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    OPTIMISING MAINTENANCE INVENTORIES OF A

    CEMENT MANUFACTURER

    By

    MORN ELOFF

    Submitted in partial fulfilment of the requirements for the degree of

    MAGISTER COMMERCII

    In the field of

    BUSINESS MANAGEMENT

    From the

    FACULTY OF MANAGEMENT

    At the

    UNIVERSITY OF JOHANNESBURG

    SUPERVISOR: DR. S. CARSTENS

    OCTOBER 2012

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    ABSTRACT

    A key performance indicator of a cement manufacturer is that of its operating

    equipment efficiencies or OEE. The world-best standard for OEE of cementmanufacturers is 85%, and this figure can only be achieved through very good

    maintenance practices and programmes combined with exceptional maintenance

    inventory levels and good maintenance inventory strategies.

    Maintenance inventory can be described as spares that support the manufacturing

    process, but that is not included in the final product. Like all types of inventory,

    maintenance inventory has a cost associated with carrying the inventory that can be

    calculated through applying the various carrying cost components associated with

    inventory.

    In a cement manufacturer this carrying cost figure can be excessively high as a result

    of the slow movement of major spare components that have to be held in inventory due

    to its critical importance to the manufacturing process. It is also evident that inventory

    levels in AfriSam are high. This may be due to the fact that management believe the

    best possible method to minimise the risk of production loss during a breakdown, is to

    increase maintenance inventory levels with no comparison to the costs associated with

    carrying the inventory.

    The chosen research problem is: AfriSam (Pty) Ltd carries maintenance inventory

    worth millions of rands with slow movement of high value maintenance inventory

    sometimes in excess of 3 years. The cost of managing the inventory together with the

    carrying cost of the inventory has become a key focus point in the business and there

    is a need to find methods to optimise the inventory.

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    The overall intention with the dissertation is to identify methods to optimise

    maintenance inventory of a cement manufacturer. The dissertation will also determine

    the knowledge of management and employees of the costs associated with

    maintenance inventory and gain an insight into their knowledge and understanding of

    the methods to optimise maintenance inventory. This may serve as a basis for further

    research to determine whether the methods that exist can be implemented at AfriSam

    to reduce the cost of carrying inventory without increasing the risk of down-time by not

    having maintenance inventory available.

    The research approach for the dissertation was through a survey of AfriSam

    employees. AfriSam consists of 5 cement manufacturing plants each operating its own

    maintenance inventory warehouse. Empirical data has been collected by distributing a

    questionnaire to the 25 managers and employees who manage and operate these

    warehouses directly or indirectly.

    The data analysis focused mainly on descriptive statistics due to the fact that the

    population for this research was relatively small.

    The analysis of the data has shown that there are methods that exist to optimise

    maintenance inventory of a cement manufacturer. It has also shown that the

    management of AfriSam are aware that optimising the maintenance inventory of the

    organisation may lead to savings on the carrying cost of the organisation. It has to be

    said that the research has shown that too many of the staff who took part in the survey

    did not know the carrying cost, neither did they know what it consisted of.

    The dissertation concludes with the findings of the research and with possible

    suggestions for future research. It also gives some indication of the possibility of

    implementing the methods of inventory optimisation into the cement manufacturing

    organisation.

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    DECLARATION OF ORIGINAL WORK

    I, Morn Eloff, student no 201029690 hereby declare that this dissertation is my ownunaided work. Any assistance that I have received has been duly acknowledged in this

    dissertation. It is submitted in partial fulfilment of the requirements of Masters of

    Commerce at the University of Johannesburg. It has not been submitted before for any

    degree or examination at this or at any other university.

    Signature Date

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    ACKNOWLEDGEMENTS

    The contribution of my supervisor Dr. Stephen Carstens has been immeasurable. I

    sincerely want to thank him for the hours of reading and constructive criticism as wellas his guidance in completing this dissertation. His knowledge and expertise made me

    think differently about the topic and assisted me in finding more answers to my

    questions. I know that without his assistance and patience I would not have been able

    to complete my dissertation.

    I have to thank all the employees at work with whom I engaged in completing this work,

    the many hours of asking questions, compiling Figures and Tables from your reports

    have made my life a lot easier. A big thank you has to go to all members of

    management who completed the survey and provided such honest and worthwhile

    feedback. It would not have been possible to complete the dissertation without your

    input.

    To Ben Britz, you have become a friend during the three years of studying together. I

    have also learnt a tremendous amount from you and the hours spent working together

    and our morning breakfasts before writing exams will remain a good MCOM memory.

    To Mark Rouse and Wentzel Coetzer, your dedication and assistance during the times

    when the going were tough and we needed some information, class notes or just

    additional information were invaluable during the past three years.

    To Elsabeth Marnits, my language editor, thank you for the hours spent reading mydissertation and for your contribution in making this dissertation the finished article. I

    thank you.

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    To my late father, Dad, I think you would have been proud of me today. I wanted you to

    know that I have completed not one but three degrees and this work is a token of my

    appreciation for the dedication that you have instilled in me from a young age.

    Finally, I want to thank my fiance, Monique Swanepoel, for her hours of styling

    changes, spelling checks and formatting of the document. You have made a big

    contribution to my work and I dedicate this dissertation to you for your hard work and

    support the past 10 months.

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    TABLE OF CONTENTS

    Page no.

    Abstract ... i

    Declaration of original work . ii

    Acknowledgements .. iii

    1 Chapter One: Introduction and background

    1.1 Introduction ................................................................................................................... 1

    1.2 Background ................................................................................................................... 1

    1.3 Reason and potential value of the Research ............................................................... 13

    1.4 Research problem statement ...................................................................................... 13

    1.5 Research objectives .................................................................................................... 14

    1.5.1 Primary objective of the research: .................................................................... 14

    1.5.2 Secondary objectives of the research: .............................................................. 14

    1.6 Chapter outline ............................................................................................................ 14

    1.7 Conclusion .................................................................................................................. 15

    2 Chapter two: Literature review

    2.1 Introduction ................................................................................................................. 16

    2.2 Inventory carrying cost ................................................................................................ 17

    2.2.1 Capital cost ....................................................................................................... 19

    2.2.2 Storage cost...................................................................................................... 19

    2.2.3 Inventory Risk Costs ......................................................................................... 19

    2.2.4 Determination of the carrying cost .................................................................... 20

    2.3 Supply chain design and sourcing strategy ................................................................. 21

    2.4 Just in time logistics .................................................................................................... 24

    2.5 Supply contracts .......................................................................................................... 27

    2.6 Supplier integration and vendor managed inventory ................................................... 28

    2.7 Inventory and warehousing management ................................................................... 29

    2.8 Risk - based optimisation of spares inventory management ....................................... 29

    2.9 Research questions ..................................................................................................... 31

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    2.10 Conclusion .................................................................................................................. 32

    3 Chapter Three: Research methodology

    3.1 Introduction ................................................................................................................. 34

    3.2 Research design ......................................................................................................... 35

    3.2.1 Methodology ..................................................................................................... 36

    3.2.2 Population ......................................................................................................... 37

    3.2.3 Sampling ........................................................................................................... 37

    3.2.4 Research Instruments ....................................................................................... 38

    3.2.5 Data Analysis .................................................................................................... 40

    3.2.6 Validity and Reliability ....................................................................................... 41

    3.2.7 Ethical Considerations ...................................................................................... 41

    3.2.8 Limitations of the study ..................................................................................... 42

    3.3 Conclusion .................................................................................................................. 43

    4 Chapter Four: Presentation of results

    4.1 Introduction ................................................................................................................. 44

    4.2 Presentation of results ................................................................................................. 44

    4.2.1 Respondent demography ................................................................................. 44

    4.2.2 Inventory management approach and carrying cost ......................................... 47

    4.2.3 Strategic impact of inventory ............................................................................ 534.2.4 Inventory management approaches used at AfriSam ....................................... 58

    4.3 Conclusion .................................................................................................................. 62

    5 Chapter Five: Interpretation of results

    5.1 Introduction ................................................................................................................. 63

    5.2 Issues identified........................................................................................................... 63

