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: sonalkumbhar90@gmail.com
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.
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