An Improved Supplier Rating Method and Modification of Inventory Management System of a Clay Manufacturing Company-libre

8/12/2019 An Improved Supplier Rating Method and Modification of Inventory Management System of a Clay Manufacturing

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AN IMPROVED SUPPLIER RATING METHOD AND

MODIFICATION OF INVENTORY MANAGEMENT

SYSTEM OF A CLAY MANUFACTURING COMPANY

ABSTRACT

The project deals with the identification of inventory management followed at English

Indian Clays Limited, Trivandrum. Reducing excess inventory and investing in the right

inventories lead to improved customer service, increased inventory turnover, reduced cost

and increased profitability. The most important objective of inventory control is to

determine and maintain an optimum level of investment in the inventory .Excess

inventory serves no purpose and simply ties up capital uselessly. The purpose of this

study is to identify the categories of inventories requiring greater managerial control,

because not all inventories need to be con trolled with equal attention .Datas,

consumption of spares and purchase details (2012-2013) were collected from the

company. The datas were analysed using selective control techniques like ABC, HML,

VED, FSN and XYZ. A matrix that coupled ABC analysis (cost criteria) and VED

analysis (criticality) was formulated for prioritization .To support the study EOQ model is

prepared.

1. INTRODUCTION

Inventories constitute the most significant part of current assets of a large majority of

companies. A considerable amount of funds is required to maintain the large size of

inventories. It is therefore absolutely necessary to manage inventories efficiently in order

to avoid unnecessary investment and the companies have to reduce the level of its

inventories to a considerable level without any adverse effects on production and sales, byusing simple inventory planning and control techniques. A set of guidelines for at what

level of depletion to reorder and how much to reorder to maintain sufficient levels of

inventory in an attempt to minimize the total inventory cost.

Under the above discussion it is clear that in English Indian Clays Ltd, inventory

management is a major problem which causes the economic losses .Therefore, we have

paid our interest in this field of study and have chosen AN IMPROVED SUPPLIER

RATING METHOD AND MODIFICATION OF INVENTORY MANAGEMENT


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SYSTEM OF A CLAY MANUFACTURING COMPANY as the topic of our

research work. It use raw data from the company and suggest some preventive measure

that helpful in reducing injuries.

2. PROBLEM IDENTIFICATION

Inventory cost is high Raw materials are not utilized in a proper way. Improper planning. Products are produced mainly for government institutions. Ineffective inventory management.

3. OBJECTIVE

To keep the investment on inventories to the minimum. To minimize the idle time by avoiding stock outs and shortages. To avoid carrying costs. To study the factors considered in selecting various vendors.

Rating with different criteria. To evaluate various cost incurred in inventory management. To analyze the relationship with the supplier. Aiding purchaser in solving the right problem. Minimum loss of energy and effort. To identify better way to analyze various vendors and rate them accordingly. Identify current problems in inventory management.

Study present inventory management system followed in the company.

4. SCOPE OF STUDY

Analysis of inventory management in English Indian Clay Limited, Veli, and Trivandrum

was conducted. This project place more emphasis on the materials management in the

organization. Through this study we can analyze how the management of inventories

takes place and the improvements can be made in that. Through different selective control

techniques and by combined analysis we can easily identify the reason and make


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corrective actions .This study enables the organization to control, eliminate or minimize

the risks and improve the companys performance. Also help to implement, maintain and

continually improve a good inventory management system.

Various tools used help us to rate vendors in a different manner. Control inventory management. Reduce inventory carrying cost. Help to prioritize the vendors. Increases awareness among departments. Standardize the procedure for evaluating the suppliers. Efficiency can be increased.

5. METHODOLOGY

HYPOTHESIS:

Well implemented and well managed vendor rating system help to reduce management

cost and problems to a greater extent.

Extensive study of the process with in the company. Study was conducted to

learn about the inventory management, planning and production process,

operations, financial performance etc. to identify possible areas of improvement.

Collection of primary data by direct observation and discussion with the

employees. The processes in the company were observed during the in-plant

training. An extensive discussion was carried out with the employees of different

departments to learn about the functioning of the company.

Collection of secondary data from Annual reports, internet, company brochuresand manuals etc.

Identified the current problems in inventory management.

6. PROJECT PLAN

In this project we need to list all the raw materials stored in the store department. The

main objective of the project is to find out the current inventory management methods in

the company. Through this study we could improve the process by collecting reports of


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materials stored in the store department. Later through selective control techniques the

materials are analysed.

7. LITERATURE REVIEW

Effective inventory management is very critical to market success. In most companies,

resources are limited .Excess inventories serves no purposes and simply ties up capital

uselessly.