    5.3 Findings linked to literature cited in the literature review ............................................. 68

    5.4 Limitations of the study ................................................................................................ 72

    5.5 Conclusion .................................................................................................................. 73

    6 Chapter Six: Conclusion

    6.1 Introduction ................................................................................................................. 74

    6.2 Brief summary of the research objective and major findings ....................................... 74

    6.3 Recommendations ...................................................................................................... 77

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    6.4 Suggestions for further research ................................................................................. 78

    7 References

    8 Appendix A

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    LIST OF TABLES

    Table 1: Key AfriSam Production Figures (2011) ...................................................................... 4Table 2: Top 30 Inventory Items by Value (Roodepoort Warehouse) ....................................... 6

    Table 3: AfriSam calculation of obsolescence provision ........................................................... 8

    Table 4: Obsolescence as percentage of Maintenance Inventory ............................................ 9

    Table 5: High Value Maintenance Inventory (2010) ................................................................ 10

    Table 6: AfriSam Inventory carrying cost ................................................................................ 21

    Table 7: Number of years employed ....................................................................................... 45

    Table 8: Distribution of education level, area of expertise and area of employment ............... 46Table 9: AfriSam material planning system ............................................................................. 47

    Table 10: AfriSam order planning method .............................................................................. 48

    Table 11: Comments from respondents in respect of inventory levels .................................... 52

    Table 12: Reasons for not holding non-critical maintenance inventory ................................... 55

    Table 13: Reasons and type of non - critical inventory to be kept in stock.............................. 55

    Table 14: Reasons for classifying inventory by business risk ................................................. 57

    Table 15: Ranking of effectiveness of the implementation of optimisation methods. .............. 60

    Table 16: Level of knowledge of the methods to optimise maintenance inventory ................. 61

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    LIST OF FIGURES

    Figure 1: Components of carrying cost ................................................................................... 18Figure 2: Components of replenishment lead time, Conventional and JIT Purchasing

    systems................................................................................................................................... 26

    Figure 3: Awareness of inventory carrying cost calculation at AfriSam ................................... 49

    Figure 4: Knowledge of the inventory carrying cost value ....................................................... 50

    Figure 5: View of Inventory levels at AfriSam ......................................................................... 51

    Figure 6: View of the impact of inventory levels on OEE ........................................................ 53

    Figure 7: Respondents view of keeping stock of non- critical inventory ................................. 54Figure 8: Respondents view on the importance of a maintenance inventory strategy ........... 56

    Figure 9: Respondents view of the classification of inventory ................................................ 57

    Figure 10: Respondents view on inventory optimisation as cost - saving method ................. 59

    Figure 11: Ranking of inventory management approaches within AfriSam ............................. 59

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    1 CHAPTER ONE: INTRODUCTION AND BACKGROUND

    1.1 INTRODUCTION

    This chapter serves as an introductory chapter and is divided into five parts. The

    first part gives background information regarding AfriSam South Africa as a

    cement manufacturer as well as the relevant context of the importance of

    maintenance inventory to a cement manufacturer, including an explanation of

    maintenance inventory and the costs associated with carrying such inventory.

    The second part of this chapter focuses on the problem statement that leads to

    the research regarding the topic. The third part of the chapter focuses on the

    primary and secondary objectives of the study. The chapter concludes with an

    outline of the remaining chapters of the dissertation.

    1.2 BACKGROUND

    AfriSam South Africa is currently the leading black controlled building

    materials group in Southern Africa since it was renamed from Holcim South

    Africa. The renaming took place after a landmark BEE transaction to the value

    of R15 billion was concluded with the sale of the majority shares that were

    owned by Holcim Switzerland (51%) and Aveng (49%) in 2006.

    Holcim Switzerland still owns 15% of the shares of AfriSam South Africa and

    due to the quality of the cement accounting policies and principles that Holcim

    formulated over many years, AfriSam still makes use of the Holcim accounting

    and reporting package (HARP) that is referenced during the next few chapters.

    AfriSam operates in South Africa, Botswana, Lesotho, Namibia and Swaziland.

    They also have a 62.5% interest in Tanzania-based Tanga Cement Company

    Ltd and have just over 2 000 people in its employment.

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    AfriSam produces over four million tons of cement per annum from four cement

    production facilities in South Africa located at Ulco (Northern Cape), Dudfield

    (North West), Roodepoort and Brakpan and one cement blending plant in

    Swaziland. AfriSam produces four types of cements which are uniquely

    developed for different applications:

    1. All purpose Cement

    2. High Strength Cement

    3. Rapid Hard Cement

    4. Eco Builiding Cement

    AfriSam Aggregate has a total of 16 aggregate operations producing nearly 10

    million tons of aggregate annually throughout South Africa. Of these 8 are

    situated in Gauteng, 6 in Kwazulu-Natal and 2 in the Western Cape.

    AfriSam Ready-mix has a total of 40 ready-mix plants producing over 1.8 million

    m of ready-mix concrete throughout South Africa, mainly situated in Gauteng

    (29), Kwa-Zulu Natal (7) and Western Cape (4). In addition, AfriSam has 1ready-mix plant in Gaborone, Botswana.

    Afrisam cement maintains it plant and equipment with maintenance inventory,

    managed and controlled between five warehouses. According to the

    management accounts of AfriSam (2011:12) the three major cement plants,

    excluding the aggregate and ready-mix operations, situated at Dudfield, Ulco

    and Roodepoort, have combined investment in maintenance inventory ofapproximately R143 million with a combined total number of 17 000-19 000

    items. There are also two smaller cement blending plants and maintenance

    inventory warehouses situated at Brakpan and in Swaziland. Aggregate and

    ready-mix plants do not operate warehouses and rely on its suppliers to supply

    spares or parts just in time to minimise downtime.

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    It is therefore evident why it is a challenge for management to ensure that there

    is a strong balance between the availability of maintenance inventory combined

    with the managing of this investment in working capital for optimal performance.

    Due to the fact that there is an interrelationship between maintenance inventory

    and cash flow, it is important that there is a strong relationship between all the

    role players such as the supply chain executive, warehouse manager,

    production manager and the financial manager. As a combined team they all

    play a very important role in the decision-making and control of the

    maintenance inventory of the organisation. The negative side of carrying such

    levels of stock is that it comes at a cost and that cost needs to be balanced with

    the risk.

    According to HARP (Holcim Accounting and Reporting Package) maintenance

    inventory comprises all the inventories that support the manufacturing process,

    but is not included in the final product. Maintenance inventories are one of the

    highest capital investments in a cement manufacturer. It is also one of the most

    important focus areas of the business unit managers to be effectively managed,

    as it could have a dramatic effect on the operating equipment efficiency (OEE)

    of a cement manufacturer. The reasons why it may have an impact on OEE are

    as follows:

    The lead times for a major spare part such as a grinding table of a cement

    mill could be as long as 3 years with a cost in excess of R100 million.

    The unavailability of a spare part could result in a plant not being able to

    produce for extended periods until the part is sourced or manufactured.

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    It has therefore become a major focus point for cement manufacturers to find

    methods that could reduce the inventory and then manage the risk of not having

    a part available. Bharadwaj, Silberschmidt, & Wintle (2011) found that

    maintenance inventories are mainly influenced by the maintenance policies at

    the organisation for the equipment.

    Scheduled maintenance has a relatively predictable demand for spares and it

    may be possible to order parts to arrive just in time for use, and indeed not stock

    parts at all. Unplanned maintenance as a result of breakdowns and the lack of

    available stock often mean that the consequences of not keeping stock include

    production loss as well as the additional cost of procuring the parts at short

    notice. Table 1 gives an indication of the production figures of the three main

    cement factories at AfriSam.

    The figures can be put into perspective when one considers the lead time of a

    grinding roller shown in Table 5 is a 100 weeks, which is critical to the

    production equipment that produces the tonnages as shown in the Table.

