sold to the restaurants and food shops in the whole country

1.1.6 Stakeholders

To be a one of member of Khanh Viet Group – State owned entity, the major stakeholders of Khatoco Trading include the Parent Company – Khanh Viet Corporation, Khanh Hoa Province People's Committee as well and related parties and internal suppliers: Khatoco Khanh Hoa Cigarette Factory, Khatoco Garment Factory, Khatoco Ostrich - Crocodile Trading Company, customers, employees and managers of the company

1.1.7 Current development and market analysis

The increase in the legislations towards tobacco industry creates difficulties for the company to develop this business line, even nowadays, cigarette product of Khatoco is one of strongest brands in Viet Nam market and directly compete with Thang Long Tobacco Company and Sai Gon Tobacco Company Therefore, men fashion is considered as key products that company will invest in to gain the competitive advantages in long-term period Moreover, the potential growth of Vietnam apparel market is supposed to be high expected to rise by 12-14 percent from 2019-2022 and gained annual growth rate of 10 percent in 2017 according to the statistic of Vietnam Textile and Apparel Association (1) Furthermore, the domestic demand is climbing powered by young aged to middle aged consumers who are living in the urban with their increased disposable incomes In addition, spending on apparel keeps going up and reaches the second place and closely behind foods spending This is the reason why fashion market is more attractive The main markets of Khatoco Trading’s fashion

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products are Nghe An, Da Nang, Binh Dinh, Can Tho and Nha Trang, and these markets are also developing in the number of young citizens who desire to express their characteristics and status via outfits Khatoco Trading is also focusing on exporting clothing by processing orders from foreign partners in EU and USA Therefore, a positive signal for export section of Khatoco Trading is that export was forecasted to rise by 15 percent per annum from 2016 to 2020 [1] As a result, the bright sight of the market in the near future creates more opportunities for men fashion products of Khatoco Trading

Currently, the close competitor of Khatoco Trading in apparel industry is Owen at the middle-age and middle-class men segment

1.1.8 Organizational performance

The growth in revenue and profits of the whole company are shown in the following chart:

Figure 2: Sale and Profits of The Company and Fashion section from 2016 to 2018

Source: Company’s financial statement 2016, 2017 and 2018

According to the above chart, there is the down trend in revenues and profits of the company from VND 7,363 billion in 2016 to VND 5,722 billion and from VND 193 billion in 2016 to VND 133 billion in 2018 respectively The decrease in total sales and

50,000 100,000 150,000 200,000 250,000

1,000,000

Sale and profits from 2016 to 2018

Total sale of Company Total sale of FashionTotal net profit of Company Total net profit of Fashion

Source: Company’s financial statement

The profit increase rate from 2017 to 2018 was faster than that of last year, but sales growth rate slightly decreased from 7.86% to 7.8% during 3 years and was lower growth rate of the market as 10% annually mentioned above

Symptoms

1.2.1 Complaints of clients about wrong shipping products

An initial symptom that Khatoco Trading is facing in recent years is the increase in complaints of key clients in agency channel about wrong shipping products From 2017

up to now, the sale volume of Khatoco Trading to agencies has been increasing and the wrong shipping time has been going up also According to the responses from key clients

in Ho Chi Minh, Nha Trang, Binh Dinh, Da Nang, Nghe An and Ha Noi, the reported number of wrong shipping orders went up to 20 times in 2018 extracted from customer service record in sale reports Specially, kinds of customer complaints and recorded times in 3 years are shown in the following chart:

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Figure 3: Number of agency's complaints from 2016 to 2018

Source: Sale report in 2016, 2017 and 2018

According to above chart, amount of wrong shipping orders, missing orders and late shipping was increasing during 3 years, while other kinds of complaints such as bad package, low commission, less facilities support for agency’s store or bad quality of products decreased gradually from 2016 to 2018 In which, in 2018, the portion of wrong shipping orders in total number of complaints is highest as 30% and the second one is the late shipping

Figure 4: Portion of customer complaints in 2018

Source: Sale report in 2016, 2017 and 2018

2016 2017 2018 Wrong orders 8 11 20

Number of agency's complaints from 2016 to 2018

Bad quality

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As shown above, in recent years, clients frequently receive wrong orders in high seasons like the year ended period and summer period as well as late shipping orders Moreover, they emphasized that late shipping orders partly were resulted from wasting time to replace wrong products Consequently, this situation impacts shapely to company business and believes of customers towards shipping service of the company are getting worse Moreover, repetitive wrong shipping orders create bad impacts on business transactions between the company and clients such as building strong obstacles to increasing company’s sales volume as well as leading to the reduction of the company reputation Furthermore, this issue also increases shipping costs of the company to replace wrong items by the right ones

