Improving the inventory management activities in phat dat joint stock company

Businesses mustpay attention to all stages in order to best meet the needs of business operationsand improve the quality, lower production costs so that it is able to ensurecompetitivene

1 Context of the thesis

In the global economy, in order to develop, every business must ensurethe autonomy in production and profitable business activities Businesses mustpay attention to all stages in order to best meet the needs of business operationsand improve the quality, lower production costs so that it is able to ensurecompetitiveness for the products

For manufacturing enterprises, warehousing activities, especiallywarehouse and inventory management, are particularly important If theseactivities are done well, businesses will reduce a large amount of costsincluding the cost of storage of raw materials, the cost of renting space, Atthe same time, good warehouse management will ensure adequate supply of rawmaterials for production, avoiding material shortages leading to productionbottlenecks or shortages of market supply products

The management of warehouse and inventory has a strong impact on theperformance of business but has not been given adequate attention, especially insmall businesses Therefore, I decided to spend my internship at Phat Dat'swarehousing department to be able to learn more about inventory managementactivities Eventually, I chose the theme: “Improving the inventory managementactivities in Phat Dat Joint Stock Company” for my thesis In addition, thethesis will clarify the pros and cons of inventory and inventory managementactivities at Phat Dat Joint Stock Company (JSC) and provide solutions toovercome the negative aspects

2 Subject and purpose of research

2.1 Subject of research

The subject of the thesis is the inventory management activities at PhatDat JSC

2.2 Purpose of research

The purpose of the thesis is to give recommendations and solutions to improve the inventory management activities at Phat Dat JSC

2.3 Missions of research

The thesis needs to focus on main missions as follow:

- Summarizing basic theoretical and concrete knowledge about the inventory and inventory management

- Analyzing the inventory management activities at Phat Dat JSC

- Giving solutions to improve the inventory management activities at PhatDat JSC

3 Scale of research

The thesis analyse the activities realated to the invnetory management ofPhat Dat JSC These activities mainly take place in the warehousing andmanufacturing department of the company In addition, the data is calculatedbetween 2017 and 2019

4 Methodology

4.1 Data collection

The thesis is made mainly based on the collection of secondary data, inaddition to collecting primary data These two data sources are collected asfollows:

- Secondary data: Analysis data is collected through accounting reportsand business statements of the company Other sources are newspapers,magazines, statistic offices, and websites, etc

Secondary data is plentiful, varied, and comes from different sources.Therefore, researchers must be familiar with the sources to exploit informationeasily and quickly

Secondary data is easy to collect and less time-consuming This type ofdata is an important document in research as well as other academic papers

However, secondary data is not enough when it comes to research because of the incompletetion.

- Primary data: the data is collected by the writer while working at thecompany, based on the observation and recording process during the internship.The data is considered simple and incompete.However, this is also a helpfulsource of information so that the writer can make conclution about the subject

of research

4.2 Data processing

Statistical, descriptive, and synthesized methods of data: using statisticaltools to collect data and then analyze, compare, evaluate, and draw conclusionsabout the causes of the change

4.3 Case study

5 Disposition

The thesis includes 3 parts:

- Chapter I: Literature review about inventory and inventory management

- Chapter II: Phat Dat JSC and the warehousing management activities of the company

- Chapter III: Recommendations and solutions

CHAPTER 1: LITERATURE REVIEW ABOUT INVENTORY AND

Inventory is either goods or materials or both of these that the companyholds for different purposes It plays an important role in the business and otheractivities related Inventory appears in both manufacture and sevices Formanufacture, inventory refers to all work that has occurred – raw materials,partially finished products, finished products prior to sale and departure fromthe manufacturing system In the context of services, inventory refers to allwork done prior to sale, including partially process information (Wikipedia:Inventory, n.d.)

There are some main reasons for keeping an inventory which makesstook important to the business:

- Time: the time lag appears at different stages of the supply chain It isalso called by a familiar name – lead time To maintain the production andshorten the ordering time, the company needs to store inventory and calculateother factors related

- Seasonal demand: the consumption of goods depends on periods of theyear Special times such as the new year or vacations can affect customer’spsychology and demand

- Economies of scale: the cost advantages could be obtained more when the company store inventory specifically activities in bulk

- Uncertainty: the instability in supply, demand, etc is the reason to hold inventory to adapt to the production of the company

In short, inventory is needed in every sector of the economy Due to itsimportance, inventory has been studied for a long time and the theoreticalframework about it is quite adequate Aspects such as classification of inventoryand how to store it efficiently were presented throughout the years.

