MNCN - PROJECT

STUDY ON INVENTORY PROCESS AT

BAKE STUDIO

Submitted to
Prof. Vidya Pratap

Prepared by
FAS Group F2
Section 1
MNCN 2
T. A. Pai Management Institute - 576104

March 06, 2017

 ACKNOWLEDGEMENT

We thank Prof. Vidya Pratap for helping us change the bakery based on the limitations faced
and decide on the scope of the project.

We thank Prof. Sham Ranjan Shetty for his supervision in application of operation
management concepts specific to our project.

We thank Mr. Sachin Poojary, Manager Bake Studio for explaining product line and
providing required data.

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 CONTENTS

ACKNOWLEDGMENT ........................................................................................................................1
EXECUTIVE SUMMARY.3
LIST OF ABBREVATIONS ....................................................................................................................4
LIST OF FIGURES ...............................................................................................................................4
LIST OF TABLES .................................................................................................................................4
INTRODUCTION ................................................................................................................................5
OBJECTIVE ........................................................................................................................................5
SCOPE AND FOCUS ...........................................................................................................................5
OBSERVATIONS.5
METHODOLOGY ................................................................................................................................8
ABC Analysis ...................................................................................................................................8
Continuous Review System (CRS)...................................................................................................9
RESULTS....9
Based on ABC Analysis.9
Based on CRS Calculation..............11
DISCUSSION.......12
CONCLUSION...........12
RECOMMENDATIOS12
LIMITATIONS12
APPENDIX ....................................................................................................................................... 13
REFERENCES ....................................................................................................................................16

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 EXECUTIVE SUMMARY

The study analyses the process of production in case of cakes and pastries along with
inventory of raw materials utilized in production process at Bake studio.
Bake studio is a bakery and confectionery with three outlets across Manipal and Udupi.
Established in 2015 holding specialization in the production and retailing of biscuits,
bread, toast, cake and pastries.
The inventory management concepts involved are ABC analysis and CRS (continuous
review system) which used data pertaining to raw materials used in cake and pastries
production line. The data included price and quantity of procurement.
The results derived from ABC analysis is identification of class A inventory/ SKUs
(stock keeping unit) so Bake studio can closely monitor and control their inventory
levels and CRS provides the reorder point of certain raw materials along with safety
stock to be maintained to avoid stock-out.
The conclusion of the project includes plan to optimize the production plan based on
the safety stock and reorder point obtained on raw materials belonging to class A.
Attention required towards inventory monitoring and control of exotic fruits which in
case not taken care may lead increase in cost or loss of reputation.
The recommendations suggested based on the observations made are reviewing the
stock ageing report at least once a fortnight and establish collaboration with suppliers
is to reduce anticipation inventory which is generally used to absorb fluctuations in
demand and supply.

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LIST OF ABBREVATIONS

LT- Lead time

SKU - Stock keeping unit
CRS - Continuous review system
EOQ - Economic order quantity

LIST OF FIGURES

Figure 1: Production flow diagram for Black forest cake

Figure 2: Production flow diagram for eggless dark base cake
Figure 3: Production flow diagram for egg white base cake
Figure 4: Production flow diagram for eggless white base cake
Figure 5: Production flow diagram for egg dark base cake

LIST OF TABLES

Table 1: ABC analysis of raw material with shelf life > 6 months
Table 2: ABC analysis of raw material with shelf life < 6 months
Table 3: Safety stock and reorder point for raw material with shelf life > 6 months
Table 4: Safety stock and reorder point for raw material with shelf life < 6 months

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INTRODUCTION
Bake studio is a bakery and confectionery with three outlets across Manipal and Udupi is a subsidiary
of Kemalle food and beverages which also runs a restaurant named Food studio and catering
services in Manipal. Bake studio first outlet was opened in the year 2015 and came up with another
two outlets by end of 2016. Bake studio holding specialization in the production and retailing of Puffs,
Indian savory snacks, biscuits, bread, cake and pastries is competing against retail chain of bakeries
such as Just bake and Ferns N petals. Within two years Bake studio had created a brand image for
itself among students of Manipal with prompt delivery and standardized quality offering. Bake studio
has its own production unit named after its parent company Kemalle food and beverages.

OBJECTIVE
In this project, the following objectives are planned

Define the process flow of cake and pastries production line

Identify the raw materials involved in the production line
Collect raw material data pertaining to price and quantity procured
Application of ABC analysis to identify class A raw material
Application of CRS to obtain the reorder point along with safety stock
Review the results obtained and make recommendations

SCOPE AND FOCUS

The project scope is restricted to analyzing a single product line within the stipulated time period of
project. We have taken up the cakes and pastries production line where we have observed the
production process of cakes. In the application of CRS, we have analyzed only few class A raw
materials and not analyzed raw materials from B and C classes of inventory.

The project post collection of data focuses on analyzing the data and interpreting the results and
making recommendations on minimizing the raw material inventory holding and which require
importance to avoid stock-out.

OBSERVATIONS
The observations made pertaining to the cake and pastries production line is depicted in the form of
flow diagrams.