The importance of this symptom

According to the performance of transportation expense towards fashion products during 3 years from 2016 to 2018, this cost increased year by year showed in the following table:

Table 2: Transportation cost from 2016 to 2018

2016 (VND) (VND) 2017 (VND) 2018

Total fashion sale 183,258,504,127 197,654,618,061 213,063,577,142 Total selling expense 16,575,248,410 20,198,170,121 23,974,621,638 Total transportation cost 1,976,580,222 2,590,082,934 3,156,840,582

Source: Accounting reports in 2016, 2017 and 2018

The transportation costs increased slightly from VND 1,976 million in 2016 to VND 3,156 million in 2018 Moreover, the proportion of this expense to net sales and selling expenses also went up year by year from 1.08% to 1.48% and 11.92% to 13.17% respectively Looking deeply into the shipping costs per order in 2016, 2017 and 2018, this amount climed up significant by 21% annual from VND 60,403 in 2016 to VND 87,724 in 2018 If this issue is not solved in this year, transportation cost would increase

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and severely affect the business results in the long-term

Based on responses of key clients, the wrong delivery postponed their business and could not meet the clients’ needs at that time Lacking of right products may cause bad relationships between company and its clients because they tend to be frustrated when receiving wrong orders As a consequence, Khatoco Trading is losing its opportunities

to increase sales in the future

1.2.2 Differences between the stocks on count (floor) and stocks on system (sheet)

At 31st December 2018, the company conducted stock count in order to close accounting book of their apparel inventories The number stocks on count was different with the amount recorded on warehouse system Moreover, the differences related to many kinds

of products including the main items – men shirts The differences between floor to sheet are presented in the following tables:

Table 3: Stock reconciliation at 31 st December 2018

Description Color Size system’s quantity Warehouse Stock take’s quantity Differences

Source: Stock count minute at 31 st December 2018

According to the above table, there are some items have the large differences between floor (stock count) to sheet (warehouse system) such as Men shirt TD 290T1 with color VNTR001-2007-D, size L and Men shirt TD 290T1 with color VNTR001-2007-D, size

M This symptom can lead to consequences of losing inventory or make mistake in delivery mentioned in the initial symptom Shortage of inventories means a loss in operating activities of the company Whereas, surpluses of actual stocks to the system

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result from many reasons in which wrong delivered items mentioned above is one of the cases Moreover, surpluses also create opportunities to warehouse staffs to steal goods and also lead to the loss of company’s assets

1.2.3 Differences between stocks quantity on accounting system and that on

Source: Stock count minute at 31 st December 2018

There are some significant differences in recorded quantity on two systems showed in above table The inconsistence between warehouse system and accounting system will take many times to compare the quantity on two systems and require a careful manual reconciliation regularly This symptom is also important to the company because it is related to failures in the inventory management and can lead to the loss or abundance in inventory Moreover, the differences of 2 systems will impact goods transfer decisions

to adapt client’s demands because the decisions based on the inventory system may be distinct with the actual amount Subsequently, this situation will lead to the fact that high-demanding products are out of stock in an area while in other areas those products are redundant Eventually, these inventories become slow-moving and obsolete, then the company will suffer a burden to dispose them

The importance of the second and third symptom

As emphasised by DeHoratius et al (2) the discrepancy between recorded inventory quantity on the system with one presented on shelves leads to the situation that is order when it is not inevitable or shortage order when it ought to (p.627) Inaccuracy in

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recording inventory also creates lack of some items and over on others (2) Moreover, inventory evaluation also be inaccurate because the evaluation is based on accounting number while warehouse record and actual amount were not the same The evidence of consequence came from the inconsistency of 2 systems as well as between actual number and recorded one is the increment in amount of clearance sales of slow-moving and obsolete stocks that was presented in the following table:

Table 5: Stock clearance and normal sale in 2017 and 2018

Source: Accounting report in 2017 and 2018

The portion of sale clearance went up from 21% to 26% in 2 years leads to the decrement

in sales growth rate as well as gross profit margin (GPM) Specifically, the sales growth decreased from 7.86% in 2017 to 7.8% in 2018 as mentioned, and the increase in sales was not as fast as the rise in cost of goods sold (COGS) mainly due to large of discounted products sold in 2018 that reduced net revenue this year Consequently, GPM declined from 25.2% in 2016 to 23.3% in 2018 that is detailed in the following chart

