1

Inventory Control
Process of
Hentex Co. Ltd.

KARACHI INSTITUDE OF ECONOMICS AND TECHNOLOGY

Submitted to
Mr. Shaham Ahmed

KARACHI INSTITUDE OF ECONOMICS AND TECHNOLOGY

Group Members

Muhammad Zuraiz Khan (58510)

Sana Saeed (59312)
Jasim (4363)
Tayyab (58728)

Table of Contents
Acknowledgement

Abstract
5
Keywords
5
Introduction

Scope And Background to Hentex Textile Mills Co Ltd

The Standard Operating Procedure for Inventory

Control..7
The Economic Order Quantity...7
Inventory position at Hentex..8
Gap analysis...8
Gap analysis for the Hantex...8
Objective of the
paper
.10
Hypothesis.

.10

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Ho..

..10
Ha.
.10
Procurement Policy
HANTEX
.11
Inventory Control Policy at Hantex.14
Significance of the study.16
Methods.16
Ordering Cost 16
Shortage Cost

16

Economic Order Quantity (EOQ)

17

The Economic Order Quantity (EOQ) Model..17

Literature
review
.18
Inventory
management
in
Karachi.
18
Study
Area
.18
Types
of
Data
Used
and
Their
Collection19
Data
analysis
..19
Ztest
..19
Calculation
of
the
EOQ
and
the
Level19

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Re-order

Table 1.20
Results
and
Discussion
20
Inventory
for
the
various
materials
20
Inventory
for
dyes
..21
Calculating the EOQ, Annual Total Cost and the
Various Raw materials.21

Re-order Point for the

Table 2.21
The
Re-order
point

.21
Table 3..22
Table 4..22
Table 5..23
Table 6..23
Testing for the Relationship between Annual Operational Costs under EOQ and Without EOQ.24
Table 7..24
Conclusion
24
.
Re
commendations
...25

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Acknowledgement:
Praise is to ALLAH Almighty, the one testing us all at all times and making
decisions about what we dont know and cant know. All thanks to him who gave us
courage to undertake and complete this project.
Writing this report appeared to be a great experience to us. It added a lot to our
knowledge.
This report is one of our memorable experiences in student life. Though words are
inadequate in offering thanks to our teacher Sir SHAHAM AHMED for stimulating
our creative abilities by assigning this project to us and for his able guidance and
useful suggestions, which helped us in completing the project work, in time.
Whatever we have learnt from him and this project report has put indelible
impression on our minds.
Abstract
Many firms/industries, whether manufacturing or purchasing, face great
challenges in managing inventories. Poor inventory management may Result in
under-stocking, overstocking as well as high inventory total cost. This paper
examines inventory situation at Hentex Textile Mills Co Ltd in Karachi, The objective
of this paper is to develop the Economic Order Quantity (EOQ) model that will be
used to determine number of units of an item to order at a time and the re-order
point (r), that is the level to which stocks of items are allowed to fall before ordering
other items, for raw materials. The resulting EOQ for each raw material is compared
to the actual ordered quantities so as to see whether there is any relationship
between them in operational cost reduction. The study used cross section
secondary data from Hentex. The comparison of operational cost reduction was
done by using normal distribution test. Excel was used to find EOQ and the re-order
point. The results show that the relationship between the EOQs and the ordered
quantities at Hentex in terms of operational cost reduction was significant.
Therefore, it was concluded that the ordered quantities at Hentex Textile Mills were
not optimal. Therefore, it is recommended that in order to manage inventory
effectively, Hentex needs to employ inventory control methods such as the
EOQ model to obtain reasonable ordered quantities for its raw materials. The
inventory level to be maintained is given in the text.
Keywords:
Inventory; EOQ; re-order point; cost reduction; Hentex; textile mills.

