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Development And Evaluation Of Inventory Matrix

Kumbhar S.V.1 , Dhavale T.B.2

1Research Scholar  &  2 Professor, Department of Civil Engineering,T.S.S.M'S Bhivarabai Sawant College of Engineering &Research,Pune,India

E-mail of corresponding author: [email protected]

Abstract'The management and control of inventory is difficult problem to all organisations in any sector. Inventory management is very important as it share integral part of working capital. This paper shows the need of inventory management and reduction in inventory cost. It is necessary to maintain inventories without affecting the work. There are different inventory control techniques to handle inventory. But every technique has limitation. In the present work, inventory data of construction materials have been collected from store ledger book and Smart Site ( ) software of company. Inventory matrix is developed using ABC, FSN, HML, VED analysis. Inventory cost is calculated using lead time, annual consumption for each category.

    Keywords'ABC, FSN, HML, VED Inventory matrix.

Introduction

Inventory is nothing but stock of goods.so Inventory control is also known as stock control. Inventory is necessary for smooth running of orgainsation.Inventories are always kept in hand to reduce future disturbance in work at minimum cost. The basic reason behind carrying inventory is that practically it is hard for each stock item to arrive exactly where it is needed, exactly when it is needed. 'Inventory control is an area that has received much attention from practitioners and academicians. Models and methodologies are available to tackle single-item inventory and multi-item inventories. The management of a single-item inventory is simpler compared to the management of multi-item inventories. Attempts to translate or apply the models related to a single-item inventory to a large number of items is really complex, time consuming and uneconomical. There are different type of inventory control technique. But every technique has limitation in terms of usage and applicability. Inventory cost can be reduced if proper inventory control techniques are used. Unnecessary investment in inventories can be reduced.

The present study is carried out at construction site named as Crown Green located at Hinjewadi, phase II, Pune developed by Unity Infra projects. Mainly the study has been adopted to identify the problems and inventory control systems of company. Data is collected from Smart Site ( ) software which is used for stock record. ABC, FSN, HML and VED analysis and their combination is used for study. The major problem related to the inventory is uncertainty and lead time which are focused here.

LITERATURE REVIEW

In the last few years, variety of case studies on inventory control and inventory management have appeared in research.

Dr. G.brindha has presented a paper on Inventory management including types of inventory involved in industry. This paper highlights different inventory control techniques like ABC,FSN,HML,VED,SOS,SDE.This paper gives basic idea about  inventory management which is necessary to balance between too high or too low inventory so as to minimize total cost [1].Tom Jose V addresses the problem of inventory management of company which is manufacturer of washing machines. ABC, FSN, EOQ analysis carried out to understand the inventory management of company including safety stock available. The analysis shows that organization does not follow EOQ for purchasing but rest of inventory management is satisfactory [2].There was a lot of discussion towards the use of single criterion, Analytical Hierarchy Process (AHP), genetic algorithm and neural networks. Vaisakh P.S. designs the inventory model for chemical process industry. Analysis is done using two techniques FSN and VED, which are then combined. The analysis shows that it is better to discard nonmoving items to reduce holding cost. Also co-ordination among purchase, production, marketing and finance department will improve efficiency.

The methodology present in this paper is similar to which classify the materials using different inventory control technqiues.Current paper also classify the material but using four techniques therefore combining materials based on the annual consumption,criticality,price,consumption rate.

IMPORTANCE AND NEED OF THE STUDY

All the Inventory Control Methods have their limitation in terms of the usage and applicability. Most effectively used analysis in industry is ABC analysis which considers only annual consumption. FSN analysis fails when used in manufacturing environment where raw materials may be issued for production and eventually the produced items may remain in inventory giving a wrong picture of consumption. HML analysis cannot be used unless they really have a major impact on the total inventory, in the sense that some high value items may have very low transactions.VED analysis only considers about criticality of materials neglecting other factors. Considering only cost and ignoring all other factors can cause loss to company. So by combining all this method and forming matrix might help to improve efficiency of inventory management and reduce inventory cost. The present system of inventory management of company consists of predetermined order quantity and rough estimates of demand of item. However, in practical demand and lead time is fluctuating which causes loss to company. If we add some improvement to inventory management leads to improvement in construction work and reduction in inventory cost.

