RESEARCH PROJECT:

INVENTORY MODEL FOR A RETAIL

TRADING STORE

Done by
FORTUNE MUSHONGA P0113892H
Applied Mathematics Department











Abstract
Medicinal drugs have and always will be a necessity for most if not all entities of
this world. The demand for medicinal drugs has always been high and it has
maintained its status regardless of the economic challenges that Zimbabwe has
been facing. A private owned pharmaceutical company in Zimbabwe that
supplies medicinal drugs to Bulawayo citizens. The company operates under
one management, and has been struggling to meet this demand thereby resulting
in a lot of shortages.

The EOQ model was used in this project to help in the solving such shortages. It
was discovered that the procurement manager was not keeping track of the
pharmacys inventory to make sure he orders in time before the medicinal drugs
actually run out hence making it impossible to meet demand. It was also
discovered that the company was sometimes ordering more than enough
medicinal drugs in anticipation of a high demand, thereby losing a lot of money
in storage fees and transportation charges. The procurement manager was
sometimes ordering less medicinal drugs which were not sufficient to cater for
the demand of the product.

From calculations of the EOQ model, results were established to give the
procurement manager a guideline of how to manage the companys inventory.
The results gave the amount of medication that is supposed to be ordered each
time and the level of medication that is supposed to trigger a new order (reorder
point). A conclusion was made that the model would work for this
pharmaceutical company and recommendations were made on how to implement
the results of the EOQ model.







Acknowledgements
Special thanks Arms Trading Store, Meluleki Sihwede for allowing me to do a
research of the companys products. Great thanks also go to the Records and
Archives Manager Miss Florence Kupeta. Special thanks also go to the staff of
R.J Pharmacy in the Bulawayo, for providing the information necessary for my
project.

I would also like to thank my family members and fellow classmates, for their
help and support during the research process and also for giving me ideas on
how best to present my project. Thanks also goes to my lecturer Mr. P.
Nyamugure for his tireless efforts in teaching the concepts that were required to
be able to come up with this project, his efforts are greatly appreciated. Also I
greatly appreciate Mr. Jason for assisting me in presenting this project.

A last but not least thanks goes to the Lord Almighty for his guidance and
protection throughout the course of my study of the project.














of units that a company should add to inventory with each order to minimize
the total costs of inventorysuch as holding costs, order costs, and shortage
costs. The EOQ is used as part of a continuous review inventory system, in
which the level of inventory is monitored at all times, and a fixed quantity is
ordered each time the inventory level reaches a specific reorder point. The
EOQ provides a model for calculating the appropriate reorder point and the
optimal reorder quantity to ensure the instantaneous replenishment of
inventory with no shortages. It can be a valuable tool for small business
owners like pharmacies who need to make decisions about how much
inventory to keep on hand, how many items to order each time, and how
often to reorder to incur the lowest possible costs.
The EOQ model assumes that demand is constant, and that inventory is depleted
at a fixed rate until it reaches zero. At that point, a specific number of items
arrive to return the inventory to its beginning level. Since the model assumes
instantaneous replenishment, there are no inventory shortages or associated
costs. Therefore, the cost of inventory under the EOQ model involves a tradeoff
between inventory holding costs (the cost of storage, as well as the cost of tying
up capital in inventory rather than investing it or using it for other purposes) and
order costs (any fees associated with placing orders, such as delivery charges).
Ordering a large amount at one time will increase a small business's holding
costs, while making more frequent orders of fewer items will reduce holding
costs but increase order costs. The EOQ model finds the quantity that minimizes
the sum of these costs.
In business management, holding cost is money spent to keep and maintain a
stock of goods in storage.




The most obvious holding costs include rent for the required space; equipment,
materials, and labor to operate the space; insurance; security; interest on money
invested in the inventory and space, and other direct expenses. Some stored
goods become obsolete before they are sold, reducing their contribution to
revenue while having no effect on their holding cost. Some goods are damaged
by handling, weather, or other mechanisms. Some goods are lost through
mishandling, poor record keeping, or theft.
Holding cost also includes the opportunity cost of reduced responsiveness to
customers' changing requirements, slowed introduction of improved items, and
the inventory's value and direct expenses, since that money could be used for
other purposes.


