Failure in inventory management at fashion department in khatoco trading co , ltd

UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------

PHAM THI PHUONG LINH

FAILURE IN INVENTORY MANAGEMENT
AT FASHION DEPARTMENT IN
KHATOCO TRADING CO., LTD

MASTER OF BUSINESS ADMINISTRATION

Ho Chi Minh City – Year 2019


UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------

PHAM THI PHUONG LINH

FAILURE IN INVENTORY MANAGEMENT
AT FASHION DEPARTMENT IN
KHATOCO TRADING CO., LTD

MASTER OF BUSINESS ADMINISTRATION
SUPERVISOR: DR. NGUYEN PHONG NGUYEN

Ho Chi Minh City – Year 2019

LIST OF CONTENTS
EXECUTIVE SUMMARY .............................................................................................1
PART 1 – BACKGROUND ............................................................................................1
Company background ........................................................................................1
1.1.1

History of establishment and development .................................................1

1.1.2

Mission of the company ..............................................................................1

1.1.3

Company’s size ...........................................................................................2

1.1.4

Internal structure .........................................................................................2

1.1.5

Geographic distribution ...............................................................................2

1.1.6

Stakeholders ................................................................................................3

1.1.7

Current development and market analysis ..................................................3

1.1.8

Organizational performance ........................................................................4

Symptoms...........................................................................................................5
1.2.1

Complaints of clients about wrong shipping products ................................5

1.2.2 Differences between the stocks on count (floor) and stocks on system
(sheet) .....................................................................................................................8
1.2.3 Differences between stocks quantity on accounting system and that on
warehouse system.....................................................................................................9
Initial cause-effect map ....................................................................................11
Updated cause-effect map ................................................................................14
PART 2 – PROBLEM JUSTIFICATION .....................................................................21
Problem definition............................................................................................21
2.1.1

Definition of inventory management ........................................................21

2.1.2

Central problem: Failure in inventory management .................................22

Problem existence ............................................................................................24
Problem importance – consequences of the problems .....................................24
PART 3 – CAUSE VALIDATION ...............................................................................26

Potential causes ................................................................................................26
3.1.1

Outdated and separated inventory control system ....................................27

3.1.2

Insufficient inventory control procedures and regulations .......................27

3.1.3 Culture miss-match: No connection between relevance departments in
inventory control ....................................................................................................28
Cause existence ................................................................................................28
3.2.1

Insufficient inventory control procedures and regulations .......................29

3.2.2

Outdated and inconsistent inventory system .............................................30


Cause importance .............................................................................................33
PART 4 – SOLUTION AND IMPLEMENTATION ...................................................34
Alternative solutions ........................................................................................34
4.1.1

Written working processes in inventory management ..............................34

4.1.2

Setting up integrated system for inventory control ...................................44

4.1.3

Solutions summary ....................................................................................48

Implementation ................................................................................................49
4.2.1

Objectives ..................................................................................................49

4.2.2

Targeted outcomes ....................................................................................49

4.2.3

Project details and schedule ......................................................................50

Conclusion .......................................................................................................54
SUPPORTING INFORMATION .................................................................................54
5.1.1

Methodology .............................................................................................54

5.1.2

Research tool .............................................................................................55

REFERENCES ..............................................................................................................58

APPENDIX ...................................................................................................................57


LIST OF FIGURES

Figure 1: Company structure ...........................................................................................2
Figure 2: Sale and Profits of The Company and Fashion section from 2016 to 2018 ....4
Figure 3: Number of agency's complaints from 2016 to 2018 ........................................6
Figure 4: Portion of customer complaints in 2018 ..........................................................6
Figure 5: Fashion Sale, Cost of goods sold and GPM in 2016, 2017 and 2018............11
Figure 6: Initial cause-effect map ..................................................................................12
Figure 7: Updated cause-effect map ..............................................................................17
Figure 8: Amount of client’s orders during 2016-2018 ................................................26
Figure 9: Final cause-effect map ...................................................................................32
LIST OF TABLES
Table 1: Fashion sale and profit growth rate from 2016 to 2018 ....................................5
Table 2: Transportation cost from 2016 to 2018 .............................................................7
Table 3: Stock reconciliation at 31st December 2018 ......................................................8
Table 4: Stock reconciliation between warehouse system and accounting system at 31st
December 2018 ................................................................................................................9
Table 5: Stock clearance and normal sale in 2017 and 2018 ........................................10
Table 6: Participants of second in-depth interviews in March 2019 .............................18
Table 7: Inventory turnover days of fashion products ..................................................25
Table 8: Participants of third in-depth interviews in April 2019 ..................................28
Table 9: ERP’s estimated costs .....................................................................................47
Table 10: ERP project schedule ....................................................................................51
LIST OF FLOWCHARTS
Flowchart 1: Goods reception process ..........................................................................35
Flowchart 2: Goods delivery process ............................................................................37
Flowchart 3: Inventory internal transfer ........................................................................40

