ESTABLISHMENT OF SYSTEMS AND
PROCEDURES AT PALOMINO JEANS WEAR
CORPORATION
by
CO, SEAN CHRISTOPHER Q.
A Practicum Report Submitted to the School of Industrial Engineering and
Engineering Management in Partial Fulfilment of the Requirements for the
Degree Industrial Engineering
MAPÚA INSTITUTE OF TECHNOLOGY
January 2010
1
2
ACKNOWLEDGEMENT
The author would like to acknowledge the following persons in a way or another that
had contributed to the accomplishment of this study:
To the Palomino Jeanswear Corporation for providing and approving his application
to be trained in their company.
To Ms. Aidai Dela Cruz, Sales Coordinator of the company, for providing sufficient
information for the study.
To Sherlyn Co, Marketing Manager of the company, for providing sufficient data for
the accomplishment of the study.
To all employees of Palomino Jeanswear Corporation namely: Maám Tess, Maám,
Sally, Sir Jerry and Sir Sunny for the knowledge that they had shared through lectures and
assistance during training.
To Prof. Andrada, for all her support and guidance throughout the study and help she
provided in the revisions.
To his friends Darell, Jewel, Pau and Allan for all the moral support and their
encouragement before the presentation.
Special acknowledgement to the persons closest to his heart Dexter, Sandee, Natasja
and his supportive parents, mom and dad, for being concerned and responsive to all his needs
throughout the development of this study.
Above all the greatest acknowledgement is due to the Almighty Father and God for
all His love and blessings.
-
Sean
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ABSTRACT
Normal Operations in the stores of the company is storing sales data, computing for
the sales for the day, checking the inventory and recording the items which sell the most. Of
the four operations, checking the inventory and recording sales are the most important
because they are the bread and butter of the company. Due to these, companies usually faced
these kinds of problems regarding the quantity variance on the inventory. This study showed
that on months of August 2008 until July 2009, Palomino Jeanswear Corporation conducted a
physical count on each of the last day in almost all stores. On the subsequent days, the
balances per count vs. the tallied inventory report were reconciled for the existence of the
quantity variance. Based on the results, inventory has the variance or discrepancy of 16.43%.
The company incurred a loss of PHP 24,615,900. The study identified the possible causes of
quantity variation and aimed to reduce it to 5%. The study came up with the corresponding
recommendations that would improve the system and increase the inventory accuracy.
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TABLE OF CONTENTS
PAGE
APPROVAL PAGE
ii
CERTIFICATION
iii
ACKNOWLEDGEMENT
iv
ABSTRACT
v
TABLE OF CONTENTS
vi
LIST OF TABLES
vii
LIST OF FIGURES
viii
Chapter 1:
Introduction
1
Chapter 2:
Review of Literature
4
Chapter 3:
Systems Improvement on Quantity Variance in Palomino Jeanswear
Corporation
22
Chapter 4:
Conclusion
50
Chapter 5:
Recommendation
51
GLOSSARY OF TERMS
ix
APPENDICES
x
REFERENCES
xi
5
6
Chapter 1
INTRODUCTION
Palomino Jeanswear Corporation is a fashion-retail company outlet that sells its own line of
ready to wear jeans and apparel. Company used to cater to different kinds of market including the
men’s, ladies, and children but because of the crisis the country is experiencing for the past years,
the company now focuses on children wear that includes jeans, shirts, school uniforms, and polo
shirts etc.
Currently Palomino Jeanswear Corporation out sources from local manufacturers the
clothing they sell from the outlets.
Palomino Jeanswear Corporation has branches on almost all SM department stores in the
Philippines. SM uses the consignment for the department stores. SM gets a commission or a
percentage for every item sold in every store.
For every branch, there are two salesladies that are assigned in the outlet. The two
salesladies record every sales transaction that happens in the day and report it to the main office
weekly. In this kind of system, accuracy should not be an issue where the salespeople record each
transaction right there and then exactly at the process when customer is buying the merchandises
but variances still arises. Such problems are focused in this study. One of which is the variation of
that arises from the system reported against the actual sales.
From the delivery of the goods to the warehouse, the warehouse staff checks if the goods
delivered tally the details in the delivery receipt. Then after checking, the delivery receipt is given to
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the inventory manager. From the warehouse, the goods are being segregated according to the
quantity that the stores have ordered and then they deliver them one by one.
For the goods in the stores, sales personnel are expected to keep a record of sales made.
Reports are then submitted to the main office weekly. These reports are then collated and
reviewed. The inventory reports are the main focus of this study.
On the last few days of the month, the sales personnel in charge for every branch does the
physical counting of the inventory in the stock room in each branch and compiles the sales reports
for the month and tallies it to check if there is a discrepancy with the reports.
From the periods of August 2008 to July of 2009, inventory report showed a quantity
variance of 16.43% which was 54,702 units of clothing items which were not returned or missing in
each store. With this, the company incurred a loss of PHP 24,615,900.
Given this high percentage of variance and its impact to the company, the author decided
to really work on this project and came up with the following objectives: (1) to identify possible
causes of variance, (2) to reduce it from 16.43% to 5% or 16644 quantities of clothing items because
of the target made by the company and (3) to establish a system and procedures in the activities of
the company that will reduce quantity variance.
The author will focused on the variance of inventory reports of the company. The time given
by the school to the author was the factor why there was a limitation on the scope of the study. The
author had to gather sufficient data for the fulfillment of the study.
The final report was presented to the management of Palomino Jeanswear Corporation
together with the results and recommendations. The company was then free to take the necessary
actions to improve its current system. This study will also helped the company to realize its
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strengths and weaknesses with the current system. Moreover, this would aid in minimizing the
predicaments encountered by the company in its daily operations.
The author of this study, being a student will have the opportunity to apply all his
knowledge like theories, concepts, principles and tools that he learned from the institute to the
company. The author will also have a chance to experience how it really works on the real world and
apply his knowledge to his everyday life. The study helped the author to develop the skills in
defining the problem in the company and to use a research in working out solutions to the problem.
This study also helped the author to improve communication skills with other people through
interviews.
The researcher studied the system of the company from recording to tallying sales. Working
days are from Monday to Saturday. The author presumed that all the data provided by the company
were accurate. Information gathered through interviews, observation and documents were treated
as a reliable source of data. Furthermore, the author assumed that the company would support
morally and financially whatever solutions may be recommended.
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Chapter 2
REVIEW OF RELATED LITERATURE
This chapter presents the review of related literature about the topic that the author
considered to be significant and believed to help the author give supplemental knowledge that
strengthened the foundation of the study.
The author presented these articles that gave relations to the study by applying the IE
principles. The articles represented on how to improve or to reduce the variation on the sales and
improving the way the company records sales would help reduce the variance on the sales.
According to Colin Drury (2004), it is not meaningful to analyze the total sales margin
variance into price and volume components, since changes in selling prices are likely to affect the
sales volume. Consequently, a favorable price variance will tend to be associated with an adverse
volume variance, and vice versa. It may be unrealistic to sell more than the budgeted volume when
the selling prices have increased.
A further problem with the sales variances is that the variances may arise from external
factors and may not be controllable by the management. For example, changes in the selling price
may be the result of the response to changes in selling price by the competitors. Alternatively, a
reduction on both selling price and sales volume may be the result of an economic recession that
was not foreseen when the budget was prepared.
According to Hansen, Mowen, and Guan (2009), managers frequently want to compare
actual profit earned with expected profit. This leads naturally to variance analysis, in which actual
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and budgeted amounts are compared. Profit variances center on the difference between budgeted
and actual prices, volumes, and contribution margin. Actual revenue may differ from expected
revenue because actual price differs from expected price or because quantity sold differs from
expected quantity sold, or both. The sales price variance is the difference between actual price and
expected price multiplied by the actual quantity or volume sold.
