1. Daleel Petroleum LLC
Proposal to optimize
inventory level
Mahmood Said Al Amri
[30 June 2012]

2. Contacts:
1. Contacts
2. Introduction
3. Purpose of this proposal
4. How to Optimize Inventory Level
4.1 Stock Holding Policy
4.2 One Inventory for all Daleel Stock
4.3 Standardization
4.4 Surplus avoidance
4.5 Materials Catalogue
4.6 Selecting the right supplier
4.7 Project materials
4.8 Write off
4.9 Price Agreement for Stock Items or/and Min Max
4.10 JIT (Just In Time) & Point of Use
4.11 Unite of Measurement (UMO)
4.12 Expediting
5. Recommendations
6. Appendix

3. 2. Introduction
Inventory is large asset in the company that supports the operations by providing critical items and
spare parts. Inventory on hand quantity must meet the end-user departments’ demand and
requirement as well as operation needs. The availability of items in stock is very important to keep
the operations running smoothly. Company inventory must have a proper quantity base on demand
and the movement of the materials. But, holding too much inventory in warehouse will make the
end users happy but not the company, also holding too little inventory in warehouse will be a risk
of stock outs. Either problem will cost the company money. There are many factors that control the
inventory level within the company. How the inventory affects company cost & profit?!
Inventory has a big impact on the company cost and profit. First of all, the inventory is frozen
money that the company will lose the opportunity of using this cash. Second, holding stock cost the
company money. Holding stock cost is 20-30% of inventory value. The holding cost include
providing space to keep stock, manpower required to control, equipments, materials, insurance,
security and overhead cost.
In this proposal I will list and explain some practices and ideas to reduce and optimize the
inventory level. The practices and ideas are: Stock Holding Policy, One Inventory for all Daleel
Stock, Standardization, Surplus avoidance, Materials Catalogue, Selecting the right supplier, Project
materials, Write off, Price Agreement for Stock Items or/and Min Max, JIT (Just In Time) & Point of
Use, Unite of Measurement (UMO) and Expediting. At the end of the proposal I will recommend
some points to reduce and optimize Daleel inventory level.

4. 3. Purpose of this proposal
• To optimize inventory level.
• To increase customer service level.
• Reduce stock holding cost.
• Utilize warehouse space.
• To have more inventory control.
• To increase efficiency and productivity.
• To minimize “Min to Bin” time.

5. 4 How to Optimize Inventory Level
4.1 Stock Holding Policy
Stock holding policy is an effective business statement that addresses diverse attitudes and
perceptions. Such a policy removes subjectivity and reduces personal opinion, as the stock
holding policy decision will usually involve business reasons and justifications to add any
new item to inventory. The company should have a stock holding policy to control adding
any new item to the company inventory. This policy must be clear and understood by all
end-users to avoid the need to hold stock. Stock holding decision keywords are: likelihood
to use, consequences of not having item in inventory and time to deliver. Based on that the
company should decide to add the item or not and quantity to keep. All company
departments should understand the purpose of Stock Holding Policy and participate
effectively to keep inventory in minimum level. Reducing inventory level is everyone
responsibility.
 Stock Holding Policy example in appendix.
4.2 One Inventory for all Daleel Stock
We should have all stock items under one umbrella as Daleel inventory rather than having
stock as Drilling, Engineering and Production. Daleel one inventory will be managed by
Min/Max and demand forecasting to ensure availability of materials. This will solve the
shortage/access of materials in stock in different departments. Also, will help to control
inventory issue and receive with more efficient. Having one inventory will eliminate the
need to transfer materials from department to department or form project to project. Also,
any material can issue to any department when needed without permeation from other
department. Moreover, the operation will gain faster service and shorter receiving time.
4.3 Standardization
Standardization is the process of establishing international technical standards and
international standard specification for all materials. Using the same standard item in all
departments will reduce the variety of items kept in inventory and will reduce the variety of
materials used for operation (variety control). Using international standard will improve
reliability, reduce amount of expediting and reduce delivery time.
4.4 Surplus avoidance
Having too much inventory will cost the company more money to keep the materials.
Surplus materials may expired, damage or kept in shelves long time. There are several
things could lead to surplus such as: lack of trust in suppliers, wrong inventory information,
long delivery time and inaccurate demand forecasting. To avoid inventory surplus Daleel
must have accurate inventory information (demand, Min/Max, order quantity, lead time…)
and select the right suppliers.
4.5 Materials Catalogue
Many companies consider their Materials Inventory as their Materials Catalogue. Materials
Catalogue is different than Materials Inventory. Materials Catalogue is database of all
company’s buying description. Materials Inventory is selection of items that are in the