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Figure 5: Fashion Sale, Cost of goods sold and GPM in 2016, 2017 and 2018

Source: Accounting report

Many consequences from the descrepancy in actual quantity and system’s quantity as well as inconsistences of two systems make the company can not control its inventory

to make right decisions Decrease in GPM year by year due to increase in stock clearance indicates ineffective in sale and also impact to the brand image of Khatoco Trading

Initial cause-effect map

Based on the face-to-face interviews with relevant people including: warehouse staffs, warehouse keeper, inventory accountant and chief accountant, the initial cause-effect map is presented as below graphic:

Fashion's Sales, COGS and GPM (VND million)

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Source: In-depth interviews

Potential problems:

Human errors in picking orders

According to responses of warehouse staffs, the initial cause of customer’s complaints

is the human error in picking goods They confirmed that sometimes they made a mistake in picking products before transferring to shippers As Mr Phuong – warehouse staff stated that “there are a lot of SKUs in the warehouse at a time and sometimes, it becomes very difficult to distinguish visually each type of products because they are somehow similar in color, especially, in size We just distinguish each SKU by a small tag on each item” In addition, he also realized that “there is one separated position to

Separated inventory tracking system

Figure 6: Initial cause-effect map

Symptoms

Complaint of client about a discrepancy in shipping goods

Differences between floor and sheet during stock count

Different stocks quantity between warehouse system and accounting system

Potential central

problem

Human error in picking orders

Reconciliation

is not correctly performed

Human error in number input

on the system

Ineffective security control

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place ready-to-shipping goods but the package for each customer was not marked clearly and this results in the shipment errors”

Insufficient re-check from different levels

Wrong shipping mainly incurred in peak season that was near Tet holiday due to large amount of shipping goods and orders, further, warehouse members didn’t have enough time to check carefully as Mr Thong – warehouse staff said that “wrong pickings likely incur in peak season, especially, the period prior to Tet holiday due to large amount of shipping goods and orders because we don’t have enough time to check them all manually carefully In peak season, we mostly focus on big orders and recheck them before shipping, for small orders, we can easily replace the wrong picked items quickly” Thus, recheck was conducted towards big orders rather than small ones because they thought that the problem of small orders would be not significant and wrong products could be replaced quickly after that

Human error in numbers and information input on the system

Firstly, the differences came from the wrong input number on the system Warehouse staff who is an in-charge of checking received goods is responsible for recording goods receipt notes on the system Sometimes, input information is wrong but they will correct

it later when goods are picked for shipment or when staffs randomly perform count on their own for checking Everyone can access the system easily without permission or access requirement, so if one person found something wrong, they are able to amend it immediately Moreover, Mr Long - warehouse keeper said that “sometimes, system went down, became slow and we have to start input over if we had not saved the pending workdone I think mistakes in inputting information is also attributable to this” Moreover, warehouse keeper had to suffer the high workload so he did not have enough time to recheck all input figures

Inventory theft

There was one circumstance of inventory theft incurred in November 2018, when one staff of a company went into the warehouse at the lunch time when everybody is leaving for meal The security guard who was hired from third party did not pay attention to this person and check him before he left the warehouse This issue just was found when staff

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identified many spaces of missing items on the stock shelves

Ineffective security control

There was no camera in the warehouse, so few items were stolen The company just hired 2 security guards to protect both office and warehouse that are located far from each other Therefore, this situation indicated the weak security system of the company

in controlling inventory This issue then was reported to the board of directors, and the cameras have been already set since February 2019

Ineffective security system and weak management in checking goods or recorded input number result from the failure in controlling inventory of Khatoco Trading

Separated inventory tracking system and reconciliation is not correctly performed

Based on confirmation of both warehouse keeper and accountant, warehouse system and accounting system are distinguished, the amounts between two systems are not suitably reconciled and they mostly focus on accounting stock amounts Whenever the accountant requires warehouse keeper to confirm on accounting numbers, he will check with his record and sign on the confirmation Therefore, the responsibility of any differences in stocks belongs to warehouse keeper As the comments of chief accountant, the loss of inventory is mainly due to failure of warehouse keeper in observing and managing inventory And Mr Tam – chief accountant also stated that

