Inventory Management : Abc and Vmi

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Part A: Inventory Management
Inventory management has always been a bone of contention for production, finance and marketing departments, as each has different goals – while production likes to secure high level of raw material, consumables and spares for uninterrupted operations, finance likes to optimize cost by minimizing stock levels and marketing like to have enough finished stock variety to serve the customers on demand. All this involves cost; hence to maintain a right balance becomes a challenge.

Identifying the right kind of inventory management system for can be a difficult and complex task. Since the investment is large and remains fixed over a considerable length of time, the correct system choice is critical to both a firm's short and long-term profitability (D. Dennisa et al., 2006).

There are various methods available to ensure a right balance. The intention of the paper is to briefly discuss them with greater focus on vendor managed inventory.

Inventory Management Methods:
Inventory management is basically about, inventory control, management and planning. There are several techniques available like Bar code, RFID for tracking, EOQ for ordering, ABC for controlling, VMI, MRP, JIT for replenishment.

ABC Analysis:
“Implementing controls for large inventory systems becomes rather cumbersome because each item requires managements of order cycle and quantity. The inventory control problem is greatly simplified as only a few groups rather than many items will have to be controlled. This method is the ABC analysis.” (Odanakaa , 1987)

Under ABC method all items are classified based on their criticality. This analysis is based on “Pareto” principal generally known as 80/20 rule. It is useful in proactively managing inventory that is critical and high value in nature.

Under A-B-C method of inventory classification, units are classified in to three categories based on their annual dollar value weightage in total inventory.

“A” category compromises of around 80% of stock value but hardly 20% of count. These are mostly high value critical components maintained on safety stock level basis for uninterrupted operation of plant. It could be highly technology sensitive items like blades of gas turbine generators (GTG) used for running LNG trains.

“B” category is represented by another around 15% of material count representing around 20% of value. These are largely consumables, though not critical but have considerable impact on the performance of the plant. It could be chemicals that are required for smooth functioning of the GTG.

“C” category is represented by 60% of items with 5% of value. Those are non critical and their unavailability doesn’t necessarily impacts the plant. It could be small parts say nuts and bolts of the GTG frame that hardly has an impact in short to medium term.

Benefits of ABC analysis, enhanced control over inventory, helpful in containing cost by focusing on necessary, improved performance as inventory is proactively managed. and better utilization of resources like warehouse space and staff. .

Materials Requirements Planning (MRP)
MRP is dependent demand inventory replenishment method where we not only control items to be purchased and its quantity but also optimize the timing. In words of Max Muller (2003), right item, in the right quantity, and at the right time.

MRP is part of the master production schedule, where stock is not order unless planned for consumption irrespective of the inventory level.

Let us understand by example. A company that makes blocks and colored paving plans to utilized its full capacity for next month manufacturing yellow bricks and 16” blocks. As per detail master production schedule white cement, grey cement, yellow pigment, sand is required. As per inventory records, yellow and red pigments are out of stock. Here, inventory order will include, cement, yellow pigment, sand but not red pigment even though not in...
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