Inventory monitoring & control in a construction company

Introduction

Inventory: Inventory is defined as the amount of Stock kept in the total chain for use at any given point in time. Inventory holding is a very critical element in any process without which a production line cannot function. At the same time holding higher Inventory beyond the planned requirement would lead to unnecessary blocking of funds.

Stores Function:

Stores are a very important link in the construction industry where the standard of materials kept preserved through different inventory techniques. Normally in the manufacturing unit, warehouses are well defined and the area of material issued is being designed to support the process. But in the case of the construction industry, the implementation of stores is not that relatively easy due to different scenarios like location change, client specification, etc. The construction industry generally has formwork, MEP, and civil-oriented materials and the same has to be witnessed each now and then for controlling the wastage which yields a better margin for the project.

In general,

• Materials are scattered in different areas of the project.
• The location of the stores frequently get changed which indeed to lose materials.
• If two contractors are working on the same premises, the chances of losing the material are very high.
• MEP and Civil oriented materials are the subsidiary items that are easy to get misplaced or damaged while stacking in the inventory or warehouse.

Inventory Control methods

Inventory control is a very complex process and multiple information sources are required to define the control mechanism. In order to control the wastages through misplacing, improper stacking, different types of inventory techniques are followed and the most utilitarian are listed below,

• ABC classification (Always Better Control)
• VED Analysis (Vital, Essential, Desirable)
• FSN Analysis (Fast, Slow and Non-moving)
• SDE Analysis (Scare, Difficult, Easy to obtain)
• JIT (Just In Time)

ABC and FSN are the popular ones which even tracks the stockpile was not been obsolete for months. This paper aims to investigate how the obsolete materials cut down the margin and the ways to deal with it.

Purchasing Strategy in Construction Industry:

The goal of every organization is to develop efficient purchasing and supply management in order to be distinctive and sustainable in the current scenario/market.

In every Organization, procurement takes the cake. The procurement of items consumes a Major portion of the resources of any organization.

On a thumb rule, the Material cost of any product is ranging from 45 to 65 % of the product cost. This indicates the importance of properly preparing a Purchasing methodology

An improper purchasing strategy and supply management could lead to the worst financial implications in the rivalry between the construction industries.

A general purchasing strategy followed in construction is being displayed through the flowchart:

The traditional policy of purchasing followed in the construction industry in which the job site raises the purchase request after checking inventory, and the same thing is been forwarded to the central purchasing team for processing. But, this policy has some flaws, which could blemish the numbers that a company can save directly. Now, it’s time to find and validate the flaws.

Problems and Constraints in Traditional Purchasing Policy:

The above strategy of purchasing policy, where the central purchasing team co-ordinates between various job sites in procuring materials is a stumbling block in developing efficient supply chain management in the construction industry. The flaws which vandalize the supply management are listed below,

• Excess inventory carrying obsolete materials.
• Inadequate inventory causing productivity loss.
• Non-moving materials are not conspicuous to declare surplus.
• The material request is not consolidated from different project sites.

The below flow chart is concerning the aforementioned constraints in a nutshell,

Here the Plant A requests 1500 no’s of some X material in their job site and Plant B requires 1350 no’s of some Y material in their job which was procured by CPT to their respective sites.

Scenario:

Here in Plant A, a client requests a change of materials, and Plant A again approaches CPT for new procurement of revised material requested by the client. But in Plant B, the revised material of Plant A is available in a surplus quantity of 250 numbers, since the order was not properly consolidated or the respective job site could have raised excess quantity which was not checked by CPT.

CPT never consider the surplus quantity which was available in Plant B as that won’t satisfy the entire need of Plant A, so preserved in inventory for future use. CPT goes with new procurement. This was an important flaw that could result in cutting down the margin.

Now, the material in Plant A remains obsolete carrying out unnecessary inventory costs and the material in Plant B also goes unused or scrapped for the ground value.

The chart simply explains the ratio of materials that get used from the obsolete materials from various inventories of job sites or from the central warehouse of the company. This summary displays that within only 10% of the materials have been used, the rest all the materials are simply carrying out the inventory cost and also lose their properties.

The ways and the opportunity for improving procurement methodology are discussed below.

Improvements and Opportunities:

The most important thing in improvements and opportunities is analyzing the backlogs, they are

1.   The major reason behind the scenario of materials getting obsolete is the organization’s lack of control over the procurement activity which was initiated against the surplus materials available right away in their plants.

• The best solution for the above constraints relies on the inventory or warehouse personnel engaged in the particular plant who can easily identify the non-moving materials and the materials which were copious from earlier plants.
• They have to identify and upload those materials in the ERP, wherein that alerts the central purchasing team to utilize those materials available as surplus in other Plants.

2. The most accentuate problem is that, improper finalizing of quantity required for the Plant or project site which leads to the scenario of getting obsolete.

• Here the problem to be noticed with high regard, CPT processes the direct request of a site without any cross-checking the quantity actually required for the site or plant. For example, the actual quantity of the site will say some 1500 nos but the request for the same material will be 1800 nos. So, in this case, the entire BOQ and the materials included in ACE should be worked out and uploaded in the particular site or plant ERP module.
• This may stop the purchasing of excess quantity then and there, which will save a huge amount of cost instead of materials deteriorated.

3. Since big conglomerate owns their warehouse, their propensity towards the materials dumped in their warehouse is trivialized.

The solution for this type of scenario is the analysis of materials periodically (say 6 months once),

• Analysis of materials in the earlier 6 months (what percentage of it is consumed).
• If the materials have not been consumed for the past 6 months, identify that material.

Now, reverse logistics is the tool. Bring the particular vendor back to our warehouse and request him to inspect the materials, once it is done processing the dispatch (back to vendor place).

Further it, you can request the vendor to take back the materials at the purchased rate (happens only if you back good rapport with him) or negotiation can be done instead of scrapping those materials at the ground value.

This may fetch you some value to the organization in terms of credit note (credit note was given by the supplier) therefore controlling the cash flow management.

Conclusion

• There can be a system wherein a periodical review of inventory could be carried out to keep the inventory under control.
• There should a periodical review of obsolete materials so that non-moving materials can be identified and suitable action can be initiated.
• At present construction companies never mind the minimum amount of surplus materials available in other plants, instead, if they use those surplus items delay in the production or progressing can be eliminated.
• It is suggested to have to close monitoring of receipts in regard to subsidiary materials either from other plants or purchasing.
• There must be proper communication between the purchasing team and site teams.
• The construction industry always gets lured by bulk-purchase discounts into acquiring more inventory than they need.

An inventory becomes obsolete because of changes in product design or because of technical change. Obsolescence cannot be controlled without proper identification of inventories that might become obsolete from time to time. Finally, an inventory management system is considered to be the key role in an organization, which is responsible to complete the company’s project in a specific budget within a certain period of time. It is clearly understood that inventory management of any construction industry will undergo intense pressure and stress in their work environment.

Thus, proper preventive measures like JIT, supply chain management along with lean management will be suggested to overcome the impacts of inventory management to improve productivity in construction projects.