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1. Introduction
Inventories are idle stocks of goods stored and waiting to be used. Other
writers define the term inventory as a physical resource that a firm holds in stock
with the aim of selling or transforming it into a more valuable state. For a
manufacturing firm, there must be some inventory of raw materials and work-inprocess that are maintained in order to keep the factory running [1-3 ]. The purpose
of maintaining raw material inventory is to uncouple the production function
from the purchasing function so that delays in shipment of raw materials do not
cause production delays. However, there are expenses associated with financing
and maintaining inventories which are a substantial part of the cost of doing
business. Sometimes, a firm may keep larger inventory than is necessary in order
to meet demand and keep the factory running under current conditions of
demand. If the firm exists in a volatile environment where demand is dynamic (i.e.,
rises and falls quickly), an on-hand inventory could be maintained as a buffer
against unexpected changes in demand. This buffer inventory or safety stock can
also serve to protect the firm if a supplier fails to deliver at the required time, or if
the supplier's quality were found to be substandard upon inspection, of which would
otherwise leave the firm without the necessary raw materials. Other reasons for
maintaining an unnecessarily large inventory include buying to take advantage of
quantity discounts (i.e., the firm saves by buying in bulk), or ordering more in
advance of an impending price increase.

1.1 Scope And Background to Hentex Textile Mills Co Ltd

Hentex Textile Mills Co Ltd, now called KarachiJapan Friendship Textile
Company Ltd, is located along Morogoro Road at Hamamatsu area. It is one of the
largest textile firms in Karachi and it was established in 1986 with assistance
from the Japanese Government under their technical assistance programs. Its
principal products include linen, kitenge (cotton-like covering attire), drills, general
prints, curtain, bandage materials and bed sheets for export and local consumption.
In its production, the company needs raw materials such as cotton, grey fabrics,
chemicals and dyes.
For continuous production and demand satisfaction, the company needs to stock
raw materials and before stocking, it is important To know the quantity of every
type of the raw materials to order at a time that will be used in production process
which will satisfy Demand and minimize total costs of inventory. Hentex Textile Mills
procures raw-materials from suppliers and process them into finished goods and
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sales the finished goods to distributors/agents who then sell to retailers/customers.

In 1996, the firm failed to operate because of financial problems, it is said that it
lacked capital and that it had outdated machines. Between 1998 and 2000, the
factory was privatized to the Japanese Government through joint venturing,
Hentex owns 52% and Japan owns 48%. This Agreement became effective since
2007.

The Standard Operating Procedure for

Inventory Control
There is no standard operating procedure for inventory control, as each individual
inventory differs in size, items available and management resources. However,
there are common procedures business owners use to control the items and
monetary value of the business inventory. All of the operating procedures for an
inventory help manage the wastes and losses of the overall inventory value.

FIFO at HANTEX
One common operating procedure for inventory control at Hantex is the FIFO
method, which essentially means first-in, first-out. The procedure involves removing
items from the inventory in chronological order, which means removing the first
item entered into the inventory system. This is a standard and common control
procedure for inventory items that have expiration dates, so items are not left in the
inventory to expire and become wastes.

HANTEX Uses Periodic Procedure

The periodic operating procedure is the least time-consuming control procedure, as

the inventory figures are only updated once per year, which is at the end of the
company's accounting or fiscal year. Hantex compares its starting inventory figures
with the figures at the end of the fiscal year to determine the overall losses or value
gained, rather than controlling each individual item on a frequent basis. This control
method provides the business owner with sales or loss figures to future inventory
planning.

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Importance of Inventory Control Procedures

Inventory control procedures are important because the valuable items within a
Hantex's inventory are part of the overall assets, which essentially affects the
Hantex's net worth. Purchasing too many items for an inventory may result in
monetary losses if the items cannot be sold for preferred price. Controlling
procedures are in place to ensure the Hantex is earning rather than losing money
for inventory items.
1.2 The Economic Order Quantity
The Economic Order Quantity (EOQ) is the order quantity that minimizes total
variable costs of inventory (holding and ordering Costs). EOQ gives the optimal
quantity that a company is to order every time when replenishing its stock. This
quantity gives a good Indication of whether or not current order quantities are
reasonable.

Inventory position at Hentex

Textile Mills is amongst the largest textile industries in Karachi . In this
company, raw materials are ordered through Experience or when inventory levels
become low in the warehouse. Sometimes, raw materials are ordered as a result of
visual check by the staff working in the warehouse. This implies that there is no
proper way that the company employs to manage its inventory. This can have two
outcomes one being overstocking where unnecessary inventory accumulates and is
kept in the warehouse at high Cost. The second outcome is under stocking
where there is not enough materials in stock which causes delay in
production. Therefore, a formalized and standardized inventory control system
should be established to solve these problems and way of Solving these
problems is to determine the EOQ which minimizes the total cost of inventory and to
determine the level to which the Stock is allowed to fall before ordering more items
i.e. the re-order point.