Flowchart 4: Goods return process ................................................................................42
Flowchart 5: ERP implementation process ..................................................................50


EXECUTIVE SUMMARY
Nowadays, cost management is more concentrated by many corporations over the
world, especially in highly competitive market. Hence, to maintain the growth in long
term and achieve sustainable competitive advantages over rivals, any business line or
any company needs to be effective and efficient in managing its internal activities and
Fashion business line of Khatoco Trading Co., Ltd is also not an exception. Although
the financial results of fashion section in the company still show some positive signals
with an increase in sales and profits, non-financial aspects indicate some problems
include: increment in customer complaints, discrepancies in inventory information
between accounting system and warehouse system as well as between stock counts and
system records. These are the significant symptoms which should be focused and
analysed to find more inside problems. Based on the deep interview technique of
qualitative research, secondary data analysis and literatures review, some potential
problems and central problem of failure in inventory management are identified. This
problem does exist because of some causes related to insufficient inventory management
procedures and regulations as well as outdated and inconsistent inventory system.
Therefore, to solve those causes effectively and efficiently, the recommendations of
compiling written working processes for all inventory activities and building ERP
system for Khatoco Trading are raised in details. These solutions will not only solve the
main problem related to stocks control in short-term but also in the long-term of business
life. More than that, they also help Board of Directors in managing and controlling entire
company’s processes and save costs for the company.


PART 1 – BACKGROUND
Company background

1.1.1 History of establishment and development
Khatoco Trading Co., Ltd (Khatoco Trading), one of the subsidiaries of Khanh Viet
Corporation with 100% owned by the Parent Company, was establish on 21st May, 2002
under the Decision No 77A/2002/QD-UB of the Chairman of Khanh Hoa Provincial
People's Committee and officially wen to the business on 1st July, 2002. The company
was operated on the basis of separation and re-arrangement from the rooms and branches
of Khanh Hoa Tobacco Import and Export Division, including: Textile and Garment
Business Department; Cigarette Trading Department with 3 branches at Hai Phong, Ha
Noi and Can Tho. Upon the establishment, the number of Khatoco ’s employees were
108 people who were recruited and chosen from other members of Khanh Viet
Corporation.
The initial function of Khatoco Trading was to consume textile products of Tan Tien
Textile Factory (one member of Khanh Viet Group) and men’s shirts produced by
Khatoco Garment Factory with the fabric supplied by Tan Tien Textile Factory. In May
2003, Khatoco Trading Company established a Cigarette Trading department on the
basis of withdrawing the cigarette market staffs from Khatoco Khanh Hoa Cigarette
Factory in Khanh Viet Group and recruiting new employees.
From 2014, the company have had three following business activities, in which cigarette
and men fashion are the two key business lines:
-

Cigarette trading: Specialize in wholesale and retail trading domestic cigarettes
that were produced and supplied by Khatoco Khanh Hoa Cigarette Factory.

-

Men Fashion trading: Design, process the textile products and distribution the
men fashion products include shirts, T-shirts and trousers.

-

Ostrich and crocodile trading: Purchase and sell ostrich and crocodile meats,
products from ostrich and crocodile meats, other food products (ostrich eggs).

1.1.2 Missions of the company
-

Mastery over the nationwide 360-degree cigarettes trading chain including
Distribution - Agency - Retail - Consumers.
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-

Khatoco Men's shirts become one of the strong brands in the market segment of
modern, masculine and stylish middle-age men from 30 to 50 years old.

