Formulation of Inventory Control strategies for Raw material store (RMS) and Finished Goods Store (FGS)

By :-

Sandeep,ANA PGDIE 40, NITIE,Mumbai

ROAD MAP
Problem statement Deliverables Methodology Analysis of RM

Analysis of FGS
Recommendations Limitations

Problem statement
Need: Highly competitive environment

Squeezed profit margins Essential to maintain the supply chain surplus Need for efficient inventory management system

Problem Statement :
To set up inventory norms for Raw Materials (RM) and Finished Goods (FG), and make necessary amendments. The rationale behind this exercise is to ensure a more accurate control on inventory when the production and scheduling processes is initialized.

Deliverables

Propose Optimum inventory levels and with safety stock for all the child parts at RMS Setting of inventory control norms ensuring optimized levels of RM and FG inventory at various echelons of the entire Supply Chain

Savings in terms of losses owing to storage of excess material

Methodology

Understanding Existing Processes Data Collection Analysis of Data Inventory Classification Devising Safety and Cycle Stock Formulating Ordering Policies

Simulation
Recommendations

Analysis of RMS

Inventory classification ABC analysis of raw materials HML analysis of raw materials Inventory Analysis by 9 Matrix Cell approach Inventory model Devising Safety Stock for RM Calculating Cycle Stock for RM Methodology for allocating ordering policy

Inventory classification:

ABC Value analysis of raw materials

The count of raw materials used in MAHLE is close to 2500 and before we proceed to setting the inventory control for them is essential For the classification the consumption data from Jan 2010 to Dec 2010 was used. The cut offs taken was 80% of value for A class , 15 % value for class B and 5% for class C ABC Value analysis accounts for Inventory cost reduction issues
Methodology:-

Consumption data form jan 10 to Dec 2010

Consumption data form Jan 10 to Dec 2010consumption value= quantity consumed x unit cost

Ranking the RM based on consumption value

Categorising the RMs based on decided cutoffs

Inventory classification:

ABC Volume analysis of raw materials

For the classification the consumption (Quantity) data from Jan 2010 to Dec 2010 was used. The cut offs taken was 80% of value for A class , 15 % value for class B and 5% for class C ABC Volume analysis accounts for Space constraint issues

Methodology:-

Consumption data form jan 10 to Dec 2010

Consumption data form jan 10 to Dec 2010 quantity consumed

Ranking the RM based on consumption

Categorising the RMs based on decided cutoffs

Inventory classification:

HML analysis of raw materials

Low variability items will be predictable and easier to forecast with accuracy Medium variability items are relatively predictable but show larger swings High variability items contain the largest swings in demand and highest risk Variability classification: Low = Std .dev sales/ Average Consumption<= 1.0 0r 100% of average usage Medium = Std .dev sales/ Average Consumption <= 2.0 0r 100 - 200% of average usage High = Std .dev sales/ Average Consumption >=2.0 0r greater than 200% of average usage
Methodology:-

Consumption data form jan 10 to Dec 2010

Average and Std Dev is calculated

Calculating Variability =st.dev/Average

Categorising the RMs based on decided cutoffs

Inventory Analysis by 9 Matrix Cell approach

Segments inventory by value and risk Enables targeted inventory strategy and policy development To calculate the inventory for Class A and B with LOW and MEDIUM variability and stock them effectively. To filter the C class with items whether they are SLOW MOVING and then stock them based on the calculated values Analyze the CLASS A and B with HIGH variability and work on action to improve the consumption pattern

Inventory model
The General Periodic order review model :-

Devising Safety Stock for RM

Safety Stock accounts for -- Uncertainty in production lead times -- Unknown customer demand -- Uncertainty in Supplier lead times

Benefits : Allows quick customer service Avoid lost sales Avoid Emergency shipments Good will of customers

Formulae: Safety stock (in quantity) = (CSL) x SQRT (D2.LT + lt2.D2) D= Demand LT=Lead time = Standard deviation (variation)

Capturing Demand Variability

Capturing Demand:- Historic consumption data from Jan 2010 to Dec 2010 was taken to estimate the average consumption for each item. For this the Daily production file is taken from production department. Then the daily consumption data was summed up to get monthly consumption for each raw material each month from Jan to Dec.

Capturing demand variation: The variations in consumption/demand will be due to many factors like: Growth in the volumes of production as market shares increase Economic batch sizes based production schedule Deviations for proposed production schedule Seasonality Other causes

Normalization
Need: Normalization is done to get a true picture of the consumption variation to calculate accurate safety stock value. If the standard deviation of this un normalized consumption is taken it will give a high value and consequently a high value of safety stock which in turn will have a high value impact in terms of A items

Methodology:- .

