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DECLARATION OF THESIS / UNDERGRADUATE PROJECT REPORT AND
COPYRIGHT

Author’s full name :

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Title :

Academic Session : 2017/2018

I declare that this thesisis classified as:

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where research was done)*

? OPEN ACCESS I agree that my thesis to be published as online open access (full text)

I acknowledged that Universiti Teknologi Malaysia reserves the right as follows:

The thesis is the property of Universiti Teknologi Malaysia
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Certified by:

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UNIVERSITI TEKNOLOGI MALAYSIA

i

“We hereby declare that we have read this thesis and in our
opinion this thesis is suffcient in term of scope and quality for the
award of the degree ofMaster of Science (Engineering Business Management)”

Signature : ________________________________
Name of Supervisor I : Dr Noor Hamizah bt Hussain
Date : 28 MAY 2018

Signature : ________________________________
Name of Supervisor I : Dr Fatimah bt Salim
Date : 28 MAY 2018

ii

Inventory Management in Aref Contractor
Company

Mohanad Alsharif

A report submitted in partial fulfilmentof the
requirements for the award of the degree of
Master of Science (Engineering Business Management)

Razak School of UTM in Engineering and Advanced Technology
Universiti Teknologi Malaysia

MAY 2018

ii
DECLARATION

I declare that this report entitled “Inventory Management in Aref Contractor
Company” is the result of my own research except as cited in the references. The
report has not been accepted for any degree and is not concurrently submitted in
candidature of any other degree.

Signature : …………………………………………….
Name : Mohanad Alsharif
Date : 28 MAY 2018

iii
DEDICATION

This report is dedicated to my father, who taught me that the best kind of
knowledge to have is that which is learned for its own sake. It is also dedicated to my
mother, who taught me that even the largest task can be accomplished if it is done
one step at a time.

iv
ACKNOWLEDGEMENT
In preparing this report, I was in contact with many people, researchers,
academicians, and practitioners. They have contributed towards my understanding
and thoughts. In particular, I wish to express my sincere appreciation to my main
thesis supervisor, Professor Dr. Mohd Shariff Nabi Baksh, for encouragement,
guidance, critics and friendship. I am also very thankful to my co-supervisor
Professor Dr Awaluddin Mohd Shaharoun and Associate Professor Dr. Hishamuddin
Jamaluddin for their guidance, advices and motivation. Without their continued
support and interest, this thesis would not have been the same as presented here.
I am also indebted to Universiti Teknologi Malaysia (UTM) for funding my
Ph.D study. Librarians at UTM, Cardiff University of Wales and the National
University of Singapore also deserve special thanks for their assistance in supplying
the relevant literatures.
My fellow postgraduate student should also be recognised for their support.
My sincere appreciation also extends to all my colleagues and others who have
provided assistance at various occasions. Their views and tips are useful indeed.
Unfortunately, it is not possible to list all of them in this limited space. I am grateful
to all my family members.

v
ABSTRACT
The purpose of this study is to investigate the application of genetic algorithm
(GA) in modelling linear and non-linear dynamic systems and develop analternative
model structure selection algorithm based on GA. Orthogonal least square(OLS), a
gradient descent method was used as the benchmark for the proposedalgorithm. A
model structure selection based on modified genetic algorithm (MGA)has been
proposed in this study to reduce problems of premature convergence insimple GA
(SGA). The effect of different combinations of MGA operators on theperformance of
the developed model was studied and the effectiveness andshortcomings of MGA
were highlighted. Results were compared between SGA,MGA and benchmark OLS
method. It was discovered that with similar number ofdynamic terms, in most cases,
MGA performs better than SGA in terms of exploringpotential solution and
outperformed the OLS algorithm in terms of selected numberof terms and predictive
accuracy. In addition, the use of local search with MGA forfine-tuning the algorithm
was also proposed and investigated, named as memeticalgorithm (MA). Simulation
results demonstrated that in most cases, MA is able toproduce an adequate and
parsimonious model that can satisfy the model validationtests with significant
advantages over OLS, SGA and MGA methods. Furthermore,the case studies on
identification of multivariable systems based on real experiment t aldata from two
systems namely a turbo alternator and a continuous stirred tank reactorshowed that
the proposed algorithm could be used as an alternative to adequatelyidentify
adequate and parsimonious models for those systems.

