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 controlled 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, by using 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

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

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 brochures and 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

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 described are (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 for evaluating alternating the strength of AHP lies in its ability to structure a complex, multiperson 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 APPLYING MANAGEMENT TECHNIQUES FOR EFFECTIVE MANAGEMENT OF MEDICAL

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 INDUSTRYAN ANALYSIS explains the material management department is expected to provide operational convenience with a minimum possible investment in inventories. The solution lies 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) should be 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.

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. NO. OF ITEMS % OF ITEMS VALUE OF ITEM % OF VALUE (CUM) 9.496 27.325 100 10866343.84 3119553.49 1557454.30 15543351.63 70 90 100

CATEGORY

A ITEM B ITEM C ITEM TOTAL

98 184 750 1032

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. OF ITEMS % OF NO. OF ITEMS 4.651 21.512 73.837 100 MAX UNIT PRICE 146897.02 9814.05 993.13 MIN UNIT PRICE 10107.39 1007.71 0.00

H ITEM M ITEM L ITEM TOTAL

48 222 762 1032

8.3 FSN ANALYSIS It is based on rate of consumption. The items can be classified into:

1. Fast moving 2. Slow moving 3. Non-moving CATEGORY NO.OF ITEMS % OF ITEMS 30.71 25.48 43.79

F ITEMS S ITEMS N ITEMS

317 263 452

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

7. EASE IN PROCUREMENT 8. MAINTENANCE HISTORY

5 10 15

Factor description % Utilization of M/C Availability of substitute

Weightage

Degree I (score) M/c loaded< 8 hrs (2) 4 and above (3)

Degree II (score) 1 Shift (4) 3 or more (6)

Degree III (score) 2 Shift (6) 2 (9)

Degree IV (score) 3 Shift (8) 1 (12)

Degree V (score) Overload (10) No substitute (15)

10

15

Effect on other M/c due to breakdown Age of the M/c

15

10% M/c`s/ men idle (3) up to 2 years (3) Mechanical fault -easy to repair (5)

10 -20 % (6)

20 -40 % (9)

40-60% (12)

>80% (15)

15

2-4 years (6) Electrical & Hydraulicdifficult to diagnose (10)

4-6 years (9)

6-8 year (12)

> 8 years (15)

Ease of Repair

15

Electronic fault -difficult to find (15)

--------------

---------------

Quality of work done on equipment

Wide tolerance - no effect on quality (1)

Tolerance bet 0. 05 to 0.1 - no effect on quality (2)

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

0.01 to 0. 025Major production loss (4)

Below 0.01complete production loss (5)

Ease in procurement in term of lead time or can be manufactured in the company

10

1 month time/ can be manufactured in the company (2)

1-3 months/ can be manufactured in company (4)

3-6 months time/ manufacture not possible (6)

Over 6 months/ in house manufacture not possible (8) 75 100 (12)

to be imported, uncertain procurement period (10)

Maintenance history in terms of repair orders

15

0-25 (3)

25 50 (6)

50 75

(9)

> 100 (15)

CATEGORY V ITEMS E ITEMS D ITEMS

NO.S 248 666 120 1034

% OF ITEMS 23.98 64.41 11.60

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. NO. OF ITEMS 133 364 1614 2111 % OF ITEMS VALUE OF ITEM % OF VALUE

CATEGORY

X ITEMS Y ITEMS Z ITEMS TOTAL

6.30 17.24 76.45 100

13492905 3871939 1929894 19294738.04

70 20 10

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

D Eliminate item or keep nil stock

Constant control Maintain at and regular moderate level follow up

Maintain at Maintain at moderate Low stock moderate level level Maintain at Maintain at Low stock High stock moderate level

11

13

16

18

21

40

10

50

90

b) ABC and HML analysis can be combined together

Critical analysis and close Convert to monitoring category-i.e. -Reduce stock reduce stock levels

Z Already within control

Frequent review of No further control Review need consumption and is less frequent stock (once in a necessary (bi-annually) month) Surplus stock disposed off is Tight control required is Only annual review is needed

30

37

21

27

57

29

16

42

30

c) FSN and XYZ Analysis can be combined together

Disposed at Tight control is optimum prices, required, carries Efforts should since they are high inventory. be towards non-moving and Constant review is reducing stock have high needed inventory value Moderate level stock Low levels stock Disposal is the best possible measure Disposal can be done even at lower price.

Stock can be Low increased to reduce levels labour

stock

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,

 (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

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 the inventory observed in the preceding periods. If R=1, then this policy is called base-stock policy.

(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.

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 reorder 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 demand and 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 onhand (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

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.:

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 in the 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.

REERENCES

1. W. J. Kennedy, J. Wayne Patterson and Lawrence D. Fredendall An overview of recent 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, pp190199. 5. P.Gopalakrishnan, M.Sundaresan, Materials Management An Integrated approach, Prentice Hall of India. 6. www.advanced-planning.eu/