Improving inventory control of laboratory chemicals using Kanban Application / Ellen N. Valerio

Year : 2009

Number of Pages : 28 leaves

Adviser : Prof. Nestor O. Rañeses

Executive Summary

Emperador Distillers Incorporated manufactures liquor products such as Emperador Brandy, Generoso Brandy and the latest product is The Bar which comes in different flavors. Emperador Brandy has been chosen three times as Reader's Digest Most Trusted Brand Gold Awardee. Emperador Distillers is under Alliance Global Group Inc., a holding company of Mr. Andrew Tan. The plant is located in Sta. Rosa, Laguna with more than 200 employees. The Laboratory which is part of the Quality Assurance department conducts analysis of liquor ingredients, in process as well as finished liquor products. Laboratory chemicals are being used for the laboratory analysis of these materials. But based on July 2008-July 2009 chemical laboratory inventory data, there were several expired chemicals and quantity maintained on some chemicals were way above actual demand. This is due to wrong assumptions of analysts during reorder of chemicals which leads to overstocking. Excess inventory leads to high carrying cost and more risky environment for laboratory personnel. The objectives of the project were to eliminate overstocking of laboratory chemicals and ensure safety of laboratory personnel. Focusing on A chemicals, the study was conducted using the DMAIC methodology. Interviews were first conducted to determine the customers' requirements. The general problem of the analysts is that inventory is tedious and time consuming. Even with the inventory data available, the question on when to reorder and how many chemicals to order is also another problem. The Quality Assurance Head wants that there is reduction in the number of stocks to avoid expiry of chemicals. There should be reduction in inventory activities as well. Disposal of expired toxic chemicals is the concern of the company's Pollution Control Officer while Purchasing Manager wants that the laboratory request only the needed chemical quantity. Better control of compounds can eliminate unnecessary purchases. In the measure phase, chemicals were categorized based on their consumption rates. Based on the results, the three categories which comprise big chunks of the inventory are chemicals with very minimal consumption at 29 percent, followed by chemicals with minimal consumption at 23 percent and expired chemicals at 21 percent, Fast moving chemicals as well as chemicals with moderate consumption comprise only 11 percent and 9 percent respectively. Since the last two categories mentioned comprise 20 percent only of the total chemicals, it means that 80 percent of the chemicals monitored every month belong to other categories where frequent monitoring is not needed or needs to be disposed in the case of expired chemicals. Using 5 Why's Analysis to determine the root cause of the problem, results showed that the problem on overstocking was due to the fact that no procedure or guideline was established for the reorder system. No consumption as well as reorder point data was available. On the other hand, the root cause why monthly inventories are being conducted was also due to unavailable established guideline on inventory system of chemicals. Kanban was applied as process improvement tool. Kanban values were computed to determine optimum safety stocks that are required per chemical. Minimum and maximum values were also established. Kanban signals or visuals were designed both in chemical container as well as in the inventory sheet for easy monitoring of stocks. New reorder system was designed and communicated to the group. Thus, after implementation of new system, stocks for category A chemicals were maintained to minimum level required which means there was no overstocking of chemicals. There was a reduction of 50 percent in the number of stocks for category A chemicals. Monitoring frequencies were established per chemical category as well. New monitoring system implemented results to 84 percent reduction in number of hours spent on inventory activities. Based on the cost benefit analysis, the projected annual savings is 27,000 Php on inventory. These are monitoring cost and cost of stocks. Also, there is an additional projected savings of 25,000 Php on cost avoidance for the carrying cost of expired chemicals and disposal.

In conclusion, reduction of inventory therefore is beneficial to the company because it means savings to the company in terms of lower carrying cost, and inventory cost (both on stocks and inventory activities). Kanban is a very good tool to apply in order to reduce inventory level however the success of implementation of this tool depends on several factors such as gathering reliable data, cooperation of people involved in the system as well as creativity in designing effective visual controls. The most important of course is that the system should be sustainable, so written procedures and guideline should be in place and communicated to those involved with the new system. Since Kanban is a work in progress, changes should be integrated in the system and periodic evaluations or review should be conducted to update the data or settings established. Kanban was used as a tool in chemical inventory because holding cost of chemicals is high while reorder cost is low. However, EOQ or economic order quantity could be computed and integrated in the system in order to achieve a more efficient method in reordering.