vi
ABSTRAK
Kajian ini dilakukan bertujuan mengkaji penggunaan algoritma genetik (GA)
dalam pemodelan sistem dinamik linear dan tak linear dan membangunkan
kaedahalternatif bagi pcmilihan struktur model menggunakan GA. Algorithma kuasa
duaterkecil ortogon (OLS), satu kaedah penurunan kecerunan digunakan
sebagaibandingan bagi kaedah yang dicadangkan. Pcmilihan struktur model
mengunakankaedah algoritma genetik yang diubahsuai (MGA) dicadangkan dalam
kajian ini bagi
mengurangkan masalah konvergens pramatang dalam algoritma genetik
mudah(SGA). Kesan penggunaan gabungan operator MGA yang berbeza ke atas
prestasimodel yang terbentuk dikaji dan keberkesanan serta kekurangan MGA diu t
arakan.Kajian simulasi dilakukan untuk membanding SGA, MGA dan OLS.
Denganmeggunakan bilangan parametcr dinamik yang setara kajian ini mendapati,
dalamkebanyakan kes, prestasi MGA adalah lebih baik daripada SGA dalam
mencaripenyelesaian yang berpotensi dan lebih berkebolehan daripada OLS
dalammenentukan bilangan sebutan yang dipilih dan ketcpatan ramalan. Di samping
itu,penggunaan carian tcmpatan dalam MGA untuk menambah baik algorithma
tersebutdicadang dan dikaji, dinamai sebagai algoritma mcmetic (MA). Hasil
simulasimenunjukkan, dalam kebanyakan kes, MA berkeupayaan menghasilkan
model yangbersesuaian dan parsimoni dan mcmenuhi ujian pengsahihan model di
sampingmcmperolehi beberapa kelebihan dibandingkan dengan kaedah OLS, SGA
danMGA. Tambahan pula, kajian kes untuk sistcm berbilang
pcmbolehubahmenggunakan data eksperimental sebenar daripada dua sistem iaitu
sistem pengulang-alik turbo dan reaktor teraduk berterusan menunjukkan algoritma
iniboleh digunakan sebagai alternatif untuk mcmperolehi model termudah
yangmemadai bagi sistcm tersebut.

vii
TABLE OF CONTENTS
CHAPTER TITLE PAGE

DECLARATION ii
DEDICATION iii
ACKNOWLEDGEMENT iv
ABSTRACT v
ABSTRAK vi
TABLE OF CONTENTS vii
LIST OF TABLES ix
LIST OF FIGURES x
LIST OF EQUATIONS xi
1 INTRODUCTION 13
1.1 Overview 13
1.2 Inventory management 13
1.3 Aref Contractor Company Background 15
1.4 Aref Contractor Company nature 15
1.5 Problem Background 15
1.6 Problem Statement 16
1.7 Research Objectives 16
1.8 Research Questions 18
1.9 Scope of Research 18
1.10 Significant of the Study 19
1.11 Report Organization 19
2 LITERATURE REVIEW 20
2.1 Introduction 20

viii
2.2 Inventory management 21
2.3 HISTORICAL SKETCH OF INVENTORY
PROBLEMS: 23
2.4 SPECIFICATION OF AN INVENTORY SYSTEM: 23
2.5 PROBLEM OF INVENTORY MANAGEMENT: 24
2.6 Inventory management techniques 25
2.6.1 Re-Order Level 26
2.6.2 Economic Order Quantity 26
2.6.3 Just-in-time 36
2.6.4 Activity Based Costing Analysis 37
2.6.5 Vendor Managed Inventory 37
2.6.6 The balanced scorecard 38
2.7 Theoretical Recommendation 39
3 RESEARCH METHODOLOGY 41
3.1 Introduction 41
3.2 Method for Information collection and analysis 41
3.2.1 PRIMARY SOURCES 41
3.2.2 SECONDARY SOURCES 42
3.3 Pilot survey 43
3.4 Sample techniques 43
3.5 PROCEDURE AND TECHNIQUES FOR DATA
ANALYSIS: 44
3.6 Summary 44
REFERENCES 46

ix
LIST OF TABLES
TABLE NO. TITLE PAGE

Table 1 Theoretical Recommendation. 40

x
LIST OF FIGURES
FIGURE NO. TITLE PAGE

Figure 1 An input-Output representation of an Inventory System. 24
Figure 2 EQO Equivalents 28
Figure 3 Source: manufacturingtomorrow.com 36