According to Siegel, Dauber, and Shim (2005), gross profit analysis deals with how to analyze
the profit variance which constitutes the departure between actual profit and the previous year’s or
the budgeted figure. The primary goal of profit variance analysis is to improve performance and the
profitability in the future. Profit whether it is gross profit in absorption costing or contribution
margin in direct costing is affected by at least three items: sales price, sales volume and costs. In
addition, in a multi-product firm, if not all products are equally profitable, profit is affected by the
mix of products sold. Detailed analysis is critical to management multi-products exist. The volume
variances may be used to measure a change in volume (while holding the mix constant) and the mix
may be employed to evaluate the effect of a change in sales mix (while holding the quantity
constant). This type of variance analysis is useful when the products are substituted for each other,
or when products which are not necessarily substitutes for each are marketed through the same
channel.
According to Robson, one of the problems with the analysis of variance is that it can be
made over-elaborate to the point that managers do not understand the meaning of the figures, as a
result of which limited use is made of the information provided. It is therefore important to be sure
that the variances which are reported are useful and fully understood by the user.
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Apart from variances outlined in the book, comparisons between performance and plan may
also be relating to assets: for example, a comparison may be made between actual and budgeted
stock levels, or between the actual and budgeted cash, debtor and creditor levels.
According to Shim and Siegel (2004), standards and variances analyses resulting there from
are essential in financial analysis and decision making. These are the advantages of standards and
variances. (1) Assist in decision making. (2) Sell price formulation. (3) Set and evaluate corporate
objectives. (4) Cost control. (5) Highlight problem areas through the “management by exception”
principle. (6) Pinpoint responsibility for undesirable performance so that corrective action may be
taken. Variances in product activity (cost, quantity, quality) are typically the foreman’s
responsibility; variances in sales are often the responsibility of marketing manager; variances in
profit usually relate to overall operations. It should be noted that if variances indicate strengths,
further advantage of them should be taken. (7) Facilitate communication within the organization. (8)
Assist in playing in by forecasting needs. (9) Establish bid prices on contracts.
According to Pizzey (1989), there are three main sales variances: the price variance, the
quantity variance and the sales mixture variance. With sales variances, profit or turnover will differ
from standard for two main reasons: variations in the selling price; and variations in the volumes
sold. The price variance shows the effect of profit or turnover if sales have been made at prices
other than the standard price, while the volume variances can be subdivided to show the effect on
profit or turnover of a different quantity sold from that specified in the standard. The mixture
variance will arise only if a company sells more than one product. When it is computed for a range
of products this variance reveals the extent to which sales of individual products are failing to meet
budgeted targets. This information will prove useful when a decision is made as to how to allocate
funds within the advertising budget. If the mixture of products sold differs from the mixture planned
12
in the budget, it will have an effect on profit, e.g. if more goods with a large profit margin are sold to
compensate for reduced sales for those products with a small profit margin.
According to Angerer (2005), for a retailer it is more challenging for the right amount of
items on the shelves if there is a large sales variance in a store. There are two problems that arise
when facing selling irregular behavior. First, the replenishment system must be flexible enough to
cope with the increased complexity. For example, the company must be able to order on one day
50, on another only 5 items of a certain product. The pack size will play a role as it determines the
minimum possible order quantity. Nevertheless, much more difficult to handle is the second effect.
If, in addition to the high sales variance of a certain product, there is also low predictability, the
replenishment becomes more complex. The amount of safety stock is strongly influenced by this
parameter: higher sales variance leads to higher inventory levels. The higher the demand
uncertainty, the higher the rates will be. For store employees, it is very difficult to keep track of
inventory levels for products that have high sales variance. Besides, some store managers prefer
regular ordering patterns. It is obvious that the bigger sales variance, the worst such simple ordering
patterns will work. For automatic systems, inventory visibility is not affected by the sales rate or
variance, the system always knows the quantity in stores (inventory records accuracy aside).
Besides, automatic store replenishment systems decide every replenishment period whether it is
necessary to place the order. For these reasons, one can expect that the store personnel will have
more difficulties replenishing correctly high sales variance products compared to automatic store
replenishment system.
According to Ryan (2001), variances of all types can be classified into two groups:
controllable and non-controllable. Controllable variances are ones which come under direct
management influence, for example: the usages of resources on processes, the level of production
13
activity, the cost of labor and certain overheads. Other costs are not directly controllable: supplier’s
price, the final market price of the product (which subjects to the influence of market). The
investigation of variances can be a very expensive process for management in terms of both time
and the resources required to identify and explain their causes. ‘Management by exception” is a
name given to a process where, following the establishment of a range of acceptable variances,
management only pursues those variances which are outside the range. In practice, the magnitude
of the range will depend upon the degree of control which management either wishes to have or
feels that it can impose upon the system. It also depends upon the degree of slack which can be
tolerated in the production or selling system.
According to Wysocki (2009), variances are deviation from the plan. Think of variance as the
difference between what was planned and what actually occurred. There are two types of variances:
positive variances and negative variances.
Positive variances are deviations from the plan indicating that an ahead of schedule
situation has occurred or that an actual cost was less than a planned cost. This type of variance is
good news to the project manager, who would rather hear that the project is ahead of schedule or
under budget. Positive variances bring their own set of problems, however, which can be as serious
as negative variances. Positive variances can result in rescheduling to bring the project to
completion early, under budget, or both. Resources can be reallocated from ahead of schedule
projects to behind schedule projects. Positive variances also can result from schedule slippage.
Consider budget. Being under budget means that not all dollars were expended, this may be direct
result of not having the completed work that was scheduled for completion during the report
period.
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Negative variances are deviations from the plan indicating that a behind schedule situation
has occurred or that an actual cost is greater than a planned cost. Being behind schedule or under
budget is not what the project manager or reporting manager wants to hear. Negative variances are
not necessarily bad news. In most cases, negative time variances affect project completion only
when associated with critical-path activities or when the schedule slippage on noncritical-path
activities exceeds the activity’s slack.
According to Shim and Siegel (2005), the sales price variance indicates if the product is being
sold at a discount or premium. Sales price variance may be due to uncontrollable market conditions
or managerial decisions. The analysis of sales volume includes consideration of budgets, standards,
sales plans, industry comparisons and manufacturing costs. Note that high sales volume does not
automatically mean high sales profits. There may be high costs associated with the products. An
unfavorable sales volume variance may arise from poor marketing or price cuts by competing
companies. If the unfavorable volume variance is coupled with a favorable price variance, the
marketing manager may have lost sales by raising prices. The sales volume variance reflects the
effect on the total budgeted contribution margin that is caused by changes in the total number of
units sold. The variance can be caused by unpredictable product demand, lack of product demand,
or poor sales forecasting.
An unfavorable total sales variance may signal a problem with the marketing manager
because of control over sales, advertising, and often pricing. Another possible cause of unfavorable
sales situation may be a lack of quality control, substitution of poorer quality components due to
deficient purchasing, or deficient product design emanating from poor engineering. The sales
variances are prepared only for the product sales report and sales district report. The marketing
manager is responsible for sales variances and must explain any deviations to upper management.
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Davis (2007) states that there is another method for computing sales variances known as
the “sales mix variance”, which measures the impact of different mixes of product sold. This is useful
for companies with multiple products and product lines where management needs to understand
the financial implications to the company of the actual product mix vis-à-vis the budgeted product
mix. Sales managers develop budgets for their business plans that outline how the department’s
money is going to be allocated between revenues and costs for a specific period of time, usually for
the forthcoming year. Once the year has been completed, the actual financial performance is
compared to the original budget. Sales variance analysis enables management of company to
identify the impact of specific variables on overall sales performance. If management reviewed only
total sales results, then they would conclude that the business performed better than the plan.