GAP ANALYSIS
In the management literature, gap analysis is the comparison of actual performance
with potential or desired performance. If a company or organization does not make
the best use of current resources, or forgoes investment in capital or technology, it
may produce or perform below its potential.

GAP ANALYSIS FOR THE HANTEX

a) Skill / Knowledge Gap in IT:

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First knowledge gap relates to IT. As discussed in Section on Production

Management, IT offers
several opportunities for boosting competitiveness in the Hantex; it replaces people
but enhances productivity; it costs but helps management in managing several
business related problems. In the short run, people are replaced but in the long run,
more job opportunities are created due to backward linkages. Evidence of success is
available in firms like Soorty Textile Mills. However, majority of the firms remain
unaware of the fruitful dividends of IT. The pace of diffusion of technology and
advanced practices is very slow primarily due to Seth culture and the lack of
capacity of the owners / top management of the Hantex (as discussed in Section on
Business and Environment). There exists an urgent need of capacity building of the
owners and top managers. TAs and the TADP must pay attention to this issue as
early as possible.

b) Skill / Knowledge Gap in People Management:

This study has found that productivity of HR in the textile sector is quite low
(Section on
Organization Management). Only 12.5 percent of the respondents termed
productivity of people
working in their organizations as excellent. People management skills seem to be
totally ignored in most of the textile sector, primarily due to Seth culture. The
owners and top management of such organizations seem unaware of the
consequences of bad organization cultures. So this emerges as one of the most
important areas of skills gap. As discussed in Section on Business and Environment,
most of the issues related with organizational management can be attributed to
poor people management skills. around 40 percent of the respondents suggested
that top management of their organizations should be imparted training in
management.
So capacities building of the company in people management skills will not only
give a big boost to the productivity of HR, but will also make the company as vibrant
entities. This will eventually, also lead to better use of ergonomics, hence not only
satisfaction of the employees will rise, their income level will also move upward and
dropout rate will fall considerably. This will obviously, contribute to the better
livelihood.

c) Knowledge Gap in Training and Development Practices:

Lack of training and development practices in the organization (Hantex) is another
knowledge gap area. None of the respondent in this study reported quality of labour
as excellent, which indicates that awareness of lack of skills of employees does exist
among the companies, as discussed in Section on Production Management.
However, it appears that the owners / top management of the company seem

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unable to establish a link of this problem with the need of training and development
practices. Only a small number of organizations reported that such practices were
on their futuristic plans. Majority of the respondent companies reportedly lacked
enthusiasm in the capacity building of their employees. Due to such weaknesses in
culture of learning and development, initiatives of the government relating to
capacity building of the textile sector seem to be in vein.

d) Skill / Knowledge Gap in Management of Yarn Quality

Forth knowledge gap lies in poor management of yarn quality as discussed in
Section on Production Management. Yarn quality is attributed with poor
management of yarn inventory in the factory / firm and mismanagement at
proceeding transfer points starting from farm to the spinning mill. It is clear that if
capacity of farmers is enhanced in managing quality of cotton, its benefits will add
value at all transfer points of CVC. Hence, everyone associated with the CVC will be
among the beneficiaries.
At firm (Hantex) level, problem arises, when cotton yarn of one lot is mixed with
other. This process damages Important characteristics of the yarn and problem
surfaces at the stage of printing/processing in the form of defects (poor shades).

e) Skill Gap in Application of Dyes and Chemicals

Fifth knowledge gap pertains to the poor application of dyes and chemicals as
discussed in Section on Production Management. If color is not skillfully applied on a
cloth (e), it devalues the product and this is the most common problem in Pakistan.
This is because there is acute shortage of qualified and trained dye masters in the
textile sector.