Following are the objectives of the research

To study and analyze the inventory management and its control techniques of company.

To develop inventory matrix to reduce inventory cost.

METHODOLOGY

RESULTS AND DISCUSSION

ABC ANALYSIS

ABC analysis is known as Always Better Control. ABC analysis is based on Pareto principle 'Vital few: Trivial many'. ABC analysis divides inventory into three categories A items, B items and C items. A B C system of classification should, however, be used with caution. We should have the following data- Name of the Items, Annual demand of each item, Unit price of each item. As shown in the table we have to calculate the annual consumption of each item from the available annual quantity. Annual consumption can be calculated from the following equation-

Annual consumption=Annual demand X Unit Price

From the annual consumption we have to arrange items in descending order. The next is to calculate the cumulative total of each item.

The % cum total can be calculated =

(Cumulative total of each material '' Cumulative total of all) X 100

Category No.Of Items % of items

Class A 5 5% Close control

Class B 5 5% Regular review

Class C 90 90% Infrequent review

From ABC analysis we have found that about 5% of the items are classified as 'A' class items which contribute 80% of the total consumption.About 5% of items are classified as 'B' class which contribute 20% of the total consumption. About 90% items are classified as 'C' class which contribute 5% of the total consumption.

FSN ANALYSIS

This analysis is based on the consumption rate of items. The items are classified as

F-Fast moving items.

S- Slow moving items.

N-Nonmoving items.

If item is issued more than 12 times in 24 months then it is classified as F items. If item is issued less than 12 times in 24 months then it is classified as S items and N if item doesn't issue for the 24 months.

Category Consumption Rate No.Of Items % of items

Class F More than 12 times 39 39

Class S Less than 12 times 55 55%

Class N 0 6 6%

HML ANALYSIS

The HML analysis is very similar to ABC analysis, the difference being instead of 'usage value' the price criteria is used. For classification, the materials having price more than 1000 Rs are classified as 'High Price' materials. The materials having price between 100 Rs to 1000 Rs are classified as 'Medium Price' materials. The materials having price less than 100 Rs are classified as 'Low Price' materials.

Category Price(Rs) No.Of Items % of items

Class H More than 1000 Rs 22 22

Class M 100'M'1000 32 32%

Class L Less than 100 46 46%

VED ANALYSIS

The VED analysis consider about criticality of materials and classified as Vital, Essential and desirable materials. Vital materials are those without which production will stop. Essential materials are those whose stock out cost is high and desirable materials are those whose absence does not affect any work.

Category No.Of Items % of items

Class V 28 28%

Class E 20 20%

Class D 52 52%

INVENTORY MATRIX

ABC-HML-FSN-VED analysis are combined together to form this matrix. For all different combinations, the treatments should be different. Suppose an item is found to be fast and it is in A class item, then constant control is necessary. Likewise, suitable treatments should be given for different combinations.

F S N

A AF AS AN

B BF BS BN

C CF CS CN

Category I is high priority group, requires greatest attention. It contains the materials which are vital, whose annual consumption is high, which are costly one, whose consumption rate is also high. P -system (Periodic review system) of inventory control is used. Category I is highlighted portion.

Category II is under moderate management and moderate attention is devoted. It contains the materials whose annual consumption is high but are least costly and slow moving whose absence does not affect the construction work. Q system (Continuous review system) of inventory control is used.

