Development of an inventory policy based on EOQ model in a dyeing unit a case study

Abstract

Many firms/industries, whether manufacturing or purchasing, face great challenges in managing inventories. Poor inventory management may result in under-stocking, over-stocking as well as high inventory total cost. The study examines inventory situation at Dyeing unit of Reedisha Knittex Ltd. Gazipur, Bangladesh. For Reedisha two inventory problems, stock-out and overstock occur frequently. The company wants to improve its efficiency and is considering a change in the inventory management. The objectives of this thesis work is to develop inventory management system of Dyeing section by using Economic Order Quantity (EOQ) model that will determine number of units of an item to order at a time and the re-order point (r), that is the level to which stocks of items are allowed to fall before ordering other items, for raw materials. The resulting EOQ for each raw material is compared to the actual ordered quantities so as to see whether there is any relationship between them in operational cost reduction. For variable demand over the period Wagner-Whitin Algorithm is used to determine ordering schedule of the items. By comparing ordering cost and holding cost for each item it is determined when to order and how much to order at a time. The study used cross sectional secondary data from Reedisha Knitex. Excel was used to find EOQ and the re-order point. After doing analysis and calculation of the data, it was concluded that the ordered quantities at Reedisha Knitex Ltd. were not optimal. Therefore, it is recommended that in order to manage inventory effectively, Reedisha needs to employ inventory control methods such as the EOQ model to obtain reasonable ordered quantities for its raw materials.