Toit (2007) states that the factors causing variances can be subdivide into the following four
elements. Element one: costing system errors. If the system itself malfunctions, variances may be
reported wrongly. For example, the issue of material stock from stores at an erroneously high price
would generate unfavorable material price variances. Likewise, inaccurate direct labor time
recording can result in false labor efficiency variances. Such variances are caused by errors and are
signals that the way the standard costing system is being run needs to be improved. Element two:
inappropriate standards. The standard cost that sets is one of the two figures from which variances
are computed. Consequently, the level at which the standard has been set can directly influence the
variances. For example, the standard may be deliberately set tightly at a level above what is
considered attainable in order to motivate employees. All variances will be unfavorable as a result,
but this will not indicate that corrective action is needed. Element three: uncontrollable random
factors. It’s unlikely that any standard will be achieved continuously where there is human
involvement in the work being done. Inevitably, human performance lacks consistency. Even simple
and familiar tasks performed by skilled individuals will show small amount of random variances.
16
Because they are inevitable they are also uncontrollable, and this variance element is not a signal
that action is required. Element four: controllable variances with operational causes. Lastly, there
are variances caused by operating factors that managers can influence. For example, an employee
may suggest and introduce a new working method that leads to faster production and increased
output. The resulting favorable efficiency and volume variances may signal the value of this initiative
to a manager, who might then incorporate it as part of the normal working routine. On the other
hand, a machine fault or the provision of inadequate training can lead to an unfavorable efficiency
and volume variances. The reporting of such cost variances can trigger managerial action. This is,
therefore, the variance element that operational managers are most interested in identifying. Any
reported variance may contain all four elements, which makes variance analysis a challenge but the
interpretation depends on the manager’s experience on how to deal with it.
Levin and Kalal (2003) state that purchased materials planning is the establishment of goals,
policies, and procedures that work together to create a continuous flow of quality materials that are
on time and at a price that meets the needs of the business. This is the difference between buying
and purchasing. There are many variances that impact production. These variances need to be
identified so that resources can be brought to bear toward minimizing the impact on the business.
An obvious planning variance would be sales volume. Is the business cyclical, seasonal, or growing at
a continuous rate? Does the business have some products that are declining in sales while there are
others that are increasing? Do some products that have just completed development and which are
ramping up in production to fill anticipated orders from the marketing efforts? Does the business
commit purchase orders from some of customers with some straddling the fence? Sales variances
are major drivers in determining the need for materials. When the sales and marketing departments
can generate accurate sales forecasts, the production levels can be met. From the production
requirements the materials and quantities that go into the product can be known. The longer the
17
range and accuracy of sales forecasts, the better will be the ability to more accurately plan materials
purchases. This gives leverage in materials planning.
Berry (2004) states that variance is the frequently forgotten other half of budgeting. Many
businesses, especially the small, entrepreneurial kind, ignore or forget the other half of the
budgeting. Budgets are too often proposed, discussed, accepted, and forgotten. Variance analysis
ranges from simple and straightforward to sophisticated and complex. Some cost accounting
systems separate variances into many types and categories. Sometimes a single result can be broken
down into many different variances, both positive and negative. The most sophisticated systems
separate unit and price factors on materials, hours worked, cost-per-hour on direct labor, and fixed
and variable overhead variances. Though difficult, this kind of analysis can be invaluable in a
complex business. In theory, the positive variances are good news because it means that spending
less than budgeted while negative variance means spending more than the budget.
Khan and Jain (2000) states that unfavorable variances are not necessarily due to inefficient
performance. To illustrate, an unfavorable material price variance may have been caused by the
purchase of better quality than the budgeted ones. The recruitment of better skilled and trained
workers may lead to an unfavorable labor rate variance. In view of these possibilities, favorable and
unfavorable variances should not be taken at their face value; there is rather a need for in depth
analysis and investigation by management. The degree of investigation will depend upon: (1) The
nature of variance – controllable or uncontrollable and (2) The significance in terms of its magnitude
and frequency of occurrence. The controllable variances are those that are controllable at the level
of the various responsibility centers. Examples of such variances are material usage variance, labor
efficiency, and overhead efficiency variances. The variances that are generally not controllable
include material price variance, labor rate variance, and fixed and variable spending variances. The
18
solution to uncontrollable variances in most situations is a revision of the relevant standards.
Controllable variances merit management attention and should be properly reported.
Marriott, Edwards, and Mellett stated that variances should be considered separately, but
people should be aware of the fact that business activity involves interaction between a range of
different resource inputs and that factors which may have favorable effects in one direction may
produce negative outcomes elsewhere. It is therefore important for management to ensure that
activities are fully coordinated and that actions are not taken that, although improving apparent
performance in one area may have unfavorable repercussions for the performance of a company as
a whole. For example, the decision might be taken to engage a lower grade of labor than anticipated
when setting the budget in order to reduce personnel costs and produce a favorable labor rate
variance. The lower cost employees may, however, take much longer to do the job, producing an
unfavorable labor efficiency variance, and may fail to process materials with sufficient care, resulting
in an unfavorable materials usage variance. In a similar vein, the purchase of cheap materials may
result in more materials being used and more time being taken due to a high rejection rate.
Kuppapally (2008) states that standard costing is considered to be a system of cost
variances. Cost affects profits of the business. But sales determine the volume of profit or loss. Cost
therefore, is very instructive for the management to calculate sales variances. If the selling price
goes high, the volume of sales shall be lower than the standard. It may result in a favorable variance
as to price and unfavorable variance as to quantity. The variances may be on account of controllable
as well as non-controllable factors. Changes in market conditions demanded by the customers, and
so on are, of course, beyond the control of the management. But certain factors such as nonaccessibility to the buyers, lack of advertisement and submission of high priced tender, are
controllable, and efforts can be made to check the adverse variance. The variances indicate the
19
difference between actual value of sales and budgeted or standard value of sales. When the actual
sales are more than the standard or budgeted sales, the variance will be favorable and vice versa.
Lawrence and Geurts (2006) states that large variances in sales generally make the
forecasting of sales less accurate. If the forecaster can reduce the variance of a time series the
forecaster can generally increase the accuracy. If the manager can forecast Christmas sales rather
than forecasting November, December, and January sales as separate months, then the accuracy
can be increased. November sales can be dramatically affected by when Thanksgiving occurs in the
United States because the day after Thanksgiving is the start of the Christmas sales season and is
often the biggest sales day of the entire Christmas season. Because Thanksgiving is always the
fourth Thursday in November, it occurs on different dates each year and the Christmas season sales
can start as early as the 22nd of November or as late as the 28th of November. For products that have
a large part of their sales during the Christmas season, November sales are dramatically impacted by
whether Thanksgiving is the 22nd instead of the 28th. By forecasting the Christmas sales cycle instead
of specific months the forecast may be more accurate because the variance caused by the varying
date of Thanksgiving is reduced. Also, Christmas sales can be shifted because of weather. Good late
November weather can shift sales from December to November. Shoppers “take advantage” of the
good weather to do their shopping hoping to avoid stormy weather that may occur in December.
Generally, Christmas sales are not increased because of an earlier start to the Christmas season. The
result is a more accurate forecast when the event, “Christmas” sales, is forecasted rather than
monthly sales.