Ordering costs include all the costs incurred while placing an order and receiving
the order, it does not include the actual cost of the goods. These costs include
cost of preparing the order or the invoice, the stationery used, salary of the
clerks, telephone costs etc. There is a cost involved in placing each order so
firms try to avoid ordering for items individually so what they do is that they
place the combined order for many items in one order to reduce the costs. Each
order has a fixed costs associated with it and it is independent of the number of
items in the order. If the ordering cost is C, the total demand or the number of
units required is D and the number of items in an order is Q then:
Total Ordering cost = C D/Q











3. Methodology
Many companies in the world have experienced shortages in the products they
supply due to poor management of inventories. Other companies have suffered
losses due to large unnecessary inventories which are also due to poor
management of inventories. The application of operations research techniques in
the area of inventory management has helped the business world to gain a
competitive edge in the market.

Inventory management involves:
1. Formulating a mathematical model describing behaviour of the inventory
system
2. Seeking an optimal inventory policy with respect to the model.
3. Use a computerised information processing system to maintain a record of
the current inventory levels
4. Using this record of current inventory levels, apply the optimal inventory
policy to signal when and how much to replenish inventory.

Economic order quantity (EOQ) Model is the level of inventory that
minimizes the total inventory holding costs and ordering costs. EOQ determines
the point at which the combination of order costs and inventory carrying costs
are the least. The result is the most cost effective quantity to order. In




purchasing this is known as the order quantity, in manufacturing it is known as
the production lot size. The EOQ model is applicable where you have repetitive
purchasing or planning of an item, demand for a product is constant over the
year and each new order is delivered in full at one time when the inventory
reaches zero.

The model to be used in this particular project is called The Economic Order
Quantity Model (EOQ). The objectives of this model are to determine:
a) How much to order when the level of inventory drops
b) When to order to avoid shortages

The EOQ involves a continuous review of the following attributes:
1. Demand- This is described as the number of units that will need to be
withdrawn from inventory for some use ( e.g. Sales) during a specific
period
2. Cost of Ordering- this is the cost of ordering a given product, the cost
comprises of transportation costs incurred per order. This cost is
regarded constant regardless of the order quantity.
3. Holding Cost- this figure represents all the costs associated with the
storage of the inventory until it is sold.
This project will be dwelling on all the attributes of the EOQ model to help R.J
Pharmacy determine how much to order to minimise its inventory costs and to
determine the reorder points to avoid shortages.
1. Formulas
i. Determining how much to order when inventory level drops at the
same time minimising the total inventory costs




I =annual holding cost rate
C = unit cost of inventory item
C
h
= annual cost of holding one unit in inventory
Ch=I * C
Q= order quantity
D= Demand (constant)
Co= cost of placing one order (constant)
Annual Holding Cost= Q*Ch




Annual Ordering Cost= (D/Q) Co
Total cost= QCh + (D/Q) Co

Q
*
= Amount to order to minimize costs


ii. Determining reorder points to avoid shortages
r = reorder point d= daily demand m= lead time (Time
between inception of order and delivery)
r=d *m


















Q
*
=
2DC
o /C h





4. Data collection

Choice of data to be collected
The main problem here is to determine the demand for different medicinal drugs
namely Antiretroviral (ARVs), Paracetamol, Antibiotics and the amount of
inventory required at the pharmacy in order to meet the established demand.

Therefore the following data is to be collected:
a) Financial accounts are prepared to acquire the opening stock, closing stock,
and the damaged stock which cannot be resold or which can be sold at half
the price of the medicinal drugs.
b) Prescription forms that are used by the customers to buy some medication
c) Receipts of purchase of the medicinal drugs from various warehouses namely
Datlabs, Pharmanova and Varichem
d) Sales of the paracetamol, antibiotics and ARV medication.

