1.1.2 Functions of inventory

There are some main functions as follow:

- Improving the service quality: inventory helps reduce the waiting time

of customers Also, defective products can be converted easily if there is anyrequest from the buyer

- Reducing logistics cost: the costs for shipment, warehouses could be reduced thanks to suitable inventory

- Adapting unexpected orders: having enough inventory will offset thelimited production capacity when there are unexpected orders with largequantities

- Saving cost for business: the company can preserve more inventory atlow price periods to cut down buying cost as well as to use for business whenthe price rises

On the other hand, different industries would hold inventory for different purposes, which makes this asset become varied functional

1.1.3 Classification of inventory

Inventories are diversified and different industries have seperated ways toclassify Therefore, to manage inventory well, we need to classify inventory bysome specific methods:

Classify inventory based on purpose and uses

Inventory in the business will be divided into:

- Inventory for production: material, semi-produced goods, etc

- Inventory for sales: fully-made products and other goods for sales

This method helps managers make purchasing estimate as well as

reserving plans for inventory and other business activities

Classify inventory based on source of formation

- Purchased inventory includes internal purchased inventories are boughtfrom suppliers inside the system of the business (these suppliers and thecompany usually share the capital or have the same owner) On the other hand,external purchased inventories would contrast to internal purchased ones

- Self-produced inventory: stock produced and store by the company itself

- Inventory from other sources: inventories as gifts or venture, etc

It is easier for managers to calculated cost of good sold in this method sothe firm could evaluate the stable level of inventories’ formation

Classify inventory based on Standard no.2

The standard was Issued and publicized together with Decision No.149/2001/QD-BTC of December 31, 2001 of the Minister of Finance In thisstandard, inventory is divided into:

- Goods purchased for sale: goods in stock, purchased goods being transported en route, goods sent for sale, goods sent for processing;

- Finished products in stock and finished products sent for sale;

- Unfinished products: uncompleted products and completed products notyet going through the procedures for being put into stores of finished products;

- Raw materials, materials, tools and instruments in stock, sent for

processing, and already purchased but being transported en route;

- Costs of unfinished services (VAS 2 - Inventories, 2001)

This document is the standard for business to determine the types ofinventory and how to make the balance sheet as well as the financial statements

In short, every method has a specific meaning to business activities.Depends on the situation and the requests of the company, the managers canchoose their ways of classifying inventory

1.2 Inventory management

1.2.1 Definition

There are many difinitions about inventory management since this is animportant party of supply chain These difinitions could be all summarized tothe following words:

Inventory management is the supervision of non-capitalized assets, or inventory, and stock items As a component of supply chain management, inventory management supervises the flow of goods from manufacturers to warehouses and from these facilities to point of sale (Inventory management, 2020).

1.2.2 Functions and meaning of inventory management

To manage inventory is to:

- Make sure the quantity and characteristics of inventory stable during the production

- Take care of the value of inventory so that the stock so that the companycan avoid damage and the decrease in value to inventory

- Ensure the capital of the firm at the reasonable and optimal level to increase the effect of capital and reduce the costs

Inventory management is significant because inventory is a valuable asset

to the business Managing current assets in a good way will bring back greatinfluences on the accomplishment of the tasks and goals set out by the company

On the other hand, if these assets are not effectively used, the business activitieswill have difficulities Therefore, inventory management is one of the mostimportant thing to do in business

There are two costrary sides of inventory management:

- If the firm wants a continuous production and there is no interruption, the manager will have to increase the amount of inventory in the warehouse

- On the contrary, a rise of stock makes the company bear more cost related to inventory

1.2.3 The costs of inventory management

Ordering cost

The costs relate to making orders, searching suppliers and other activities

in the order process such as negociation, etc

Storage cost

Costs of storage includes:

- Renal and other fee related:

+ Rental or depreciation for houses

+ Insuarance for warehouses or stores

- Costs for using devices and vehicles:

+ Rental or depreciation for devices and vehicles

+ Energy cost

+ Equipment operating costs

- Labour cost

- Costs of damage or broken inventory

- Other costs such as taxes, insurance for inventory, etc

1.3 Content of inventory management

1.3.1 Criterias for inventory management

To manage the quantity and quality of inventory by:

- Guaranteed the condition of the warehouse such as temperature, space, etc to preserve goods

- Classify the inventory suitably

- Apply appropriately methods and tools to manage the inventory in the strorage

To manage the value of inventory by: Control the capital of goods in

physical form as a basis for assessing the assets of enterprises and the efficiency

of using capital goods From there, the administrator sets the basis of areasonable selling price and calculates the profit after sale

1.3.2 Models for inventory management

CHAPTER 2: PHAT DAT JSC AND THE WAREHOUSING

MANAGEMENT ACTIVITIES OF THE COMPANY.

2.1 Introduction of Phat Dat JSC

2.1.1 Overview

- Company’s name: Phat Dat JSC

- Location : Bac Hong, Dong Anh, Hanoi

- Tell: 0977386986

- Fax: 0348836792

- Email: phatdat0666@gmail.com

- Business Code: 0102018662

- Legal Representative: Truong Van Phong

Phat Dat JSC was established in 25/08/2006 with the main business area

is producing wood household appliances such as table, chair, etc, and officestationeries like bookshelf With a wide range of products, the company hascreated a flexible business activity that can help to provide the most neededproduct and adapt the market’s demand at an instant point

Orders from other manufacturers are taken which makes the companybecome a production supporter producing semi-finished products or accessories

At the same time, the firm manufactures products based on typical designs andoffers to customers by planning marketing and sale strategies These self-produced products are the advantages of the company in diversifying andexpanding the business

The suppliers of the company:

- Dai Hiep Import and Export Co., Ltd

- Hoang Anh Gia Lai JSC

- Minh Long Production and Trading Co., Ltd

The customers of the company:

- TMC Hanoi production, trade and construction limited company

- Truong Thinh Trading and Import-Export Company Limited

- Xuan Hoa Vietnam JSC

- MM INTERIOR Vietnam Co., Ltd

1.2 Vision and mission

- Vision:

Become a leading company in the wood material field focusing onmanufacturing productively to gain consecutive and sustainable development aswell as the value of customers, employees, and community - Mission:

To produce products with high quality, diversified designs and reasonableprices to meet the requirements of not only domestic but also internationalcustomers

To constantly renovate to expand the business relationship and to reach ahigher position in the market

1.3 Organization of the company

Picture 1 Organization of Phat Dat JSC

Source: Administration Department

Phat Dat is a family company so there are just 30 labors regardless of thedirector However, the organization of the company is considered to becomplete and reasonable because of the sufficiency of the departments Everydepartment has its own missions and works together to maintain the operation

of the company

Functions and missions:

Director:

The one who has the highest authority and takes full responsibility forany business activity of the company Also, the director is the legalrepresentative of the firm and direct manager of departments represented bymanagers of these departments Furthermore, the director not only plans thebusiness and investment but also signs the contracts and organizes the resources

of the company

Accounting Department:

The function of this department is giving advice on the process of

operating and using the company’s capital as follows:

- Recording accurately and fully every economic transaction in the

company and preparing financial statements according to the laws

- Planning and managing revenues and expenditures to ensure effectivebusiness activities; balancing expenses and reconciling the capital in thecompany Also, the accounting department aggregates receivables as well asliabilities to propose appropriate solutions

- Advising and proposing salary, bonus and benefit regulations of thecompany’s officers

- Other duties according to the operation regulation of the accounting department and the company as well as the provisions of relevant laws

Business Department:

- Preparing statistical thesiss to analyze and comment on the businesssituation Therefore, making future business plans to improve the disadvantages

of current business activities as well as to adapt changes in the market

- Being responsible for checking and proposing solutions for

implementation contracts and bad debt recovery, etc,

- Woking with other departments and supervising each other to ensure theaccomplishment of the work

- Researching and proposing business strategies and selecting potential customers, partners or compertitors

Warehousing and Manufacturing Department:

The department plays a key role in managing the company’s warehouseand producing activities according to the orders given by the director including:

- Producing ahead on working schedule and ensure the quality as well as quantity of products

- Storing inventory and other material needed for the production of the firm in an efficient way to avoid damage or loss of the goods

- Making thesiss to the director and other departments when there arechanges in the inventory especially the redundance or short of material toproduce and goods for sale

Administration Department:

Having tasks of recruiting and allocating the labors of the company Thedirector could perceive the organization of the company in general as well asthe working situation of every individual thanks to this department The

administration department also combines with the accounting department todecide the payments for the workers.