“warehouse keeper and his staffs would compensate for the any differences After that,

we will adjust the amount as a sale transaction to him and receive his compensate We all agree with this practice for a long time without deeply finding the root causes leading

to discrepancies” In addition, warehouse keeper said that loss rarely incurred, the differences sometime due to wrong number of the system and he will adjust after self-count Failure in inventory control is shown more clearly through depreciation of inventory control system, two related departments just rely on confirmation of responsible individuals without a careful reconciliation

Updated cause-effect map

Based on general information collected from face-to-face interviews indicated in initial cause-effect map, the potential central problem is identified as failure in inventory management And according to Stevenson (3), effective inventory management played

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an important role in achieving customer satisfaction and maintaining the inventory cost within acceptable bounds (p.559) Therefore, any failure in inventory control will badly impact on firm’s performance like reduce customer satisfaction, surplus or shortage inventory even poor forecasting for production and trading as Koumanakos (4) emphasized (p.356) Moreover, Zomerdijk et al (5) indicated the relationship between wrong organization perspective on inventory control and inventory management problems (p.175) In details, Zomerdijk et al stated that concerning inventory management is the delegation of responsibilities and authorities (5) If nobody in a company is unclear about his or her responsibility in controlling inventory or responsible individual has insufficient authorities to undertake the tasks, problems will incur Furthermore, Zomerdijk et al also showed that inaccurate inventory records also caused the consequences like wrong system number and actual amount (5)

Another reason of inaccuracy inventory record is weak data access control which was partly mentioned by warehouse keeper in the initial interview Many researches (6,9-11) indicated that information security was a serious requirement toward warehouse system, the access authority must be defined and limited to ensure the accuracy of the data and avoid loss In addition, Richards (7) emphasized the role of warehouse in supply chain of every organization, in which, a clean and tidy warehouse located in suitable place contributes to delivery right products in exact quantity to right customer

on time and create cost-efficient operation for a company (p.6) Hence, a messy warehouse creates the difficulties in counting and observing as well as wastes increases cost due to time waste and wrong picked products to delivery Richards (7) also mentioned that “security of product within the warehouse is paramount” and security system has to be designed to protect products and facilities from theft or any person breaking in (p.176) Thus, a company which has ineffective security system can be stolen not only products but also important warehouse data

In another research, Vries (8) emphasized that:

“Lack of information sharing, information processing obstacles and the application

of different platform technologies throughout the company are often considered to

be the main reasons for a malfunction of inventory management systems” (p.66)

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The second round of face-to-face interviews is carried out with the purpose of

checking the application of literatures mentioned above into actual situation and

deeply finding the details in potential problems The participants join these in-depth interviews includes:

Table 6: Participants of second in-depth interviews in March 2019

Warehouse

Unclear responsibility and authorities of each level

As the information collected from interviewees, there is unclear responsibility toward warehouse staffs as well as warehouse keeper The management role of warehouse keeper was not performed correctly because he was in-charge in controlling all warehouse activities but he did not re-check work done sufficiently of his staffs

Manual input methods/ confused inventory codes

There are many product codes which are not completely distinguished, so they cannot ensure entirely correct inventory input information This is confirmed by warehouse keeper For example, long sleeves shirt has a code A1MD and code of short one is A1MN with same colour and same material Moreover, staffs input code by hand with

no recheck from higher level may lead to some mistakes

Unclear regulations for stock checking when deliver - receive goods

Both warehouse staffs and warehouse keeper confirmed that there was no regulation for stock checking There is no official regulation for checking when goods were arrived to warehouse or shipped from it Mr Thong emphasized that “I have been working following to directions of warehouse keeper and never seen official instructions or regulations of company about stock checking process” Moreover, Mr Phuong stated

“all activities of the warehouse belong to management of warehouse keeper and staffs,

so we discussed to conduct job based on most suitable ways as we agreed” Besides, warehouse keeper also showed that he had been working for the company since establishment, so he understood clearly how to operate the warehouse that can adapt to

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the requirement of sale department in distributing and arranging goods As a result, the warehouse keeper is operating warehouse work mainly based on his own experience instead of having professional regulations to direct their activities Unclear regulation for stock checking is one of reasons why management steps for inventory receiving and delivery were not performed sufficiently and correctly that lead to uncontrollable differences

Unclear regulations of recording inventories – weak data access control

The unclear regulations of recording inventories on the system was due to each department recorded figure on their own manual and did not have any integration between them In details, accountant and warehouse keeper did not discuss to record in consistent way as well as no regulation issued for this action As warehouse keeper said:

“Warehouse system is just used for our reference and management Accounting system belongs to accounting department and we are not required to compare number with that one in accounting system Whenever accountant needs us to confirm accounting amounts We will compare with our system to sign on their report if total quantity is matched because the accountant is mainly focus on total stock amount Therefore, no direction of managing inventory records were agreed by both of us as well as I have never seen any regulation about this situation yet”

Anyone can access into warehouse system to input or adjust the number due to no regulation of recoding inventories This also indicated the weak control towards system data

Untidy warehouse, uncategorised goods

Untidy warehouse is shown through stock arrangement in the warehouse Depending on the answer of Mr Long, he found an empty place to put the new ones received, then gathered same kinds of products to place in the same area and separated position for goods-ready-to-transfer which did not follow to any storage techniques like racking, material handling tools or equipment which were mentioned by Kovács (12) In addition, goods are not categorised based on code, color, quantity or some essential details, and all information of products are marked on its tag of suppliers Consequently, human error is inevitable

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Potential central problem (real problem):

Failure of controlling inventories

Considering on many aspects of inventory management activities through face-to-face interviews relevance employees and literatures of previous researches, Khatoco Trading

is facing with two problems: the first one is failure in controlling stocks and second one

is wrong organization perspective on inventory control

Based on the interviews, failure in inventory management is indicated through:

- Unclear inventory management responsibilities and authorities

- Unclear regulations for checking and recording inventory

- Messy warehouse arrangement

- Ineffective security system

- No reconciliation between independent departments to control stocks

According to Kumar et al (13), there are two aspects related to the concept inventory control involving inventory management and store control, in which inventory management approaches the process of ordering and using inventory, whereas store control discusses about warehouse operation (p.90-91) The failure in inventory management could be the failure in process of ordering, using stocks or ineffective warehouse operation or both, which are performed clearly in potential problems of the company

The failure in inventory management is also impacted by the wrong organization perspective on inventory control In which, the organization perspective on inventory control is analysed on four criteria as Zomerdijk et al (5) mentioned as below:

2.1.1 Definition of inventory management

Inventory management is an essential process in operation management which affected

on all activities in an organization such as supply chain, finance and marketing Russell

et al (14) stated that effective inventory management contributed to build a lower cost which could provide a lower price of products in comparison with rivals (p.554) There are many aspects related to inventory management need to be focused as mentioned by Oluwaseyi et al (15), including: types of inventory, responsibilities of entire company employees, storage and warehousing and inventory management techniques (p.3-9)

- Tools and supplies

Each type of inventory has different characters and appearances, so separating inventory following to its type may help the company be more effective in controlling inventory

Responsibilities of entire company

Inventory management is not only the responsibility of warehouse but also the accounting department and other relevant departments or entire organization The communication between person in-charge, different functions, sections as well as positions in controlling stocks will lower cost, increase profitability and even minimize stocks for the company (16) Furthermore, clear job allocation and description to verify clear responsibility in stocks control also contribute to build a good inventory

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management system Hence, to gain good inventory management, connective network

of the whole company is required

Storage and warehousing

Warehouse is known as a stockholding point to store inventories and plays an important role in building strong supply chains As Richards (7) emphasized that a suitable location of warehouse and adaptable number of warehouses could drive competitive advantages for a company which contributed to deliver right goods to right customers

at the accurate quantity in the right time with right condition and competitive price (p.6) Moreover, a logical storage system helps stocks management become more effective include adaptable warehouse infrastructure, efficient stock tracking system and connection between inventory processes Thus, storage methods and warehouse arrangement are an essential aspect should be concentrated by board of directors because

a modern logistic cannot exist without warehousing service that is summarized by Oluwaseyi et al (15) (p.3)

Inventory management techniques

Applying right management techniques in controlling merchandises can reduce storage expenditure for a firm is the statement of Oluwaseyi et al (15) (p.4) Many techniques

to manage inventory are using nowadays in big organizations in the world such as ABC analysis (Activity Based Costing analysis), HML analysis, FSN analysis and other methods listed by Kumar et al (13) In which:

- ABC analysis is a method to determine amount of existing goods in store based

on annual consumption and the annual value of stocks

- HML analysis is to classify the inventory based on its unit price include high price, medium and low price

- FSN analysis focuses on consumptions of the items to classify them such as fast moving, slow moving as well as non-moving inventories

ABC analysis is widely used than other methods, but different techniques have different advantages and disadvantages Therefore, any organization can apply the suitable one with its business and inventory characteristics