Data Analysis




RETAIL
PRODUCTS


COSTS (US$) Salt Dlite Baby
Cereal
Diapers

Purchase cost 0.20

7.00 0.16
Transportation cost 0.05

1.20 0.01
Total/Ordering cost 0.25

8.20 0.17

The cost of each retail product is per unit sold in Arms Trading Store




































The demand for Salt, Dlite Baby Cereal and Diapers in the 1
st
quarter of the year
2013 was 2503, 1058 and 645






Calculations
Annual holding cost rate of each 1kg packet of Salt is at 10%
Annual holding cost rate of each 1kg packet of Dlite Baby Cereal is at 22%
Annual holding cost rate of each Diaper is at 8%
Unit cost per packet (C): Salt - $0.20
Dlite Baby Cereal - $7.00
Diaper - $0.16

Annual holding cost per unit cost: Ch IC
Salt: $0.20 * 0.1 =
$0.02 Dlite Baby
Cereal: $7.00 * 0.22
= $1.54
Diapers:
$0.16 * 0.08 = $0.0128

Quarter Annual demand (D)
Salt: 2503
Dlite Baby Cereal: 1058
Diapers: 645

Quarter annual Ordering cost per unit
Salt: 0.25
Dlite Baby Cereal: 8.20
Diaper: 0.17





How much to order decision

Salt:
Q


=62575
=250.14996
=250
Dlite Baby Cereal:
Q


=26720.848
=163.46513
=163
Diapers:
Q


= 41.39180
= 41




Q
*
=
2DC
o /C h





Quarter annual holding cost = Salt
QCh 0.02
= 2.5014996
= 2.50
Dlite Baby Cereal
QC
h

= 125.8681501
= 125.87
Diapers
QC
h
=
= 0.26490752
= 0.26

Annual Ordering Cost= Co
Salt

= 2.50



Dlite Baby Cereal

= 53.07

QCh





Diapers

= 2.65
Total Cost = QCh * Co
Salt
T.C = 2.50 + 2.50
= 5

Dlite Baby Cereal
T.C = 125.87 + 53.07
= 178.94
Diapers
T.C = 0.26 + 2.65
= 2.91
Determining reorder points to avoid shortages Re-order
point: r=dm
r = 1
4
annual demand * daily lead time
Salt
The lead time to order salt from Fortwell Wholesalers is 2 days were 1 day is
for placing the order and the other day for processing the order and getting it
ready for collection.
r = 2503 * (2/120)
= 42
Dlite Baby Cereal




The lead time to order antibiotics from the National Foods Harare branch which
is 4days were 1 day is for placing the order and the other 2 days for processing
the order and getting it ready for collection and the last day is for collection.
r = 1058 *(4/120)
= 35
Diapers
The lead time to order diapers from Fortwell Wholesalers is 2days were 1 day is
for placing the order and the other day for processing the order and getting it
ready for collection.
r = 645 *(2/120)
= 11
Results
From the calculations done above, the results can be shown in the following
table:
Entity

Salt Dlite Baby Cereal

Diapers
Q*

250 163 41
r 42 35 11
Total Cost

5 178.94 2.91

Q*- This is the minimum order quantity, meaning that this is the amount of
medicinal drugs per packet of 20 tablets or 50millilitres that the procurement
manager needs to order each time an order for more medicinal drugs is made in
order to minimize costs incurred by the company.
r - This is the reorder point, meaning that each time the stock levels of
medicinal drugs get to this point in the pharmacy, the pharmacist is supposed to
inform the procurement manager to start ordering more medicinal drugs.





Total Cost This is the total of those costs associated with maintaining or
carrying a given level of inventory which depend on the size of the inventory
and the costs associated with ordering the retail products.

With the results shown above it can be seen that Meluleki Sihwede is ordering
little salt than the quantity required to satisfy the demand for the salt. Also there
must be some problem with his sales person that he is not informing the him
(Meluleki Sihwede) well in time to reorder the salt when the stock levels get to
42 packets.