2 Analysis the bussiness situation of Phat Dat JSC

To know about the business of a company and to evaluate its value, wewill take a closer look at the fanacial data of the company in the last three years

Table 1 Phat Dat JSC business review 2018-2019

Source: Accounting Department

Revenue of the company rose continuously from 2017 to 2019 with anaverage increase of 18.5% and the COGS increased in this time too which led tounexpected profit results

In 2018, the profit of the company increased from 321 million dong to

414 million dong with the growth rate of 28.8% However, the growth ratedecreased to 17.2% the year after

These numbers are the outcome of many reasons:

- The rise in general of the industry was one of the important reasons In

2019, the wooden industry's export turnover reached over 10.3 billion USD Thisindustry spent nearly 2.55 billion USD to import wood products into Vietnam,mainly wood materials

- The increase in demand and income of customers has led to more

consumption of high-value furniture

- New technology applied to production of enterprises The company hasbuilt a processing plant with the sawn - drying - surface coating process byautomation technology to bring high efficiency The rate of sawn timber from

plantation forests was previously only nearly 50%, now with the automationtechnology, it has reached nearly 80%, with high quality of sawn timbermeeting the requirements of the market.

- The rise in the cost of goods sold was caused by an increase in costs such as transportation, materials and labor costs,

3 Warehousing activities in phat dat JSC

3.1 Human resource and types of inventory

Human resource

The warehousing and manufacturing department has 4 labors including:

Table 2: Human resource of Warehousing and Manufacturing Department

Manager

Source: Administration Department

The activities related to produce and store goods are controlled by themanager – Mr Nguyen Quoc Huy, who has years of experience working in thewarehousing field Starting working in the company since the early days, Mr.Huy takes responsibilities for the storage and production as follow:

- Making decisions about receiving and issuing goods and proceduresrelated

- Taking notes and making records about goods (quantity, condition of goods, etc, )

- Storage location of different types of inventory as well as methods and conditions of storing

Another important position is the bookkeeper Ms Huong who hasworked in the company for 2 years, is responsible for checking the validity of

figures, invoices, documents (such as goods receipt and issue) and inputtingdata into the software to help control the inventory with the manager.

Besides, the company hired two more workers to meet the increase inrequirements of work Mr Duc and Mr Toan mainly work as stevedores andguards for the warehouse

In this department, despite the differences in the academic level andbackground, every individual has the same professional attitude and knowledgeabout the warehouse and the inventory inside thanks to the long working time.Moreover, the key positions have work experience would be extremelybeneficial to the company in the future Other advantages that could beconsidered are the familiarity of workers with the process and the combination

of ages

However, there are drawbacks when the labor force cannot adapt to theworkload which increases by time As the business of Phat Datexpands, thecompany, especially the warehousing department would need to improve theworking process and the workforce to enlarge the scale of storage andmanufacture as well The salary and welfare is also a controversial topicbetween staffs The core employees are well paid while the unskilled labors likeMr.Duc and Mr.Toan received from 4,5 to 6 million per month Moreover, thereare no necessary added benefits such as paid holidays at Tet or sick time

Types of inventory

To manage effectively the manufacture of the company, inventories need

to be classified clearly The inventories are divided into 2 main types according

to the activities of the company:

- The wood commodities for household and office stationeries, mainlybasins, chairs and tables These products need to be stored carefully in goodcondition because they are easy to be broken or deformed, which leads to adecrease in the value of goods

- The wood products ordered from other manufacturers These products are usually the same as the first type of inventory above.