    Table 1: Key AfriSam Production Figures (2011)

    Average Hourly Production Tons (Roodepoort

    Factory):

    117 Tons Per Hour

    Average Monthly Production Tons (Roodepoort) 76 000 Tons

    Average Sales Tons per Day (Roodepoort) 3000 Tons (YTD 2010)

    Sales Tons per Month(Roodepoort) 79 580

    Average Maintenance Repair Inventories Value(Roodepoort plant over past 10 years)

    R 25 892 928

    Average Monthly Clinker Production Tons (Ulco Kiln) 82 000 Tons Per month

    Average Monthly Clinker Production (Dudfield Kiln) 88 000 Tons Per Month

    Source:AfriSam Management Accounts (December 2011.)

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    From these figures one can gauge the importance of keeping the production

    equipment operating and the importance of the availability of spare parts in the

    event of a breakdown. No cement manufacturer can afford to lose production

    due to the unavailability of spare parts for the critical manufacturing equipment

    such as kilns that produce clinker, cement mills that process the clinker into

    milled clinker, cement packing and palletising equipment that packs the cement

    bags and wraps and packs the pallets ready for the market place.

    Managing maintenance inventory in order to ensure the optimum operating

    equipment efficiency (OEE) ratios of production equipment is important to

    AfriSam. Poor management of maintenance inventory may result in

    unavailability of spare parts. Spare part unavailability will cause a loss in

    production which in turn will result in a catastrophic loss of income due to lead

    times of critical components in excess of 2 years. The reason why management

    is concerned with the maintenance inventory management is that optimal spare

    provisioning is a prerequisite for all types of maintenance tasks in the cement

    factory, such as inspections, preventive maintenance and repairs.

    As a result of the increase in global lead times, the high cost of finance,

    combined with the critical importance of having spare parts available to

    minimise operational downtime, management is faced with the challenge to

    optimise the investment in spare parts through leaner supply chains and

    balance it with a further investment in spares. Management has to consider the

    investment in maintenance inventory that tie up working capital which could

    have been used to aid capital expansion that may result in larger returns ontheir assets. In addition, the high inventory carrying costs versus the opportunity

    cost of losses if a critical part with a long lead time is not available, is another

    issue that needs to be addressed in the decision regarding an inventory

    strategy.

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    Table 2 is an extract from a warehouse report with the top 30 items in terms of

    value of maintenance inventory in one of the AfriSam cement warehousing

    stores at Roodepoort with a combined value of R31.4 million. The average

    inventory value per month over the past 10 years was R25.9 million (Table 1)

    but it increased dramatically since 2010 after the installation of a R700 million

    vertical roller mill.

    Table 2: Top 30 Inventory Items by Value (Roodepoort Warehouse)

    Description Last Movement Date Stock value for the month

    Raw mill table liner segment 21.10.2008 3 331 193.00 ZAR

    GRINDING ROLLER (M) CPL. W/O TIRE 01.11.2011 2 579 323.95 ZAR

    Monobloc raw mill roller liner FMU52 21.10.2008 1 580 344.25 ZAR

    Bearings for new design raw mill rollers 07.12.2009 1 490 488.00 ZAR5.4 MVA Transformer 30.11.2011 1 455 000.00 ZAR

    Conv Belt;900W x 5T x 1,6B;Grade 'N'. 23.03.2012 1 204 205.84 ZAR

    Motor. 1595kW, 690V, AMB 560L6A BATFH. 15.04.2004 1 193 314.67 ZAR

    Wearing Segment of Special Cast Iron 18.11.2011 1 178 387.19 ZAR

    11 A-L 32,5 50kg 3x 70g P-Bag 12.04.2012 1 170 800.34 ZAR

    hydraulic cylinder acc. drwg. M907003-60 28.10.2008 1 110 188.84 ZAR

    Inlet Trunion Of Cast Steel. Xl-85. 01.11.2005 1 102 713.00 ZAR

    ABB Fan Motor 2000kW 991rpm 3300v 21.09.2011 1 093 500.00 ZAR

    APC CEM V A(S-V) 32,5 50kg 2Ply 10.04.2012 1 082 907.07 ZAR

    LINK BELT SBX2859 ELEV. CHAIN 16.01.2012 1 057 199.25 ZARGRINDING MEDIA;90mm;Steel;Ball;Casted; 30.12.2011 1 003 282.86 ZAR

    APC CEM V A (S-V) 32.5 50kg Paper Bags 12.04.2012 969 466.02 ZAR

    High speed setting wheel c/w hub & bolts 26.06.2009 924 560.01 ZAR

    Wearing Segments For Grinding Bowl. 04.05.2005 736 424.00 ZAR

    louvre ring cpl. (=27 segments) pos. 2 11.09.2009 717 297.59 ZAR

    Spherical Roller Brg.241/670 BK30 MB.C3. 04.07.2006 668 450.72 ZAR

    APC CEM V A(S-V)32.5 50kg 2PlyPaper Bags 11.04.2012 655 423.19 ZAR

    Bearing Set Bt2b 332945/ha4 Compr. 1 X 06.10.2009 644 307.44 ZAR

    Impeller type: DHRV - 50 1800 14.01.2009 606 206.25 ZAR

    TRUNION BEARING 238/1180 09.04.2010 598 652.77 ZAR

    roller tyre (S) pos. 3 27.10.2008 576 222.04 ZAR

    ELEVATOR CHAIN K44 SS2857 20.04.2011 564 354.08 ZAR

    Builders Pride CEM v/a (S-V) 32.5 BAGS 12.04.2012 555 985.02 ZAR

    bearing cartridge cpl. acc. drwg. 047941 08.09.2010 550 316.84 ZAR

    guide vanes (1 set = 180 pcs.) VSK1750-0 11.09.2009 543 730.82 ZAR

    Sector of Heat Resistant Cast Steel. 10.02.2012 533 304.00 ZAR

    31 477 549.05 ZAR

    Source: AfriSam Management Accounts (December 2011)

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    This figure equates to a total of 22% of the total maintenance inventory. Upon

    further investigation it becomes clear that certain of these items have not moved

    since 2004.

    AfriSam has a policy of writing off inventory due to obsolescence after a periodof time which directly impacts the profitability of the business, as the allowance

    for obsolescence is charged to production cost which increases the operating

    cost and decreases the operating profit.

    According to HARP (2003) the process for determining any value adjustments

    (allowance for obsolescence of spare parts) is as follows:

    Review item by item and write the specific item off 100% if:

    The related equipment is permanently out of use

    There is no related equipment

    The spare part is damaged

    The remaining spare part inventories have an allowance for obsolescence

    raised globally in the cement industry by applying the following rule:

    30% provision for obsolescence after 1 year without usage

    50% provision for obsolescence after 2 years without usage

    80% provision for obsolescence after 3 years without usage

    Table 3 shows the model being used by AfriSam to calculate the provision to

    write off inventory due to obsolescence for all maintenance inventory at AfriSam

    cement plants.

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    Table 3: AfriSam calculation of obsolescence provision

    Inventory movement dates as per AfriSam policy

    Items

    2011

    2012

    2010

    2011

    2009

    2010

    Before

    2009Total

    % to be

    written off0% 30% 50% 80%

    Total

    Inventory

    Value

    R62 203 508 R16 128 733 R14 332 537 R50 443 009 R143 107 790

    Provision for

    obsolescenceR4 838 620 R7 166 268 R40 354 407 R52 359 296

    Insurance

    SparesR-177 169 R-586 421 R-2 955 252 R-3 718 842

    Total provision for obsolescence R48 640 453

    Source:AfriSam Management Accounts (December 2011)

    Insurance spares referred to in Table 3 are maintenance spares that are

    separately indicated and classified in the management accounts. Insurance

    spares are compulsory inventory items in the risk insurance policy of a cement

    manufacturer. The spares usually have a very slow turnover, but due to the risk

    to the business in terms of production and subsequent cement volumes and

    turnover, these spares form an integral part of the maintenance inventory policy

    of the cement industry.

    Due to the nature and classification of insurance spares as described above, the

    calculation for obsolescence needs to exclude the value of obsolescence on

    insurance spares and it is subtracted from the provision as shown in Table 3.

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    Table 4 shows the provision for obsolescence as a percentage of the total

    inventory value.