AN OVERVIEW OF RECENT LITERATURE ON SPARE PARTS ,a work done by

W.J.Kennedy,J.Wayne Patterson, Lawrence D.Fredendall explain the policies that govern

spare parts inventories are different from those which govern WIP and final product

inventories.Mathematical model for the relevant policies are given. The policies describedare (S-1,S),metric based model ,with and without indenture levels, other continuous

review models ,periodic review models, queuing models. He concluded that sound

statistical measurement and application of statistical control techniques lead to a

significant increase in inventory effectiveness.

In 2004, Fuh-Hwa Franklin Liu, Hui Lin Hai published a journal on THE VOTING

ANALYTIC HIERARCHY PROCESS METHOD FOR SELECTING SUPPLIER. This

report detail AHP as a simple but theoretically sound multiple criteria. Methodology forevaluating alternating the strength of AHP lies in its ability to structure a complex, multi-

person and multi-attribute problem hierarchically and then to investigate each level of the

hierarchy separately, combining the results as the analysis progress.

A REVIEW OF SUPPLIER SELECTION METHODS IN MANUFACTURING

INDUSTRIES BY Farzad Tahriri, Mohammad Rasid Osman ,Aidy Ali and Rosnah

Mohd. Yusuf explain supplier selection is a multicriterion problem which includes both

qualitative and quantitative factors. The main objective of supplier selection process is to

reduce purchase risk, maximize overall value to the purchase and develop closeness and

long term relationships between buyers and suppliers , which is effective in helping the

company to achieve just in time production .Choosing the right method for supplier

selection effectively leads to a reduction in purchase risk and increase the number of JIT

suppliers and TQM production .

Rabindranath Roy, Saikat Manna, Gautam Narayan Sarkar explain in APPLYINGMANAGEMENT TECHNIQUES FOR EFFECTIVE MANAGEMENT OF MEDICAL


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STORE OF A PUBLIC SECTOR UNDERTAKING HOSPITAL, the management

techniques developed to optimize the use of scarce resources have had limited application

in the settings of greatest need.ABC analysis is a basic analytical management tool, which

enables top management to place the effort where the result will be greatest. It concluded

that the use of inventory control techniques need to be made a routine practice in the

present health care institution .Substant improvement could be brought about not only in

patient care , but also in the optimal use of resources by judicious practice of these

method.

AN OPTIMAL INVENTORY CONTROL PLANNING FOR AN INDIAN INDUSTRY-

AN ANALYSIS explains the material management department is expected to provide

operational convenience with a minimum possible investment in inventories. The solutionlies in excersing a selective inventory control and application of inventory control

techniques. The most important objective of inventory control is to determine and

maintain an optimum level of investment in the inventory. The importance of materials

management can be emphasized in India where the cost of material accounts for nearly

60% of the production / total cost. It explains the existing inventory control policy at

Indian industry organization.

Imelda Junita ,Rhessy Kartika Sari wrote a report on ABC VED ANALYSIS AND

ECONOMIC ORDER INTERVAL MULTIPLE TERMS FOR MEDICINES

INVENTORY CONTROL IN HOSPITAL .It is to minimize the inventory investment

the hospital may keep the medicines inventory low, but on the other hand maximum

services to the patients cannot be provided .Priorities must be developed to allow

management to decide which items should receive the most effort in controlling .It also

observed that ABC analysis for prioritization was a feasible and efficient technique for

effective management of store in hospitals. ABC analysis (based on cost criteria) shouldbe coupled with VED (based on criticality) to narrow down the group of medicines

requiring greater managerial monitoring. The economic order interval multiple item has

been proposed to determine when and how much the order should be placed .It also help

to determine which actions are the right ones for the organizations, they first carry out the

detailed analysis of the inventory. The results of the analysis can be used as the basis for

defining the appropriate inventory optimization measures.


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In 2013, INVENTORY MANAGEMENT PRACTICES, LIQUIDITY AND

PROFITABILITY OF MULTI NATIONAL CORPORATIONS:A CASE STUDY OF

SIEMENS ELECTRICALS ASIA detailed about long term assets that plays a very

important role in the business , but also it is the known fact that many businesses have

failed because of inefficiency in management of current assets too. The current assets

include cash, bank, inventory, receivables, debtors and other short term assets .Turnover

of inventory represents one of the primary sources of revenue generation and subsequent

earning for the companys shareholders/ owners. An inventory system is the set of

policies and controls that monitor levels of inventory and determine what levels should be

maintained.

8. ANALYSIS AND INTERPRETATION

Tools used are,

8.1 ABC ANALYSIS

Prepare a list of items and estimate their annual consumption.

