Project Construction & Management - Material & Inventory Management

Material Management

• Planning, organizing, and controlling material flow from purchase to distribution.
• Major concerns: purchasing, transportation, inventory management, warehousing.
• Four basic needs:
  • Adequate materials when needed.
  • Lowest possible prices.
  • Minimize inventory investment.
  • Efficient operation.

Basic Principles of Material Management

• Effective management and supervision.
• Sound purchasing methods.
• Skillful negotiations.
• Effective purchase system.
• Must not increase other costs.
• Simple inventory control program.

Purchasing

• Exchange of goods/services for money; planning, procuring, and delivering parts/materials when needed.
• Principles:
  • Right quality, quantity, and price.
  • Right source, time, and place.
• Objectives:
  • Maintain supply continuity.
  • Minimize inventory investment.
  • Avoid duplication, waste, obsolescence, and delays.
  • Maintain quality standards.
  • Procure materials at the lowest cost.
  • Maintain competitive market position.
• Procedure:
  1. Purchase Requisition (PR).
  2. Verification of authority and budget.
  3. Request for Quotation or Bids.
  4. Evaluation of bids and supplier selection.
  5. Issuing of Purchase Order.
  6. Follow-up and expediting.
  7. Receiving, inspecting, and storing.
  8. Closing the Order.

Storage

• Adequate space required.
• Appropriate placement.
• Group-wise, alphabetical arrangement.
• First-in, first-out principle.
• Monitor expiry date.
• Avoid stock-outs; maintain reserve and safety stock.

Inventory Management

• Function in controlling assets in the supply chain.
• Includes raw materials, work in process, and finished products.
• Key elements: importance, types, management techniques, forecasting relationship, and financial impacts.
• Inventory control: stocking adequate materials when and where required.
• Objective: Balance inventory investment and customer service.

Functions of Inventory Management

1. Decouple production processes.
2. Buffer against demand fluctuations.
3. Take advantage of quantity discounts.
4. Protect against inflation.
5. Maximize supply service.
6. Cushion between forecasted and actual demand.

Types of Inventory

• Raw Material: purchased, not processed.
• Work-In-Process: Undergone some change, not completed.
• Maintenance/Repair/Operating (MRO): For machinery and processes.
• Finished Goods: Completed, awaiting shipment.

Inventory Costs

• Acquisition costs: PO preparation, receiving, inspecting.
• Carrying costs: Storage, utilities, tracking systems.
• Stockout costs: When an item is out of stock.

Challenges in Managing Inventories

• Insufficient Inventory: causes downtime & lost sales.

Reasons to Carry Inventory

• Meet customer needs with raw materials and components to create finished products to meet production schedules.
• Deal with supply chain uncertainty coming from supplier delays, late deliveries, poor quality, damaged and incorrect deliveries.

Problematic Reasons for Carrying Inventory

• Compensate for supply chain problems; poor demand planning, forecasting, product theft, supplier performance, production yields, planning/tracking systems, counting systems, large-quantity purchases, obsolete inventory.
• Backorder Costs: Rush shipments for customer needs.
• Lost Customers: Due to unwillingness to wait for backorder.

Inventory Carrying Locations

• Supplier facilities, warehouses, buying company’s facilities, manufacturing facilities, distribution centers, retail locations.

Functional Types of Inventory

• Cycle Stock: depleted through normal use.
• In-process stock: Goods being manufactured.
• Safety stock: Protect against uncertainties.
• Seasonal stock: Held in advance of season.
• Promotional stock: Respond to marketing promotions.
• Speculative stock (hedge stock): Protect against price increases.
• Maintenance, Repair, and Operations (MRO) Inventory: Ensure facility and equipment are safe and reliable.

Managing Inventory

• Optimize inventory levels to meet customer needs without overinvesting.
• Key areas: demand planning, deciding how much to hold, counting, tracking, and controlling inventory.
• Demand Planning: Estimate inventory needed over time; prevents over/under supply.
• Counting Inventory: Physical count (physical inventory) or cycle counting.
• Tracking and Controlling Inventory: Essential for knowing location and quantity; control methods must be implemented.

Inventory Management/Control Employee Tasks

• Classify, label, maintain inventory, keep accurate locations, communicate levels to managers reduce breakage, damage, and obsolescence.

Inventory Models for Independent Demand

• Economic Order Quantity (EOQ) model.
• Economic production model.
• Quantity discount model.

Basic EOQ Model

• Order size minimizes total annual cost.
• Assumptions:
  1. Demand is known, constant, and independent.
  2. Lead time is known and constant.
  3. Receipt of inventory is instantaneous and complete.
  4. Quantity discounts are not possible.
  5. Stockouts can be completely avoided.
• Costs involved:
  1. Ordering and setup costs: expenses for placing orders.
  2. Carrying costs: storage, handling, insurance, taxes.
  3. Item/purchase costs: price paid.
  4. Stock out cost: results from lost sales.

Economic Production Quantity (EPQ)

• Assumptions:
  • One product.
  • Known annual demand.
  • Constant usage rate.
  • Continuous usage, periodic production.
  • Constant production rate.
  • Constant lead time.
  • No quantity discounts.