    Table 4: Obsolescence as percentage of Maintenance Inventory

    Stores Items Value R 143 107 790.25

    Value of stores items with no movement in

    last 4 years

    R 64 775 547.56

    Value of stores items with no movement in

    last 4 years as a %

    45%

    Source:AfriSam Management Accounts (December 2011)

    Again, this figure should be alarming to the management of AfriSam as an

    average for obsolescence according to Hugo, Van Rooyen and Badenhorst-

    Weiss, (2002) is between 2 4% per annum. However, it must be noted that the

    figures quoted by Hugo et al. (2002) are based on standard inventory items and

    not based on maintenance inventory as described herein.

    Since AfriSam South Africa still reports to Holcim on a monthly basis due to the15% shareholding, the obsolescence calculation is based on guidelines

    according to HARP. Holcim prescribes an obsolescence figure that should range

    between 10 and 15 per cent which may still be acceptable provided all terms

    and conditions of storage as per original equipment manufacturers

    specifications are met. It is also important that stock is reviewed once in a two -

    year cycle by a technical expert to ensure all maintenance inventory is well

    maintained and warehoused. As a result of the figures provided above one can

    see why it is an issue being investigated amongst cement manufacturers

    worldwide to find new ways to minimise the high cost of carrying extremely large

    values and quantities of maintenance inventory without compromising the

    operational efficiency.

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    Holcim Ltd, Switzerland hosts a maintenance inventory and warehousing

    summit annually that is attended by all subsidiaries of Holcim across the world in

    order to address the issue of maintenance inventory holding. Holcim is one of

    the largest manufacturers of cement and aggregates in the world with

    operations in Europe, Africa, America and Asia. The researcher attended a

    warehousing and inventory seminar in 2007, where a study was conducted on

    Swiss Air to investigate their success of managing long lead times with low

    levels of inventory. Although some key learning into supplier integration was

    taken from this exercise, the model is yet to be successfully implemented in the

    cement manufacturing industry as a result of the critical nature of daily

    manufacturing targets.

    This research may bring further insight into existing methods which can

    minimise the carrying cost of inventory for AfriSam South Africa. Table 5 shows

    a number of the critical spare parts that are required in a vertical cement roller,

    such as the one built at AfriSams Roodepoort factory, together with the cost in

    Euro and lead time to manufacture in weeks. Currently there is only one vertical

    mill of this size and nature in South Africa.

    Table 5: High Value Maintenance Inventory (2010)

    Description Quantity Unit Price () Lead Time (Weeks)

    Grinding Plate 1 70 091.40 32

    Roller Tyre 3 40 782.65 32

    Grinding Roller 1 333 390.90 100

    Cylindrical Roller Bearing 1 19 012.17 100Tape Roller Bearing 1 31 067.54 100

    Grinding Table, Louvre Ring 1 63 132.32 24

    Dam Ring 1 34 822.48 24

    High Pressure hose 8 103.46 10

    Piston Rod Protection Bellow 8 173.58 10

    Source:AfriSam Management Accounts (December 2011)

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    From the information provided in Table 5 it becomes clear that the component

    of capital cost in the total carrying cost will be high due the high value of each of

    these components. As a result of the long lead time to manufacture these spare

    parts, it also means that carrying the inventory may be a necessity since the

    opportunity cost for not having this part available during a breakdown to

    produce may be tripled. The obsolescence cost component of the carrying cost

    will also be high since the part may be written off to obsolescence due to its age

    if it is not required for a breakdown or scheduled maintenance.

    Considering the total value of inventory of AfriSam is calculated at R143 million

    it is important to note that to carry the 9 critical items of inventory in Table 5 will

    make up R35.6 million. AfriSam has a total of between 17 000 and 19 000

    maintenance inventory items and these 9 items will constitute 25% of the total

    inventory value, indicating how important a good inventory management

    strategy is to AfriSam, especially when one considers the lead time to

    manufacture and supply the parts.

    The inventory management and supply chain strategy needs to take into

    account the importance of maintenance spares to the organisation, the risk of

    not having it available in the case of a breakdown, and the lead time to have it

    delivered. A comparison should then be drawn between the overall carrying

    cost of the maintenance inventory and the opportunity cost risk factor of

    breakdown maintenance in order to formulate and define the maintenance

    inventory policy.

    The maintenance inventory policy should include all the components of carrying

    cost such as insurance, provision for obsolescence, storage cost, insurance

    and the capital cost of such high value maintenance inventory items.

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    The original equipment manufacturer guidelines in terms of the useful life of the

    parts has to be reviewed carefully and addressed together with their guidelines

    in terms of maintenance to ensure a balanced risk optimisation strategy. The

    strategy can be implemented to ensure that the organisation has optimal

    maintenance inventory levels for all the critical manufacturing equipment that

    may have a debilitating impact on the organisation should it fail without spare

    parts available.

    According to the production and engineering managers of the cement factories

    within Holcim, lost or unaccounted spare parts and the unavailability of spare

    parts are the most frequent reasons for delays in completion of maintenance

    activities and in the cement industry, these delays could cause major losses in

    turnover. However, from the figures provided above it is clear why mitigating the

    risk of not having parts available through an increase in inventory levels is not

    the solution, since the provision for inventory obsolescence is 45% of the total

    inventory value. Management needs to be made aware of these values in order

    to compare the opportunity cost of an unavailable spare part to the cost of

    obsolescence, as well as the total carrying cost of inventory.

    Based on the background and the information provided above it is important to

    investigate whether there are alternative measures and methods that can be

    implemented by cement manufacturers and AfriSam in particular, to ensure that

    they have maintenance inventory available. In addition to having inventory

    available, there may be a need to investigate how maintenance inventory

    availability can be achieved without having such high inventory carrying costand balance it with the manufacturing lead times of critical maintenance

    inventory components.

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    1.3 REASON AND POTENTIAL VALUE OF THE RESEARCH

    Based on the background study done on AfriSam South Africa (Pty) Ltd, it was

    found that they carry maintenance inventory worth millions of rands with slowmovement of high value maintenance inventory. The turnover of the

    maintenance inventory is shown in some cases to be in excess of 3 years.

    This research aims to provide information in respect of methods that exist to

    optimise maintenance inventory. In addition, the research aims to gain a better

    understanding to the methods that exist within the cement manufacturer to

    source and manage their maintenance inventory. It also aims to show whethermanagement and employees know of and manage the components of carrying

    cost of maintenance inventory.

    The potential benefits of the research are:

    It will provide management of AfriSam an insight into the total cost of

    ownership of their maintenance inventory.

    It will provide AfriSam with a framework of optimisation methods of

    maintenance inventory that upon further investigation could be

    implemented.

    to provide savings to the operating cost and improve on the profitability of

    the business.

    1.4 RESEARCH PROBLEM STATEMENT

    AfriSam South Africa (Pty) Ltd carries maintenance inventory worth millions of

    rands with slow movement of high value maintenance inventory sometimes in

    excess of 3 years. The cost of managing the inventory together with the carrying

    cost of the inventory has become a key focus point in the business and there is

    a need to find methods to optimise the inventory.

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    1.5 RESEARCH OBJECTIVES

    The primary and secondary objectives of the study are as follows:

    1.5.1 Primary objective of the research:

    To identify methods for optimising maintenance inventories.

    1.5.2 Secondary objectives of the research:

    To determine whether AfriSam is aware of the carrying cost of the maintenance

    inventory.

    To determine whether management believes there is merit in implementing and

    adopting the methods to optimise inventory.

    1.6 CHAPTER OUTLINE

    Chapter one provides a background to the importance of managing

    maintenance inventories of a cement manufacturer optimally. It also

    provides the objectives of the research. Chapter two provides an overview of the available literature on optimising

    maintenance inventory and methods that are used by organisations to

    reduce maintenance inventory.

    Chapter three focuses on the research methodology which gives cognisance

    to the research approach followed. It provides detail in terms of the

    population, the sample, data collection methods as well as the data analysis

    together with the validity and reliability of the data.

    Chapter four focuses on the presentation and discussion of the results in

    view of the research objective.

    Chapter five deals with the interpretation of the results and the findings of the

    research, as well as the discussion of any limitations of the study.

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    Chapter six covers the conclusion of the study, inclusive of a brief summary

    of the research objectives and major findings. In addition, recommendations

    in respect of the study and any possible future research are proposed.