Determine unit price of each item.

Multiple annual consumption with unit price to get the annual consumption in

rupees.

Arrange the items in descending order of their annual usage.

CATEGORY NO.OFITEMS

% OFITEMS

VALUE OFITEM

% OFVALUE

(CUM)

A ITEM 98 9.496 10866343.84 70

B ITEM 184 27.325 3119553.49 90

C ITEM 750 100 1557454.30 100

TOTAL 1032 15543351.63


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8.2 HML ANALYSIS

Management will decide the cut off line.

Accordingly the materials are classified.

Based on price criteria.

Based on cost per unit

Highest

Medium

Low

This is used to keep control over consumption at departmental level for deciding

the frequency of physical verification.

Criteria H items- Item with unit price above Rs.10,000

M items- Item with unit price between Rs.10000and Rs.1000

L items- Item with unit price below Rs.1000

CATEGORY NO. OFITEMS

% OFNO. OFITEMS

MAXUNITPRICE

MINUNITPRICE

H ITEM 48 4.651 146897.02 10107.39

M ITEM 222 21.512 9814.05 1007.71

L ITEM 762 73.837 993.13 0.00

TOTAL 1032 100

8.3 FSN ANALYSIS

It is based on rate of consumption.

The items can be classified into:


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1. Fast moving

2. Slow moving

3. Non-moving

CATEGORY NO.OF ITEMS % OFITEMS

F ITEMS 317 30.71

S ITEMS 263 25.48

N ITEMS 452 43.79

8.4 VED ANALYSIS

The stores when subjected to analysis is based on criticality can be classified into

vital, essential and desirable stores.

Vital: non availability cannot be tolerated.

Essential: non availability can be replaced by alternative items.

Desirable: non availability can be tolerated

DESCRIPTION OF FACTOR WEIGHTAGE(%)

1.PERCENTAGE UTILIZATION OF MACHINE

2.NUMBER OF ALTERNATIVE MACHINES

3.EFFECT ON OTHER MACHINES DUE TO BREAKDOWN

4. AGE OF MACHINE

5. EASE OF REPAIR

6. QUALITY OF WORK DONE ON THE EQUIPMENT

10

15

15

15

15


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7. EASE IN PROCUREMENT

8. MAINTENANCE HISTORY

5

10

15

Factordescription

Weightage Degree I(score)

Degree II(score)

Degree III(score)

Degree IV(score)

Degree V(score)

% Utilization ofM/C

10 M/c loaded< 8hrs (2)

1 Shift(4)

2 Shift(6)

3 Shift(8)

Overload(10)

Availability ofsubstitute

15 4 and above(3)

3 or more(6)

2(9)

1(12)

No substitute(15)

Effect on otherM/c due tobreakdown

15 10% M/c`s/men idle

(3)

10 -20 %(6)

20 -40 %(9)

40-60%(12)

>80%(15)

Age of the M/c 15 up to 2 years(3)

2-4 years(6)

4-6 years (9) 6-8 year (12) > 8 years (15)

Ease of Repair 15 Mechanicalfault -easy torepair

(5)

Electrical &Hydraulic-difficult todiagnose

(10)

Electronicfault -difficultto find

(15) -------------- ---------------

Quality of workdone onequipment

5 Wide tolerance- no effect onquality

(1)

Tolerance bet 0.05 to 0.1 - noeffect on quality(2)

Tolerance bet.0. 025 to 0. 05- some effect(3)

0.01 to 0. 025-Majorproductionloss

(4)

Below0.01completeproduction loss

(5)

Ease inprocurement interm of lead timeor can bemanufactured inthe company

10 1 month time/can bemanufactured inthe company

(2)

1-3 months/ canbemanufactured incompany

(4)

3-6 monthstime/manufacturenot possible

(6)

Over 6months/ inhousemanufacturenot possible

(8)

to be imported,uncertainprocurementperiod

(10)

Maintenancehistory in termsof repair orders

15 0-25(3)

25 50(6)

50 75 (9) 75 100(12)

> 100(15)


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CATEGORY NO.S % OF ITEMS

V ITEMS 248 23.98

E ITEMS 666 64.41

D ITEMS 120 11.60

1034

8.5 XYZ ANALYSIS

Depending on balance stock lying in the store from time to time .

X: items whose value of balance stocks lying in the stock are very high.

Y: items whose balance stock is moderate.

Z: items whose balance stock is very low.