xi
LIST OF EQUATIONS
EQUATION NO. TITLE PAGE

Equation 1 31
Equation 2 32

xii

13

CHAPTER 1
1 INTRODUCTION
1.1 Overview
Inventory management is the artwork and science of attaining the set targets
of deciding to buy the materials at the lowest viable costs, making sure sufficient go
with the flow and making the most economical use of such materials in order that the
total cost of production is minimized through the creation of such an environment
that would enable the humans make a contribution to the success of the objectives
with least quantity of such inputs as money, time, materiality. On the different hand,
inventory manipulate is the science primarily based art of making sure that enough
inventory is held via an agency to meet economically both its internal and external
demand commitments. There can be dangers in holding both very a good deal or too
little inventory, as such, inventory control is principally concerned with acquiring the
correct balance or compromise between these two extremes. It is therefore, the extent
that should be held that management is interested in.
1.2 Inventory management
Organization’s stock is an important component and its management is
imperative to the company and cost lessening of the firm’s use. Appropriate
warehousing of stock so that when products are requested, they are held at the
warehouse for the least time conceivable minimizing holding cost of stock (Wild, T.,
2017). Consequently, other operational costs may increment inventory management
costs like through the balance of requesting costs, holding costs, security stock and

14

stock outs (Palevich, 2011) and (Wisner, Tan and Leong ,2011). Once an
organization realizes this, it can create online stock management instrument to screen
its stock data by breaking it down into bunches by relating the categories with its
customers.
Beamon and Kotleba (2006) clarify that Re-order level (ROL) is helping
organizations to attain ideal efficiency and be successful. They got to have two
reorder levels one that’s normal whereas a second one that’s for emergency cases
.This gives customer satisfaction.
Bachetti, Plebani, Saccani and Syntetos (2010) argue that inventory
management got to be organized in a consistent way to encourage the organization
knowledge of when to order and amount to order. financial order amount enables
organizations plan their inventory replenishment on a timely basis such as month to
month quarterly half yearly or yearly basis. as organizations attempt to move forward
on the stock management economic order quantity EOQ and re-order point ROP are
important tools organizations can use to guarantee that stock supply does not hit a
stock out as clarified by (gonzalez and gonzalez ,2010 )
just-in-time (JIT) contributes significantly to an organizations positive
execution and client satisfaction. a study attempted that in the us to analyze
inventory management was found out that organizations that kept as well much stock
in their warehouse an wasteful supply chain whereas those that kept minimal stock in
their warehouse were exceptionally effective ( lai and cheng ,2009). Also was found
out that keeping direct stock is nice and it empowers an organization work negligible
costs of holding and setup costs eliminate undesirable lead time and create products
as per clients order. this enables an organization accomplish total quality control
(TQC) as proficient and successful supply chain management are executed in a firms
value chain kumar and suresh (2009) datta ( 2007) guarantee an unceasing supply of
raw materials to encourage continuous production.

15

1.3 Aref Contractor Company Background
Aref Controcter is one of the unique companies in Jeddah Saudi Arabia
owned by Abdullah Aref Alsharif. It was founded in 2006. It offers the customer a
variety of services such as a design for residential and public buildings, road design,
road construction, and gardens. Aref Contracting has a large number of clients from
Jeddah, Riyadh, Makkah, Dammam and Tabuk, and now wants to expand in Saudi
Arabia. The success is a strong relationship with customers and the believe in
customer satisfaction.
1.4 Aref Contractor Company nature
Aref Contractor Company is providing all materials, labor and equipment
such as cars, tools, engineers and services required to build the project. The main
contractor is the person who hires the workers to perform construction work.
1.5 Problem Background
Inventory management is important to both the contractor company and
manufacturing company . The availability of goods and materials that have the right
amount of finished products, components and / or raw materials is essential to the
success of a business. For example, if a company that sells goods or services has
insufficient inventory, sales may be lost when customers access another company to
purchase available goods or services. The cost to the business can increase, because
costs associated with overstocking may include, but are not limited to, maintenance,
storage, depreciation, amortization, loss of assets, such as money, net interest
income, and / or inventory impairment. In any case, over-inventory will allocate
capital that can be used more effectively elsewhere. Manufacturing companies or
contracting companies face many challenges. In this regard, a manufacturer may
require a variety of manufacturing parts / components used in the manufacture of a
good. Inventory of inadequate workforce from these components can result in
production delays, delivery delays, and ultimately, low customer satisfaction. As

16

with entrepreneurs, it is necessary to reconcile the need for available stocks with the
cost of excessive stock (Henderson, M., Pytel, D., McCreary, P. and Cortes, G.,
Flowvision LLC, 2013).