f) Skill / Knowledge Gap in Creative Designing

Sixth knowledge gap relates with skill of designing. Creative designing adds
substantial value to the value of garments products. A survey of garments shops in
several shopping malls like Liberty Lahore, Jinnah Supper, Islamabad, and Park
Tower, Karachi revealed that prices of one piece of garments with creative designs
range from Rs. 2,000 to Rs. 50,000, which clearly indicates potential of value
addition. As discussed in Section on Production Management, creativity in fashion
and design is a major asset for gaining control over the future markets. Fact is that
more you go downward along the CVC, the need of knowledge, skills, creativity and
innovations tends to increase. However, in this study, only 25 percent of the
respondents termed innovation in designs as tool for fetching higher market price
(Section on Marketing Management). This finding vividly surfaces the lack of
knowledge on this account. So capacity development in the creative designing can
make the garments sector most vibrant and increasingly prospering. Obviously, this

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initiative will also create job opportunities as this process is more or less labour
intensive.

g) Knowledge Gap in Quality Management

Poor quality management has emerged as another important area of knowledge /
skill gap. Several sections of this report have highlighted the issue of quality. As
discussed in Section on Training and Development, training of top management in
quality management emerged as one of the 4 most important training need areas
for the top management.
1.3 Objectives of the Paper
1. To develop a model that will be used to determine the EOQ.
2. To find an optimal re-order level to which stocks can be allowed to fall before
placing an order for more.
3. To test if the annual total cost of inventory (ordering and holding costs) before the
application of the EOQ model is greater than, less than or equal to the annual total
cost of inventory after the application of the EOQ model.

Hypothesis
Ho: The annual total cost of inventory (ordering and holding costs) before the
application of the EOQ model is less or equal to the Annual total cost of inventory
after the application of it.

Ha: The annual total cost of inventory before the application of the EOQ model is
greater than the annual total cost of inventory after the application of it.

Procurement Policy HANTEX

1. Working together with Suppliers:
Suppliers are invaluable partners in our efforts to continually better serve customers
in all of our business areas, mainly by helping us to develop products that meet the
customers' expectations. Hantex is committed to creating the functions and values

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customers demand by establishing relationships of mutual trust with suppliers

though joint efforts.

To evaluate and select the best suppliers in a fair manner, Hantex has adopted the
following criteria.
1.
2.
3.
4.
5.
6.
7.
8.
9.

Assurance of required product quality and safety

Competitive pricing
Fulfillment of on-time delivery
Advanced styles and development capability
Stable operation infrastructure
Environmental consciousness
Compliance
Information security
Respecting human rights and the health and safety of labor.

2. Implementation Information Gathering and

Purchasing during the Development Phase:
Our procurement employee serves as a liaison between the company and its
suppliers to collect information on market trends in parts, materials, and products
as well as new design, materials, and processes. We are responsible for collecting
key information and sharing it with the relevant sections and individuals.
Procurement employee must collaborate with suppliers and the company's product
planning, design, and R&D operations to take proactive actions. We want to help
make products that are more competitive through active involvement in all
manufacturing processes.

3. Ensuring Product Quality and Safety:

In line with the autonomous quality assurance policy, we will clarify the quality level
of functions and standards that procured parts, materials, and products must fulfill
in the development phase and request suppliers to secure and maintain the
required quality.
We also ask each suppliers to develop their own autonomous quality assurance
systems by ensuring high quality in manufacturing processes.

4. Implementation Cost Reduction Programs:

We will endeavor to reduce not only materials and processing costs but also total
costs to achieve the product values and prices expected by customers. To this end,
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we will closely work with our suppliers to expedite the development of new
materials and processes and merchandising activities .

5. Achieving Optimum Procurement by Shortening Leadtimes:

We will strive to shorten lead-times for procurement, product development,
production and administrative processing to flexibly respond to changes in market
needs by closely collaborating with our various sections.

6. Living in Harmony with the Global Environment

through Green
Procurement:
We will place priority on procuring environmentally friendly parts, materials, and
products and promote the development of new materials and parts that have less
impact on the global environment with a view to achieving Green Procurement.

7. Improving Global Procurement:

Hantex must contribute to host countries through local procurement. We aim to
establish partnerships with suppliers by considering the feasibility of long-term
business arrangements in addition to optimum quality and prices. We will also
develop an information network among global production operations to make
flexible and prompt responses.

8. Enhancing Compliance:
To conduct procurement activities with integrity, we will ensure compliance with the
laws, regulations, and social ethics in each nation and region and promote fair and
open competition.