    1.7 CONCLUSION

    AfriSam has an obsolescence provision for inventory which constitutes 45% of

    the total maintenance inventory carried at a value of R48 million as at 31

    December 2011. It is important to consider and investigate whether the

    management of AfriSam have calculated the possible opportunity cost of not

    having spare parts available and compared this to the carrying cost, or whether

    they have only tried to minimise risk by increasing maintenance inventory levels.

    From the figures presented in chapter 1 it seems to be exorbitant to write off

    such high values of inventory to production cost due to the high value of

    obsolescence. The intention with the rest of the study is to determine whether

    AfriSam calculates the carrying cost or the opportunity cost in order to manage

    and report on the overall cost to the business of the maintenance inventory.

    It is only during periods of financial constraint that organisations start to focus on

    optimising working capital as it has an impact on the cash flow and availability of

    capital to the organisation. AfriSams maintenance inventory of R143 million is

    capital that could be better applied in the business, and the purpose of this

    research is to identify possible solutions to the problem of such high levels of

    inventory and based on the results, the identification of a best inventory

    management approach for AfriSam.

    The next chapter investigates possible inventory management strategies found

    in literature that may provide a solution to the research problem.

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    2 CHAPTER TWO: LITERATURE REVIEW

    2.1 INTRODUCTIONWith reference to the research problem and objectives of this research the

    following aspects relating to inventory management are discussed:

    Firstly, a detailed analysis of the carrying cost of inventory is provided that will

    show the high average carrying cost of maintenance inventory of AfriSam. The

    aim is to show why the researcher believes it should become a focus area to the

    management of AfriSam. It will also show why the optimisation of inventory is of

    such importance to the business.

    Secondly, various inventory management approaches that could provide

    solutions to the research problem are discussed. In addition, approaches to

    minimise the risks of unavailable inventory without the potential losses are

    discussed.

    The following management approaches that influence inventory will be

    discussed:

    Supply chain design and sourcing strategy.

    Just in time logistics.

    Supply contracts.

    Vendor managed inventory through supplier integration.

    Inventory and warehouse management.

    Risk - based optimisation of spares inventory management.

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    2.2 INVENTORY CARRYING COST

    The carrying costs of maintenance inventory is an important aspect to consider

    for a cement manufacturer such as AfriSam, since the value that is carried maybe as high as 15 20% of the total maintenance inventory. The carrying cost of

    inventory consists of a number of components each with a contribution relative

    to the value of the inventory.

    Lambert, Stock, & Elram (2008) explain that holding inventory is associated with

    a number of generally high costs. The importance of determining the carrying

    cost follows from the fact that the value of the carrying cost may have significant

    impact on inventory management (Berling, 2005). It may also have an effect on

    the profitability of the organisation according to Lambert et al (2008). Karrlson,

    Morichetto and Schwerin (2007) showed that the investments in inventory in

    some companies can be more than 20% of the total assets.

    In a cement manufacturer the maintenance inventory figure could be even

    higher with a turnaround time in excess of 5 years, and it ties up a great deal of

    capital that prevents the organisation to make investments elsewhere in terms of

    expansion perhaps. According to Bowersox, Closs & Cooper (2002), carrying

    cost can make up to 37% of the logistics costs of a manufacturing company.

    Figure 1 gives a detailed breakdown of the components of carrying cost. A

    detailed interpretation of the various components of carrying cost will follow.

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    Inventory

    carrying

    cost

    Capital

    Cost

    Interest

    Storage

    Cost

    Inventory

    Investment

    Own

    Warehouse

    Risk Cost

    Property Tax

    Rented

    Warehouse

    Obsolescence

    Cost

    Damage

    Theft

    Insurance

    Figure 1: Components of carrying cost

    Source: Hugo, Van Rooyen, Badenhorst-Weiss), (2002:169)

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    2.2.1 Capital cost

    From Figure 1 it follows that this component is related to the cost of the capital

    that is tied up when carrying inventory (Lambert et al. 2008). Inventory should

    be viewed as an investment. The organisation needs to determine whether the

    cost of carrying the inventory is lower than the opportunity cost of not having the

    maintenance inventory available at the time of a breakdown in the

    manufacturing plant. In a cement manufacturing plant such opportunity costs

    can be extremely high due to the extended lead times on heavy duty engineered

    items with high values.

    2.2.2 Storage cost

    The costs associated with this component are rent, water and electricity. The

    storage cost for company - owned warehouses is a fixed cost and will not have

    an effect on the carrying cost of the inventory, although it may carry an

    opportunity cost if there is a possible alternative use of the warehouse (Lambert

    et al. 2008). For the purpose of this research the storage cost is excluded as

    part of the calculation of carrying cost since all warehouses are company

    owned.

    2.2.3 Inventory Risk Costs

    The study by Karrlson et al. (2007) revealed that holding inventory is associated

    with four types of risk:

    i. Risk of obsolescence

    ii. Damage

    iii. Pilferage

    iv. Relocation

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    One of the highest cost factors to AfriSam is the risk of obsolescence. It is

    provided for on a rolling yearly basis in the management accounts, which has a

    negative effect on the profitability of the business.

    Obsolescence costs can be directly attributed to inventory that is slow moving,

    and is something that is very evident in the maintenance inventory of cement

    manufacturers. With spare parts in some cases not moving for up to 3 years

    this equipment may become obsolete or damaged in the warehouse.

    Examples of such spare parts are v-belts that due to the age and incorrect

    storage could become worn and unusable. Rotor motors also become obsolete

    with age due to rust inside, unless they are turned on regular intervals to ensure

    adequate lubrication.

    Pilferage costs make up a considerable amount of inventory carrying costs as

    these costs occur due to theft (Lambert et al. 2008). Due to the size and nature

    of spares in AfriSam warehouses pilferage is not highlighted as a major cost.

    2.2.4 Determination of the carrying cost

    According to Berling (2005), a company such as AfriSam that does not calculate

    the carrying cost of inventory can choose to determine the carrying cost by

    applying an industry index or using recommended numbers from purchasing

    text books. Berling (2005) argues that many companies still use the carrying

    cost percentages prescribed in textbooks from as early as 1940.

    Karrlson et al. (2007) found that carrying costs in textbooks and industry

    periodicals may range from as low as 20% to as high as 50%.The most

    commonly used practice to determine the carrying cost is based on practice and

    previous knowledge (Lambert et al. 2008).

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    Table 6 below shows the carrying cost based on averages for the various

    elements known from practice in the cement industry. This provides an

    indication of the high cost to AfriSam of carrying such high value of inventory.

    Table 6: AfriSam Inventory carrying cost

    Element Average Ranges Carrying Cost(R 000)

    Capital Cost 15% 8 -25% 21 450

    Taxes N/A 0.5 -2% 0

    Insurance 1% 0 - 2% 1 430

    Obsolescence 45% 0.5 - 2% 48 000

    Storage 2% 0 - 4% 2 860

    Total 73 740

    Source: AfriSam Management Accounts (2011)

    The carrying cost is calculated on an inventory value of R143 million asprovided in Table 4.

    2.3 SUPPLY CHAIN DESIGN AND SOURCING STRATEGY

    According to a study by Kouvelis, Chambers and Wang (2006), the supply chain

    design can only be done once there are strategic plans to cater for the location

    of facilities including production, storage and distribution. Management should

    also know how to allocate capacities and they must be able to choose and

    develop supplier and distribution channels.

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    Organisations need to devise strategies to respond to competitive demand and

    find new methods of sourcing engineered items due to the long lead times. The

    development of global strategies and approaches, including global sourcing

    strategies, has become a key success factor and has become an increasingly

    attractive option. (Monczka & Trent, 2003)

    In order for firms to compete globally they have to source globally. Inventory has

    also been a subject in the debate on supply chain design, which has been of

    increasing interest in recent years, particularly as the leaning-down of

    companies and global sourcing have increased supply chain risks (Christopher

    & Peck, 2004).

    Global sourcing has become an important function in the supply chain design.

    The sourcing strategies of AfriSam are built around fundamentals of global

    sourcing. One of the key reasons why it became such an important aspect is

    that many of the strategic spare parts are only available and manufactured

    internationally and sometimes with lead times of up to 3 years.