1.1.3 Company’s size
Currently, Khatoco Trading is ranked as a large company not only in Khanh Hoa
Province but also in Viet Nam with the total number of full-time staffs is more than 700
employees. Moreover, the average annual turnover (profits before taxes) of the company
in 3 recent years was approximately VND173 billion and the total asset calculated as at
31st December 2018 was about VND1,777 billion.
1.1.4 Internal structure
The internal structure of Khatoco Trading is shown in the following chart:
Figure 1: Company structure

Source: Company structure Decision No. 27/QD-CTTM.
1.1.5 Geographic distribution
Khatoco Trading’s products are widely distributed throughout Viet Nam from northern

area to southern area. In which:
-

The cigarettes are focused in many provinces spreading over 3 regions in Viet
Nam such as: Ha Noi, Lang Son, Cao Bang, Hai Phong, Thai Binh in Northern
area; Nghe An, Hue, Da Nang, Binh Dinh, Khanh Hoa, Binh Thuan, Dak Lak in

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the Middle and Highland area; Ho Chi Minh, Long An, Ben Tre, Bac Lieu, Kien
Giang, Ca Mau in Southern area.
-

Towards men fashion products, Khatoco Trading concentrates mostly on middle
area including Khanh Hoa, Binh Dinh, Da Nang, Nghe An and Can Tho province
in Southern Vietnam. Products are mainly distributed through agency channel
and showrooms. Besides, the products are also distributed in Ha Noi, Ho Chi
Minh, but the volume is not as many as mentioned area.

-

Ostrich and Crocodile meats are mainly sold to the restaurants and food shops in
the whole country.

1.1.6 Stakeholders
To be a one of member of Khanh Viet Group – State owned entity, the major
stakeholders of Khatoco Trading include the Parent Company – Khanh Viet
Corporation, Khanh Hoa Province People's Committee as well and related parties and
internal suppliers: Khatoco Khanh Hoa Cigarette Factory, Khatoco Garment Factory,

Khatoco Ostrich - Crocodile Trading Company, customers, employees and managers of
the company.
1.1.7 Current development and market analysis
The increase in the legislations towards tobacco industry creates difficulties for the
company to develop this business line, even nowadays, cigarette product of Khatoco is
one of strongest brands in Viet Nam market and directly compete with Thang Long
Tobacco Company and Sai Gon Tobacco Company. Therefore, men fashion is
considered as key products that company will invest in to gain the competitive
advantages in long-term period. Moreover, the potential growth of Vietnam apparel
market is supposed to be high expected to rise by 12-14 percent from 2019-2022 and
gained annual growth rate of 10 percent in 2017 according to the statistic of Vietnam
Textile and Apparel Association (1). Furthermore, the domestic demand is climbing
powered by young aged to middle aged consumers who are living in the urban with their
increased disposable incomes. In addition, spending on apparel keeps going up and
reaches the second place and closely behind foods spending. This is the reason why
fashion market is more attractive. The main markets of Khatoco Trading’s fashion
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products are Nghe An, Da Nang, Binh Dinh, Can Tho and Nha Trang, and these markets
are also developing in the number of young citizens who desire to express their
characteristics and status via outfits. Khatoco Trading is also focusing on exporting
clothing by processing orders from foreign partners in EU and USA. Therefore, a
positive signal for export section of Khatoco Trading is that export was forecasted to
rise by 15 percent per annum from 2016 to 2020 [1]. As a result, the bright sight of the
market in the near future creates more opportunities for men fashion products of
Khatoco Trading.
Currently, the close competitor of Khatoco Trading in apparel industry is Owen at the
middle-age and middle-class men segment.
1.1.8 Organizational performance

The growth in revenue and profits of the whole company are shown in the following
chart:
Figure 2: Sale and Profits of The Company and Fashion section from 2016 to 2018

Sale and profits from 2016 to 2018
8,000,000
7,000,000
6,000,000

250,000

7,363,363
193,112

5,000,000

5,691,625
149,019

5,722,753
132,570

4,000,000
3,000,000
2,000,000
1,000,000
-

(10,364)

(6,639)

183,259
2016

197,655
2017

3,211
213,064
2018

200,000
150,000
100,000
50,000
(50,000)

Total sale of Company

Total sale of Fashion

Total net profit of Company

Total net profit of Fashion

Source: Company’s financial statement 2016, 2017 and 2018
According to the above chart, there is the down trend in revenues and profits of the
company from VND 7,363 billion in 2016 to VND 5,722 billion and from VND 193
billion in 2016 to VND 133 billion in 2018 respectively. The decrease in total sales and