COMPARISION BETWEEN PRESENT AND PROPOSED INVENTORY SYSTEM

In this, the annual cost of inventory of material has been calculated-

FOR CATEGORY 'I

For the TMT bars 8MM, the calculation of Annual total inventory cost has been explained as follows:

Annual Demand = 494.013 MT

Ordering Cost=47880 Rs

 Holding Cost=20 % of unit cost=10080 Rs

Unit Cost=50400 Rs

 Total Inventory cost by the Present Inventory System:

 Predetermined Order Quantity=68.51 MT

So according to annual demand the No.of orders per year=7

Annual ordering cost=7''47880=335160 Rs

Annual holding cost= (68.51''10080)/2=345272.13 Rs

Total Cost=Annual ordering cost + Annual holding cost

 T.C.=335160+345272.13

 T.C.=680432.13 Rs      

  V E D

AFH AFHV AFHE AFHD

AFM AFMV AFME AFMD

AFL AFLV AFLE AFLD

ASH ASHV ASHE ASHD

ASM ASMV ASME ASMD

ASL ASLV ASLE ASLD

ANH ANHV ANHE ANHD

ANM ANMV ANME ANMD

ANL ANLV ANLE ANLD

BFH BFHV BFHE BFHD

BFM BFMV BFME BFMD

BFL BFLV BFLE BFLD

BSH BSHV BSHE BSHD

BSM BSMV BSME BSMD

BFL BFLV BFLE BFLD

BNH BNHV BNHE BNHD

BNM BNMV BNME BNMD

BNL BNLV BNLE BNLD

CFH CFHV CFHE CFHD

CFM CFMV CFME CFMD

CFL CFLV CFLE CFLD

CSH CSHV CSHE CSHD

CSM CSMV CSME CSMD

CSL CSLV CSLE CSLD

CNH CNHV CNHE CNHD

CNM CNMV CNME CNMD

CNL CNLV CNLE CNLD

Total Inventory Cost by the propose Inventory System

As TMT Bar 8MM comes in Category-I ,P system of Inventory control is used.

Average Demand= Annual demand '' (L+R)/52

                    = (494.01 '' 3)/52

                    = 28.50 MT

Lead time L =1 Week

Review Period R= 2 weeks

Standard deviation=6 MT per week

Safety Stock at 99% service level='(L+R) ''S.D.''3.09

                                              ='3''6''3.09

                                              = 32.11

Targated Inventory T = D + S.S.

                        = 28.50 + 32.11

                       = 60.61 MT

Order Quantity = T - Inventory Position

                 = 60.61-2

                 = 58.61 MT

No of orders per year=8

Annual ordering cost= 8''47880=383040 Rs

Annual holding cost=(58.61''10080) / 2=295394.4 Rs

Total Cost= Annual ordering cost + Annual Holding cost

         = 383040 + 295394.4

         = 678434.4 Rs

Total Cost Saving by Inventory Matrix for TMT bar 8 MM-

=Total Cost by present inventory system - Total Cost by proposed Inventory Matrix

=680432.13 ' 678434.4

=1997.4 Rs

So annual cost saving on TMT Bar 8 MM = 1997.4 Rs

Likewise the total annual saving for category 'I materials

Description Present Inventory System Inventory Matrix

No Of orders/year 136 360

Annual ordering costs 1629756.49

20%

Annual holding costs 1650563.32

52%

Total cost 3280319.81

For Category 'II Items:

For the TMT bars 25 MM, the calculation of Annual total inventory cost has been explained as follows:

Annual Demand = 98.12 MT

Ordering Cost=42132.50 Rs

 Holding Cost=20 % of unit cost=8870 Rs

Unit Cost=44350 Rs

 Total Inventory cost by the Present Inventory System:

 Predetermined Order Quantity=30.53 MT

So according to annual demand the No.of orders per year=3

Annual ordering cost=3''42132.5=1,26,297.5 Rs

Annual holding cost= (30.53''8870)/2=1,35,400.55 Rs

Total Cost=Annual ordering cost + Annual holding cost

 T.C.=1,26,297+1,35,400.55

 T.C.=2,61,697.55 Rs      

Total Inventory Cost by the propose InventoryMatrix

As TMT Bar 25MM comes in Category-II , Q system of Inventory control is used.