Manhiw (1994) formulates that judging performance by the variance of the nominal GDP
growth rate is equivalent to targeting the growth rate of nominal GDP rather than a path of nominal
GDP levels. Although distinction has no implication for the long term inflation rate, it does not affect
20
the optimal response of policy to short-term shocks to the economy. In particular, the implicit
desired future path of nominal GDP is always independent of the starting point. This can be seen
more clearly by contrasting the target of minimizing the variance of the nomincal GDP growth rate
with the alternative target of minimizing the variance of nominal GDP around a trend with an
exponential rate of growth equal to the sum of the desired rate of inflation and the mean real GDP
growth rate in the sample. If the economy starts on the trend line, the two criteria are the same for
the first period. But any departure from the trend during the first period implies a different standard
for the second period. The criterion of minimizing the variance of the nominal GDP growth rate
ignores any “base drift” in nominal GDP. It can be thought of as minimizing the variance around the
trend line with the starting point of the trend rebased in each period to the actual level achieved in
the previous period.
According to Owen (2003), an approach that influenced sales is by considering the product
life cycle. If the product is mature, sales should be budgeted the same as the previous financial year.
If the product is at the growth stage, more sales should be budgeted than the last year. Next the
trade cycle should be considered. If the outlook is for a recession, a company might sensibly predict
lower sales than last year. If a boom seems likely, a company may increase their sales budget. If a
product moves into the decline stage of the product life cycle at the same time as a recession, the
predicted fall in sales could be substantial. The sales budget may have to be 20% lower than the
previous financial year. If the product is at the growth stage when a boom is imminent, the sales
budget may be 20% higher than the last financial year. Also inflation and interest rates should be
taken into account. If the inflation is expected to be around 5%, a firm might sensibly increase sales
budget by 5%. If the inflation is expected to be low, e.g. 2%, budgeted sales may be the same as last
year. Interest rates also have an impact on consumer spending. In an increase in interest rates is
likely, firms should consider reducing sales budgets.
21
Finally, when predicting sales, competition is a significant factor. If competitors are
launching new products or conducting intensive advertising campaigns, the potential impact should
be taken into account in sales budgets. If all the right factors are considered, the sales budget will be
more accurate.
According to Meckin (2007), variance analysis also suggests that there are two issues
adversely affecting profit: the decreased percentage gross profit being achieved on sales and the
increased rate of spend per $1 sale on administration costs. Of these, the decreased percentage
gross profit on sale is deemed the most important, as this having the greatest monetary impact on
profit. In fact, variance analysis goes on to suggest that sales and marketing costs are not a problem
at all. If anything, the people should be trying to ascertain how the company has managed to reduce
its expenditure per $1 sale and congratulate the people responsible for the improvement on
performance.
According to Jackson, Sawyers, and Jenkins (2009), standard costs and variance analysis can
be useful to managers attempting to diagnose organizational performance; they are most effective
in stable companies with mature production environments characterized by a heavy reliance on
direct labor. On the other hand, there may not be much help in rapidly changing companies,
companies with flexible manufacturing systems, companies with heavily automated manufacturing
processes, or companies that emphasize continuous improvement and reducing non-value-added
activities in the production process. Although variance analysis may still be of value as a summary
report for top management, still have a number of drawbacks when used in many modern
manufacturing environments: (1) The information from variance analysis, is likely to be too
aggregated for operating managers to use. To be useful, material variances may need to be broken
down into detail by specific product lines and even batches of product, and labor variances may
22
need to be calculated for specific manufacturing cells. (2) The information from variance analysis is
not timely enough to be useful to managers. As product life cycles are reduced, timely reporting is
even more critical than in the past. (3) Traditional variance analysis of variable and fixed overhead
providers little useful information for managers. (4) Traditional variance analysis focuses on cost
instead of product quality, customer service, delivery time, and other non-financial measures of
performance.
Gorman (2003) states that budget variances are rarely self-explanatory. Therefore, the
manager accountable for meeting a sales or expense budget must identify the causes of any
significant variances. The reasons for shortfalls in sales are among the most difficult to identify and
address. Assuming that the sales budget was realistic and achievable, variances can usually be
traced to one or more of the following factors: (1) Competitors with better prices, products, service,
warranties, advertising, or promotions. (2) Market saturation. (3) Loss of major accounts or high
performing salespeople. (4) Misallocated marketing and sales resources. (5) Inadequate training or
support of salespeople. (5) Poor post-sale customer service and support. (6) Low morale among
sales or customer service employees.
According to Thomas (1995), variances are produced by comparing actual results against the
pre-set standards. However, this simple method may need to be refined as high variances may
result which reflect the forecast error of the standards. For example, although the average daily call
rate is set at eight, there is probably no cause for alarm if this varies between six and ten. Because
so many of the standards are produced by averaging past performance, it may well be necessary to
process the actual results before comparing them against standard. Having identified the true
nature of the variance, the sales manager has to decide whether it results from faulty standard
setting or inadequate performance. If the former, the standards will have to be improved, usually by
23
some form of training or instruction. If the individual is to improve, the person must be given
specific targets to achieve within specific time periods otherwise little or no change will result.
Needham and Dransfield (1994) states that as the budget period gets under way,
departmental coordinators will follow its progress and, by exercising close control over areas, will
try to ensure its success. Managers could break the year down into monthly accounting periods so
that, as the year progresses, the actual figures can be compared with the budgeted figures and the
difference of variance analyzed. If actual figures are more than budgeted figures, there will be an
adverse expenditure variance and a favorable sales variance. If actual figures are less than budgeted
figures, there will be a favorable expenditure variance and an adverse sales variance. Variance
analysis detects problems and enables managers to take prompt action to try to improve efficiency
and profitability.
24
Based on the books read by the author, variance is the difference between the actual value
and budgeted value or the forecast. There are two types of variance. Positive variance which entails
that the actual sales are greater than the planned sales or forecasted while negative variance is that
the actual sales are less than the forecasted sales. There are also controllable and non-controllable
variances. Controllable variances are the ones which management has influences like usage of
resources on processes and etc. while non-controllable variances are the ones which management
doesn’t have any control like the supplier’s price. Variances are analyzed with the goal to improve
the profitability and performance in the future. One of the problems with analysis of variance is that
it can be made over-elaborate to the point that managers do not understand the meaning of the
figures, as a result of which limited use is made of the information provided. It is therefore
important that the user fully understands the reports on variances. Variances can usually be traced
to one or more of the following factors like competitors with better prices, products and services,
market saturation, loss of high performing salespeople, misallocated marketing and sales resources,
and inadequate training or support of salespeople.
25
Chapter 3
SYSTEMS IMPROVEMENT STUDY ON QUANTITY VARIANCE IN PALOMINO JEANSWEAR
CORPORATION
Normal Operations in the stores of the company is storing sales data, computing for the
sales for the day, checking the inventory and recording the items which sell the most. Of the four
operations, checking the inventory and recording sales are the most important because they are the
bread and butter of the company. Due to these, companies usually faced these kinds of problems
regarding the quantity variance on the inventory. This study showed that on months of August 2008
until July 2009, Palomino Jeanswear Corporation conducted a physical count on each of the last day
in almost all stores. On the subsequent days, the balances per count vs. the tallied inventory report
were reconciled for the existence of the quantity variance. Based on the results, inventory has the
variance or discrepancy of 16.43%. The company incurred a loss of PHP 24,615,900. The study
identified the possible causes of quantity variation and aimed to reduce it to 5%. The study came up
with the corresponding recommendations that would improve the system and increase the
inventory accuracy.