    These are important issues to consider in the cement industry and for the supply

    chain executive as they provide the platform from which the production facilities

    as well as the maintenance departments schedule and perform their work. The

    design and sourcing strategy should be devised with the input from all the

    business units in order to consider the risk of out of inventory stock outs,

    together with the high cost of carrying maintenance inventory.

    The concern with an increase in lead times for heavy duty engineered

    maintenance inventories is that organisations face supply uncertainty and it is

    often necessary to have multiple sources of supply. However, it becomes

    important to find the optimal number or type of supply source.

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    Agrawal and Nahmias (1997) found that an increase in the number of suppliers

    reduces the variability of delivered quantities, but it also increases the cost of

    having to manage supplier relationships. There is however value-creation

    initiatives, e.g. logistical information exchange (Dyer & Singh, 1998) that can be

    implemented and used by the supplier and customer.

    An example would be when information is exchanged regarding the suppliers

    production process, delivery reliability, technical specifications and delivery

    schedules. According to Chen and Paulray (2004) and Fugate, Sahin and

    Mentzer (2006) this is important for successful logistics integration. Sourcing

    from multiple suppliers is one of the problems facing the supply chain executive

    in the cement industry as the quality and availability of suppliers for critical

    components are limited. It places more impetus on the sourcing process and

    strategic planning of the supply chain.

    A strategic sourcing department should continuously enter into various long -

    term agreements in order to ensure sustainability of supply. The long - term

    agreement has the added advantage that both organisations derive benefit from

    the relationship. The supplier has a guarantee for future business provided they

    perform to an acceptable service level, whilst the customer can pressurise the

    supplier for better long - term pricing, vendor managed inventory or consignment

    stock. Supplier performance is a key issue that has to be investigated and

    monitored closely when an organisation wants to operate with a lean and agile

    supply chain. It is especially important in organisations that deal with

    maintenance inventory where downtime could contribute to large scaleproduction losses. Vendor managed inventory is one of the aspects of a lean

    supply chain design strategy that must be investigated, as many of the spare

    parts such as bearings, v-belts and smaller maintenance type inventories could

    be managed by the supplier. However, their performance in terms of just in time

    delivery will be the major factor when one considers such a strategy.

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    2.4 JUST IN TIME LOGISTICS

    Biggart and Gargeya (2002) mention that just in time production systems such

    as the production system used by Toyota was introduced as early as 1970. Ithas also been cited by Bharadwaj et al. (2011) from (Das and Handfield 1997)

    that Just in Time (JIT) has been written about since the early 1970s and they

    indicated in their study that Golhar and Stamm (1970) identified over 860

    published articles on JIT since 1970.

    Gourdin (2001) indicated that just in time philosophies requires manufacturers to

    work in concert with their suppliers and transportation providers to get required

    items to assembly lines at the precise time required for production. JIT has

    become an inherent attribute to the lean logistics paradigm and it embodies the

    elimination of non value added processes throughout the supply chain.

    It is important to note that you cannot look at the importance of creating a

    leaner, more agile supply chain and reduce the high carrying cost of inventory

    without looking at the importance of JIT principles. Unfortunately, all the

    principles do not apply in a maintenance spare environment such as the cement

    manufacturing industry particularly due to the long manufacturing lead times.

    Monczka, Trent and Handfield (2005) defined a JIT purchasing system by:

    Zero defect commitments.

    Frequent, but smaller shipment of lot sizes according to stringent quality

    and delivery performance standards.

    Closer, and in many ways collaborative buyer and seller relationships.

    Stable production schedules.

    Sharing of electronic information between supply chain members.

    Electronic data interchange capability with suppliers.

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    Considering the characteristics of the JIT purchasing system, it shows that there

    have to be cultural and personnel mindset changes at supplier and customer

    level for this principle to be successful. However, it is more important to realise

    that JIT purchasing does not imply that you are pushing inventory back to the

    supplier.

    JIT requires cooperation, coordination and sharing of information that will

    ultimately optimise maintenance inventory across the supply chain. It will also

    lead to a subsequent decrease in the carrying cost of inventory. It is a principle

    that has been implemented to a very limited extent in the cement manufacturing

    industry as a result of the high risk of not having critical components available

    on time.

    However, it is possible to implement a JIT strategy for planned maintenance

    inventory but not for engineered items with long lead times. In addition, other

    approaches such as early supplier involvement and design together with the

    supply chain design and sourcing process must be used when using JIT for

    planned maintenance. Such an inventory management process could lead to

    major savings of inventory carrying cost.

    Figure 2 shows the shortened time of replenishment when an organisation has

    entered into an agreement with its suppliers and designed its supply chain

    according to lean principles.

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    Figure 2: Components of replenishment lead time, Conventional and JIT Purchasing systems

    Source: Hahn, (1983:9).

    The four components of conventional purchasing practices are combined into a

    three - step JIT lead time that ensures the spares are ordered, manufactured

    and delivered within three steps that drastically shorten the time and minimise

    the risk of standing time without having spares available. It also removes a

    number of the carrying cost components such as the need for insurance,

    pilferage and obsolescence.

    Ordering lead

    time

    1

    Vendors

    manufacturing

    lead time

    Transportation

    lead time

    3

    A. Replenishment lead time using conventional purchasing

    ractices

    Order lead time Manufacture and

    transport lead time

    Receiving and

    Inspection

    Receiving and

    Inspecting

    B. Lead Time with JIT

    Total Replenishment Lead Time

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    The lean principle as a supply chain strategy has been implemented to its fullest

    at organisations such as Dell and Toyota, but it is less evident in organisations

    with maintenance inventory. The JIT purchasing system can be implemented

    with success for scheduled maintenance where operational downtime is planned

    and the maintenance engineers specify the spare part requirements for a

    specific date and time.

    2.5 SUPPLY CONTRACTS

    Another very important area to consider when looking at the high carrying cost

    of inventory is the designing of supply contracts. In the United States, large

    retailers such as Wal-Mart exert tremendous market power over their suppliers.

    (Liu & Cetinkaya,2005:687)

    In South Africa this is also evident at the food retail giant Woolworths, that has

    extremely tight control over their supply contracts with their suppliers and it

    ensures that their JIT system works extremely well. This enables Woolworths to

    have some of the best and freshest produce available to the consumer on a

    daily basis which forms part of their value contribution. It is in line with the

    findings of Liu et al. (2005) that larger retailers have a bigger influence over their

    suppliers as a result of their bargaining power.

    This has led to the formation of buyer-driven channels where the power lies

    more with the buyer rather than the supplier, and it could ensure that the terms

    of purchase supersede the terms of supply. This leads to a further question that

    could be addressed in this research: Is the collective cement manufacturing

    industry placing enough pressure on their suppliers to improve performance

    through the implementation of approaches such as JIT, vendor managed

    inventory and consignment inventory?

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    2.6 SUPPLIER INTEGRATION AND VENDOR MANAGED

    INVENTORY

    Supplier integration is another key principle in the supply chain managementprocess that can add tremendous value to overall performance and efficiency of

    the supply chain as well as the business operation as a whole (Monczka, Trent

    & Handfield, 2005).

    Buyers enter into formal agreements or partnerships with distributors featuring

    onsite support. The agreements often stipulate further conditions such as wider

    stock ranges as well as a provision for agreed - upon service levels such asdelivery lead time and in many cases vendor managed inventory or VMI. The

    buyer has the advantage of no longer carrying inventory for all spares under

    contract, but in return has an exclusive supply agreement with the supplier for

    those particular inventories. This strategy has been implemented with a great

    deal of success in the construction material business of AfriSam and with good

    management may work in the cement business.

    Groves and Valsamakis (1999) discuss the different degrees of relationships

    that can exist between customers and suppliers. Adopting a system of

    partnership is consistent with supply chain management theory. A full

    partnership will require the sharing of risks, benefits and to ensure there are

    continuous improvement assessment efforts. Partnerships can be done based

    on single or multisourcing.

