eloff, m.com, 2012
TRANSCRIPT
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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