1.6 Problem Statement
Any contracting company must manage its inventories effectively. Inventory
management involves identifying inventory that must remain at hand at a given time,
decisions regarding the purchase of raw materials in large quantities, the number of
times physical orders are placed and the optimal time to submit a request. “Why do
we always run out of stock?” A large number of contractors face the frustration and
frustration of trying to maintain stable production processes at the same time,
providing customers with appropriate services and maintaining investments in
equities and equipment at reasonable levels. The fact that statements are made so
often indicates the many conflicts of interest (Henderson, M., Pytel, D., McCreary, P.
and Cortes, G., Flowvision LLC, 2013).

1.7 Research Objectives
Aiming to improve the service , this paper studies on inventory situations
throughout the contractor company and manufacturing . The findings of this research
will be the input for improve the inventory managment to retain customers’ loyalty
and trust, also to maintain the reputation of Aref Contractor Company
The research objectives (RO) can be further detailed as follows:

17

? To determine the extent of inventory management techniques
application in Aref Contractor.

? To establish the challenges of inventory management implementation
techniques in Aref Contractor.

? To examine basic action models (such as EOQ), safty stocks also
amount of work.

? To find out how much the company loses by using quantitative
volumes (EOQ).

? To determine if there is a relationship between inventory level and
production level and customer services.
? Determine if there is a relationship between the inventory level and
the profitability level of Aref Contracting Company.
? Finally. Make recommendations for improvement

18

1.8 Research Questions
? The research questions (RQ) for this study are:
? Objective 1. What is the amount of economic order of the Aref
Contracting Company ?
? Objective 2. Does the company buy in the amount of the economic
order?
? Objective 3. What basic inventory models are most common for
contractor companies and manufacturing companies?
? Objective 4. What should be the size of the inventory?
? 5. Is there a link between inventory levels and profitability?

1.9 Scope of Research

Inventory management is really a very broad area, but this study is limited to
contractor companies, with special reference to the Aref Contractor Company in
Jeddah Saudi Arabia.
the Investigations in this project is to what extent the inventory managment
have affected the profitability, efficiency e.t.c. Also, attempts are made to analyses

19

any cost savings . Efforts are also made to relate the level of inventory to the level of
production and sales. Finally, inventory costs are related to the levels of profit with
the aid of basic statistical tools .

1.10 Significant of the Study
It is important to consider the social and economic commitment to the growth
of the country . So that all the ways that will improve the company’s growth ,it must
be exploited, so the researcher’s hope is that this study is useful for owner of Aref
Contractor Company and others.
This research project would help the management of Aref Contractor
Company, to identify the most influential risk of inventory management and
production. Furthermore, the study will also help the management of the company, to
guide against losses .

1.11 Report Organization

In this course, three chapters will be covered that comprises
introduction, literature review, and methodology.

20

CHAPTER 2
2 LITERATURE REVIEW
2.1 Introduction
Of course, no one thought of an issue in the same way, but the profit of the
companies depends on the good management , an issue that seems to be unanimous
among the leaders of the company. This is what happened here, when we try to
examine and examine the past and present work that deals with inventory
management and the development of an economic quantity model suitable for
contractor companies. The subject of inventory management has sparked much
debate in public debates, workshops and symposia, at the local, national and
international levels, between public institutions and policy makers, organizations and
academics. Various efforts have been made through the management of new
businesses through projects, incentives, etc. For the organization of workshops in the
same field. A study of most scripts in inventory management has some common and
interesting features. Many of these writings deal with most of the problems
associated with inventory management; others still focus on the best inventory
management model.
This literature review was largely based on journals, some ,owner interview
and expert opinions on issues relevant to the objectives of this study. It is divided
into the following items:

21

? Historical sketch of inventory problems
? Specification of an inventory system
? Problem of inventory management
? Inventory Management Techniques
? Re-Order Level
? Economic Order Quantity
? Just-In-Time.
? Vendor Managed Inventory
? Activity Based Costing ( ABC )
? The balanced scorecard