CATEGORY NO.OFITEMS

% OFITEMS

VALUE OFITEM

% OFVALUE

X ITEMS 133 6.30 13492905 70

Y ITEMS 364 17.24 3871939 20

Z ITEMS 1614 76.45 1929894 10

TOTAL 2111 100 19294738.04


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8.6 CONTROL MATRIX

It can be easily visualized that the various types of analysis discussed are not mutually

exclusive. They can be, and often are used jointly to ensure better control over

materials.

a) ABC and VED analysis can be combined together

V E D

A

Constantcontroland regularfollow up

Maintain atmoderate level

Eliminateitemor keep nilstock

B

Maintain atmoderate

level


Low stock

C

Maintain atHigh stock


Low stock

V E D

A 11 13 16

B 18 21 40

C 10 50 90


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b) ABC and HML analysis can be combined together

H M L

A

Critical analysisand closemonitoring-Reduce stocklevels

Convert to Zcategory-i.e.reduce stock

Alreadywithincontrol

BFrequent review ofconsumption andstock (once in amonth)

No further controlisnecessary

Review needless frequent(bi-annually)

CSurplus stock isdisposed off

Tight control isrequired

Only annualreview isneeded

H M L

A 30 37 21

B 27 57 29

C 16 42 30


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c) FSN and XYZ Analysis can be combined together

F S N

X

Tight control isrequired, carrieshigh inventory.Constant review isneeded

Efforts shouldbe towardsreducing stock

Disposed atoptimum prices,since they arenon-moving andhave highinventory value

YModerate stocklevel

Low stocklevels

Disposal is the

best possiblemeasure

ZStock can beincreased to reducelabour

Low stocklevels

Disposal can bedone even atlower price.

8.7 INTERPRETATION

Some selective inventory control techniques like ABC, VED, FSN, HML, XYZ analysis

are carried out on the selected items. It helps any organization to achieve the required

objective with minimum cost and less time.

8.8 INVENTORY POLICY

Inventory policies differ in two aspects, namely the mechanism used to trigger

replenishment orders and the decision rule that specifies the determination of the order

size. The specific inventory policies are defined through the combination of the decision

variables s (reorder point), r (review interval, order cycle), q (order quantity) and S (order

level) as follows:

(s, Q) policy,

(R, S) policy,

(s, S) policy,


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(R, s, S) policy

Order-point, Order- Quantity (s, Q) system

Under the (s, Q) policy, the point in time at which replenishment orders are triggered,

depends on the size of the reorder point s, whereas the order quantity Q is constant

over time. In the ideal (textbook) form of the (s, Q) policy, the inventory position is

continuously monitored. The inventory position is the sum of the inventory on hand plus

the inventory on order minus the outstanding backorders (backlog). The inventory

management system (or the inventory manager) acts according to the following decision

rule: If at a review instant the inventory position has reached the reorder point s (from

above), and then launches a replenishment order of size Q.

Order-point, Order-up-to-level(s, S) system

Under an (s, S) inventory policy, the points in time when an order is triggered are

determined in the same way as with the (s, Q) policy, i. e. through the reorder point s.

However, in contrast to the (s, Q) system, a variable replenishment quantity is used,

ordering enough to raise the inventory position to the order-up-to-level S. If demands


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arrive unit-sized, then the (r = 0, s, S) policy is identical to the (s, Q) policy with

continuous review, i.e. S = s+Q.

Periodic review order up to level (R, S) policy

If an (R, S) inventory policy is in effect, the points in time at which replenishment orders

are released are determined through the review interval R. The inventory management

system proceeds according to the following decision rule: In constant intervals of r

periods launch a replenishment order that raises the inventory position to the target order

level S. Obviously, the (R, S) policy is an inventory policy with periodic review. The

order size at a time of a review depends on the demands and the development of theinventory observed in the preceding periods. If R=1, then this policy is called base-stock

policy.


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(R, s, S) System

This is a combination of (s, S) and (R, S) systems. The idea is that every T units of time

we check the inventory position. If it is at or below the reorder point s, we order enough

to raise it to S. If the position is above s, nothing is done until at least the next review. It is

a periodic version of (s, S) system. The best (R, s, S) system produces a lower total of

replenishment, carrying and shortage costs than does any other system.

Inventory policy for fast-moving spares

Inventory control policies for fast-moving spares have been covered fairly extensively in

various textbooks (including the authors'). Just one such policy will therefore be

presented here, and then only in sufficient outline to illustrate the basic principles, the

main effort of this section being directed at the problem of slow-moving spares.

As already explained, the task is to balance the cost of holding stock against the cost of

running out.