26
Palomino Jeanswear Corporation is a fashion-retail company outlet that sells its own line of
ready to wear jeans and apparel. Company used to cater to different kinds of market including the
men’s, ladies, and children but because of the crisis the country is experiencing for the past years,
the company now focuses on children wear that includes jeans, shirts, school uniforms, and polo
shirts etc.
Currently Palomino Jeanswear Corporation out sources from local manufacturers the
clothing they sell from the outlets. There is a quantity variance on the inventory report compared
against the physical count of the sales personnel in the stores. This entails loss to the company.
Executing ways to improve the system of the company will help in reducing the quantity variance.
Some methods were used in order to determine the possible causes of quantity variation.
Various techniques and methods were utilized in data gathering needed to begin this study.
Procedures undertaken to obtain the needed information were work orientation, direct observation,
and review of company records and interview. The researcher was oriented by the coordinators of
the salesladies Ms. Aida dela Cruz and Maritess Rosario. The coordinators explained the flow of
system inside the company and the stores that the company engages starting from the point of sale
to the point of recording sales and then reporting it to the manager. Ms. Sherlyn Co, marketing
executive of the company also suggested to the researcher some possible areas of the study.
Direct observation on the workers was done to see the activities performed by the sales
personnel and to determine additional information to the study. Processes were carefully observed
to verify the flowchart provided by the coordinators, to find out the possible causes of the problem
and to let the author learn the daily tasks performed by the personnel. A careful analysis of the
study was important to arrive at the best possible result.
27
Interviews helped the researcher to clarify and to verify the things that he observed.
Mingling with different people helped to determine additional information or data which were not
gathered through actual observation. It also enabled the author to gather issues regarding the
activities performed by the personnel. Interviews were conducted depending on the availability of
the personnel and other workers involved in the process.
The author was hired as an on-the-job trainee at the Palomino Jeanswear Corporation. He
was assigned to handle the problem regarding the determination of the main cause of a large
difference in the sales reports. Past records and reports of the company regarding the information
on the problem was provided by Ms. Sherlyn Co, the marketing executive. The basis of the problem
was the data from August of 2008 until July of 2009.
The tools used in this study were the following: why-why diagram, how-how diagram,
flowchart and cost-benefit analysis.
Why-why diagram was used to show the main causes of the problem. This would tackle all
the possible sub problems of the company and would see the inner cause. This diagram is very
helpful because sub-problems may arise that are not yet encountered by the company and thus,
helping them realize about it and act on it.
How-how diagram was used to show possible solutions to the main problem. This diagram
comes with the why-why diagram because it shows solutions that will eliminate sub-problems and
eventually the main problem.
Flowchart was used to show some sequences of operations and to represent the processes
involved from point of sale to recording a sale. This would record the entire process in a compact
manner for better understanding. This would also, represent the separate steps or events that
28
occurred during the performance of a task in the series of actions to illustrate the movement of data
from personnel of Palomino and the personnel of SM department store.
Cost benefit analysis was used in the evaluation process, in order to determine the cost
entailed together with the benefits that the company would incur in establishing the method
proposed by the researcher. This could help in determining whether the proposed solution would be
worthwhile and be feasible economically.
Methods Improvement was used in the company. This would help the company to analyze
the job or the workplace and to help the company improve its productivity. This would also help the
company to see in what particular activities needed to be improved in order for the company to
reach its goals based on this study.
29
WHY-WHY DIAGRAM
Insufficient no. of
sales personnel
Inconsistency in
the sales report
Improper man
power allocation
Returned items
not counted
Inconsistency in
counting
Occurrence of
Quantity Variance
Theft
Insufficient no. of sales
personnel during promotional
events
Poor handling
methods
Damage items
No quality checking on
the warehouse
= Key cause
Figure 3.1: Why-why Diagram
30
Insufficient policies on the
company regarding
warehouse
31
HOW-HOW DIAGRAM
Be more consistent
in reports
Additional employee
during promotion
Returned items should
be recorded and
counted
Be consistent
in counting
Reduce quantity
variance
Minimize
theft
Revised policy on
sales processing
tpolicy
Double check on
physical count
Additional employee
during peak season
Revise policy on
warehouse
department
Be more careful
with the items
Create a variance form
in the warehouse dept.
Minimize damaged
items delivered in
stores
Inform supplier
about defects
Quality check
before delivery
= Selected solution
OR
= alternative solution
Figure 3.2 How-How Diagram
32
OR
Add in the policy of
the company
Based on figure 3.1, the researcher came up with the corresponding key causes which
were insufficient number of sales personnel and insufficient policies. These key causes were
considered for the occurrence of the quantity variance in the reports. So, the researcher studied
the whole system of different activities like processing of sales in the department store, process
of delivery of items from supplier to warehouse to the stores, and the process of promotional
events using the standard policies and procedures and revise it to establish a system and
procedures that will minimize quantity variance.
On figure 3.2, the researcher came up with the possible solutions or alternatives to the
main problem. The possible solutions were adding new employees during peak season, and
revising the policies and procedures with the company regarding those activities mentioned
above which needed improvement. Systems and procedures policies were being added to
improve the system to attain the goal of the study.
33
PALOMINO JEANSWEAR CORPORATION
SALES PROCESSING POLICY AND PROCEDURE MANUAL
Doc Code: SP – 01
Activities in Sales Processing
Rev No: 1
Eff. Date: Dec 2009
SECTION 1: Sales processing in stores
Page 1 of 5
I. OBJECTIVE
To ensure the attainment of goals of the company, management shall revise the policies
and procedures for the activity that is related with the sales processing in each store. It shall
likewise evaluate each store’s sales personnel for following the rules and procedures made by
the company.
II. COVERAGE
Sales personnel who are involved in the stores of the department stores.
III. POLICY
1. Sales personnel should always record and report immediately any defects on the
items delivered.
2. Before submitting the report, the sales personnel should have updated the
inventory and sales report in case of changes to lessen the discrepancy between the
reports.
3. In case a personnel need to take a break, make sure that there is a personnel left in
the stores. Sales personnel should never take a break at the same time leaving the
stall with no staff.
34
4. Sales personnel should inform the coordinator at least 3 days before taking a day-off
that way the coordinator can adjust the personnel or look for a replacement for the
mean time.
5. Sales personnel should always double check when making a physical count on the
items.
6. Each store should always have 2 sales employees.
IMPLEMENTATION
The manager which is in charge of the sales personnel will implement these policies.
35
PALOMINO JEANSWEAR CORPORATION
SALES PROCESSING POLICY AND PROCEDURE MANUAL
Doc Code: SP – 01
Activities in Sales Processing
Rev No: 1
Eff. Date: Dec 2009
SECTION 1: Sales processing in stores
Page 2 of 5
IV. PROCEDURE
Activity
Responsibility
Document
Customers go to the stores to check
the items.
Customer
2
Customer picks an item from the
store.
Customer
3
Customer asks for size of the item or
other color.
Customer
4
Checks the items requested in the
store
Sales personnel
5
Available? If yes, gives the item to the
customer, otherwise goes to
stockroom to get the item
Sales personnel
6
Tears off the part with the barcode
sticker
Sales personnel
Barcode sticker
7
Records the sales made in the sales
report
Sales personnel
Sales report form
8
Checks the returned items in the main
cashier
Sales personnel
1
36
PALOMINO JEANSWEAR CORPORATION
SALES PROCESSING POLICY AND PROCEDURE MANUAL
Doc Code: SP – 01
Activities in Sales Processing
Rev No: 1
Eff. Date: Dec 2009
9
Record the changes made in the sales
report and inventory report
Sales personnel
Sales report, inventory
report
10
Summarizes the sales for the day
Sales personnel
Sales report
37
PALOMINO JEANSWEAR CORPORATION
SECTION 1: Sales processing in stores
SALES PROCESSING POLICY AND PROCEDURE MANUAL
Page 3 of 5
V. PROCESS FLOW
Activity
Details
START
Customer scans the items
Customer checks
the merchandises
Customer picks an item from the
stall
Picks an item from
the stall
Customer asks for size or other
colors
Ask for the size or
other colors
Sales personnel checks if the items
requested is already in the stall
Checks the items
available in store
YES
1
Available?