2.2 Inventory management
Inventory management could be a bargains with administration of settled and
current resources. Moreover, it involves the management of day by day operational
supplies and in our case. Stock is additionally a basic resource in any organization in

22

spite of the fact that agreeing to Barnes (2008) stock is looked at as a risk beneath the
just-in-time (JIT) control framework. He agrees with the way accountants treat stock
as an resource to the organization. Within the explanation of money related position,
stock shows up beneath the current resources of the organization in any case whether
it’s for benefit or not for benefit organization. Stock plays a major role and its
administration goes a long way in making a difference a firm to develop because it
relates to its external customers as well as the inner clients (Gibson, 2013).
Therefore, stock is basic within the operation of Aref Contractor Company since they
may hold stock as finished products, work in progress or raw materials for advance
preparing (Fellows and Rottger (2005) and Shapiro (2009)). Shapiro, (2009) also
advises that stock plays a crucial part when it comes to demand 15 planning and as a
result, the organization needs to be flexible in its management of its stock when it
comes to occasional or regular inventories.
Directors cannot avoid inventory management since it shapes the basis of
their in general performance through disposal of uncertainties in their management.
For the boards and management of Aref Contractor Company to find out that they
are performing over standards, inventory management metric measures should be
over board so that they may keep up the management’s certainty (Shapiro, 2009).
Subsequently, Just-in-time concept has been found to have a few outlandish hidden
cost that increment the cost of doing business in a few cases such as little suppliers to
expansive companies .
In any case, the management of stock is important because the firm will be
keen to guarantee that its resources and stock are well managed and request
estimating is improved to avoid spontaneous acquirement. Stock can double up as
stock and resources respectively. Therefore, when an organization improves request
estimating, it enables the minimization of operational costs as well as client
satisfaction (Hines and Bruce, 2007). When this is often done, it enables an
organization plan for the longer term consequently applying different factors that an
organization can use for its objective achievement to be specific: request and supply,
taken a toll and staff requirements.

23

2.3 HISTORICAL SKETCH OF INVENTORY PROBLEMS:
Although inventory problems are as old as history itself, it has only been
since the turn of the century that any attempts has been made to employ analytical
techniques in studying these problems. The initial impetus for the use of
mathematical methods in inventory analysisseems to have been supplied by the
concurrent growth of the contractor company and the various branches of
engineering, – especially industrial engineering. The real need for analysis was first
recognized in industries that had a combination of production scheduling problems
and inventory problems i.e. in situations in which items were produced in lots – the
cost of set up being fairly high – and then stored at a factory warehouse (Ardichvili,
A., Cardozo, R. and Ray, S., 2003).

2.4 SPECIFICATION OF AN INVENTORY SYSTEM:
The inventory system is basically an input-output system. In order to arrive at
the best inventory policy i.e. the best decision rules for when and how much to order,
it is necessary to have a clear picture of the inventory system.

24

Figure 1 An input-Output representation of an Inventory System.

2.5 PROBLEM OF INVENTORY MANAGEMENT:
The problem of inventory involves the formulation of decision rules that
answer two important questions:
1. When to place an order (or configure it for production) to restoreinventory?
2. How much should you ask for (or produce) for each supply?
the decision-making rules should aim to meet the expected demand at
a minimum or maximum cost of benefits. (Puche, J., Ponte, B., Costas, J.,
Pino, R. and De la Fuente, D., 2016).

25

In many situations, our assumptions about known quatity and zero or
constant delay are not valid. Demand and delay are often variable quantities,
so we know best only their probability distribution. If we assume that the
question and the delay are random variables, the analysis of the inventory
management problem will become very complex. It has been found,
however, that reasonably good situations can be obtained for many practical
inventory management problems by assuming that the delay is a known
constant.

2.6 Inventory management techniques
Inventory management techniques are extremely critical for business
operations because their success and cost decrease of the firm’s use require improved
supply chain performance and information to the workers (Lambert, 2008). These
procedures are basic and information in them is profoundly desirable in this way,
managers and obtainment staff need to be able to apply the procedures for the
advantage of the organization (Fellows and Rottger, 2005).
Wild (2002) suggests, proper warehousing of stock so that when products
items are requested, they are kept at the warehouse for the least time possible
minimizing holding cost of stock. Consequently, other operational costs may
increase inventory management costs. The way an organization is able to maintain its
costs at low levels the way better it is for the year end profits (Palevich, (2012),
Wisner, Tan and Leong (2011)). Organizations purchase and sell their stock; there
continuously arises balance at the end of the year which have to be be carried over to
the next year. Once an organization realizes this, it can create online stock
management tool to monitor its stock information by breaking it down into groups by

26

connecting the categories with its clients. Since organizations works differently in
numerous fields, the stock can be classifies by either seasons or financial year
conclusion of your most critical clients thus, request forecasting got to be employed
to have an proficient supply chain (Poiger, 2010).