    The key issue to consider is that in the case of AfriSam many of the critical

    components are from single source suppliers and it requires a great deal of trust

    to develop the required relationship. In addition, only a few companies are able

    to develop such a relationship cited by Tait (1998) in Groves and Valsamakis

    (1999).

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    2.7 INVENTORY AND WAREHOUSING MANAGEMENT

    Other inventory reducing strategies include the following:

    Centralisation of inventory: The level of safety stocks can be reduced by

    centralising inventory in a single warehouse, rather than having inventory

    warehouses at all the cement operations. (Landers et al. 2000).

    The virtual warehousing concept: This implies that all inventories across

    many locations are regarded as one common inventory pool (Landers et al.

    2000). Herer cited in Landers et al. (2000) that it may be associated with the

    transhipment of goods between warehouses at the same echelon level in the

    supply chain.

    Such methods of reducing inventory can only be implemented if the warehouse

    infrastructure and the transportation to the various cement locations are well

    managed and possible within a short space of time. However, from AfriSams

    perspective it needs to be considered that the time-factor and the cost oftransportation to the Dudfield and Ulco factories may exceed the initial savings

    of inventory reduction.

    2.8 RISK - BASED OPTIMISATION OF SPARES INVENTORY

    MANAGEMENT

    It has become increasingly important to focus on advanced approaches to

    reflect the complexity and innovation required to optimise maintenance inventory

    (Bharadwaj et al. 2011). Risk - based approaches are based on the risk

    estimate of various options. In essence it means that maintaining spares

    inventory at optimal levels depends on the risk profile of the spares, as well as

    the likelihood of a failure to meet the demand for a spare and the consequences

    should the parts not be available (Bharadwaj et al. 2011).

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    Bharadwaj et al. (2011) stated that risk is a combination of the probability of a

    stock out and its consequence, and a stock out is an event where a spare is not

    available on demand. The approach proposed by Bharadwaj et al. (2011) is a

    semi quantitative approach that will capture best estimates from experts

    together with raw historical data. The risk of a stock out is a relative risk, in other

    words, the risk of a stock out of a spare component or equipment in relation to

    each other.

    The risk profile of the spares is obtained by considering the likelihood of failure

    to meet the demand for that spare together with the consequences of the failure

    to meet that demand. The risk profile is then used to find an optimal level of

    inventory, such that financial benefit is maximised together with an acceptable

    risk level (Bharadwaj et al. 2011).

    The model Bharadwaj et al. (2011) developed relates to the cement industry by

    means of the following:

    1. There is available spares inventory to maintain the cement plants.

    2. There is a demand for parts of different kinds to keep the equipment in

    the plant available for service.

    3. There is a cost involved in the inventory and a penalty or risk when not

    being able to meet the demand for spares (stock outs).

    4. To determine the optimum level of inventory that should be held under a

    budget constraint and/or an acceptable risk of a stock out.

    The optimal inventory level could be achieved by using a linear programming

    approach in two parts: Part 1 establishes baseline values and part 2 optimise

    the values (Bharadwaj et al. 2011).

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    In an organisation that operates warehouses that consist of maintenance spares

    rather than traditional inventory, it becomes difficult to quantify the full

    implication of an item or spare that is not available. It has to be considered that

    the spare parts are not only used for planned maintenance but also for

    breakdown maintenance. Production is of critical importance to the cement

    manufacturer and the cost of a plant unable to produce due to spare parts on

    order is difficult to quantify.

    According to Bharadwaj et al. (2011) qualitative assessments of consequences

    or the impact of stock out is the best way to factor in the opportunity cost such

    as loss of orders or reputation.

    In the cement industry such opportunity cost will be dramatic in terms of loss of

    production that will have a knock-on effect on the loss of order and loss of

    reputation. The risk - based model will work by qualifying the likely impact (in

    monetary terms) of a failure to meet the demand for a particular spare.

    2.9 RESEARCH QUESTIONS

    Based on the literature reviewed and the availability of resources in this regard,

    the following research questions need to be answered in order to fulfil the

    objective of this research problem.

    1. Are supply chain managers in the cement industry aware of the methods that

    exist to optimise maintenance inventory?

    2. Can these methods be implemented to reduce the carrying cost of inventory

    and therefore reduce the investment in working capital of the organisation?

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    2.10 CONCLUSION

    A literature review of the methods available to optimise inventory indicates the

    importance of this area of study. Clear evidence of success can be found inlarge organisations such as Toyota, Dell and Wal-Mart. In fact, Wal-Mart gained

    a strong cost advantage over its competitors because of progressive buying,

    shipping and storage. Some consider this as Wal-Marts core competency to

    gain an edge over its competitors (Lester, 2000).

    It should be noted that the companies referred to above do not operate

    warehouses or production facilities that require maintenance inventory or spare

    parts. However, there are some key principles that can be taken from these

    approaches and implemented in the management and optimisation of spare

    parts for a cement manufacturer.

    From experience within AfriSam and the way they manage their maintenance

    inventory, it is evident they have catered for the uncertainty of an increase in

    lead time through increasing the level of their stock holding. However, with the

    downturn in the economy worldwide combined with the low appetite for risk in

    the banking sector the availability of cash has become very important. It had a

    knock - on effect in businesses that found it difficult to obtain finance.

    This once again placed the spotlight on management to find ways to reduce the

    high value of inventory as a method to reduce risk. Lower levels of inventory

    means less funds tied up in working capital especially considering the slow turn-

    around time of maintenance inventory. It will create less leverage on the balance

    sheet and create more available funds for operating.

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    The important factor that management has to consider in all of the approaches

    of minimising inventory is to reconcile the vulnerability of the supply chain

    together with the risks involved for the business overall. The effect of these

    variables, such as lead time in relation to minimum stock levels and total

    investment in inventory, may lead to large scale losses to the organisation if not

    accounted for.

    Based on the literature review, inventory management approaches is an area of

    research that may provide important insight to supply chain executives together

    with their engineering counterparts when making inventory decisions.

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    3 CHAPTER THREE: RESEARCH METHODOLOGY

    3.1 INTRODUCTIONThe research process can be seen as a journey or guided tour and the

    methodology will be the map or the guide to take you through the journey. It is

    important to know that all journeys have more than one route, however, the road

    one takes depends on where one wants to go and the resources (money, time,

    labour) one has available to complete the trip (Zikmund, 2003).

    The study of human behaviour or objects is empirical research, whereas the

    studies of theories and models analysing concepts or reviewing the body of

    knowledge are all non - empirical studies (Babbie & Mouton, 2010).

    The aim of the research is to investigate whether existing methods to optimise

    maintenance inventory can be applied by AfriSam. In order to achieve the

    objective it is necessary to obtain an insight whether the management of

    AfriSam understand and know of these methods. It constitutes the empirical

    research, and analysing the concepts and the figures provided through the

    research will form part of the non-empirical research.

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    3.2 RESEARCH DESIGN

    The research design provides the researcher with a framework that has

    information of the sample, the data collection methods, the measuringinstrument as well as the procedures that will be used to analyse the data

    (Zikmund, 2003).

    The intention of the study is to research the background to the research problem

    and also intends to isolate and identify the most likely reasons why the problem

    exists in the cement industry. Exploratory research as a research method should

    provide the information required to address the problem statement and answer

    the research questions.

    Selltiz et al. (1965), cited in Babbie & Mouton. (2010), emphasise three methods

    by which exploratory research may be conducted:

    1. By means of a review of pertinent literature.

    2. Through a survey of the people who have had practical experience of theproblem to be studied.

    3. An analysis of insight stimulating examples.

    Because exploratory studies usually lead to insight and comprehension rather

    than collection of detailed, accurate and replicable data, these studies frequently

    involve the use of in-depth interviews, the analysis of case studies and the use

    of informants (Babbie & Mouton, 2010:80). This suggests a qualitative

    approach of research which will be applied in the study.

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    3.2.1 Methodology

    According to the Longman Dictionary of Contemporary English (1993:655)

    methodology can be defined as the set of methods used for study or action in a

    particular subject, as in science or education.

    The main concern when choosing a research design and data collection method

    for a study should be that the methodological tools must be able to generate the

    empirical results required (Karrlsson, Morichetto, Schwerin2007).