Page | 4


profits of the Company is mainly due to the decrease in sales and profits of Cigarette
which faced many barriers from the Gorvenment. On the other hands, the sale and profits
of Fashion section still increased during 3 years even profits of 2016 and 2017 were
negative, showing the positive signal for the business of Khatoco.
Table 1: Fashion sale and profit growth rate from 2016 to 2018
Men Fashion
section
Sale increase rate

2017 vs 2016

2018 vs 2017

7.86%

7.80%

Profit increase rate
35.94%
Source: Company’s financial statement

148.37%

The profit increase rate from 2017 to 2018 was faster than that of last year, but sales
growth rate slightly decreased from 7.86% to 7.8% during 3 years and was lower growth
rate of the market as 10% annually mentioned above.
Symptoms

1.2.1 Complaints of clients about wrong shipping products
An initial symptom that Khatoco Trading is facing in recent years is the increase in
complaints of key clients in agency channel about wrong shipping products. From 2017
up to now, the sale volume of Khatoco Trading to agencies has been increasing and the
wrong shipping time has been going up also. According to the responses from key clients
in Ho Chi Minh, Nha Trang, Binh Dinh, Da Nang, Nghe An and Ha Noi, the reported
number of wrong shipping orders went up to 20 times in 2018 extracted from customer
service record in sale reports. Specially, kinds of customer complaints and recorded
times in 3 years are shown in the following chart:

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Figure 3: Number of agency's complaints from 2016 to 2018
Number of agency's complaints from 2016 to 2018
20
18
16
14
12
10
8
6
4
2
0

2016
8
7

15
9
4
11
7

Wrong orders
Missing orders
Bad package
Low commission
Less facilities support
Late shipping
Bad quality

2017
11
8
9
8
3
13
6

2018
20
10
5
6
4
17

5

Source: Sale report in 2016, 2017 and 2018
According to above chart, amount of wrong shipping orders, missing orders and late
shipping was increasing during 3 years, while other kinds of complaints such as bad
package, low commission, less facilities support for agency’s store or bad quality of
products decreased gradually from 2016 to 2018. In which, in 2018, the portion of wrong
shipping orders in total number of complaints is highest as 30% and the second one is
the late shipping.
Figure 4: Portion of customer complaints in 2018

Portion of customer complaints in 2018
7%

Wrong orders
30%

25%

Missing orders
Bad package
Low commission
Less facilities support

6%

15%
9%

7%

Late shipping
Bad quality

Source: Sale report in 2016, 2017 and 2018
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As shown above, in recent years, clients frequently receive wrong orders in high seasons
like the year ended period and summer period as well as late shipping orders. Moreover,
they emphasized that late shipping orders partly were resulted from wasting time to
replace wrong products. Consequently, this situation impacts shapely to company
business and believes of customers towards shipping service of the company are getting
worse. Moreover, repetitive wrong shipping orders create bad impacts on business
transactions between the company and clients such as building strong obstacles to
increasing company’s sales volume as well as leading to the reduction of the company
reputation. Furthermore, this issue also increases shipping costs of the company to
replace wrong items by the right ones.
The importance of this symptom
According to the performance of transportation expense towards fashion products
during 3 years from 2016 to 2018, this cost increased year by year showed in the
following table:
Table 2: Transportation cost from 2016 to 2018

Total fashion sale
Total selling expense

2016
2017
2018

(VND)
(VND)
(VND)
183,258,504,127 197,654,618,061 213,063,577,142
16,575,248,410

20,198,170,121

23,974,621,638

Total transportation cost

1,976,580,222

2,590,082,934

3,156,840,582

Transportation cost/Sale

1.08%

1.31%

1.48%

11.92%

12.82%

13.17%

32,723

35,728

35,986

72,494

87,724

Transportation cost/Selling
expense
Number of orders

Transportation cost/order
60,403
Source: Accounting reports in 2016, 2017 and 2018

The transportation costs increased slightly from VND 1,976 million in 2016 to VND
3,156 million in 2018. Moreover, the proportion of this expense to net sales and selling
expenses also went up year by year from 1.08% to 1.48% and 11.92% to 13.17%
respectively. Looking deeply into the shipping costs per order in 2016, 2017 and 2018,
this amount climed up significant by 21% annual from VND 60,403 in 2016 to VND
87,724 in 2018. If this issue is not solved in this year, transportation cost would increase
Page | 7


and severely affect the business results in the long-term.