9. Better Utilizing Information and Enforcing Information

Security:
We will make efforts to gather information that is useful to our business operations
and then effectively manage, utilize and eventually dispose of this information.
Regarding the information of other companies, we will carefully consider whether
it's necessary before obtaining it and take every possible measure to maintain its
confidentiality and prevent leakage.

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10.
Respecting Human Rights and the Health and
Safety of Labor:
Hantex will conduct its procurement activities while respecting the human rights of
individual employees of the company and its suppliers and thus provide a safe and
healthy working environment.

Inventory Control Policy at Hantex:

Store is the place where every type of raw materials, spares, finished goods are
kept in proper system. Inventory control means the accurate calculation and data of
every type of raw materials, spares and finished goods in time to time store.
Inventory control in Hantex mills is necessary because:
1.
2.
3.
4.
5.

To know about the required amount of raw material.

To know about the job no which would be processed.
To be continued the production process.
To find out the profit or loss of a company.
Stock and stock value for consumption measuring.

Frequency of Inventory Update:

1. Monthly inventory control.
2. Annual inventory control.

Scope of Inventory Control:

1.Raw materials

Dye store.

Other chemicals.

Grey fabrics.

2. Finished fabric.
3. Spareparts.
4. General store

Capital equipments.

Accessories.

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Stationary.

Maintenance parts.

Inventory System for Raw Material:

1. Raw materials partially received from production planning & directly from
head office.
2. Material receiving & inspection report is prepared. Received quantity is
mentioned and noted down.
3. Submitted to Q.C. department. Some are OK & few rejected.
4. Entry of data of goods in DATATEX.
5. Goods are arranged according to OK or rejected group.
6. Department gives store requisition to warehouse.
7. As per requisition materials supplied & this record are noted down.

Grey Fabric Store:

All the grey fabrics are stored in the fabric store near the batch section. Different
types of fabric are listed in the sheet according to fabric types, quantity and
cons1.uners requirement. Fabrics GSM, shrinkage, diameter & other properties are
also taken into consideration. The batches are prepared by taking the required
fabrics from the grey store.

Stages of Grey Fabric Inventory Control:

1. After knitting production.
2. Grey inspection.
3. Warehouse.
4. Batch preparation.
5. Dye house.

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Dyes and Chemicals:

There is a different store for dyes and chemicals. Varies types of dyes and chemicals
are stored here according to dyes and chemicals companies. Different types of dyes
and chemicals are listed in a sheet. In the sheet the stored quantity of dyes and
chemicals are also included. Every day the sheet is updated and a copy of this sheet
is supplied to the dyeing manager, dye house and lab section.

Spares:
In Hantex textile mill required amount of spears of different machines are stored in
the mechanical store room. All the spears are listed in a sheet which is controlled by
the mechanical & maintenance personnel. Spares are arranged in the store room
according to their size, quantity & requirements. There are shelves in the store room
to keep the small spare parts.

Finished Goods:
Hantex textile mill supplies its finished dyed fabrics to its garments section. So,
dyed finished fabrics are stored for short time in the finishing section. All the
delivered fabrics are noted on the tally khata according to the lot no, quantity,
fabrics diameter, buyer's name, Color & considering other technical parameters.

Stages of Finished Fabric Inventory Control:

1. Finishing section.
2. After final inspection.
3. Warehouse.

Others:
Normally keep a central store at mill. In that store the various types of forms,
papers; stationary & other necessary goods are kept .

Inventory Procedure:
1. Bin Card
2. Store Requisition
3. Store Ledger Account
4. Daily Inspection & Package Report
5. Monthly Stock & Consmnption Report

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6. Monthly LIC wise Delivery Report

7. Received Delivery & Balance Stock

Significance of the study

Many companies including the Hentex Textile Mills Co. Ltd. do not have
effective methods for managing their inventories. Therefore the findings of this
study are expected to help the management of the Hentex Textile Mills and other
such companies to formulate Good inventory policies.
2. Methods
In developing the inventory policy, the following standard terminologies are
used [2-4] amongst many others.

Ordering Cost
This is the sum of the fixed costs incurred each time an item is ordered. This
cost has nothing to do with the quantity Ordered. Instead, it is connected with the
manual labor for processing the order. It is also known as purchase cost or set-up
cost.