Average Demand= Annual demand '' (L)/52

                    = (98.12 '' 1)/52

                    =1.89 MT

Lead time L =1 Week

Standard deviation=16 MT per week

Safety Stock at 99% service level='(L ''S.D.''1.64

                                              ='1''16''1.64

                                              = 26.24 MT

Targated Inventory T = D + S.S.

                        = 1.89 + 26.24

                       = 28.13 MT

Order Quantity = T - Inventory Position

                 =28.13-0

                 =28.13 MT

No of orders per year=3

Annual ordering cost= 3''42132.5=1,26,297Rs

Annual holding cost=(28.13''8870) / 2=1,24,756.55Rs

Total Cost= Annual ordering cost + Annual Holding cost

         = 1,26,297 + 1,24,756.55

         =2,51,053.55 Rs

Total Cost Saving by Inventory Matrix for TMT bar 25 MM-

=Total Cost by present inventory system - Total Cost by proposed Inventory Matrix

=2,61,697.55 ' 2,51,053.55

=10,644 Rs

So annual cost saving on TMT Bar 25MM = 10,644Rs

Description Present Inventory System Inventory Matrix

No Of orders/year 136 360

Annual ordering costs 1629756.49

20%

Annual holding costs 1650563.32

52%

Total cost 3280319.81

CONCLUSION

The study shows that if we apply proper inventory control technique can save investment over inventories. This has enabled the managers to design proper system which would keep track on inventory and help to reduce inventory cost.If the proposed inventory matrix is used,then the annual saving on inventory cost will be     RS.Based on the results ,the total cost determined by this matrix is less than that of the present inventory system of company.

References

Dr.G.Brindha (2014). 'Inventory management', International Journal of Innovative Research in Science, 3(1), 8163-8176.

Tom Jose V, Akhilesh Jayakumar (2013). 'Analysis of Inventory Control Techniques; A Comparative Study', International Journal of Scientific and Research Publication, 3(3), 1-6.

Chitra G. (2014). 'Inventory Management-A Case Study', International Journal of Emerging Research in Management & Technology, 3(3), 94-102.

Arunprakash N., Nandhini N. (2013). 'Study on Stock Management Practices in Construction Companies', Research Journal of Management Sciences, 2(4), 7-13.

N.Padmavathy (2012). 'Inventory Management and Its Controlling Techniques at Wheels India Limited', International Journal of Marketing and Technology, 2(6), 121-130.

YE Weilong (2007). 'ABC Inventory Classification Based On Multicriteria Optimization', ASCE, 4073-4079.

Wan Lung Ng (2007). 'A simple classifier for multiple criteria ABC analysis', European Journal of Operation Research, 344-353.

Pramod Kumar (2013). 'An ABC Analysis for the Multiple-Products Inventory Management', International Journal of Research in Engineering & Advanced Technology, 1-6.

R.N.Roy (1999). 'A proposed model of JIT purchasing in an integrated steel plant', International Journal of Production Economics, 179-187.

Shibamay Mitra, M Sukumar Reddy and Kumar Prince (2015). 'Inventory Control Using FSN Analysis', International Journal of Innovative Science, Engineering & Technology, 2(4), 322-325.

Dinesh Kumar Dhoka (2013). 'XYZ Inventory Classification & Challenges', Journal of Economics and Finance, 2(2), 23-26.

Maj Sushil Kumar (2015). 'ABC-VED analysis of expendable medical stores at a tertiary care hospital', 24-27.

Vaisakh P.S. (2013). 'Inventory Management of Spare Parts by Combined FSN and VED Analysis', International Journal of Engineering & Innovative Technology, 2(7), 303-309.

Levin Thomas (2014). 'Development and Evaluation of AVSER Matrix Analysis of Inventory Control Technique for Community Pharmacy Practice in a Tertiary Care Hospital', Scholars Academic Journal of Pharmacy, 257-264.

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