Checks if the item is already
available, if not goes to the next
process
NO
A
38
Doc Code: SP – 01
Activities in Sales Processing
Rev No: 1
Eff. Date: Dec 2009
SECTION 1: Sales processing in stores
Page 4 of 5
Details
Activity
A
Goes to the stockroom to
get the item requested
Gives the item to the customer
Give the item to the
customer
1
Barcode
sticker
Sales report
Sales personnel go to stockroom to
get the item
Personnel tears off the part of the
price tag with the barcode sticker
Personnel tears off the
part with the barcode
sticker
Personnel records the sales made in
the sales report form
Records
the sales
made
Personnel get the items not bought in
main cashier. This is where the
quantity variance will be lessened.
Gets the items not
purchased in main
cashier
B
39
PALOMINO JEANSWEAR CORPORATION
SALES PROCESSING POLICY AND PROCEDURE MANUAL
Doc Code: SP – 01
Activities in Sales Processing
Rev No: 1
Eff. Date: Dec 2009
SECTION 1: Sales processing in stores
Page 5 of 5
Details
Activity
B
Inventory
report
Sales report
Sales personnel record the changes in
the sales report and inventory report
Record the changes in the
sales report form and
inventory report form
Sales report
Summarizes the sales
for the day
Totals the sales made within the day
and documents it in the sales report
END
Figure 3.3: Suggested SPG of Sales Processing in Department Stores.
40
PALOMINO JEANSWEAR CORPORATION
PROMOTIONAL EVENTS POLICY AND PROCEDURE MANUAL
Doc Code: PE – 01
Promotional Events
Rev No: 1
Eff. Date: Dec 2009
SECTION 1: Flow of planning of promotional events
Page 1 of 4
I. OBJECTIVE
To ensure that study attain the goals and its objectives, there will be an additional
employee for every promotional event or during peak season. This will lessen the theft
encountered in stores. It will also evaluate how the employee works in stores.
II. COVERAGE
Positions that involved hiring a new employee and staff involve in promotional events.
III. POLICY
1. During a promotional event, the marketing manager should always include in the
proposal that they will be adding 2 sales employees for only that event.
2. Before the promotional event takes place, always ready the materials and items to
be used and to be sold.
3. Always give the new employees for the promotional events an orientation of what
they will be doing so as not to get confused.
41
4. As much as possible, always hire the same employees for every promotional event
so that the regular employees will feel comfortable with them and do not need to
give an orientation again for the same employees.
5. Inform the regular sales personnel that there is going to be additional employees so
that they won’t get shock with the development. Also, let the new employees talk
with the regular employees to so that they will feel comfortable with each other.
IMPLEMENTATION
The human resources and sales coordinator will be responsible for finding additional
employees while the marketing manager will be responsible for informing the changes with the
SM head office for the new employees.
42
PALOMINO JEANSWEAR CORPORATION
PROMOTIONAL EVENTS POLICY AND PROCEDURE MANUAL
Doc Code: PE – 01
Rev No: 1
Promotional Events
Eff. Date: Dec 2009
SECTION 1: Flow of planning of promotional events
Page 2 of 4
IV. PROCEDURE
Activity
Responsibility
Document
Informs the company with the
promotional events
SM personnel
Promotional events
document
2
Checks the date and the proposal for
the event
Marketing executive
3
Sends the proposal for approval to the
SM head office
Marketing executive
Proposal document
4
Approve? If yes prepares the tools and
items to be used and sold
otherwise, wait for the adjustment
made by the SM head office
Marketing executive
Proposal document
5
Assigns sales personnel for each
stores
Sales coordinator
6
Sends the details of the additional
sales employees to the SM head
office
1
SM personnel
43
7
Arrange a meeting for all the sales
personnel including the additional
sales employees
Secretary
44
Personal information
PALOMINO JEANSWEAR CORPORATION
PROMOTIONAL EVENTS POLICY AND PROCEDURE MANUAL
Doc Code: PE – 01
Promotional Events
Rev No: 1
Eff. Date: Dec 2009
SECTION 1: Flow of planning of promotional events
Page 3 of 4
V. PROCESS FLOW
Activity
Details
START
Informs the company
with the promotional
events
Document
Marketing executive checks the date
of the event and prepares the
proposal
Checks the date and
the proposal for the
event
Sends the proposal to
the SM head office for
approval
1
SM personnel in charge of
promotional events informs the
company thru fax, phone call, e-mail
Proposal
document
Approve?
45
Secretary sends the proposal
documented to the SM head office
for approval
If proposal not approved, SM
personnel sends adjustment to the
proposal
YES
NO
A
46
PALOMINO JEANSWEAR CORPORATION
PROMOTIONAL EVENTS POLICY AND PROCEDURE MANUAL
Doc Code: PE – 01
Promotional Events
Rev No: 1
Eff. Date: Dec 2009
SECTION 1: Flow of planning of promotional events
Page 4 of 4
Details
Activity
A
SM sends adjustment
to the proposal
1
Proposal
document
SM personnel sends the proposal
to the company
Prepares the tools for promotion and
chooses the items to be sold
Prepares the tools to be
used and items to be sold
Assigns additional personnel for the
promotional event. This is where the
variance can be minimized.
Assigns a personnel for
the promotional event
Sends the details of
employee for additional
personnel
Personal
information
47
Sends the details of the personnel to
the SM head office for clarification
Sales coordinator arranges a
meeting with all the sales
employees with additional sales
employees
Arrange a meeting for all
sales employees
END
Figure 3.4: Suggested SPG for the Promotional Events
48
PALOMINO JEANSWEAR CORPORATION
WAREHOUSE DEPARTMENT POLICY AND PROCEDURE MANUAL
Doc Code: WD – 01
ACTIVITIES IN WAREHOUSE
DEPARTMENT
Rev No: 1
Eff. Date: Dec 2009
SECTION 1: Deliveries of items from supplier to dept. stores
Page 1 of 5
I. OBJECTIVE
To ensure that the flow of activities in warehouse department follow the policies and
the procedures made by the company and will also help to reduce the quantity variance and
also evaluate the workers task.
II. COVERAGE
All workers or positions that are involved in warehouse department.
III. POLICY
1. Warehouse personnel should always check the items delivered based on the
delivery receipt if tally and check for defects. Warehouse personnel should never
assume that the items delivered are of good quality even though items have
undergone quality check.
2. When the warehouse personnel found defects on the items delivered, they should
immediately report it to the manager and write the necessary report in the variance
report form to be submitted back to the supplier.
49
3. The company should coordinate with the supplier on the items delivered. There
should be an agreement in the items delivered with defects.
4. Items delivered to the department stores should be handled carefully. Warehouse
personnel should pack the items properly in order to avoid scratches or defects
during delivery.
IMPLEMENTATION
The manager is responsible for the implementation of these policies in the warehouse
department.