Example
A raw material "O"RING-2557(MTJ P.NO.K1086-101-1640) (1864012557) is taken to demonstrate the normalization process. Firstly a linear best fit trend line is calculated based on method of least squares Least square method ensures that the distance of the trend line form all the points are the minimum Now the deviation of each point is calculated from the trend line The Root mean square of the deviation of all points from the trend line gives the consumption variation for the respective parameter. This is D in the safety stock formulae.

Capturing Supply Variability

Lead time is taken based on supplier locations Lead time variation is assumed to be 20 %

Methodology:-

Procurement data form jan 2010 -Dec 2010

Lead time assumed based on location

lead time variation is assumed to be 20 %

lead time= External lead time+ PO generation time+ QC time

Calculating Cycle Stock for RM

Model of periodic review

Cycle stock is equivalent to the lead time of the respective raw material

Methodology for allocating ordering policy

The X axis indicates the category in which the RM falls based on the ABC value analysis The Y axis is the Volume class of the RM based on the consumption based ABC Volume analysis The idea of the above matrix is -- For a raw material having high value in terms of cost it would ideal to carry less average inventory to reduce our working capital. -- Similarly for items having a high volume value again carrying low average inventory would mean lesser warehousing space required

X ordering policy: Order quantity would be to bring the stock on hand equal to (Cycle stock + 7+ safety stock) number of days. Here order would be generated at the end of every review period Y ordering policy: Order quantity would be to bring the stock on hand equal to (2 x Cycle stock + 7+ safety stock) number of days. Here order would be not be generated at the end of every review period

Methodology for ordering policies

Calculate 7 day demand for

respective RM

IF Y then Freeze it

IF X calculate combined coefficient of variation=cof. Variation consumption+ cof. variation lead time

If combine cof. variation < 50% assign X else Y

IF Y FREEZE

IF x then check if cof. variation consumption <80% and cof. of variation LT<80%

IF YES assign X

IF YES assign Y

Analysis of FGS

Understanding Existing Processes Classification of finished goods Variability of Demand vs. Usage Analysis Stocking methods

Formulating Strategies for stocking

Adherence to planning policies

Understanding Existing Processes

Dispatch process Customer order acceptance by Sales department and approved by Finance department. Verification the order by checking the inventory Advance Shipment Notice to customer Dispatch invoice generated to the Logistics department. -- Paid freight -- Customer freight Generation of L.R.no

Classification of Finished Goods

Classification is done using 9 matrix cell method and the goods are classified accordingly CORE ITEMS - Goods with high value (i.e A,B) and Low and Medium variability NON CORE ITEMS Goods with Low value (i.e C) and Low and Medium variability VOLATILE Goods with high value (i.e A) and High variability SLOB Goods with Low value (i.e C) and High variability

After classifying the products decision is taken on stock inventory control of the material based on the classification

Stocking methods
Based on processing Lead time we have 3 ways of stocking options i.e
MTS Make to stock Order receipt+ pick+ transit + Receiving time

ATO Assemble to order -

Order receipt+ assembly + transit + Receiving time

Order receipt+ Build+ transit + Receiving time

MTO Make to order -

Formulating Strategies for stocking

CORE ITEMS - Safety Stock + MTO+ATO NON CORE ITEMS No safety stock + Monthly replenishments VOLATILE No safety stock +MTO+ May require further review

SLOB No safety stock

Adherence to planning policies

Setting clear policy on order planning and adhering to it can minimize the costs of expedited
shipments and can minimize risks to stock outs Because of capacity planning, MAHLE will need to work with suppliers to provide visibility to the order forecast

Demand through lead time is determined using MRP

Actual reorder quantities may vary due to supplier/manufacturing lot/batch sizes, order modifiers, and anticipated/forecasted demand Accurate lead times are crucial to determining the amount of inventory you will have to order.

Inaccuracies can lead to overages or shortages in inventory orders

Recommendations

Integration with advanced radio-frequency and bar coding technologies. Complete back-office integration with Order Entry, Inventory Control, and Purchase Orders modules. Scalability to accommodate future business growth. Real-time inventory updates. Hand-held interface. Advanced reporting capability. Support for multiple picking methods. Compliance labeling and ASNs. Automated inventory receipt and assisted put-away.

Limitations

Calculations have been done using the average demands from historical data. In case of order quantities for raw materials and packing materials the optimal truck loading conditions have not been considered