The same applies to Dlite Baby Cereal Meluleki has been ordering a constant
supply of 80 packets which is approximately half the required amount to cater
for the demand of 163

Meluleki is ordering too many packets of the diapers. The demand is at 41
packets yet he is ordering 150 packets each month hence creating unnecessary
holding costs of storing the unsold diaper packets


















Conclusion
The conclusion thereby stands to say that R.J Pharmacy was using a poor
inventory management system resulting in some financial losses. The
procurement manager should therefore use the results in the previous chapter to
make decisions on how much to order and when to order more medicinal drugs.

This model will ensure that the pharmacy never runs out of medicinal drugs,
meaning there will always be medicinal drugs at all times for clients who want
to purchase the different types of medicinal drugs. This will increase the
companys efficiency resulting in increased customer faith and a greater
competitive edge.

The model also ensures that the costs of storing the medicinal drugs decrease.
Hence increasing the companys profits, since the costs are reduced the amount
of revenue increases.











Recommendations
The procurement manager needs to continuously monitor the demand for
medicinal drugs because although this model is for a constant demand, it is
recommended that any changes in the demand be catered for in order to avoid
further losses. The demand is likely to increase because of the increased
customer faith resulting from better efficiency of the company, so the model
will have to be recalculated using the new figures.

The pharmacist will need to be vigilant in keeping up to date with their balances
of medicinal drugs to make sure they do not order before medicinal drugs is
needed as it may resulting in demurrage costs. Keeping up to date with their
balances of medicinal drugs will also ensure that they do not order after there is
no more medicinal drugs. They should The procurement officer will also need
to be ready at all times to order more medicinal drugs so as to minimise any
delays in delivery which may cause run outs at the stations because the lead
time will have been tempered with.

R.J Pharmacy can also invest in a medicinal drugs management system that will
manage the inventory of the company. This will help the pharmacist to keep
track of how many medicinal drugs are left and be able to keep track of the
reorder point.

A manual with the results of this project must then be drafted and released in the
procurement department and the stations so that even when new employees are




contracted by the company, they will know how to manage the inventory to
avoid losses

Appendix


Salt

Dlite
Baby
Cereal


Diapers

Date









1/1/2013 4 100 32 72 38 80 6 112 42 150 20 172
1/2/2013 72 - 36 36 112 - 8 104 172 - 5 167
1/3/2013 36 - 34 2 104 - 15 89 167 - 11 156
1/4/2013 2

2 0 89 - 11 78 156 - 8 148
1/5/2013 0 100 38 62 78 - 13 65 148 - 8 140
1/6/2013 62 - 35 27 65 - 10 55 140 - 10 130
1/7/2013 27 - 27 0 55 - 2 53 130 - 7 123
1/8/2013 0 - 0 0 53 - 2 51 123 - 9 114
1/9/2013 0 - 0 0 51 - 1 50 114 - 6 108
1/10/2013 0 100 28 72 50 - 3 47 108 - 17 91
1/11/2013 72 - 30 42 47 80 5 122 91 - 23 68
1/12/2013 42 - 25 17 122 - 10 112 68 - 5 63
1/13/2013 17 - 14 3 112 - 8 104 63 - 4 59
1/14/2013 3 - 0 3 104 - 13 101 59 - 5 54
1/15/2013 3 100 30 73 101 - 17 84 54 - 3 51
1/16/2013 73 - 21 52 84 - 20 64 51 - 6 45
1/17/2013 52 - 0 52 64 - 9 55 45 - 3 42
1/18/2013 52 - 0 52 55 - 11 44 42 - 0 42
1/19/2013 52 - 42 10 44 - 5 39 42 - 0 42
1/20/2013 10 100 33 77 39 - 4 35 42 - 0 42
1/21/2013 77 - 25 52 35 80 8 107 42 - 0 42
1/22/2013 52 - 27 25 107 - 12 105 42 - 1 41
1/23/2013 25 - 0 25 105 - 34 71 41 - 0 41
1/24/2013 25 - 15 10 71 - 3 68 41 - 0 41
1/25/2013 10 100 0 110 68 - 4 64 41 - 0 41