- The semi-finished products used for the manufacturing activities of other companies

Due to the fact that Phat Dat JSC is a manufacturer, the first type of

inventory accounts for the highest proportion in the storage Besides, rawmaterials are also stored to use for the production of the company However, thematerials are often bought only when there are orders and they would be usedimmediately so this type of inventory is only kept in a short amount of time inthe warehouse

3.2 The management of inventory

The record of inventory

Managing and recording activities are mainly handled by the accountingdepartment and other department related The inventories are recorded with thecost which includes the cost of material, labor cost, and other directly relatedcosts such as fixed manufacturing cost and variable manufacturing cost

The inventories which are not self-produced by the company such as thematerial and accessories also recorded with their costs The cost combinespurchasing prices, tax, transportation costs, and other costs to take theinventories to the current condition However, if the net relizable value (NRV)

is lower than the cost, the NRV will be recorded in the accounting book

The periodic weighted average costing method is used by the accountingdepartment to value of the company’s inventory by applying the average cost ofon-hand inventory to each item of inventory stock This means that both thecost of goods sold (COGS) and on-hand inventory are treated the same when itcomes to determining the value This method is caculated using the followingformula:

The process of receiving and delivery inventory

The process for receipt of inventory

- Arrival of Shipment: when the truck arrives at the warehouse, theemployees from the warehousing department will work with the driver to startunloading the truck The quantity and condition of the goods will be recorded onthe document, and then two parties will sign the document to verify

- Comparing documents: such documents as the original order, theshipping document, etc will be checked to make sure the correct record ofinventory If there is any difference or discrepancy, the employees will notedown and verify after that

- Storing inventory: after the stocktaking is done, the inventory will bestored in the warehouse on different shelves The goods which have large sizeswill be located in specific places by the manager

- Entering the quantity and quality of inventory to the system: the

documents now are used to update the quality and condition of inventory in thecompany’s system so that other departments and the director could know thesituation of the inventory

- Announcing the discrepancies to the supplier: when all informationabout the inventory is uploaded, the one who made the order (usually thebusiness department and sometimes the director herself) will review andcompare the documents and the invoice sent by the vendor If discrepanciesexist, the company will contact the supplier to negotiate about the compensation

or return of goods

The process for delivery of inventory

- Receipt of order: if any orders or transactions occur, they will beuploaded to the company’s system Notifications will be sent to thewarehousing department for preparing inventory for shipment

- Picking the inventory: the warehousing department will prepare theinventory and documents needed after receiving the order Then, the employees

will bring the inventory to the output location to wait for the transporting

vehicle

- Shipment: load the truck with goods and work with the driver and at thesame time, check the inventory to match the quality as well as quantity of thesegoods Then, both the employee of the company and the driver sign thedocuments and the goods will be shipped

Receiving and delivery inventory activities in Phat Dat JSC

Receiving and delivery activities of inventory occur constantlythroughout the year The company makes a plan every year based on data of lastyear and the market’s situation, customers’ demand Other crucial elementssuch as the government’s policies, inflation, etc are also calculated so that thecompany can make a sound plan for the following year

Table 3 The implementation percentage of purchasing plan

Source: Warehousing Department

Table 3 provides information about the progress of purchasing inventoryduring a-three year period in Phat Dat JSC In 2017, the actual value ofinventory bought accounted for nearly 95% This was the highest number thecompany had in three years However, the number for sale was very lowbecause some orders had been returned since the overdue delivery

In the next two years, the proportion of inventory bought compare to theplan decreased averagely by 12% The lack of material in the domestic marketled to a great import from the foreign market especially from Chinese suppliers.The transportation cost rose to an unexpected level so that the company did notcomplete the buying plan

Nevertheless, the number of inventory sold increased gradually andpeaked in 2019 with nearly 90% This contributed to the highest revenue of the

company since its establishment However, from 2017 to 2019, the percentage

of inventory sold was still approximately 80% and could not reach higher value.The reason for this situation is there were defective orders were returned andentered into the warehouse as discounted inventory In addition, due to the pricedecrease of the market at the time of delivery, the company's finished productprice was more expensive and led to some orders which had no strictcommitment and advance deposit were canceled by the buyers

Inventorying and controling activities in warehousing department

Regulations

The diversity of wood products requires employees to check theinventory regularly Due to the small scale of the company, the warehousingdepartment mainly uses the methods which are done by human to control thestorage The staff would count the number of inventory and divide them intodifferent types At the same time, the quality of goods is checked using thefollowing regulations:

Table 4: The regulation of checking frequence

inventory received Self-produced products Other products

Source: Warehousing Department

Other regulations and requirement are also added to control the inventory and guarantee the quality of products:

- Get rid of defective products at the start to assure the quality of productsand the prestige of the company

- Divide the warehouse into different areas to put severall types of product