Degree

Master of Business Administration Executive

Faculty / School

Faculty of Business Administration (FBA)

Year of Award

2024

Advisor/Supervisor

Dr. Rameez Khalid, Associate Professor, Department of Management

Project Type

MBA Executive Research Project

Access Type

Restricted Access

Executive Summary

This research project explores the prevailing techniques to determine safety stock levels, the effectiveness of these techniques, and the costs associated with inaccurate estimation of safety stock in Pakistani process industries. Another objective was to understand if there was any difference in the ways safety stock was managed for different types of inventories with special consideration to the aspects of obsolescence and perishability.

The research is exploratory research in nature. We used convenience sampling and snowball sampling techniques, to conduct detailed, semi-structured interview was selected as method for data collection. Inventory managers from six different companies, belonging to the sectors of petrochemical, steel, chemical, fertilizer and food under process industries, were interviewed for insights into different aspects of safety stock management. Two of these companies belonged to the chemical sector. A total of 18 interviews were conducted, that is, three each from six companies.

We found that basic framework and awareness on safety stock is in place in Pakistani process industries but overall, the safety stock management has low maturity. Use of complex methodology using statistical methods and modelling for estimation of safety stock are nonexistent in the process industries studied; rather it is mostly based on experience, or on a thumb rule using simple calculations for safety stock cover. Key performance indicators (KPIs) were only defined in some organizations, which indicates that there is significant room for improvement towards making safety stock management more effective through proper monitoring and formal reporting. The software under use for inventory management are one of best available tools globally for the purpose. However, their full potential is under-utilized. Firms prefer to combat uncertainties by keeping a higher level of safety stock. Focus on long term mitigation plans or strategies for building resilience uncertainties were observed to be missing.

Stock-outs are highly undesirable in organizations studied due to their serious repercussions for process industries. Multiple external factors like supply chain disruptions caused by geo-political tensions, volatile exchange rate, many raw materials and equipment spares being imported, global inflation and import restrictions set by regulatory bodies due to low foreign exchange reserves held in the country make these organizations extremely vulnerable. All these factors, in view of our respondents, justify carrying higher safety stock quantities to keep the manufacturing from stalling. On the other hand, most of these organizations are also focused on minimizing all types of losses, but it was not seen to be ix translating into efforts for optimizing safety stock levels through using advanced techniques for safety stock management. There is more focus on ensuring continuity of operations by carrying higher safety stock than on cost optimization. One major reason for this is the fact that the cost of stock-out significantly outweighs the cost of carrying more than necessary inventory, therefore, there is generally an inclination towards a safer approach. Prevalence of just-in-time (JIT) stock replenishment is also very limited.

Five out of six companies studied used different techniques for estimation and management of safety stock for raw materials (RM), finished goods (FG) and maintenance, repair and operations (MRO) spares, primarily due to different nature of each type with regards to demand variability, obsolescence, perishability and number of stocks keeping units (SKUs).

MRO Spares management was found to be the most complex. Major reasons of the complexity of MRO spares management are a large number of SKUs and vendors, intermittent demand patterns making it difficult to predict stock levels, factors such as machinery condition, maintenance schedules, individual machine behavior and history, and categories such as insurance and warranty spares.

FG inventory management was the least complex with 3 out of 6 companies not requiring a safety stock strategy. 4 out of 6 companies were already running their plants at maximum rates to meet demand, and all product that is made gets sold rendering the FG inventory management only per functionary. Apart from fairly constant production rates, one company had the advantage of excess stock in their distribution channel and so a stock out at company level did not have any major implications.

RM inventory management had intermediate complexity. While import and associated complexities make inventory management more challenging, the effect was mitigated by constant RM demand due to fairly constant plant rates.

This complexity of MRO Spares inventory management was observed to be translating into more stringent methods for inventory management. A greater incidence of categorizations such as ABC, VEN and FSN analysis was observed. A more evolved safety stock determination strategy using a combination of thumb rule and experience was also unique to MRO Spares inventories in the companies studied. Compared to FG and RM, more than double the number of controls were in place for MRO Spares to prevent expiration, obsolescence and redundancy.

The most common disposal method for MRO Spares was auctioning in lots to vendors or selling as scrap. Special disposal methods such as burial, incineration, treatment and x drainage were being used for RM and FG inventories. FG inventories had an additional strategy of selling off material with cosmetic issues at a discount.

The issue of immaturity in safety stock management is a larger problem of immaturity of overall supply chain management in Pakistani process industries. The problem needs to be looked at holistically. The inventory managers did have ideas for improvement, but supply chain management being heavily integrated and dependent on other functions requires, require a more integrated and systematic approach for problem solving. It is recommended to drive change management through excellence mindset by leveraging WCM methodologies. Leadership commitment is key to such an effort. A typical improvement roadmap would involve benchmarking, analysis, defining milestones and steps, and executing and monitoring the change process.

Pages

x, 154

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