1/26/2013 110 - 17 93 64 - 10 54 41 - 2 39
1/27/2013 93 - 20 73 54 - 7 47 39 - 1 38
1/28/2013 73 - 29 44 47 - 9 38 38 - 1 37
1/29/2013 44 - 36 8 38 - 0 38 37 - 0 37
1/30/2013 8 100 34 74 38 - 5 33 37 - 0 37
1/31/2013 74 - 30 44 33 80 7 106 37 - 1 36
2/1/2013 44 - 26 18 106 - 5 101 36 150 25 186
2/2/2013 18 - 0 18 101 - 9 92 186 - 21 165
2/3/2013 18 100 20 98 92 - 7 85 165 - 18 147
2/4/2013 98 - 18 80 85 - 5 80 147 - 11 136
2/5/2013 80 - 26 54 80 - 10 70 136 - 4 132
2/6/2013 54 - 34 20 70 - 10 60 132 - 6 126
2/7/2013 20 - 17 3 60 - 4 56 126 - 7 119
2/8/2013 3 100 20 83 56 - 5 51 119 - 17 102
2/9/2013 83 - 23 60 51 - 9 42 102 - 15 87
2/10/2013 60 - 24 36 42 - 11 31 87 - 10 77
2/11/2013 36 - 20 16 31 80 11 110 77 - 8 69
2/12/2013 16 - 11 5 110 - 8 102 69 - 7 62
2/13/2013 5 100 15 90 102 - 9 93 62 - 3 59
2/14/2013 90 - 20 70 93 - 7 86 59 - 2 57
2/15/2013 70 - 25 45 86 - 6 80 57 - 3 54
2/16/2013 45 - 23 22 80 - 5 75 54 - 1 53
2/17/2013 22 - 22 0 75 - 10 65 53 - 1 52
2/18/2013 0 100 20 80 65 - 8 57 52 - 2 50
2/19/2013 80 - 24 56 57 - 7 50 50 - 1 49
2/20/2013 56 - 22 34 50 - 5 45 49 - 3 46
2/21/2013 34 - 17 17 45 80 6 119 46 - 1 45
2/22/2013 17 - 17 0 119 - 16 113 45 - 0 45
2/23/2013 0 100 19 81 113 - 7 106 45 - 1 44
2/24/2013 81 - 21 60 106 - 9 97 44 - 3 41
2/25/2013 60 - 20 40 97 - 10 87 41 - 1 40
2/26/2013 40 - 17 23 87 - 15 72 40 - 4 36
2/27/2013 23 - 15 8 72 - 3 69 36 - 0 36
2/28/2013 8 100 18 90 69 - 7 62 36 150 30 156
3/1/2013 90 - 20 70 62 - 7 55 156 - 25 131
3/2/2013 70 - 23 47 55 - 15 40 131 - 33 98
3/3/2013 47

37 10 40 - 20 20 98 - 17 81
3/4/2013 10 100 26 84 20 80 22 78 81 - 29 52
3/5/2013 84 - 24 60 78 - 12 66 52 - 10 42
3/6/2013 60 - 21 39 66 - 14 62 42 - 7 35
3/7/2013 39 - 16 23 62 - 8 54 35 - 5 30
3/8/2013 23 - 13 10 54 - 11 43 30 - 0 30