Shortage Cost:
This is a cost associated with a temporary or permanent loss of sales, when demand
cannot be met.
Economic Order Quantity (EOQ):
This is the number of units which a company is supposed to add to the
inventory for each order to minimize the total cost of the inventory.
All inventory models are expected to answer the two questions below;
1. How much material should the company order?

2. When should a company order?

2.1 The Economic Order Quantity (EOQ) Model:
This is the most fundamental inventory model. It is applicable when the demand for
an item has a constant or nearly constant rate and when the entire quantity ordered
arrives in inventory at one point in time. We know for sure employment of the EOQ

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model for Hentex is a simplification. Given the nature of the data available at
Hentex, this simplification is justifiable. This is because there are no records for
orders placed but not honored and so on. Such records would pave ways of
estimating probabilities of stock outs and So forth. However, this can be regarded
as a starting point for which more complex, realistic and probabilistic models
can be Developed. However, even at this juncture, it can be shown that a
significant amount of cost reduction to the firm can be enhanced by the use of EOQ
hence the usefulness of this paper.

The basic formula for EOQ is given below [1-4].

U = Annual demand / annual consumption in units

O = Cost of placing and receiving an order
IC = Carrying cost per unit per annum

Raw Materials:
These are materials used for the production of components, sub-assemblies or
finished goods.
Inventory Management:
This is the implementation of the managements inventory policies in a
manner that assures that the Objective of having an inventory are reached.
Fixed Re-order Stock Level:
Through this method, a business identifies the minimum level of stocks that it
can have and places new Orders when the stocks reach that level.

2.2 Literature Review

Inventory management in Karachi
Discusses the factors affecting efficient management of inventories in local
governments in Karachi. It was found that the EOQ is the most used method of
inventory records control. To show that inventory methods are scarcely used in
Karachi, it was noted that some respondents were not familiar with the word
inventory. In his study, found that non-application of Inventory management and
control techniques in dealing with inventories caused the following to the
organization.
(a) Low inventory turnover due to overstocking, hence high inventory keeping costs.

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(b) Frequent shortages.

He further argues that if ESSO Karachi Limited had been using inventory
management and control techniques, the company might not have experienced the
above problems. Lack of skilled personnel trained for materials management was
singled out as the root cause of in efficiency in materials management and control.

Analyzed the role of Economic Order Quantity model in reducing the cost of raw
material inventory at Kibaha Animal Project. He compared total costs of raw
material inventory incurred through the project-employed method with the total
costs of raw material inventory which could have been incurred under the EOQ
application. Found that there was a cost saving which could have been observed
through employing the EOQ model.

They used inventory technique methods in solving real inventory issues for business
in a variety of industries from to retail consumables and from automotive to process
chemicals. They noted that appropriate database was a pre requisite for the
application of the techniques. This implies that manufacturing entities such as
Hentex need to have a well Identifiable database for the application of more
sophisticated inventory models.

2.3 Study Area

This study was carried out in Karachi, Karachi at Hentex Textile Mills Co Ltd. The
authors chose this company because it is among the largest and earliest textile
mills to operate in the country and its products are very useful and well known
inside and outside the country.

2.4 Types of Data Used and Their Collection

In this study, cross section secondary data, particularly for 2014 from Hentex Textile
Mills Co Ltd, were used. The authors collected data for the annual demand and the
price per unit for each raw material. Data on annual ordering and holding costs and
the lead times for each raw material were obtained from raw materials ordering
record for 2014 from the company.

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Table 1 shows the summary of the data on raw materials for 2014. Some data were
not given directly; so some calculations were made to get such data. For example,
the researchers made some calculations to get data on ordering costs.

Data analysis
The EOQ and the re-order point for each raw material were calculated using the
appropriate formulae. Then, the total annual cost for the actual ordered quantities
and for the EOQ were compared using a statistical technique known as the Z-test.

Z-test
Normally, the Z-test is used for comparing the mean of a sample to some
hypothesized mean of the population, in case of a large sample or when the
population variance is known. It is also used for establishing the significance of the
difference between means of two independent samples, in case of large samples or
when population variance is known. For the details of the Z- test, see any standard
statistics textbook [9, 10]. More details on the calculation of this test for our paper
are found in [11].
2.5 Calculation of the EOQ and the Re-order Level

The calculations of EOQ and Re-order level for each raw material [11] are presented
in Table 1.
The EOQ model employed in this study is based on the following assumptions:

1. Demand is constant throughout the year at D items per year. This is so done to
take advantage of the formula e. This assumption can be justified because at the
end of the day, the demand of the material is cumulated on yearly basis and not on
a periodic basis.