Based on responses of key clients, the wrong delivery postponed their business and
could not meet the clients’ needs at that time. Lacking of right products may cause bad
relationships between company and its clients because they tend to be frustrated when
receiving wrong orders. As a consequence, Khatoco Trading is losing its opportunities
to increase sales in the future.
1.2.2 Differences between the stocks on count (floor) and stocks on system (sheet)
At 31st December 2018, the company conducted stock count in order to close accounting
book of their apparel inventories. The number stocks on count was different with the
amount recorded on warehouse system. Moreover, the differences related to many kinds
of products including the main items – men shirts. The differences between floor to sheet
are presented in the following tables:
Table 3: Stock reconciliation at 31st December 2018
Description

Color

Size

Warehouse
system’s quantity
9

Stock take’s
quantity
7

Differences

Men shirt TD 290T1 THTR001-2003-D

XL

(2)

Men shirt TD 290T1 VNTR001-2003-D

L

60

67

7

Men shirt TD 290T1 VNTR001-2004-D

L

52

43

(9)

Men shirt TD 290T1 VNTR001-2004-D

M

13

15

2

Men shirt TD 290T1 VNTR001-2004-D

S

36

34

(2)

Men shirt TD 290T1 VNTR001-2007-D

L

1,143

1,110

(33)

Men shirt TD 290T1 VNTR001-2007-D

M

671

709

38

Men shirt TD 468T1 CNCR075-2005-D

L

17

15

(2)

Men shirt TD 468T1 CNCR075-2005-D

M

19

24

5

Men shirt TD 468T1 CNCR075-2005-D

XL

14

15

1

st

Source: Stock count minute at 31 December 2018
According to the above table, there are some items have the large differences between
floor (stock count) to sheet (warehouse system) such as Men shirt TD 290T1 with color
VNTR001-2007-D, size L and Men shirt TD 290T1 with color VNTR001-2007-D, size
M. This symptom can lead to consequences of losing inventory or make mistake in
delivery mentioned in the initial symptom. Shortage of inventories means a loss in
operating activities of the company. Whereas, surpluses of actual stocks to the system
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result from many reasons in which wrong delivered items mentioned above is one of the
cases. Moreover, surpluses also create opportunities to warehouse staffs to steal goods
and also lead to the loss of company’s assets.
1.2.3 Differences between stocks quantity on accounting system and that on
warehouse system
Table 4: Stock reconciliation between warehouse system and accounting system
at 31st December 2018
Warehouse
Nha Trang

Total accounting
system’s quantity
643,036

Total warehouse
Differences
system’s quantity
647,085
4,049

Sai Gon

93,650

92,236

(1,414)

Nghe An

26,032

25,932

(100)

Da Nang

33,550

33,022

(528)

Can Tho

50,349

50,213

(136)

36,307

(1,889)

Ha Noi
38,196
Source: Stock count minute at 31st December 2018

There are some significant differences in recorded quantity on two systems showed in
above table. The inconsistence between warehouse system and accounting system will
take many times to compare the quantity on two systems and require a careful manual
reconciliation regularly. This symptom is also important to the company because it is
related to failures in the inventory management and can lead to the loss or abundance in
inventory. Moreover, the differences of 2 systems will impact goods transfer decisions
to adapt client’s demands because the decisions based on the inventory system may be
distinct with the actual amount. Subsequently, this situation will lead to the fact that
high-demanding products are out of stock in an area while in other areas those products
are redundant. Eventually, these inventories become slow-moving and obsolete, then the
company will suffer a burden to dispose them.
The importance of the second and third symptom
As emphasised by DeHoratius et al. (2) the discrepancy between recorded inventory
quantity on the system with one presented on shelves leads to the situation that is order

when it is not inevitable or shortage order when it ought to (p.627). Inaccuracy in
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recording inventory also creates lack of some items and over on others (2). Moreover,
inventory evaluation also be inaccurate because the evaluation is based on accounting
number while warehouse record and actual amount were not the same. The evidence of
consequence came from the inconsistency of 2 systems as well as between actual
number and recorded one is the increment in amount of clearance sales of slow-moving
and obsolete stocks that was presented in the following table:
Table 5: Stock clearance and normal sale in 2017 and 2018
2017