3/9/2013 10 100 10 100 43 - 9 34 30 - 0 30
3/10/2013 100 - 12 88 34 - 7 27 30 - 0 30
3/11/2013 88 - 14 74 27 - 5 22 30 - 0 30
3/12/2013 74 - 19 55 22 - 6 16 30 - 0 30
3/13/2013 55 - 29 26 16 - 0 16 30 - 0 30
3/14/2013 26 100 26 100 16 80 7 89 30 - 0 30
3/15/2013 100 - 21 79 89 - 9 80 30 - 1 29
3/16/2013 79 - 23 56 80 - 5 75 29 - 0 29
3/17/2013 56 - 20 36 75 - 6 69 29 - 0 29
3/18/2013 36 - 17 19 69 - 7 62 29 - 2 27
3/19/2013 19 100 21 98 62 - 5 57 27 - 0 27
3/20/2013 98 - 23 75 57 - 5 52 27 - 0 27
3/21/2013 75 - 25 50 52 - 6 46 27 - 0 27
3/22/2013 50 - 22 28 46 - 4 42 27 - 0 27
3/23/2013 28 - 17 11 42 - 5 37 27 - 0 27
3/24/2013 11 100 15 95 37 80 0 117 27 - 0 27
3/25/2013 95 - 17 78 117 - 7 110 27 - 0 27
3/26/2013 78 - 20 58 110 - 3 107 27 - 0 27
3/27/2013 58 - 21 37 107 - 4 103 27 - 0 27
3/28/2013 37 - 28 9 103 - 5 98 27 - 0 27
3/29/2013 9 100 25 84 98 - 7 91 27 - 0 27
3/30/2013 84 - 30 54 91 - 4 87 27 150 23 154
3/31/2013 54 - 23 31 87 - 5 82 154 - 30 124
4/1/2013 31 - 24 7 82 - 3 79 124 - 34 90
4/2/2013 7 100 21 86 79 - 5 74 90 - 11 79
4/3/2013 86 - 23 63 74 80 10 144 79 - 13 66
4/4/2013 63 - 26 37 144 - 10 134 66 - 6 60
4/5/2013 37 - 22 15 134 - 7 127 60 - 3 57
4/6/2013 15 - 15 0 127 - 5 122 57 - 1 56
4/7/2013 0 100 20 80 122 - 8 114 56 - 2 54
4/8/2013 80 - 17 63 114 - 5 109 54 - 1 53
4/9/2013 63 - 21 42 109 - 4 105 53 - 0 53
4/10/2013 42 - 17 25 105 - 7 98 53 - 0 53
4/11/2013 25 - 19 6 98 - 6 92 53 - 2 51
4/12/2013 6 100 21 85 92 - 12 80 51 - 0 51
4/13/2013 85 - 22 63 80 - 14 66 51 - 0 51
4/14/2013 63 - 21 42 66 80 10 136 51 - 0 51
4/15/2013 42 - 20 22 136 - 14 132 51 - 1 50
4/16/2013 22 - 17 5 132 - 6 126 50 - 3 47
4/17/2013 5 100 15 90 126 - 8 118 47 - 4 42
4/18/2013 90 - 18 72 118 - 7 111 42 - 3 39
4/19/2013 72 - 20 52 111 - 20 91 39 - 2 37




4/20/2013 52 - 19 33 91 - 25 66 37 - 1 36
4/21/2013 33 - 26 7 66 - 32 34 36 - 4 32
4/22/2013 7 100 34 73 34 - 30 4 32 - 1 31
4/23/2013 73 - 30 43 4 - 4 0 31 - 0 31
4/24/2013 43 - 33 10 0 80 28 52 31 - 2 29
4/25/2013 10 - 10 0 52 - 34 18 29 - 3 26
4/26/2013 0 - 0 0 18 - 18 0 26 - 1 25
4/27/2013 0 100 36 64 0 - 0 0 25 - 1 24
4/28/2013 64 - 38 26 0 - 0 0 24 - 1 23
4/29/2013 26 - 26 0 0 - 0 0 23 - 1 22
4/30/2013 0 - 0 0 0 - 0 0 22 150 1 172




References
David Piasecki, Inventory Management Explained, March 2009
James H. Greene, American Production and Inventory Control Society,
Production and Inventory Control Handbook, McGraw-Hill, January 1996
Richard J, Tersine, Principles of Inventory and Materials Management, PTR
Prentice Hall, August 1993