2.6.1 Re-Order Level
As organization endeavor to achieve effectiveness, they should be able to
understand their ReOrder Levels (ROL) which empowers them know when to order
and when not to order. This may be accomplished through the use of quantitative
strategies which require proper inventory management (Apte, 2010). Re-Order level
is critical for Aref Contractor Company to attain optimal efficiency and be successful
leading to high supply chain performance and client satisfaction, at that point they
need to have two reorder levels one that’s normal whereas the other is an emergency
one in case of disaster (Beamon and Kotleba, 2006).

2.6.2 Economic Order Quantity
Bachetti, Plebani, Saccani and Syntetos (2010) contends that inventory
management got to be organized in a consistent way so that the organization can be
able to know when to order and how much to order. This will only be accomplished
through the Economic Order Amount (EOQ) computation. Economic order amount
enables organization to plan their stock replenishment on a timely basis such as
month to month, quarterly, half yearly or yearly basis. By so doing, it empowers
firms to have minimal storage costs or zero within their warehouses since stock is
coming in and going out instantly. In this way, this tends towards the just in time
concept of supply chain management received by Toyota motor Organization in
Japan which helps in having zero holding costs, (Schonberger, 2008). In this way, as

27

organizations try to progress on the stock management, the Economic Order Quantity
(EOQ) and Re-order Point (ROP) are critical tools that organizations can use to
guarantee that stock supply does not hit a stock out as explained by Gonzalez and
Gonzalez (2010). Over time, organizations have been keeping up their stock in a
haphazard way which has required a change within the way firms conduct their
business. Stock outs have been experienced adversely leading to client dissatisfaction
hence; firms are changing their approach to be able to stay important by employing
Economic Order Quantity (EOQ) and Re-order Point (ROP) for client satisfaction.

The derivation of the basic EOQ model (Quantity of economic order) is quite
simple in a situation

28

Figure 2 EQO Equivalents

To determine the economic order quantity given the fixed demand
assumption, we can
evaluate the following model:

D = Total annual demand in unit

29

Q = Economic order quantity in unit

D/Q = Number of orders placed and received during the year

Q/2 = Average inventory

Co = Cost of placing an order

Cc = Carrying cost per unit of inventory during the year

30

Total inventory cost is defined as the whole of ordering cost and carrying
cost. To define total inventory cost in terms of the controllable variable order amount
(Q), we must express both types of cost in terms of amount. Total ordering cost can
be gotten by multiplying the number of orders D/Q by the cost of placing an order
(Co), consequently:

Annual ordering cost = D/Q Co

So also, annual carrying cost can be found by multiplying the carrying cost
per unit of inventory (Cc) by the average number of units in stock (Q/2). This
expression for average inventory accept a steady rate of demand all through the year.

Annual carrying cost = D/2 Cc

Combining the two components, we get total inventory cost for the period:

TC = D/Q Co + Q/2 Cc

31

Review that this variable can be controlled by management to yield the least
cost for inventory amid a particular time period. From Fig. 2.5.2 we know that
optimum solution is that quantity (Q*) that can therefore be gotten by setting the
equation for ordering cost equals to the equation for carrying cost and solving for Q:
thus:

Annual carrying cost = annual carrying cost

Cc Q/2 = DCo/Q

Cc Q2 = 2DCo

Q2 = 2DCo/Cc

Equation 1

32

The ideal solution is also obtained by separating the total cost function to get
an equation that expresses the rate of change in total cost with respect to changes in
quantity. When the first derivative of the total cost function is set equal to zero, the
economic order quantity is obtained by solving for Q.