2018

Stock clearance (unit)

60,971

110,170

Agency channel
Online channel
Showroom channel

60,388
583

109,227
307

636

293,601
233,560
60,041

422,028
357,440
714
63,874

21%

26%

Normal sale (unit)
Agency channel
Online channel
Showroom channel
Stock clearance/normal sale
Source: Accounting report in 2017 and 2018

The portion of sale clearance went up from 21% to 26% in 2 years leads to the decrement
in sales growth rate as well as gross profit margin (GPM). Specifically, the sales growth
decreased from 7.86% in 2017 to 7.8% in 2018 as mentioned, and the increase in sales
was not as fast as the rise in cost of goods sold (COGS) mainly due to large of discounted
products sold in 2018 that reduced net revenue this year. Consequently, GPM declined
from 25.2% in 2016 to 23.3% in 2018 that is detailed in the following chart.

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Figure 5: Fashion Sale, Cost of goods sold and GPM in 2016, 2017 and 2018
Fashion's Sales, COGS and GPM (VND million)
250,000
200,000

25.2%
183,259

150,000
100,000

137,120

197,655

213,064
24.7%

25.0%
24.5%

163,351

148,883

23.3%

50,000

-

25.5%

24.0%
23.5%
23.0%
22.5%

2016
Total sale of Fashion

2017

2018

Cost of goods sold

22.0%
GPM

Source: Accounting report
Many consequences from the descrepancy in actual quantity and system’s quantity as
well as inconsistences of two systems make the company can not control its inventory
to make right decisions. Decrease in GPM year by year due to increase in stock clearance
indicates ineffective in sale and also impact to the brand image of Khatoco Trading.
Initial cause-effect map
Based on the face-to-face interviews with relevant people including: warehouse staffs,
warehouse keeper, inventory accountant and chief accountant, the initial cause-effect
map is presented as below graphic:

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Figure 6: Initial cause-effect map
Potential problems

Potential central
problem

Human error in
picking orders
Insufficient
recheck from
different levels
Human error in
number input
on the system

Failure in
controlling
inventory
Ineffective
security control

Reconciliation
is not correctly
performed

Symptoms

Complaint of
client about a
discrepancy in
shipping goods

Differences
between floor and
sheet during
stock count

Inventory theft

Separated
inventory
tracking
system

Different stocks
quantity between
warehouse
system and
accounting
system

Source: In-depth interviews

Potential problems:
Human errors in picking orders
According to responses of warehouse staffs, the initial cause of customer’s complaints

is the human error in picking goods. They confirmed that sometimes they made a
mistake in picking products before transferring to shippers. As Mr. Phuong – warehouse
staff stated that “there are a lot of SKUs in the warehouse at a time and sometimes, it
becomes very difficult to distinguish visually each type of products because they are
somehow similar in color, especially, in size. We just distinguish each SKU by a small
tag on each item”. In addition, he also realized that “there is one separated position to
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place ready-to-shipping goods but the package for each customer was not marked clearly
and this results in the shipment errors”.
Insufficient re-check from different levels
Wrong shipping mainly incurred in peak season that was near Tet holiday due to large
amount of shipping goods and orders, further, warehouse members didn’t have enough
time to check carefully as Mr. Thong – warehouse staff said that “wrong pickings likely
incur in peak season, especially, the period prior to Tet holiday due to large amount of
shipping goods and orders because we don’t have enough time to check them all
manually carefully. In peak season, we mostly focus on big orders and recheck them
before shipping, for small orders, we can easily replace the wrong picked items quickly”.
Thus, recheck was conducted towards big orders rather than small ones because they
thought that the problem of small orders would be not significant and wrong products
could be replaced quickly after that.
Human error in numbers and information input on the system
Firstly, the differences came from the wrong input number on the system. Warehouse
staff who is an in-charge of checking received goods is responsible for recording goods
receipt notes on the system. Sometimes, input information is wrong but they will correct
it later when goods are picked for shipment or when staffs randomly perform count on
their own for checking. Everyone can access the system easily without permission or
access requirement, so if one person found something wrong, they are able to amend it
immediately. Moreover, Mr. Long - warehouse keeper said that “sometimes, system

