Ordering and inventory control at ARPS

Abstract

Abstract
Title Ordering and inventory control of raw materials at AR Packaging Systems

Authors Hedda Trönnberg and Hedvig Orvenholt

Supervisors Ph.D. Jan Olhager, Lund University, Faculty of Engineering, Department of
Industrial Management and Logistics
Max Ivarsson, Supply Chain Specialist, AR Packaging Systems AB

Examiner Ph.D. Louise Bildsten, Lund University, Faculty of Engineering, Department of Industrial Management and Logistics

Background AR Packaging Systems in Lund (ARPS) is relocating to smaller premises and the
substantial decrease of available storage space will require sufficient inventory
control. As ARPS wishes to maintain low procurement costs as well as reaching
a service level at 99% towards their customers, there is a need to formulate an
efficient strategy applicable for this specific case.

Purpose The goal with this master thesis is to develop and formulate a strategy for cost
optimal ordering and inventory control regarding raw materials from AR Packaging Flexibles to ARPS’ production.

Methodology This master thesis has been conducted with an abductive approach, where
gathering of quantitative and qualitative data has been iterated. This confirms
valid, reliable and objective results. Using triangulation, Fisher’s model for
conducting empirical research has been used as a framework for developing an
optimal solution from case studies to be used in practice.

Result Demand for all raw materials was modeled and showed a great variety in pattern.
It was found that all raw materials but three have a large coefficient of variance and relatively low demand. Three different
propositions were developed regarding a strategy for how ARPS should tackle these large demand variations considering future
space restrictions.

Conclusion The authors recommend for ARPS to classify products according to coefficient of
variance, where no stock should be kept for customers with a value larger than 1. Further, the solution should be tested and
implemented under current basis in order to avoid any unexpected operational challenges.

Abstract (Swedish)

Sammanfattning
Titel Beställning och lagerstyrning av råvaror hos AR Packaging Systems

Författare Hedda Trönnberg och Hedvig Orvenholt

Handledare Ph.D. Jan Olhager, Lunds Tekniska Högskola, avdelningen för Teknisk Logistik
Max Ivarsson, Supply Chain Specialist, AR Packaging Systems AB

Examinator Ph.D. Louise Bildsten, Lunds Tekniska Högskola, avdelningen för Teknisk
Logistik

Bakgrund AR Packaging Systems i Lund (ARPS) ska flytta till mindre lokaler vilket ger en efterfrågan av effektiv lagerstyrning för
råmaterial orsakat av ett mindre lagringsutrymme. Då ARPS vill hålla låga inköpskostnader samt nå en servicenivå på 99%
gentemot sina kunder finns det ett behov av att formulera en effektiv strategi som är applicerbar för detta specifika syfte.

Syfte Målet med detta examensarbete är att utveckla och formulera en strategi för
kostnadsoptimal beställning och materialstyrning av råmaterial från AR
Packaging Flexibles till ARPS produktion.

Metod Detta examensarbete har genomförts med en abduktiv metod, där insamling av
kvantitativa och kvalitativa data har varit iterativ. Detta ger giltiga, pålitliga och
objektiva resultat. Med hjälp av triangulering har Fisher’s modell för att
genomföra empirisk forskning använts som ett ramverk för att utveckla en
optimal lösning från fallstudier till att användas i praktiken.

Resultat Efterfrågan för alla råvaror modellerades vilken visade på stor efterfrågevariation.
Det konstaterades att alla råvaror förutom tre har både stor variationskoefficient och relativt låg efterfrågan. Tre olika
lösningar utvecklades beträffande hur framtida strategi för ARPS bör hantera dessa stora efterfrågevariationer med åtanke
till begränsningar i lageryta.

Slutsats Författarna rekommenderar ARPS att klassificera produkter enligt
variationskoefficienten, där inget lager bör hållas för kunder med en koefficient större än 1. Vidare bör lösningen testas
och implementeras under nuvarande bas för att undvika oväntade operativa utmaningar.