The operation is as follows in three steps:

1. Take the first derivatives of total cost function:
TC = D/Q Co + Q/2 CC
d(TC)/dQ = -DCo/Q2 + Cc/2

2. Set the first derivative equal to zero, and solve for Q:
-DCo/Q2 + Cc/2 = 0

Equation 2

33

3. Test to determine the solution is a minimum.
d2(TC)/dQ2 = 2DCo/Q3 0

Given the assumption of fixed demand, the equation can be utilized in finding
the economic order quantity (Q*), which is equal to the square root of 2 times
demand (D) times ordering cost (Co) divided by carrying cost (Cc) For example;
assume the following example:

D = 3000 units per annum

Co = N30

CC = N2 per unit per year

34

To obtain the Economic order quantity, we evaluate the basic equation
using the values for demand, ordering cost and carrying cost.

Q = ?(2 × 300 × 30 ÷ 2)

?(900)

Q = 300 units

The optimum order quantity is 300 units. Observe that a total of ten order
will be placed.

35

D = 3000 = 10

Q* = 300

For a total cost due to ordering of 300. Average inventory will be 150
units.

Q*/2 = 300/2 = 150

an inventory carrying cost will equal N300. Therefore, total inventory cost
will be equal to N600.

36

2.6.3 Just-in-time
Just-in-time (JIT) is a positive performance to the company . Inventory
should be managed by using JIM to reduce loses and customer`s satisfaction.
Invontory management in organizations that kept too much stock in their warehouse
were an wasteful supply chain, whereas those that kept very few stock in their
warehouse were exceptionally productive (Lai and Cheng, 2009). Thus, it was found
out that keeping direct stock is nice and it empowers an organization work minimal
costs of holding costs as well as keep setup cost at bare minimum, increase unwanted
lead time and produce goods as per clients order. Eventually, this empowers an
organization accomplish total quality control (TQC) as efficient and successful
supply chain management are employed inside a firm’s value chain (Datta, 2007).

Figure 3 Source: manufacturingtomorrow.com

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2.6.4 Activity Based Costing Analysis
Fellows and Rottger (2005) agree that having stock in your store has an
advantage for the organization since clients will be satisfied immediately . With
stock in your warehouse, an organization has the advantage of timely delivery . Thus,
Aref Contractor Company got to guarantee that they have adequate stock for their
operations . One way they can accomplish this is thorough the “Pareto Analysis” also
known as Activity Based Costing (ABC) analysis. ABC analysis is where stocks are
classified into three categories to be specific : A – stock items that are of high value
and material to the organization but low volume such as building and engine
vehicles; B – stock items which are of medium volume; C – stock items baring
minimal value but are of big volume .

2.6.5 Vendor Managed Inventory
Management of inventory decides the way an organization will pushed itself
to tall performance efficiency. A few organizations have resulted to vendor managed
inventory (VMI) systems which help the provider to monitor customer’s stock usage.
Through this VMI system, clients will avoid stock outs since the suppliers will have
already recharged their inventory. The key viewpoint here is communication which
should be planned well from the starting of business relations between the supplier
and the customer (Frahm, 2003). Vendor managed inventory saves an organization
immense finance and time since the supplier will be able to monitor its customer’s
stock levels and make a point of replenishing them. As the client and supplier
connected, the communication channel has to be clear and quick so that they may
avoid instances of stock outs. Where the client expects having an irregular order
levels, they should notify the supplier so that they can adjust their production to cater

38

for the demand. Moreover, we presently have Joint Managed Inventory (JMI) which
is an progress level of vendor managed inventory (VMI). It looks for to integrate the
supplier more firmly into the customer’s organization by using the point of sale
(POS) which permits the supplier to see the real time data of its customer’s stock
(Frahm, 2003).

2.6.6 The balanced scorecard
The balanced scorecard has been used to evaluate the quality of inventory
management performance measure and its improvement. In any case, the balance
scorecard complements financial measures of past performance with measures of
drivers of future performance. The objectives and measures for organizational
inventory management performance come from four perspectives; financial, client,
internal process and learning and development (BPP, 2008). Consequently, Aref
Contractor Company Balance scorecard in relation to transport management has been
molded to upgrade its transport and requirements owing to the fact that it has multi-
discipline functionalities in its operations. The performance management of Aref
Contractor Company has been improved and progressed to foster smooth running of
the institution over Jeddah ,Saudi Arabia by guaranteeing that clients are treated well
(Sutherland, David and Alistair, 2002).