2. The company ordered the same amount of a given raw material every time when
making orders. This helps the calculation of ordering costs easy because the

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ordering costs of the studied raw materials were not directly provided; the ordering
costs comprised costs related to transportation, freight and clearing charges.

Table 1: Summary of data on raw materials for 2014 (field data)

Name of
raw
material
Cotton lint

Annual Demand
(D)

Average
price units
P(Tshs)

Order ring
costs (Tshs)

Annual
Holding
cost Rate(I)

1,9 41 ,648.5 Kgs

1404/=

6 ,411,451/=

0.2 5

Grey fabrics

4006169.28 Meters

568/=

8 ,961,222/=

0.2 5

30

Chemicals

1,204,798 Kgs

1015/=

6 ,186,429/=

0.2 5

30

Lead-time
(m) (Days)
14

Dyes
69,000 Kgs
5685/=
1 ,504,843/=
0.2 5
30
3. Purchasing price per unit is constant (no discounts).
4. Le ad-time for each order for every raw material is known.
5. Receipt of inventory is not instantaneous, that is, ordered items for some raw
materials such as cotton lint arrive in the inventory at different batches in different
times without affecting the demand.
6. Planned shortages are not allowed.
3. Results and Discussion
Inventory for the various materials
Cotton is the major raw material used by the company in the production of different
goods. It is used in producing most of the goods in the company. It is ordered
seasonally during harvest times. After the Hentex Textile Mills Co. Ltd. has placed an
order for cotton, the material arrives in two weeks time. It is not necessary that the
entire ordered amount arrive at the same time. Orders for this raw material arrive at
different times. The company uses cotton from Sindh and Punjab, and therefore
prices vary according to where the material is bought. The most used chemicals at
the Hentex Textile Mills Co. Ltd. include Sodium Hydroxide, Maize Starch, Sodium
Bicarbonate, Ludigol (salt resistant), Sodium Alginate, Liquid Soap, Urea, Whitening
Agent (VBL) and Designing Agent, all of which are imported from Japan.

Inventory for dyes

Type of raw material used by the company is dyes. This raw material is also
imported from Japan.
3.1 Calculating the EOQ, Annual Total Cost and the Re-order Point for the

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Various Raw materials

By employing the EOQ model and input data from Table 1, the Economic Ordering
Quantity (EOQ), which is given as
Q is the economic order quantity (units).
D is demand (units, often annual),
S is ordering cost (per purchase order),
H is carrying cost per unit.
For the various materials are presented in Table 2, Re-order Point in Table 3 and
Annual total cost in
Table 4. Total cost is given as

TC = (
H) + (

Name of Raw Material

EOQ

Cotton Lint

266,332.95 Kgs

Grey Fabrics

711,081.02 Meters

Chemicals

711,081.02 Meters

Dyes

12,088.94 Kgs

The repoint is
as:

Q*
C)

Q*
order
as given

r = dm, where, r = Re-order point, d = Demand per day, m = Lead-time for a new
order in days, D = Annual demand, C = Ordering costs, H = Holding cost.

Table 2: The EOQ for each raw material

The Re-order point

The second aspect regarding the time when to place a new order gives an answer to
the minimum stock level at which additional quantities are ordered. After making
some calculations, the value of the re-order point was obtained and Table 3
summarizes the results:

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Table 3: The re-order point for each raw material

Name of Raw Material

Re-order point (r)

Cotton Lint

108,732 Kgs

Grey Fabrics

480,741 Metres

Chemicals

144,570 Kgs

Dyes

8280 Kgs

Having worked out the EOQ, comparison was made to ascertain whether there were
any differences in operational costs.