For explanatory purpose we define production process of Black forest cake

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Diagram 1: Production flow diagram for Black forest cake

Every cake or pastry contains a base made of batter which is baked, in case of Bake studio it
produces four main varieties of sponge cake bases which are basically eggless white sponge base,
eggless dark sponge base, white sponge base with egg and dark sponge base with egg. The
production flow diagrams for all the bases produced are reported below.

Diagram 2: Production flow diagram for eggless dark base cake

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Diagram 3: Production flow diagram for egg white base cake

Diagram 4: Production flow diagram for eggless white base cake

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Diagram 5: Production flow diagram for egg dark base cake

METHODOLOGY

ABC Analysis
ABC analysis involves division of inventory/ SKUs into three classes based on their dollar/ rupee usage
so that management can focus on items that have the highest monetary value. Class A items typically
consists only about 20 percent of the items but account for 80 percent of the rupee usage. Class B
items account for another 30 percent of the items but only 15 percent of the rupee usage. Finally, 50
percent of the items fall in class C, representing hardly 5 percent of the rupee usage. The purpose of
classification using ABC analysis is to identify the inventory levels of class A items and enable
management to control them tightly.

The procedure involves first calculating the monetary usage by multiplying the monthly demand rate for
one item by the rupee value of one unit. From the overall monetary usage of each product a cumulative
percentage is derived to classify the class A, B and C products.

Class A items should be reviewed very frequently to enhance the lot size of procurement and the review
of inventory records should be frequent. For class C items the monitoring and control can be less.

For analyzing the inventory, we have considered consumption data obtained from the primary systems
at Bake studio for the month of February is divided basically into two categories one part holding shelf
life greater than 6 months and the other part holding shelf life less than 6 months

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 Continuous Review System (CRS)
An independent demand inventory control system for calculating reorder point. A system made to track
the remaining inventory of a SKU each time the inventory is withdrawn it is determined whether it is
time to reorder. To determine the reorder point, the following are required

1. Average demand per month

2. Lead time

3. Safety stock

Reorder Point = (Average demand per month) * LT + Safety stock

Average demand per month ()

Average demand of a particular inventory/ SKU is calculated based on historical data of demand
obtained from data. The data is considered for 6 months starting from September 2016 to February
2017

Average demand per month = Total demand/no of months

Lead time (LT)

Lead time is the time required for ordering and the time the order of inventory/ SKU takes to reach the
production plant.

Safety stock

It is the amount of stock to be maintained at production plant to handle uncertainties in demand, lead
time and supply.

Service level policy is approach used in calculation of safety stock which gives the desired probability
of not running out of stock during any of the ordering cycle.

RESULTS
Based on ABC analysis:
Table 1: ABC analysis of raw material with shelf life > 6 months

Quantity Unit Total Cumulative %

SKU Used/ Value(per rupee of rupee Cumulative
No Description Month litre or kg) value % total value % of SKU Cass
1 Cocoa powder 210 1100 231000 37.36413043 37.36413043 11.11 A
2 Baking powder 205 846 173430 28.05221273 65.41634317 22.22 A
3 Baking soda 155 250 77500 12.53558489 77.95192805 33.33 A
4 Dark chocolate 62 1250 38750 6.267792443 84.2197205 44.44 B
5 Maida 1040 28 29120 4.710144928 88.92986542 55.55 B
6 Vanilla essence 3 9000 27000 4.367236025 93.29710145 66.66 B
7 Coffee powder 55 420 23100 3.736413043 97.03351449 77.77 C
8 Granulated sugar 205 68 13940 2.254787785 99.28830228 88.88 C
9 Sugar 110 40 4400 0.711697723 100 100 C
Total 618240

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 The raw material classification for Table A products based on monetary usage is defined by ABC
analysis into
class A containing - Cocoa powder, Baking powder and Baking soda
class B containing - Dark chocolate, Maida and Vanilla essence
class C containing - Coffee powder, Granulated sugar and Sugar

Table 2: ABC analysis of raw material with shelf life < 6 months

Quantity Unit Total Cumulative %

SKU Used/ Value(per rupee of rupee Cumulative
No Description Month litre or kg) value % total value % of SKU Cass
1 Kiwi 300 280 84000 46.34994206 46.34994206 9.090909091 A
2 Condensed milk 100 288 28800 15.89140871 62.24135077 18.18181818 A
3 Lemon 200 90 18000 9.932130442 72.17348121 27.27272727 A
4 Curd 100 90 9000 4.966065221 77.13954643 36.36363636 A
5 Cherry 50 160 8000 4.414280196 81.55382663 45.45454545 B
6 Eggs 1500 5 7500 4.138387684 85.69221431 54.54545455 B
7 Strawberry 50 140 7000 3.862495172 89.55470949 63.63636364 B
8 Milk 210 33 6930 3.82387022 93.37857971 72.72727273 B
9 Litchi 40 150 6000 3.310710147 96.68928985 81.81818182 C
10 Apple 30 140 4200 2.317497103 99.00678696 90.90909091 C
11 Pineapple 30 60 1800 0.993213044 100 100 C
Total 181230 100

The raw material classification for Table B products based on monetary usage is defined by ABC
analysis into
class A containing Kiwi, Condensed milk, Lemon and Curd
class B containing Cherry, Eggs, Strawberry and Milk
class C containing Litchi, Apple and Pineapple

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Based on CRS:

Raw Material Sept Oct Nov Dec Jan Feb

Cocoa 170 190 182 192 202 210
Baking Powder 160 180 172 182 192 205
Baking soda 110 130 122 132 142 155
The CRS parameters are derived for class A items only as they require better monitoring assuming
service level of 95% in the calculation of safety stock for items has been followed. The normal
distribution appendix for 0.9500 is a value which falls between 0.9495 ( z=1.64) and 0.9505 (z=1.65).
We use more conservative value of 1.65 as z.