50
PALOMINO JEANSWEAR CORPORATION
WAREHOUSE DEPARTMENT POLICY AND PROCEDURE MANUAL
Doc Code: WD – 01
ACTIVITIES IN WAREHOUSE
DEPARTMENT
SECTION 1: Deliveries of items from supplier to dept. stores
Rev No: 1
Eff. Date: Dec 2009
Page 2 of 5
IV. PROCEDURE
Activity
Responsibility
Document
Delivery man
Delivery receipt
1
Delivers the items ordered to the
warehouse
2
Check each item for defects
Warehouse personnel
3
No defects? If yes, sort the items with
defects and record it, otherwise
check the items if complete
Warehouse personnel
4
Complete? If yes, sort the items for
delivery otherwise, notes the
difference in the receipt and write
in variance form
Warehouse personnel
5
Gives the copy to the main office for
recording
Warehouse personnel
Delivery receipt
6
Contact the supplier about the
changes and sends the variance
form
Inventory manager
Variance form
Delivery receipt
Variance form
51
7
Makes a packing list for the deliveries
in stores
Delivery personnel
Packing list
8
Issues a delivery receipt to be given to
SM personnel
Warehouse personnel
Delivery receipt
9
Delivers the items to each stores
Delivery personnel
Delivery receipt
52
PALOMINO JEANSWEAR CORPORATION
WAREHOUSE DEPARTMENT POLICY AND PROCEDURE MANUAL
Doc Code: WD – 01
ACTIVITIES IN WAREHOUSE
DEPARTMENT
Rev No: 1
Eff. Date: Dec 2009
SECTION 1: Deliveries of items from supplier to dept. stores
Page 3 of 5
V. PROCESS FLOW
Activity
Details
START
Delivers the items ordered to the
warehouse
Delivers the items to
the warehouse
Personnel checks the items if there
are any defects. This is where the
delivered items with defects will be
minimized.
Check each item for
defects
NO
1
No
defects?
Quality check the items delivered
if there are any defects
YES
Sort the items with
defects
53
Personnel sort the items with
defects
Record the items
with defects and
quantities
Variance form
A
54
Personnel record the items with
defects and its quantities
PALOMINO JEANSWEAR CORPORATION
WAREHOUSE DEPARTMENT POLICY AND PROCEDURE MANUAL
Doc Code: WD – 01
ACTIVITIES IN WAREHOUSE
DEPARTMENT
Rev No: 1
Eff. Date: Dec 2009
SECTION 1: Deliveries of items from supplier to dept. stores
Activity
Page 4 of 5
Details
A
Check if delivered
items are complete
1
Delivery
receipt
Personnel checks if the receipt tallies
what is delivered
YES
2
Physical count to check if items are
complete according to the delivery
receipt
Complete?
NO
Notes the difference in
the receipt and form
Variance form
Delivery
receipt
Personnel notes the difference in the
receipt
Variance form
Delivery receipt
Gives the copy to the
main office
Gives the copy to the secretary in
main office
55
Inventory manager contacts the
supplier about the changes and
sends the variance form
Contact the supplier
about the changes and
sends the variance form
B
56
PALOMINO JEANSWEAR CORPORATION
WAREHOUSE DEPARTMENT POLICY AND PROCEDURE MANUAL
Doc Code: WD – 01
ACTIVITIES IN WAREHOUSE
DEPARTMENT
Rev No: 1
Eff. Date: Dec 2009
SECTION 1: Deliveries of items from supplier to dept. stores
Activity
Page 5 of 5
Details
B
2
Warehouse personnel sort the item
to be delivered
Sort the items for
delivery
Packing list
Personnel creates a packing list to be
given to the sales personnel
Delivery
receipt
Personnel issues a delivery receipt to
be given to SM
Makes a packing list
Issues the delivery
receipt
Personnel deliver the item to
different stores
Delivers the items to the
stores
END
57
Figure 3.5: Suggested SPG for the Delivery of Items from Supplier to Department Stores
58
Delivery
personnel
Based on what the researcher observed in the system of the company, he researcher
came up with the corresponding proposals to improve the system and establish a procedure and
policy for the company. For the processing of sales, the researcher just added a few changes like
the personnel have to go to the main cashier to get the items that are not bought and return it
to the stall. Then, the personnel have to make the changes in the sales report and inventory
report to be accurate. On the planning of promotional events, the researcher just added the
sending of details of additional personnel because when the researcher monitored what was
going on when there was a promotional event like 3-day sale and etc. two sales staff couldn’t
accommodate the people who were coming in and out and theft is going on when the sales
personnel are occupied with customers. So the researcher had decided to add one sales staff
when there is an on-going promotional event to lessen the theft incident. For the delivery of the
items, the researcher included additional quality check on the items delivered before sorting
them for delivery. This would help the company to minimize the defects which were being
delivered in stores.
59
JOB DESCRIPTION OF THE NEW EMPLOYEE
For the job description of the sales employee, the activities which were going to be
his/her task would help the sales personnel in accommodating customers especially when
customers were getting to be crowded. Another task was to help the sales personnel to
summarize the sales reports for the event and also to help sales personnel guard the stores for
theft.
60
Variance Report Form
Warehouse Department
Name
DR #
Date
Item Description
61
Qty
Cause
Remarks
NOTE: On the causes,
we use the following legend:
--- Damaged Items
--- Wrong Quantity
Figure 3.6: Summary Variance Report Form
62
Figure 3.10 shows the summary variance report form that is going to be used in the
warehouse. Normally, variances are encountered by the warehouse personnel during the quality
checking of the items. Damage items, wrong quantity and wrong variant (actual variant does not
match the description outside the box) are the usual discrepancies. These discrepancies are
reported to the manger then to the supplier without forms. Without forms, the supplier could
not remember all the information. With this document, this kind of instances can be avoided.
The warehouse personnel would fill up these forms. Discrepancies are to be reported to the
manager and to the supplier. The personnel should enter the name together with the date,
delivery receipt number, and item description including the name of the item, quantity, cause,
which would indicate whether it is due to damaged items, wrong quantity, or wrong variant and
remarks for the further explanation of the difference of the actual versus the document meet.
Then this form will be forwarded to the manager and another copy to the supplier for the
verification purposes.
63
COST-BENEFIT ANALYSIS
Table 3.1: Cost Benefit Analysis
Benefit
Plan of Action 1
PHP
Since there will be an additional sales personnel for every
promotional event, the incident of theft will be lessened for
sure. The additional employee will have an extra pay. The
duration of the employee will depend on the duration of the
said promotional event. (24615900*0.55)
Cost
Whole day for 2 employees
@ (700/day) x 3 days x 12
months
Php 13538745
Loss sales through theft
(estimation): Php 7000 x 12
months
PHP
Savings
Php 25200
Php140,000
Php 13373545
Plan of Action 2
By suggesting and revising policies, workers involved are
informed of the tasks and responsibilities. In this way,
pinpointing will be avoided, sources of the problem can be
easily traced thus workers will be more responsible and
aware enough regarding duties and responsibilities they
need to perform. (24615900*0.15)
Loss
sales
through
disruption (estimate): Php
5000 x 12 months
Php 3692385
64
Php 60,000
Php 3632385
Plan of Action 3
There is only one form to be added which is the variance
report form. With this form the company will be able to
trace the causes of the defects in the delivery and as well
talk with the supplier regarding the problem. It can also
improve the relationship between the supplier and the
company in the sense that by coordinating with each other,
they can be more competitive compared to other
companies. (24615900*.10)
Php 2.50 per page x 100
forms x 12 months
Php 3,000
Loss
sales
through
disruption (estimate): Php
3500 x 12 months
Php 2461590
Php 42,000
Php 2416590
Php 19692720
Php 270200
Php 19422520
Total Savings (Cost)
65
Advantages and Disadvantages for each recommendation
Table 3.2 Plan of Action 1: Additional Personnel
ADVANTAGES
DISADVANTAGES
1. Theft during promotional event will lessen.
1. Workers may not feel comfortable with the
additional employee even though just for a
short period of time.
