Inventory Management Case Study

Author: Roger Handley, MIOM, Caradon MK Electric Limited

During the period January 1996 to December 1997, Caradon MK Cable Management Division reduced Inventory by 45% (in excess of £1.5 million) whilst increasing complete and on time deliveries by over 10%.  This article explores the events behind this achievement.

The Theory

K-Curve Methodology (KCM)

The KCM is based on a decision support software package ‘The Inventory Analyser’ which analyses different approaches to the ordering of purchased and manufactured parts.

The main theory behind the Inventory Analyser package is that of splitting the total number of items that have to be ordered and stocked by an organisation, into a number of groups or classes and then ordering each class on a different ordering frequency.  The method of splitting up the parts is based on the familiar Pareto or ABC analysis using the annual usage value (unit cost x annual volume) of the parts as the basis for the ranking.

The Inventory Analyser allows the user to model many permutations of classes, class boundaries and ordering frequencies.  The package automatically calculates class boundaries for a given number of classes and their respective ordering frequencies by using a modified Economic Order Quantity formala.  This allows the user to use a cost ration that can be flexed instead of having to know or estimate the actual costs of holding stock and ordering and delivery costs.

The minimum inputs that are required for the package are a list of part numbers and their respective annual usage values, the length of the company’s working year in days, and an initial cost ratio.

The outputs that are provided are essentially a set of ordering and classification policies, each of which give a particular combination of inventory level and number of orders (or deliveries).  This then allows the user to eventually choose a particular combination for their organisation and, more importantly, to be able to determine the parameters in terms of number of classes, class boundaries and ordering frequencies that will give that combination.

In simple terms the KCM groups low value, slow moving items suggests an infrequent ordering pattern in contrast to the high value, fast moving items which should have a low stock holding but frequent replenishment.  These parameters are then set up in the company’s materials management system, whether it is a MRP system, a stock control system, Just-in-Time or a combination of them.

This was the theory – we however were in the ‘real’ world. Would this SYSTEM help us achieve our objectives of improving stock turns without adversely affecting cutsomer service?  We decided to test the hypothesis.

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