Table 4: Total annual costs before and after applying the EOQ model

Total cost
before
applying the
EOQ model
TC (Q) in Tshs

Total cost after

applying the
EOQ model
TC (EOQ) in
Tshs

Difference
between TC (Q)
and TC (EOQ) in
Tshs

Cotton lint
Grey
fabrics
Chemicals

140,872,621/=

93,482,865/=

47,389,756/=

189,650,692/=

100,973,507/=

88,677,185/=

266,517,307/=

61,533,128/=

204,984,179/=

Dyes

19,957,017/=

17,178,379/=

2,778,638/=

Name of
raw
material

From Table 4 it is observed that the total cost of an inventory before applying the
EOQ model was higher than after applying the model. This means that if the
company employed the EOQ model, it would reduce its annual total cost (holding
and ordering costs) substantially as shown in Table 4. The differences in operational

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costs could be attributed to ordering costs as shown in Table 5 or to

Overstocking/under stocking as shown in Table 6.
Table 5: Number of orders before and after applying the EOQ model.
Name of raw material

Number of orders before

applying the EOQ model

Number of orders after applying the

EOQ model (D/Q*)

(D/Q)
19

Grey
fabrics
Chemicals

20

42

Dyes

10

Cotton lint

Table 5 above shows that the number of orders was much higher before applying
the EOQ model than it was after applying it. This applies to all type s of raw
materials dealt with in this study. By having a large number of orders, the company
increases ordering costs, hence increasing the annual total cost of inventory.

Table 6: Demand and ordered quantities

Name of raw material

Demand

Ordered Quantity

Cotton lint

1,941,648.5 Kgs

2,426 ,487.5 Kgs

Grey
fabrics
Chemicals

4,006,169.28 Meters

1,435 ,242.24 Meters

1 ,204,798 Kgs

992 ,195 Kgs

Dyes

69,000 Kgs

82,750 Kgs

Table 6 shows that the company placed higher orders than the demand
(overstocking) for two types of raw materials; which were cotton lint and dyes. This
means that the company kept unnecessary stocks with regard to these two raw
materials, which increase the annual total cost. Table 6 also indicates that the
company placed fewer orders than the demand (under-stocking) for two types of
raw materials which were chemicals and grey fabrics. In any business, this
phenomenon is costly because a company cannot meet customers demands.

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3.2 Testing for the Relationship between Annual Operational Costs under EOQ and Without EOQ
The hypothesis was tested by using the Z-test. The details on the calculations for
the test are shown in [11]. It was hypothesized that Ho: = o, where, = the
average total annual cost of inventory before the application of the EOQ model, o
= the average total annual cost of inventory after the application of the EOQ model.
After applying the Z-test, the null hypothesis was rejected at a = 0.0 5 for all types
of raw materials that were studied. Table 7 summarizes the results after testing the
hypothesis.

Table 7: Summary of the results of hypothesis testing and the conclusion.

Cotton lint

Z1.645

Calculated value
of Z
18.04

Grey
fabrics
Chemicals

Z 1.645

35.4

Reject Ho

Z 1.645

370

Reject Ho

Dyes

Z 1.645

3.095

Reject Ho

Raw Material

Rejection region

Conclusion
Reject Ho

Therefore, it can be concluded that the annual total cost of inventory before the
application of the EOQ model was greater than the annual total cost of inventory
after the application of the model and hence the essence of the application of
the EOQ and the usefulness of this paper.

4. Conclusion
It can be concluded that Hentex Textile Mills needs a formalized inventory system to
minimize operational costs. If the Economic Order Quantity model is objectively
used, with the aid of some judgment by the management, holding costs and

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ordering costs will become low. The use of this model will help the company to know
the exact amount of raw materials to order and when to place new orders for each
raw material.

Re commendations
Since there is no formal inventory control system employed by Hentex Textile
Mills Co Ltd, to manage inventories for its raw materials, some aspects need
to be improved in order to minimize the raw materials inventory costs. The
following are recommended:

1. A large company like Hentex Textile Mills should improve their ways of
keeping records about purchasing and the daily consumption of the raw
materials. If possible, the company should computerize these systems.

2. Lack of awareness on the quantitative techniques of managing inventories

indicates that storekeepers
and supplies
staff
are lacking some business
management skills, therefore these staff should be undergoing on job training
about
stores
and supplies management to improve their knowledge and
competence in the field.
3. It is also suggested that periodic review where inventory are reviewed in a
regular interval may be the appropriate policy for Hentex Textile Mills Co Ltd to
solve the when to order problem.

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