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2.7 Theoretical Recommendation

It is expected that the application of Economic Order Amount, Marginal
Analysis, and Just-in-Time, will improve Aref Contractor Company performance. As
the staff gets it the strengths of having these strategies, at that point the unnecessary
costs caused will be avoided. Therefore, the strategies will progress performance
within the following ways:

No Inventory Management Techniques

How Performance Improvement
will be achieved

1 Economic Order Amount Ability to know how much and
when to replenish stock
2
Activity Based Costing Analysis

The organization is able to
account for each inventory
according to its classification
and this can be achieved
through the Pareto analysis
.
3 Just-in-Time
Requesting stock when they are
required thus reducing
storage/holding costs

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Vendor Managed Inventory

Improving on inventory
management systems by
engaging outsourced
suppliers to management
inventory observing and
replenishment.

Table 1 Theoretical Recommendation.

41

CHAPTER 3
3 RESEARCH METHODOLOGY
3.1 Introduction
It would have been best to conduct this research in all the manufacturing
companies and contractors companies in Saudi Arabia in arrange to seek after
excellence and at the same time achieve the most excellent possible result. However,
such a huge amount of companies will pose a few issues. As a result of the attendant
monetary, time and other limitations, the research has limited this investigation to
only one contractor company in Saudi Arabia: Aref Contractor Company.

3.2 Method for Information collection and analysis
The information used for this investigation were collected from primary and
secondary sources of information.

3.2.1 PRIMARY SOURCES

The information were collected from the works accountant, production
manager, marketing manager, sale official and other people from the chosen
company. It was facilitated through questions, perception and oral interview. These

42

instruments and other means of information collection were found convenient for this
study because they helped to induce the view of the literate members of the company
. Secondly, in a investigate work of this nature, where information collected will be
totally analyzed, the researcher considered it very shrewd to use more of questions in
order to avoid gathering of information that will have very small or no pertinence to
the subject matter beneath study. Also, considering the kind of respondent being
tended to, it was found most attractive because it does not require expound reply.
Most of the questions are basic “yes” or “no” type. However others are such that
require the respondent to rate a statement into choices; such as “strongly agreed”,
“undecided”, “disagree” etc. The survey, generally utilizes a printed format that
efficiently indicates all the questions as well as the arrangement to which they are to
be presented. All these steps were made for easier investigation of information and
result.

3.2.2 SECONDARY SOURCES

The result of existing literatures on stock management helped in~measurablyi
n directing the researcher during the study. Other secondary sources of information
include:

1.Newspapers
2.Magazines and Periodicals
3.Reference books and Dictionaries

43

4.Course reading materials
5.Secondary information also exists within the company
6.Examination of the company’s yearly reports and journals.

3.3 Pilot survey
A pilot overview was carried out to eliminate all ambiguous questions from
the study instrument used. The pilot study was similarly carried out since the level of
understanding contrasts among the respondents. The sample for this pre-testing was
drawn from the company reviewed. The pilot study empowered the researcher to test
the respondents’ attitudes to the questions and terms used.

3.4 Sample techniques

For easier collection of information, only Aref Contractor Company was
used as a case study, since all others might not be covered as a result of time and
financial constraints. The observations and results got from the company were used
to generalize and predict what is obtainable in all other contractor companies,
particularly within the areas of their stock management.

44

3.5 PROCEDURE AND TECHNIQUES FOR DATA ANALYSIS:

Majority of the questions within the survey have relevance to the speculation
and investigate questions raised earlier. Information from the different questions
were categorized concurring to their pertinence to the confirmation of the theory of
this research project and realization of the stated goals. The information were
analyzed utilizing basic statistical (eg mean, chi-square, regression and correlation
co-efficient) and mathematical methods. The economic order quantity of the
company was calculated after estimating a few figures, as a few of the required
figures were not in existence within the company’s books.
However, from the available information, relationship between certain
variables were determined and analyzed. The relationship that existed between
variables have been tested within the speculation for validity and reliability.
Information for writing survey were obtained from relevant books. Most quantitative
information were drawn from the accounts office of the Aref Contractor Company.

3.6 Summary
This study sort to answer the questions what is the inventory management
techniques application, how to determine the affect and challenges of inventory
management techniques and how to determine the challenges of inventory

45

management techniques in Aref Contractor Company .It was established that Aref
Contractor Company has worked for more than ten years meaning they have been
developing . However, the Aref Contractor Company should embrace inventory
management techniques so that they can gain more profits and they extend all across
of Saudi Arabia

46

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APPENDIX A

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