    It should also answer the problem statement. According to a study by Karrlsonet al. (2007) the chosen method must further be proportioned to the given time

    limit, the available financial resources, the minimum level of quality accepted

    and the knowledge, experience and preference of the authors.

    Based on the research problem and subsequent research questions together

    with the objective of the study, the research will be undertaken as a case study.

    The research will be done through the review of data and documentation from

    the organisation.

    Questionnaires will be used to obtain information that will be analysed to provide

    answers to the research questions. The analysis will be done by means of a

    descriptive analysis of surveys and in-depth interviews of the populations as

    specified. The interviews will be conducted after the results of the surveys are

    obtained and analysed. The combination of surveys and interviews can be

    consideredas a mixed methods approach.

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    3.2.2 Population

    According to Karrlson et al. (2007) the first part of the research process is to

    specify the study population. A population is the theoretically specified

    aggregation of the study elements (Babbie & Mouton, 2010:173). Zikmund

    (2003) stated that a population is a grouping sharing similar characteristics.

    The chosen population for this study can be defined as cement plants of

    AfriSam South Africa (Pty) Ltd that operate and manage warehouses with

    maintenance inventory.

    These operations are situated at Roodepoort, Ulco, Dudfield, Brakpan and

    Swaziland. It is also the same operations where the warehouses are situated as

    discussed in chapter 1. The population will include all the general managers,

    procurement managers and maintenance managers of the specific operations.

    3.2.3 Sampling

    Zikmund (2003) indicates that a sample is some part of the whole populationand that sampling is a process where a sample or part of the whole population

    is used to analyse a research problem in order to make recommendations to the

    entire population.

    Zikmund (2003) distinguishes between probability and non probability

    sampling. Probability sampling is a method where every member of the whole

    population has an equal chance to be selected, and non probability samplingis a method where the researcher decides to select parts of the whole

    population.

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    Since there are only five cement operations within AfriSam that operate

    warehouses of maintenance inventory, the population will consist of

    procurement, warehousing and maintenance management employees.

    Combined it constitutes complete enumeration and therefore sampling will not

    be utilised in this study. The research will be conducted as a sensus of expert

    informants who are involved with maintenance inventory.

    3.2.4 Research Instruments

    Behavioural science is known to make use of surveys to obtain large amounts of

    information. Surveys take the form of carefully constructed questions that give

    recognition to attitudes, opinions and characteristics of a particular group.

    Questionnaires provides a method of collecting data by (1) asking people

    questions, or (2) asking them to agree or disagree with statements representing

    different points of view (Babbie & Mouton, 2010:265). According to Zikmund

    (2003), a questionnaire is one type of instrument that can be used to provide

    answers to the research questions, but a survey is only as good as the

    questions asked. Zikmund (2003) distinguishes between open-ended responses

    and fixed-alternative questions. Open - ended questions probe for more

    information and allow the respondents to answer in their own words. Fixed

    alternative questions give the respondents more than one limited response and

    allow them to select the most appropriate response.

    According to Zikmund (2003), there are some advantages and disadvantages to

    open ended responses and fixed alternative questions. Open - ended response

    questions are more expensive to administer than fixed alternative questions and

    the interviewer may influence the responses to open - ended questions.

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    The survey used for this study needs to provide valuable information to be used

    in the exploratory research phase. Therefore, the questionnaire consists of a

    combination of open - ended and fixed alternative questions. The responses

    have been categorised as restricted and rated to gather the information required

    to answer the research questions and to provide answers in respect of the

    objectives of the study. The questionnaire was designed based on a literature

    review and a case study of AfriSam to gain a good knowledge base of the

    possible supply chain management and inventory management principles that

    may be implemented to minimise maintenance inventory without increasing

    business risk.

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    3.2.5 Data Analysis

    Content analysis is a social research method appropriate for studying human

    communications. (Babbie & Mouton, 2010:404). In order to further analyse thequantifiable raw data, data categories will be designed in order to facilitate

    univariate and multivariate analysis to measure the aspects of frequency count,

    data distribution and central tendency.

    The data was coded into language a computer can understand for statistical

    analysis. In order to do this, code categories derived from the research purpose

    were developed. These codes represented attributes composing variables,

    which, in turn, were assigned card and column locations within a data file.

    (Babbie & Mouton, 2010:414).

    The coded numerical data facilitated the analysis of the data in to quantifiable

    raw data, and it also makes calculations easier which in turn can then be

    transformed into descriptive statistics. The data is transferred to a sheet after

    which possible code cleaning takes place in order to ensure that only codes

    assigned to particular attributes possible codes appear in the data files

    (Babbie & Mouton, (2010).

    Descriptive statistics involves the basic conversion of data in a way that

    describes the basic features such as variability, central tendency and

    distribution (Zikmund et al., 2010). Since the population researched were so

    small it was decided that descriptive analysis of the data will provide better

    results that are presented in chapter 4.

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    3.2.6 Validity and Reliability

    Validity refers to the extent to which a measurement instrument provides data

    that relates to commonly accepted meanings of a particular concept (Babbie &

    Mouton, 2010).

    If it does not measure what it is supposed to measure there is a problem

    (Zikmund, 2003). Reliability refers to the likelihood of the same test returning the

    same results. It is the intention of the researcher to ensure that the recorded

    and observed data conforms to these measures, in order to ensure credible

    analysis results.

    There are various validity measures that aim to ensure the intended measure

    equals the achieved measure. These measures include face validity, construct

    validity and content validity. Reliability refers to the likelihood that a given

    measurement procedure will provide the same description of a given

    phenomenon when the measurement is repeated (Babbie & Mouton, (2010)

    3.2.7 Ethical Considerations

    Apart from the technical and scientific considerations, social research projects

    will also be shaped by practical, ethical and political considerations (Babbie &

    Mouton, 2010). According to Babbie and Mouton. (2010) the following are key

    ethical considerations of social research:

    Respondents must participate on a voluntary basis. The anonymity of the respondents must be ensured at all times.

    The researcher must maintain high levels of information confidentiality.

    It is important to make it clear to all participants in the research that participation

    is voluntary and that they will not be harmed in any way.

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    The researcher has also been requested by the organisation that all information

    will be treated as confidential. Confidentiality refers to the situation in which

    even the researcher although knowing which data describes which subjects

    agrees to keep the information confidential (Babbie & Mouton., 2010:546).

    3.2.8 Limitations of the study

    The fact that the study only included AfriSam excludes other cement

    manufacturers and could be construed as a limitation of this study.

    Once the research proves that these methods are possible, the research maybe expanded to include other cement manufacturers, and therefore lead to a

    possible cooperative agreement between cement manufacturers and

    collaboration with its suppliers.

    The results of the study has shown that there are methods available to optimise

    maintenance inventory and it has the potential to decrease maintenance

    inventory holding, without increasing the business risk of potential unavailability

    of critical maintenance inventory. The limitation of the study will not have any

    adverse effect on the validity of the study, neither on the reliability of the study

    since the study can be repeated on other cement manufacturers.

    The only limitation is that the other manufacturers would not be willing to

    participate in research of this nature due to confidentiality. This limitation may be

    overcome by expanding the research to include the minority shareholder of

    AfriSam, Holcim Ltd, that has an international cement footprint.

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    3.3 CONCLUSION

    The main aim of this chapter was to explain the research methodology. The

    objectives of the study were formulated and identified, the population, sampleand sample design, method of collecting the data were discussed and

    furthermore light was shed on the statistical method that will be used to analyse

    the data. The next chapter will therefore look at the discussion of the results.

    Should the research be conducted within the above scope and with the aid of

    the planned methodology, it will result in findings that may have an impact on

    the management and organisation of maintenance inventory within AfriSam

    South Africa (Pty) Ltd.

    The results obtained from this research should provide the researcher and the

    organisations researched with answers to the research questions and also

    satisfy the objectives of the intended research.

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    4 CHAPTER FOUR: PRESENTATION OF RESULTS

    4.1 INTRODUCTIONThis section presents the results of the survey which focused on the research

    questions (See Section 2.9.).

    Since the population consisted of the five cement plants of AfriSam South Africa

    (Pty) Ltd. that operate and ma