Popular Abstract

The two-faced reality
A study of how to manage the conflict of interest between supply chain actors

This master thesis was born out of an industry-wide problem that many supply chain practitioners are familiar with. This problem inflicts the performance of supply chain operations more often than seldom, and therefore often reminds itself of its presence. A dilemma that arises from the impossibilities of reaching complete satisfaction for all actors in a partnership. That due to the remains of units operating with misaligned incentives, and the difficulty of seeing the supply chain as a whole, rather than individual business units. Many companies can face an almost impossible situation, being stuck between two counterparts with different preferences or even business objectives, which is also highlighted in chosen theory. This study applies for the company AR Packaging Systems, later referred to as ARPS. It focuses on how to manage the balance between serving customers when demand is random at a satisfactory level while dealing with constraints in terms of limited storage space. Additionally, it addresses the trade-off between wishing to achieve quantity discounts from supplier when there exists a space cap.

Historically, storage features have made it possible for ARPS to fulfill wishes from both customer and supplier. They have accepted ad hoc orders as well as retrieved non-scheduled deliveries. This, as their storage capacity has enabled accommodation of a very large volume of goods. Thus, little to no regard has been taken to order frequencies or sizes. Neither from their customers, nor the sizes of deliveries from their supplier, Flexibles. This approach has resulted in keeping large volumes inhouse, which inevitably drives up inventory tied-up costs. This aspect has up until now been disregarded, and preventative actions have been absent. Continuing with this approach is no longer possible, since ARPS are relocating to new premises with strict limitations on storage space that cannot be stretched. If ARPS were to continue the similar way as before, it would be unrealistic to overcome this conflict of interest. Therefore, it is rather a necessity for the involved parties to start compromising on expectations, especially after the relocation has been finalized. In other words, new prerequisites impact the direction of possible future partnerships and practices. Therefore, in order for this move to be possible, some agreements in ARPS’ current collaborations will need to be scaled down. Thus, a guiding tool was initiated in order to differentiate between customers and products, the so-called coefficient of variance. This coefficient figured as reference while formulating separate strategies, suitable for different scenarios with different demand patterns. So, to better comply with the needs and wishes from ARPS, they were given three alternatives. The first alternative was to give ARPS an opportunity to continue storing all raw materials, provided that their customers start to order more frequently, thus lowering the coefficient of variance. This would regulate the batch sizes and govern against uncertain order volumes. The second alternative was to give ARPS a chance to proceed as before, meaning to keep all raw materials in stock and let their customers maintain their normal order routines. This would create a need for external storage and unluckily, impact the cash flow. A question that consequently arises from this suggestion; are the customers willing to pay this fee or should ARPS be responsible for the additional cost? Last but not least, the third alternative was to focus on the raw materials that account for a majority of the produced volume and sales, and with a coefficient of variance lower than one. The authors recommended ARPS to proceed with this alternative. Moreover, such a strategy would be aligned with relevant theory and conducted case studies.

Intuitively, one might believe that orders should be adjusted according to volume discounts, but as for the case of ARPS, no benefits are discovered due to limited space and the trade-off considering holding costs. It is thus recommended for ARPS to order according to what fits their premises, with the frequency and size that optimizes their production. Finally, this thesis emphasizes the fact that one cannot always satisfy all parties in a supply chain. And thus, the dilemma of the two-faced reality remains.

• author: Orvenholt, Hedvig and Trönnberg, Hedda
• supervisor: Jan Olhager
• organization: Engineering Logistics; Department of Industrial Management and Logistics
• course: MTTM05 20201
• year: 2020
• type: H2 - Master's Degree (Two Years)
• subject: Technology and Engineering
• keywords: Inventory control, order planning, production planning, cost-optimal, cost efficiency, quantity discounts, storage limitation
• report number: 5923
• language: English
• id: 9017001
• date added to LUP: 2020-06-17 13:57:45
• date last changed: 2020-06-25 15:49:07