Table 3: Safety stock and reorder point for raw material with shelf life > 6 months

Raw Lead Standard Reorder

Material Average Time(days) Deviation Safety Stock Point
Cocoa 6.366667 2 0.431620547 1.007165991 13.74049932
Baking
Powder 6.061111 1 0.474699385 0.783253985 6.844365096
Baking soda 4.394444 1 0.474699385 0.783253985 5.17769843

Table 4: Safety stock and reorder point for raw material with shelf life < 6 months

Raw Material Sept Oct Nov Dec Jan Feb

Kiwi 245 268 295 278 292 300
Condensed
milk 46 69 96 79 93 100
Lemon 143 166 193 176 190 200
Curd 47 70 97 80 94 100

Lead Standard Reorder

Raw Material Average Time(days) Deviation Safety Stock Point
Kiwi 9.322222 3 0.62971677 1.799657375 29.76632404
Condensed
milk 2.683333 2 0.623832242 1.455682829 6.822349496
Lemon 5.933333 1 0.642045343 1.059374816 6.992708149
Curd 2.711111 1 0.61814138 1.019933277 3.731044388

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DISCUSSION
From results of ABC analysis for raw materials having shelf life greater than 6 months we can observe
the unusual trend of classification where the primary powders mixed are contained in class A items
except Maida which falls under class B items, this can be stated unusual as without Maida in stock the
production of cake does not take place.

From raw materials having shelf life less than 6 months we can observe the exotic fruits are distributed
across 3 classes even though their consumption pattern was similar, this trend was because of price
differentiation.

From results of CRS for we can interpret that safety stock to be maintained is close to range of 0 to 1
per day as the lead time is close to 1 day in some of the items of class A considered.

CONCLUSION
Based on the analysis of raw materials we conclude that there exists lot of dependent demand items
whose required quantity varies with the production schedules for other items held in the firms inventory.

Raw materials which are perishable such as exotic fruits require utmost inventory monitoring and control
because rotten fruits need to be dumped or usage in cakes may lead to loss of reputation.

The safety stock and reorder point calculated in case of class A products help Bake studio optimize its
production plans by implementing them in practice.

RECOMMENDATIONS
1. Stock ageing report must be reviewed on a fortnight basis and inventory nearing expiry date
must be used effectively or dumped.
2. Utilize cost effective ways to reduce inventory in supply chains by reducing pipeline inventory.
3. Adopt bulk procurement to reduce cost of ordering and delivery.
4. Collaborate with suppliers to reduce anticipation inventory which is generally used to absorb
fluctuations in demand and supply.

LIMITATIONS
1. EOQ method cannot be used in this project as Bake studio uses make-to-order strategy.
2. Order size is sometimes constrained by lack of storage capacity at production plant.
3. Analyzed only one product line because of time limitation and project scope.
4. Considered important raw materials going into production process and missed out on few of
them which had missing data points.

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APPENDIX

ABC analysis of raw material with shelf life > 6 months

Rupee value usage

120
Cumulative % of rupee

100

80

60

40

20

0
11.11 22.22 33.33 44.44 55.55 66.66 77.77 88.88 100
Cumulative % of SKU

Cumulative % of rupee value

ABC analysis of raw material with shelf life < 6 months

Rupee value usage

120
Cumulative % of rupee

100
80
60
40
20
0

Cumulative % of SKU

Cumulative % of rupee value

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Demand pattern of raw materials from class A

cocoa
250

200

150

100

50

0
Sept Oct Nov Dec Jan Feb

200
Baking soda
150

100

50

0
Sept Oct Nov Dec Jan Feb

Baking Powder
250

200

150

100

50

0
Sept Oct Nov Dec Jan Feb

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 Kiwi
400

300

200

100

0
Sept Oct Nov Dec Jan Feb

Condensed milk
150
100
50
0
Sept Oct Nov Dec Jan Feb

Condensed milk

Lemon
300
200
100
0
Sept Oct Nov Dec Jan Feb

Lemon

Curd
200

100

0
Sept Oct Nov Dec Jan Feb

Curd

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REFERENCES

Krajewski, Lee J., Ritzman, Larry P., Malhotra, Manoj K., and Srivastava, Samir K. (2011), Operations
Management Processes and Supply Chains (11th Edition), New Delhi: Indian Subcontinent
Adaptation, Pearson Education Inc

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