2. Customer without sales personnel to assist
will be minimized.
2. Sometimes it would take time to find an
additional employee just for the event.
Table 3.3 Plan of Action 2: Suggest Policies
ADVANTAGES
DISADVANTAGES
1. Gives the worker sense of responsibility.
1. Employees involved might feel being
warned regarding their neglect of
responsibilities.
2. There will be a standard policy which will be
followed by all employees.
2. Some may not be able to adapt to new
policy.
Table 3.4 Plan of Action 3: New Form
ADVANTAGES
DISADVANTAGES
1. Effective monitoring of defects in the
delivery of items.
1. Personnel may get confused if many forms
are too filled for every delivery.
2. Can be used as a basis for the problem with
the defects.
2. Personnel might regard the form as an
added burden to them.
The three plans of actions include additional employee during events, new policies, and new
form. In the additional employee, this is only done during promotional events because the sales
66
personnel cannot handle all the customers that are coming in and out of the stores. This way theft in
the stores will be lessened. With the new policy, the company would have a standard that the
employees need to follow. In the new policy, employees taking a break or day-off should ask 3 days
before to allow the manager to have time to look for replacement for the mean time. In this way,
employees will have to follow the policies given or else their request won’t be granted. For the new
form, sources of defects in the delivery will be traced and can be solved. Relationship between the
company and the supplier will improve and be more competitive. The researcher chose these plans
of action because these actions will attain the objectives set by the researcher for this study and
helps the company reduce its quantity variance. Based on table 3.1, these plans of action mentioned
gave the company the major savings rather than cost in implementing them.
Based on the findings of the study, the researcher concluded that two key causes namely
insufficient number of sales employee and insufficient policies were accountable for the occurrence
of quantity variance in the reports. The researcher was able to make some recommendations for the
company in order for them to lessen the loss every month. Other source of loss would be theft
which also resulted to damage items and would be included in the researcher’s study. Additional
employees would be needed during promotional event because theft was happening when the
personnel were occupied with customers and also, it is frequently happening that the customers are
looking for the items while there were no sales personnel present in the stores. For the damaged
items, the researcher revised the policy on delivered items to lessen the damaged items delivered to
stores. Also, forms will be used in the warehouse to trace the source of defects. Also, the researcher
included the sales processing policy to double check when making a physical count in order for the
company to be more consistent in counting.
67
Chapter 4
CONCLUSION
In the study, the researcher studied the whole system of the company in order to arrive
with appropriate proposals for the system. The researcher was able to conclude that key causes of
the problem were lack of sales employee and insufficient policy. Theft in the stores would be
lessened especially for the promotional events if the additional employee would be implemented
and it would also be lessened if the sales personnel were always present in the stores. Another
reason for the variance in the report was the returned items whatever reason it may be. So the
researcher included in the proposed system and in the policy those sales personnel before at the
end of the day should check the main cashier for the returned items. Another policy added was the
quality checking in the warehouse, the reason behind this was to minimize the reasons for the
customer to return the items. The policy wherein the sales personnel need to inform the company
about his break or day-off should be earlier to let the manager look for a replacement. But of course
in implementing policies, all of the workers involved must clearly understand their responsibilities in
order to avoid negligence of one's duty. Variance form was also considered as a plan of action for
the company to lessen the damaged items delivered to the stores. With this, reasons for returned
items will be reduced.
68
Chapter 5
RECOMMENDATION
The researcher observed the whole process of the system of the company and also asked
some employees for their reaction son what to do to improve the system. The author really believed
that in order for the company to be more competitive, they need to minimize their losses and
convert it to profit. The researcher observed that the company still uses the manual inventory
system where the personnel still check the reports that came from the sales personnel and compute
them to have the inventory level. With this, the researcher further recommends for the company to
have an automated inventory system. This new system will have to be further studied and it will
take time to implement because of the time to change the manual system to an automated
inventory system. The new system of the inventory will surely help the company to have an easier
access and faster way to have the inventory level. The automated inventory system will also help
the company in terms of the reorder point. Most importantly, it is important that the sales
personnel feel that they are being treated well and fair because they are the ones interacting with
the customers in the stores so they are the ones responsible for the sales of the company.
69
GLOSSARY OF TERMS
Barcode Sticker – sticker that is placed on the tag of the items and is kept by the personnel for
reference on sales report.
Computerized inventory system – a system developed years ago to help company have easier access
just like SAP.
Damaged Items – items damaged upon delivery to the warehouse which may be subjected to the
supplier.
Inventory – investment and sold by the company in terms of clothing items.
Packing List – A list of purchase orders of stocks for stores to be delivered.
Physical Counting – method of determining the inventory level by counting all the items in the
inventory.
Promotional Event – events like 3-day sale, Christmas sale, clearance sale planned by SM
Quantity Variance – discrepancy where variation arises from the report form against the physical
count.
Stockroom – it is where the extra items are placed in the stores.
Wrong Variant – items delivered that are wrong label or in the wrong box.
70
APPENDICES
71
Appendix A: Inventory table report from August 2008 to July 2009
Period
Quantity Delivered
Quantities
Sold
On-hand
Inventory
Difference
August
19,282
14,424
1,457
3,401
September
17,150
12,669
1,586
2,895
October
25,764
20,947
1,862
2,955
November
35,483
26,264
2,563
6,656
December
89,367
63,551
3,679
22,137
January
14,883
11,089
1,226
2,568
February
12,849
10,754
1,052
1,043
March
19,874
17,092
1,693
1,089
April
20,045
15,091
2,038
2,916
May
40,015
32,296
2,791
4,928
June
22,365
18,859
1,874
1,632
July
15,789
11,362
1,945
2,482
TOTAL
332,866
254,398
23,766
54,702
COMPUTATION:
Variance ( qty) =
332,866 - ( 254,398+23,766) = 54,702 units
Variance ( in %) =
54,702 / 332,866 *100% = 16.43 %
72
Appendix B: Loss from August 2008 to July 2009
Period
Amount of Quantity
Delivered
Amount of Quantity
Sold
August
PHP 8,676,900
PHP 6,490,800
PHP 655,650
PHP 1,530,450
September
PHP 7,717,500
PHP 5,701,050
PHP 713,700
PHP 1,302,750
October
PHP 11,593,800
PHP 9,426,150
PHP 837,900
PHP 1,329,750
November
PHP 15,967,350
PHP 11,818,800
PHP 1,153,350
PHP 2,995,200
December
PHP 40,215,150
PHP 28,597,950
PHP 1,655,550
PHP 9,961,650
January
PHP 6,697,350
PHP 4,990,050
PHP 551,700
PHP 1,155,600
February
PHP 5,782,050
PHP 4,839,300
PHP 473,400
PHP 469,350
March
PHP 8,943,300
PHP 7,691,400
PHP 761,850
PHP 490,050
April
PHP 9,020,250
PHP 6,790,950
PHP 917,100
PHP 1,312,200
May
PHP 18,006,750
PHP 14,533,200
PHP 1,255,950
PHP 2,217,600
June
PHP 10,064,250
PHP 8,486,550
PHP 843,300
PHP 734,400
July
PHP 7,105,050
PHP 5,112,900
PHP 875,250
PHP 1,116,900
PHP 149,789,700
PHP 114,479,100
PHP 10,694,700
PHP 24,615,900
TOTAL
73
Amount of OnHand Inventory
Loss (in pesos)
Monthly percentage of variance
25.00%
20.00%
15.00%
10.00%
5.00%
Figure 3.8 Monthly Percentage of Variance
74
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