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There are two basic categories of control policy for fast movers, viz.:

1. Re-order level: replenishment prompted by stock falling to a pre-set re-order level;

2. Re-order cycle: stock reviewed, and replenishment decided, at regular intervals.

A re-order level policy- the so-called 'two-bin' system : The inventory policy is set in

terms of a re-order level M and a re-order quantity q. The stock is continuously monitored

and a replenishment order for a fixed quantity q is placed when stock on-hand (stock held

plus stock on order) falls to or below a pre-set re-order level M (i.e. storage in two bins,

order placed when first bin empty, service from second bin until order received). The re-

order level stock (i.e. the contents of the second bin) thus acts as a reservoir which

diminishes the risk of running out of stock arising from the random variability of demandand the uncertainty of the lead time. The resulting pattern of stock holding is shown in

Figure 2.4 where the solid line represents the stock held, and the broken line the stock on-

hand (as defined above).

In the two-bin system a fixed quantity is ordered at variable intervals of time; in general

to operate such a method needs continual monitoring of all stock transactions and it is

only with the advent of the computer that it has become at all widely used.

The re-order quantity q can be evaluated from the expression


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Where

D is the mean demand for the part per unit time,

Co is the cost of the replenishment order,

CH is the cost, per item, of holding the part.

The re-order level M can be calculated from the expression:

Where

L is the mean lead time,

Is the standard deviation of demand per unit time,

k is the standard normal variant.

Inventory policies for the control of slow-moving spares

It was noted earlier that the greater part of the value, and hence the dominant control

problem, of a spares inventory lies in the expensive slow-moving parts, where

overstocking is not quickly corrected by subsequent consumption. The decision that is

then required is whether to hold none, one or- at the very most- two of a given part.

Mitchell, working for the National Coal Board of the UK, developed a technique for

dealing with this problem. The way the technique is used depends on whether the parts

fail randomly or by wear-out.

Random failure parts: If demands for a part, although infrequent, occur quite randomly

(i.e. they are equally likely to occur at any time) then the probability P(n) of receiving n

demands in any given lead time can be assumed to be given by the Poisson distribution,

i.e.:


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Where m is the mean demands per lead time(LD)

For a re-order level system where only one item is ordered at a time (which would

probably be the case with a very high-cost item) and non-captive demand (i.e. stock out

would be met from another source, egg by making- at known extra expense the spare inthe workshop; with captive demand stock out would be met by earlier delivery of a spare

on order), Mitchell derived the decision chart, it indicates the value of N, the number of

items on band (i.e. in stock plus on order), which will minimize CN, the average total cost

per unit time (of holding and stock out, the cost of ordering being assumed negligible).

For points on the line Co = C1 equal cost arises if N = 0 or 1; along C1 = C2 equal cost

arises if N = 1 or 2 (unlike the curve Co = C1, the position of this latter curve is a

function of L- and is therefore plotted for various values of this).

So, for a given spare, for which L, D, Cn and Cs (the stock out cost) are known, the chart

is used as follows. If Cs/CH and D give a point lying:

(a) Below Co = C1 then no spare should be held,

(b) Between Co and C1 = C2 then one spare should be held,

(c) Above C1 = C2 then two spares should be held.

9. CONCLUSION

A sample of inventories were selected from stores department English India Clays

Ltd,Veli .Some selective inventory control techniques like ABC, VED, FSN, HML, XYZ

analysis are carried out on the selected items. It helps any organization to achieve the

required objective with minimum cost and less time.

Inventory Control matrices like (ABC, VED), (ABC, HML), and (XYZ, FSN) helps to

identify the different nature of items and their control methods. EOQ calculations and

forecasting of items are also done because a good forecast is essential to plan inventory

levels and policies. Finally suitable inventory policies are suggested to the selected items.


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REERENCES

1. W. J. Kennedy, J. Wayne Patterson and Lawrence D. Fredendall An overview ofrecent literature on spare parts inventories International Journal of Production

Economics Volume 76, Issue 2, 21 March 2002, Pages 201-215.

2. Edward A. Silver, David F. Pyke and Rein Peterson Inventory Management and

Production Planning and Scheduling, Third Edition John Wiley $ Sons.

3. A.M Natarajan, P. Balasubramani, A. Tamilarasi Operations research Person

Education, Delhi 2005.

4.

S.N Chary, Production and Operations Management, TMH, pp-136-153, pp190-199.

5. P.Gopalakrishnan, M.Sundaresan, Materials Management An Integrated

approach, Prentice Hall of India.

6. www.advanced-planning.eu/
http://www.advanced-planning.eu/http://www.advanced-planning.eu/http://www.advanced-planning.eu/

Documents

An Improved Supplier Rating Method and Modification of Inventory Management System of a Clay Manufacturing Company-libre