went down, became slow and we have to start input over if we had not saved the pending
workdone. I think mistakes in inputting information is also attributable to this”.
Moreover, warehouse keeper had to suffer the high workload so he did not have enough
time to recheck all input figures.
Inventory theft
There was one circumstance of inventory theft incurred in November 2018, when one
staff of a company went into the warehouse at the lunch time when everybody is leaving
for meal. The security guard who was hired from third party did not pay attention to this
person and check him before he left the warehouse. This issue just was found when staff
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identified many spaces of missing items on the stock shelves.
Ineffective security control
There was no camera in the warehouse, so few items were stolen. The company just
hired 2 security guards to protect both office and warehouse that are located far from
each other. Therefore, this situation indicated the weak security system of the company
in controlling inventory. This issue then was reported to the board of directors, and the
cameras have been already set since February 2019.
Ineffective security system and weak management in checking goods or recorded input
number result from the failure in controlling inventory of Khatoco Trading.
Separated inventory tracking system and reconciliation is not correctly performed
Based on confirmation of both warehouse keeper and accountant, warehouse system and
accounting system are distinguished, the amounts between two systems are not suitably
reconciled and they mostly focus on accounting stock amounts. Whenever the
accountant requires warehouse keeper to confirm on accounting numbers, he will check
with his record and sign on the confirmation. Therefore, the responsibility of any
differences in stocks belongs to warehouse keeper. As the comments of chief
accountant, the loss of inventory is mainly due to failure of warehouse keeper in
observing and managing inventory. And Mr. Tam – chief accountant also stated that

“warehouse keeper and his staffs would compensate for the any differences. After that,
we will adjust the amount as a sale transaction to him and receive his compensate. We
all agree with this practice for a long time without deeply finding the root causes leading
to discrepancies”. In addition, warehouse keeper said that loss rarely incurred, the
differences sometime due to wrong number of the system and he will adjust after selfcount. Failure in inventory control is shown more clearly through depreciation of
inventory control system, two related departments just rely on confirmation of
responsible individuals without a careful reconciliation.
Updated cause-effect map
Based on general information collected from face-to-face interviews indicated in initial
cause-effect map, the potential central problem is identified as failure in inventory
management. And according to Stevenson (3), effective inventory management played
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an important role in achieving customer satisfaction and maintaining the inventory cost
within acceptable bounds (p.559). Therefore, any failure in inventory control will badly
impact on firm’s performance like reduce customer satisfaction, surplus or shortage
inventory even poor forecasting for production and trading as Koumanakos (4)
emphasized (p.356). Moreover, Zomerdijk et al. (5) indicated the relationship between
wrong organization perspective on inventory control and inventory management
problems (p.175). In details, Zomerdijk et al. stated that concerning inventory
management is the delegation of responsibilities and authorities (5). If nobody in a
company is unclear about his or her responsibility in controlling inventory or responsible
individual has insufficient authorities to undertake the tasks, problems will incur.
Furthermore, Zomerdijk et al. also showed that inaccurate inventory records also caused
the consequences like wrong system number and actual amount (5).
Another reason of inaccuracy inventory record is weak data access control which was
partly mentioned by warehouse keeper in the initial interview. Many researches (6,911) indicated that information security was a serious requirement toward warehouse
system, the access authority must be defined and limited to ensure the accuracy of the
data and avoid loss. In addition, Richards (7) emphasized the role of warehouse in

supply chain of every organization, in which, a clean and tidy warehouse located in
suitable place contributes to delivery right products in exact quantity to right customer
on time and create cost-efficient operation for a company (p.6). Hence, a messy
warehouse creates the difficulties in counting and observing as well as wastes increases
cost due to time waste and wrong picked products to delivery. Richards (7) also
mentioned that “security of product within the warehouse is paramount” and security
system has to be designed to protect products and facilities from theft or any person
breaking in (p.176). Thus, a company which has ineffective security system can be
stolen not only products but also important warehouse data.
In another research, Vries (8) emphasized that:
“Lack of information sharing, information processing obstacles and the application
of different platform technologies throughout the company are often considered to
be the main reasons for a malfunction of inventory management systems” (p.66).
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Thus, the information in different systems has to be consistent and as same as each other
because distinguished data will lead to bad results in managing inventory.