6. Catalogue and have been chosen to be held in inventory. In other words, Materials
Inventory is part from Materials Catalogue. All purchasing specifications should be input in
the Catalogue at their first time of being used. This ensures they can be accessed and used in
the future when that item needs to be purchase. However, not everything that is bought is a
stock item.
All company staff should understand the difference between Materials Catalogue Materials
Inventory. Understanding this difference can help people understand why a company’s
Materials Catalogue might grow in size and content whilst at the same time the Materials
Inventory might be reducing.
4.6 Selecting the right supplier
Selecting the right supplier is a very important factor that affects inventory level. Selecting
wrong supplier will cause late deliveries, wrong and poor quality materials. As result, end-
users keep big quantities in inventory to ensure availability of materials all the time. Having
good relations with supplier will built trust and confidence. Also, it will reduce the amount
of expediting and delivery time. Daleel must have supplier management to evaluate supplier
performance. Any supplier is not meeting the company standards should remove from the
list and only keep the approved suppliers.
4.7 Project materials
Project materials should be different than inventory. Projects material should not consider
as stock materials or add to inventory. Because project materials are different than stock
materials and we cannot mix between them. In any project there are plans that specify all
materials needed for the project (quality, quantity, type …). Also, project materials should
purchase in direct charge rather than purchasing as stock materials. And from finical point
of view, by purchasing project materials in direct charge Daleel will get cost recovery of the
materials faster. However, it may kept and controlled by warehouse.
Example;
Engineering projects materials purchase, receive, issue, stored and controlled as inventory
materials. Project materials ordering are controlled by project owner.
4.8 Write off
Died Stocks are any materials that not moved from inventory in the last three years for any
reason. Sometimes died stock resulted from technology change, so the materials will no
longer use for any other purpose now or even in future. Also, it may come from projects
surplus, damage materials and demand change. It is better to sale Died Stock and get cash to
use rather than keep them and cost the company more money and space to keep them.
Materials
Catalogue
Materials
Catalogue
Material
s
Inventor
y

7. Example;
We have died stock from 1990s! Some of those materials will no longer use for any purpose.
There is no demand for those materials because technology change or for other reason.
4.9 Price Agreement for Stock Items or/and Min Max
There is invisible ordering cost that can be reduced. Ordering cost includes time and efforts
spend in each stage of ordering cycle.
*Requester *Approval **Buyer *Approval ***Supplier
*Spend time to write, check, review and approve.
**Spend time to review the request, look for suppliers and waiting quotations & review.
*** There is a probability to deliver wrong item or poor quality.
Price agreement for stock items will reduce the ordering cost and delivery time. Moreover,
it will ensure that the supplier will supply the right item at the right time. Also, it will reduce
inventory stock level since the lead time is known.
Add to that, buyers will get fewer requisitions for stock items and that will give buyers more
time to focus on big bides and projects materials.
Price Agreement should apply for all stock items. However, we can have price agreement for
consumable items and fast/medium moving items.
Example;
Consumable items: AIR FILTER, OIL FILTER, FUEL FILTER, ENGINE OIL, PRESSURE
GAUGE… etc
All above items should be under Price Agreement.
4.10 JIT (Just In Time) & Point of Use
Receiving materials JIT or/and in the Point of Use is one of the most important factors that
affect the inventory level. Applying JIT system will account as a big advantage to the
company. JIT system depends on supplier relation and trust to deliver in time. In addition,
receiving the materials in Point of Use is very practical and efficient. Also, projects material
should deliver to the point of use when it is possible.
Example;
Rig Materials, Casing and Tubing received from supplier and off load at site warehouse.
Then, warehouse upload again to send to Rigs! All Rig materials should go direct to Rig
(point of use) rather than double the job. Also, there is risk in handling Casing & Tubing and
other heavy material. This risk must be minimize and avoid. However, we have to keep
safety stock at warehouse.
4.11 Unite of Measurement (UOM)