2.1.2 Central problem: Failure in inventory management

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Failure in inventory management is defined as the unsuccess or omission in performing one or all aspects of inventory control such as process of ordering and using stocks; ineffective warehouse operation; warehouse information security or all of them (13) Based on the general information about inventory management, failure in controlling goods can be understood as the weakness in some aspects shown above like ineffective connection between relevant sections and unclear allocation, unsuitable storing and warehousing management or incorrect controlling methods

Ineffective communication between relevant sections and unclear allocation

Inappropriate communication and no connection can lead to lack of information among many departments and result a poor inventory management As Ozer (17) said that the effective use of information, value of information and coordinate decentralized operations are three main aspects of good inventory management (p.321-322) Therefore, poor information resulted from poor connection can lead to wrong decision then increase cost for the firm Moreover, task allocation also plays essential role in managing inventory as per Zomerdijk et al (5) stated that:

“The allocation of tasks is an important dimension in the organizational context of inventories.” (p.175)

If people whose functional positions and authorities related to stocks control or warehouse operation do not comprehensively understand job allocation, failure may be not avoidable Besides task allocation, remaining three aspects (decision making processes, communication processes, behavior) in ‘the organizational perspective on inventory control’ mentioned by Zomerdijk et al (5) in Part 1, also impact largely to a firm (p.175) As a result, if it fails in setting up the right dimension or losing interaction between all dimensions, this can lead to inventory control problems

Unsuitable storage and warehousing methods

Warehouse layout and warehouse system are two main parts of warehouse management,

so unsuitable storage methods may come from wrong warehouse design or weak system (7) An effective warehouse design is based on available space, company’s requirements and budget, so in order to build a best design, technology (software drawing tools) and financial calculation need to be taken into account Lack of supporting tools or financial

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consideration can lead to bad warehouse layout In addition, technology also contribute

to a strong warehouse tracking system combines with security system Company cannot operate its warehouse efficiently if it completely relies on staff knowing without locational system (7) Wrong warehouse methods or wrong warehousing arrangement which are due to ineffective applied methods such as ABC analysis, HML analysis, FSN analysis or the others mentioned above lead to the errors in distributing stocks Thus, unsuitable storage and warehousing methods is one of the main reasons cause the failure

in inventory management

Problem existence

Failure in controlling inventory is indicated through information of in-depth interviews According to warehouse employees, the failure comes from situation where all tasks are mostly worked by manual without clear regulations and directions They showed the evidences that job description was not detailed specifically as well as no warehouse regulations to follow Most of the work-done is carried out according to the direct instruction of warehouse keeper and to be confirmed by warehouse keeper which varies depending on given cases Next, ineffective regulations also lead to ineffective job allocations as well as job authorities and job limitations, so any one can access warehouse information and adjust the number without authorities Moreover, even the company has equipped tracking systems for accounting department and warehouse but they are separated instead of consistent and being reconciled to each other One of the symptoms indicated the differences between numbers on two systems, so it caused difficulties in reconciling and controlling inventory

There was no necessary tool used to form an effective warehouse layout in order to avoid picking mistakes It is explained that technology was not invested and used adequately Last but not least, from the evidence of losing stocks in 2018, security system of warehouse indicated some weaknesses need concentration

Problem importance – consequences of the problems

Failure in inventory management is considered to be a very important problem because

of its consequences toward the company As Stevenson (3) also emphasize that:

“Poor inventory management hampers operations, diminishes customer

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satisfaction, and increases operating costs.” (p.555)

Within the scope of internal control’s job, the failure in inventory management which is related to the aspects of ineffective communication between relevant sections and unclear allocation will be focused, while another aspect related to unsuitable storage and warehousing methods will be delegated to warehouse for improvement

One of consequences which failure in controlling stocks caused for Khatoco Trading is the decrease in gross profit margin (GPM) from 25.2% in 2016 down to 24.7% in 2017 and to 23.3% in 2018 due to increment in stocks clearance as mentioned in previous section Looking deeply into the inventory turnover days of Fashion products in the following table:

Table 7: Inventory turnover days of fashion products

Inventory (VND million) 100,796 48,539 44,483 93,715

Cost of goods sold (VND million) 137,120 148,883 163,351

Inventory turnover days (days) 196 112 152

Source: Financial statements in 2016, 2017 and 2018

The inventory turnover days of Khatoco Trading showed the fluctuation during 3 years, from 2016 to 2017, there was a down trend by 40% from 196 days to 112 days respectively, while inventory turnover days increased sharply by 35% from 112 days in