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Reconciliation
is not correctly
performed

Unclear regulations for
stock checking and
inventory recording

(5: p.175)

Unclear responsibilities and
authorities of each level

Source: Literatures and In-depth interviews

(4: p.356)

Failure in
controlling
inventories

(5: p.175)

Wrong
organization
perspective
on inventory
control

Central problem

(7: p.176)

Ineffective
security system

(6, 7, 9-11)

Weak
warehouse data
access control

Manual input
method/
Confused
inventories codes

(8: p.66)

Separated
inventory
tracking
system

Inventory theft

(7: p.6)

Untidy warehouse,
uncategorised goods

(5: p.176)

Inaccuracy
inventory record

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Different stock
quantity between
warehouse system
and accounting
system

Differences
between floor and
sheet during stock
count

Complaint of
client about a
discrepancy in
shipping goods

Insufficient
recheck from
different level
Human error in
picking orders

Symptoms

Potential problems

Figure 7: Updated cause-effect map


The second round of face-to-face interviews is carried out with the purpose of

checking the application of literatures mentioned above into actual situation and
deeply finding the details in potential problems. The participants join these in-depth
interviews includes:
Table 6: Participants of second in-depth interviews in March 2019
No

Full name

Position

1

Bui Van Long

Warehouse keeper

2

Pham Hoai Phuong

Warehouse staff

3

Doan Minh Thong

Warehouse staff

Department
Warehouse

Unclear responsibility and authorities of each level
As the information collected from interviewees, there is unclear responsibility toward
warehouse staffs as well as warehouse keeper. The management role of warehouse
keeper was not performed correctly because he was in-charge in controlling all
warehouse activities but he did not re-check work done sufficiently of his staffs.
Manual input methods/ confused inventory codes
There are many product codes which are not completely distinguished, so they cannot
ensure entirely correct inventory input information. This is confirmed by warehouse
keeper. For example, long sleeves shirt has a code A1MD and code of short one is
A1MN with same colour and same material. Moreover, staffs input code by hand with
no recheck from higher level may lead to some mistakes.
Unclear regulations for stock checking when deliver - receive goods
Both warehouse staffs and warehouse keeper confirmed that there was no regulation for
stock checking. There is no official regulation for checking when goods were arrived to
warehouse or shipped from it. Mr. Thong emphasized that “I have been working
following to directions of warehouse keeper and never seen official instructions or
regulations of company about stock checking process”. Moreover, Mr. Phuong stated
“all activities of the warehouse belong to management of warehouse keeper and staffs,
so we discussed to conduct job based on most suitable ways as we agreed”. Besides,
warehouse keeper also showed that he had been working for the company since
establishment, so he understood clearly how to operate the warehouse that can adapt to
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the requirement of sale department in distributing and arranging goods. As a result, the
warehouse keeper is operating warehouse work mainly based on his own experience
instead of having professional regulations to direct their activities. Unclear regulation
for stock checking is one of reasons why management steps for inventory receiving and
delivery were not performed sufficiently and correctly that lead to uncontrollable

differences.
Unclear regulations of recording inventories – weak data access control
The unclear regulations of recording inventories on the system was due to each
department recorded figure on their own manual and did not have any integration
between them. In details, accountant and warehouse keeper did not discuss to record in
consistent way as well as no regulation issued for this action. As warehouse keeper said:
“Warehouse system is just used for our reference and management. Accounting system
belongs to accounting department and we are not required to compare number with that
one in accounting system. Whenever accountant needs us to confirm accounting
amounts. We will compare with our system to sign on their report if total quantity is
matched because the accountant is mainly focus on total stock amount. Therefore, no
direction of managing inventory records were agreed by both of us as well as I have
never seen any regulation about this situation yet”.
Anyone can access into warehouse system to input or adjust the number due to no
regulation of recoding inventories. This also indicated the weak control towards system
data.
Untidy warehouse, uncategorised goods
Untidy warehouse is shown through stock arrangement in the warehouse. Depending on
the answer of Mr. Long, he found an empty place to put the new ones received, then
gathered same kinds of products to place in the same area and separated position for
goods-ready-to-transfer which did not follow to any storage techniques like racking,
material handling tools or equipment which were mentioned by Kovács (12). In
addition, goods are not categorised based on code, color, quantity or some essential
details, and all information of products are marked on its tag of suppliers. Consequently,
human error is inevitable.
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