8. UOM is minor thing that makes major effects and improvement in the company inventory
level. Using proper UOM will help to improve inventory. There are some materials always
issue together and they are for one job like: machine over whole and service. Those kind of
materials should traded as one SET not as Number. Keeping the items as SET helps to utilize
the space as well as it make it more easily when issue and receive.
4.12 Expediting
Expedite is to follow and speed up the process of delivery (internal and external). There are
two types of expediting: Disk and Field visit. Disk expediting is to contact suppliers from
office such as; send e-mail or/and phone call. Field visit is to visit the supplier field, work
shop, yard or storage area. As mentioned above, selecting the right supplier will reduce the
amount of expediting. However, expediting is a key factor to reduce delivery time.
Expediting should start after the requisition is created to expedite internally. Also, after the
purchase order is awarded expediting should take place.

9. 4. Recommendations
 Write Stock Holding Policy.
 One Inventory for all Daleel Stock.
 Use international standard specification for all items.
 Price Agreement for fast/medium moving items and consumable items.
 Apply JIN system and Point of Use system.
 Write off procedure.
 Project materials should purchase, store and issue not as stock materials.
 Supplier management.
 Continues expediting.

10. 5. Appendix
Example, Stock Holding Policy.
1 Criteria for adding new items to the company’s Materials Inventory:
1.1 Material should be held as warehouse stock only if one of the following conditions is met –
1.1.1 The item cannot be obtained in the time period necessary to meet a requirement once that
need has been identified. Key factors in this decision are
• The total time to obtain the item – internal processing time plus supplier delivery
time
• The criticality of the item – the impact the item has on production / profit, health,
safety and environment – or to meet regulatory requirements
1.1.2 The material item is used frequently / in continuous demand
1.2 Examples where an item should NOT be added to the Materials Inventory include –
1.2.1 Items required for a specific job or ‘project’ where the demand is not expect to arise again
• These includes materials that can be obtained as a ‘non-stock’ purchase before work is
planned to start – or where work can be delayed until the required material is available.
1.2.2 Items for which there is a suitable alternative already in the company’s Materials Inventory
(including any surplus project materials)
1.2.3 Items that are readily available from known, reliable suppliers and can be obtained within
the necessary timeframe
1.2.4 The equipment that requires the spare part is backed-up on site by an installed spare unit –
in which case the spare unit can be operated during the time the required part is obtained
and fitted.

11. 2 Stock decision matrix
The following guidelines are provided to help convert the above policy into departmental Work
Instructions / Procedures.
Requirement Criticality
High Medium Low
Frequent demand stock stock Stock
Specific job requirement Time dependant Time dependant Do not stock
Spare part Stock Time dependant Do not stock
Time dependant: If the requirement can be planned – or the activity can wait until the item is
available – then it should NOT be held in stock. Factors to be considered include:
• The level of uncertainty of the requirement
• The integration of inventory / end-users’ planning systems
• The speed of the internal procurement process
• The reliability of supplier delivery performance
Criticality: This includes the economical balance between the costs of holding items in stock
VERSUS the consequences of NOT having the item immediately available when required.
Interpretation of the bandings – typically
• High = the item is critical to the safe & profitable operation of the process
• Medium = safe & profitable operations are not significantly affected if the item is not
available
• Low = no and very little impact on company performance if the item is not available
Establishing the level of criticality requires a ‘helicopter’ Management judgment above the
potential risks and their consequences.
Requirement: The frequency of demands for the item is a significant factor in operating the
Stockholding Policy
• Frequent / continuous demand = needs to be available immediately – often considered as
‘consumable’ items. The level of stock-holding needs to reflect the criticality of each item
• Specific need = aim to maximize integration of planning systems to purchase as-and-when
needed, whilst ensuring availability at time of requirement
• Spare part = items to meet unplanned maintenance of facilities – and depending on the
criticality of the item.