2017 to 152 days in 2018 The significant decrement in turnover days of inventory in

2017 was partly due to the decrement in inventory affected by Damrey typhoon in December 2017 Hence, the growth in inventory turnover days in the period 2017-2018 showed the weakness in controlling stocks, especially for the seasonal and trending products like fashion Furthermore, inventory turnover days of fashion products were nearly a half of year means the company could not clear stocks more than 2 times in a year which indicated it is getting a trouble with slow-moving stocks problems in fashion industry Consequently, the portion of clearance sales went up sharply from 21% in 2017

to 26% in 2018 indicated in previous section

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Secondly, the customer dissatisfaction was also badly impacted by failure in inventory management As the statistic of sales department, some clients complained about goods receiving such as wrong delivery or missing orders in 2016 tended to make less amount

of orders in 2017, and some clients of 2017 who got the same trouble also reduced amount of orders in 2018 which is indicated in the following chart:

Figure 8: Amount of client’s orders during 2016-2018

Source: Sale statistics of Sale department in 2016, 2017 and 2018

According to above chart, An Phu Thinh – one of largest customer in Binh Dinh reduced its order amount strongly from VND 1.7 billion in 2016 to VND 0.83 million in 2018

as the same as the down trend of Shop co Hien, Shop Ut and Men shop – some clients

in Southern area Moreover, Co.op Mart branches had the fluctuation in orders year by year but overall the sales of Khatoco Trading in 2018 were lower than that of two previous years As a results, the dissatisfaction of clients caused from failure in inventory control diminished sales of Khatoco Trading

3 PART 3 – CAUSE VALIDATION Potential causes

The potential causes of central problem – Failure in controlling inventories (related to the aspect of ineffective communication between relevant sections, involve insufficiency in performing inventory reconciliation as well as unclear allocation and direction) includes:

200,000,000

Sales of some clients during 2016-2018

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- Outdated and separated inventory control system

- Insufficient inventory control procedures and regulations

- Culture miss-match: No connection between relevance departments in inventory control

3.1.1 Outdated and separated inventory control system

Nowadays, with the growth of Fourth Industrial Revolution or 4.0 technology revolution, many companies over the world, even small ones are applying the automation and data exchange in every process of business, which create a very large connection network based on cyber-physical systems The connection between the physical, digital and biological ispheres in whole company system, specially in inventory system will help company control them effectively and contribute to create competitive advantages Therefore, if a company do not catch up with the growth trend

of technology in modern business, it can fail in the long term This consequence is also indicated by Agbola et al (18), he stated that an unrealiable, inconsistent and outdated inventory control system caused poor stocks tracing and cost control (p.47) Moreover, various items in warehouse may not be verified as well as recognised quickly due to ineffective system (18) To control various kinds of stocks in modern business, the advanced system is required for any company, specially in trading company with a wide range of products If a firm can not equip a strong and advanced inventory system, it can loss customers as well as increase slow-moving stocks or obselete stocks and finally can not survive in its industry Thus, outdated and disjointed stocks control system is one of the important potential causes need to be solved

3.1.2 Insufficient inventory control procedures and regulations

Working procedure contributes a critical role toward company operation According to Suchman et al (19), three criterias need to be formulated by a business are:

“(a) Official company policies and standard procedures, (b) descriptions of how thing should be done with respect to particular jobs, and (c) worker’s individual descriptions of the steps they follow in carrying out (a) and (b).” (p.139)

Insufficient working procedures as well as regulations not only lead to the decrement in productivity but also cause decline in employee satisfaction and collaboration (19)

is set up that indicated the interaction and relationship between all positions in a company, culture formed by tone from the top, senior managers, still affects largely on operation (20) Khatoco Trading has been being a 100% state-owned company, so its culture was influenced by experience-based management methods Therefore, each department just takes care its main business line as well as its internal jobs without communication with other relevant departments leads to the asymmetry of important information which caused problems in inventory control Finally, Patterson et al (21) demonstrated that good organization culture pushed employee productivity through creating their satisfactions, positive attitudes and commitments for their jobs (p.6) Some problems come partly from situation where staffs lost their motivation or positive attitudes in solving problems like what have incurred in Khatoco Trading

Causes existence

To verify the potential causes of central problem, the in-depth interviews with relevant employees and higher level was continued to conduct The interviewees include:

Table 8: Participants of third in-depth interviews in April 2019

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- Unclear inventory management responsibilities and authorities

- Unclear regulations for checking and recording inventory

- Messy warehouse arrangement

- Ineffective security system

- No reconciliation between independent departments to control stocks

These criteria of stock management are resulted from two main causes which are raised

by participants of the third depth interviews, involving:

- First: Insufficient working procedures as well as regulations toward inventory control activities

- Second: An outdated and inconsistent inventory tracking system

Main causes of the problems

3.2.1 Insufficient inventory control procedures and regulations

There are many unsuitable procedures are existing in inventory control activities which made warehouse staffs as well as accounting department be confused in solving inventory issues Lack of written processes related to stocks activities leaded to the unclear responsibilities as well as authorities for all related employees No one knows who was in-charged of solving problems when they arise As mentioned by warehouse staffs in the second interview, they did not receive any written documents related to working processes from the first day of work at Khatoco Trading, all processes were transferred orally through warehouse keepers based on his experience And Mr Long (a warehouse keeper) also shared that “there were some mistakes incurred due to human error that I did not have enough time to check and I was not always available when staffs needed my advices Moreover, the consequences of these issues did not solve immediately because there was no written guideline for staffs to refer Therefore, a clear

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procedures and instructions related to inbound and outbound activities, organization chart, and some common mistakes can help me and my staffs work more effectively Unfortunately, I have never seen it before.” Furthermore, according to Mr Chung (Deputy Director of fashion business), the issue of warehouse or accounting department related to inventory rarely raised to him in many meetings He said that “I saw that some problems were not significant as well as they are solved quickly by the coordination between warehouse keeper and accountant.” And “I think all activities related to inventory in our company mostly had verbal processes instead of written one such as sale, purchase, inbound and outbound logistic and this was a big problem”

Up to now, state-owned company like Khatoco has mainly focused on how to push sale

to meet targets of parent company and to complete tax liabilities without caring about internal operation In addition, any idea raised related to some internal problems like internal procedure would be resolved slowly as well as inadequately However, since

2019, Khatoco has been being in equitization process Thus, this is an opportunity for the company to improve its business and concentrate on outstanding problems As a result, Mr Chung also recognized that ineffective procedure leaded to failure in inventory management and had to be improved as soon as possible

3.2.2 Outdated and inconsistent inventory system

Up to now, Khatoco Trading has used An Linh accounting system – a local system with limited functions for accountants and warehouse system which was designed and installed by IT department for warehouse internal control These systems do not link together and are showing many weaknesses in responding to complex requirements of accounting and warehouse work done As discussing with IT manager – Mr Cuong, he confirmed that “in recent years, accountants get stuck in adding new details of goods into accounting system for their control Even though I required supplier to update and extend system for these details, they could not adapt to this requirement thoroughly An Linh system is quite outdated and seems not to be suitable to a variety of accounting requirements in a big company like Khatoco”

Mrs Tam, chief accountant had the same idea with IT manager about the weaknesses

of An Linh system recently, and she also raised her feedbacks about this problem to Mr

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Chung (Deputy director) He also confirmed that he had received some complaints from accounting department about the outdated system but they have been considering which system can adapt to company’s requests and company’s budget

Finally, both Mrs Tam and Mr Chung agreed that separated tracking systems, especially for inventory and sale activities leaded to unexpected consequences in internal control and the company had to replace some outdated ones by a new consistent system which can store a huge database and perform complicated functions In addition, they emphasized that to find and complete system replacement would take many times while company had been working and facing with problems every day, so they appreciated thorough procedures related to inventory controls to fix above problems as soon as possible as well as to reduce stock risks for the company

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Source: Literatures and In-depth interviews

The above chart is the final cause – effect map which briefs whole information from main real causes to central problem and its consequences which also lead to material symptoms in Khatoco Trading

According to the literatures and third depth interviews, two main causes of failure in controlling stocks are determined The first cause is insufficient inventory control procedures, especially working processes, and the second is outdated and separated inventory systems Moreover, miss-match culture was a potential aspect had influence

to inventory management activities Based on the information of the interviews, the third cause was not recognized by both chief accountant and warehouse keeper They thought

Symptoms

Complaint of client about a discrepancy in shipping goods

Differences between floor and sheet during stock count

Different stock quantity between warehouse system and accounting system

Failure of controlling inventories

Central problem Potential causes

days

Increase customer’s dissatisfaction due

to wrong delivery

Loss sale due to the increase in slow-moving stocks