Optimization of Multi-Item Inventory System

Abstract

Inventory is the lifeblood of a business organization. Industry uses various types of materials for its smooth running. A significant amount of total assets is invested as inventory. In many companies, the management has the lack of control over quantity of material to order and their lead-time. As a result, it is not possible to maintain schedule. Hence management of inventory becomes primary concern everywhere. Khulna Shipyard Ltd follows the traditional method of purchasing multiple inventory items. Demand for replenishment of inventory items are placed when they are needed. Sufficient additional stock is not maintained to meet the lead time demand. Therefore, shortage of materials frequently occurs during production. So, appropriate method of inventory replenishment for the shipyard is developed in this research. The present study is all outcome of scientific planning of ordering right inventory items in the right quantity in right place at right time to facilitate uninterrupted production of Shipyard. To provide continuous supply of inventory during the production period a standard method for purchasing multiple inventory items for joint replenishment was developed. This method is consisting of some models and policies. EOQ model for single inventory system is used with necessary adjustment for multi-items. This model will provide optimal ordering quantity of each item. The ROP models will provide information when to order the items. The policies of grouping inventory items are based on the sequential need of the items in the assembly line of the end product. Safety stock policy can be adopted for providing protection against the variability in both demand and lead time. Continuous review type (R,Q) inventory replenishment policy is also introduced in the new procurement method. In (R,Q) policy, if the inventory position is reviewed quantity is placed immediately. Where R is the re-order point and Q continuously at a point, if the point is less than R, all order for Q is the order quantity. Material demand and replenishment policy is almost similar for all the shops of KSY. Machine shop is selected as representative of all the shops for applying the new purchased method in the procurement of three components of Gun Metal. Material demand and lead time Data of Material demand and lead time for last three years from 2006 to 2009 was collected from the three individual departments of the organization named Machine Shop Indoor, Costing Department and Main Store in this regard. Calculation for determining EOQ, ROP and safety stock for joint replenishment of inventory items is done according to the procedure mentioned in the chapter-4. It is observed from the Figurc-5.1 that, monthly demand for Gun Metal fluctuates. This is due to the fact that number of ships to be repair or renewed are not constant, this varies over time. Again, the requirement of Gun Metal is not same for the ships during their each schedule repair/maintenance. Monthly average consumption of Gun Metal in the shipyard is found 101 Kg. Again it is observed that, lead time for Gun Metal procurement also varies due to Unavailability of material in the market, transportation delays, complexities arise in procurement process and so on. Average lead time for the procurement of Gun Metal components is found 41 days. Fixed ordering cost for purchasing inventory items in KSY is calculated TK 21,100 according to the procedure mentioned in the chapter 4. Inventory carrying cost is found 25 % of the purchase price of items in the group. EOQ of each item is computed using the formula (4.3.1.3). Safety stock for Gun Metal is obtained 889.72 Kg by using the formula (4.3.4.1). Safety stock depends on the variability of the demand and lead time, desired service level, average demand rate and average lead time. This stock is also proportional to the supply disruption, demand forecast error, square root of the lead time. The order for replenishment of Gun Metal is triggered when the quantity level falls below the 1036.48Kg.This quantity is influenced by the demand rate, lead time and degree of stock out risk. The frequency distribution of monthly demand for Gun Metal and lead time for the procurement illustrated in the separate figure in chapter 5. The finding comes out from the analysis of EOQ model is presented in the figure 5.3. No scientific method was found for purchasing inventory items in the Khulna shipyard. So, it is to be recommended that, to use this new purchasing method, the shipyard needs to change their method of ordering, ordering cost and ordering cycle in the following ways: The method of grouping inventory items based on the type of production, inventory level, work load, customer service. In the study, company producing one unit of certain product may require a multiple units of different components in a sequence assembling procedure to fabricate the end product. So, grouping of items based on the sequence of assembly of the end product. Ordering cost of the multi-item inventory system has two components. One is fixed cost and another is variable or marginal cost which includes the cost of processing some specific purchase activities of an individual items. So, Marginal cost must be calculated for determining the economic order quantity of each item. When inventory item are ordered in a group, the number of order cycle is then fixed not for the individual items, but for the group items as a whole. Order cycle for each item can be calculated in terms of integral multiple of the shortest order cycle among the individual item. When the cycle length is a multiple of some basic cycle time, reduces the major ordering costs. If the developed purchase method is implemented for the inventory replenishment of the shipyard, then the company will be benefited in many ways. This method will ensure continuous supply of materials to facilitate uninterrupted production. Inventory level will be optimal. Holding cost of materials can be reduced. Even out the production load. Finally some recommendations are made based on the data and information collected from the shops. This model can be used in procurement process of other shops by collecting the data of the monthly demand, lead time and purchase price of different inventory items reverent to that purchase.