Inventory Management System of “Quasem Dry Cells Ltd”

The “Quasem Dry cells Ltd” is an old and premier manufacturing company of Bangladesh. The factory of the company is situated in Tangail district. The company mainly produced various types of batteries. The demand of the product of the company is high. So, the company has to follow a proper inventory management system. The company follows “Safety Stock” inventory management system.

Safety stock system helps the company to fulfill its market demand. For instance, the demand of inventory is likely to fluctuate from time to time. In particular, at certain points of time the demand may exceed the anticipated level. In other words, a discrepancy between the assumed and actual usage rate of inventory is likely to occur in practice. Similarly, the receipt of inventory from the suppliers may be delayed beyond the expected lead-time. The delay may arise from strikes, floods, transportation and other bottlenecks. Thus, a firm would come across situations in which the actual usage of inventory is higher than the anticipated level and / or the delivery of the inventory from the suppliers is delayed.

The effect of increased and / or slower delivery would be a shortage of inventory. That is, the firm would face a stock-out situation. This, in true, as explained in detail below, would disrupt the production schedule and alienate the customers. The company would, therefore, be well advised to keep a sufficient safety margin by having additional inventory to guard against stock-out situation. Such stocks are called “ Safety Stock”. This would act as a buffer or cushion against a possible shortage of inventory caused either by increased usage or delayed delivery of inventory. The safety stock may, then, be defined as the minimum additional inventory to serve as a safety margin or buffer or cushion to meet an unanticipated increase in usage resulting from an unusually high demand and or an uncontrollable late receipt of incoming inventory.


The implementation process of “Safety-Stock”

The financial manager has the responsibility to implement the “safety-stock” system. The safety stock involves two types of costs: (1) stock-out, and (2) carrying costs. The job of the financial manager of the company is to determine the appropriate level of safety stock on the basis of a trade-off between these two types of conflicting costs.

The term stock-out costs refer to the cost associated with the shortage of inventory. It is, in fact, an opportunity cost in the sense that due to the shortage of inventory the firm would be deprived of certain benefits. The denial of those benefits, which would otherwise be available to the company, is the stock-out costs. The first, and the most obvious, of these cost is the loss of profit, which the company could have earned from increased sales if there was no shortage of inventory. Another category of stock-out costs is the damage to the relationship with the customers. Owing to shortage of inventory, the company would not be able to meet the customer’s requirements and the latter may turn to the company’s competitors. It should, of course, be clearly understood that this type of cost couldn’t be easily and precisely quantified. Last, the shortage of inventory may disrupt the production schedule of the company. The production process would grind to a half involving idle time.

The carrying costs are the costs associated with the maintenance of inventory. Since the company is required to maintain additional inventory, in excess of the normal usage, additional carrying costs are involved.

The stock-out and the carrying costs are counterbalancing. The larger the safety stock, the larger would be the carrying costs and vise versa. Conversely, the large is the safety stock; the smaller would be the stock-out costs. In other words, if the firm minimizes the carrying costs, the stock-out costs are likely to rise; on the other hand, an attempt to minimize the stock-out costs implies increased carrying costs. The objective of the financial manager should be to have the lower total cost. The safety stock with the minimum carrying and stock-out costs is the economic level which financial manager should aim at. In brief, the appropriate level of safety stock is determined by the trade-off between the stock-out and the carrying costs.


Conclusion

The “Quasem Dry Cells Ltd” is a manufacturing company. For this reason the company has to maintain a proper inventory management system for its profit. We found that the company has implemented “safety-stock” inventory management system. In this inventory management system the financial manager is the key person to conduct. We also found that the company has become profitable by this “safety-stock” inventory management system.

Reference:
1. M Y Khan &P K Jain, Financial Management Page 20.1 to 20.20
2. Mats & Usury, Cost & Management Accounting.
3. Block & Heart, Financial Management.
4. Annual report of Quasem Dry Cells Ltd.
5. www.quasemdrycells.com