Group ordering inventory management system : a case study of a construction materials' distributor

Abstract

Inventory management is a crucial part of any company. It is important to keep stocks of various items to act as a cushion between supplies and demands and to balance holding costs and ordering costs. This study concerns a group ordering inventory management system of a distributor of construction materials. A wide variety of items is grouped by suppliers. There are 13 product groups including 3 major suppliers, 8 minor suppliers and 2 miscellaneous suppliers. The Minimum - Maximum Inventory for each item (s, S) system is used. It involves continuous review of the inventory position and a replenishment is made whenever it drops to the order point (minimum), s. A replenishment quantity (EOQ) is placed to raise the position to the order-up-to-level (maximum), S. This system is referred to as a min-max system. Values of order quantity (EOQ), order point (s), order-up-to level (S) of each item are calculated. The demands are assumed constant and deterministic. Then, the truck loading algorithm, which is a heuristic algorithm, is studied. It is to search proper utilization of truck loading capacity for lower transportation cost by using a set of decision rules that are close to the practical situation. When any item drops to order point, it is ordered that is equal to order quantity (EOQ). If capacity of truck is available, other items will be considered by Ratio To Order (RTO). RTO is calculated by (inventory position - minimum) / (maximum - minimum). If an item has lower RTO than other items, it is concerned before and ordered that is equal to maximum - inventory position. So one purchase order is considered from inventory system to truck loading algorithm. The results are compared with values from actual practice. Two major product groups of major suppliers are tested in three months. Holding cost of the proposed system is increased by 2,484.12 baht in sum of three months or 0.54 per cent due to the suitable order quantities of Ratio To Order of truck loading algorithm. However, substantial savings, in transportation cost 2,877.42 baht in sum of three months or 21.67 per cent are possible through proposed system. Total cost is reduced by only 393.30 baht in sum of three months or 0.08 per cent. Even though total cost of proposed system can save a few cost, systematic operation of min-max inventory system and heuristic truck loading algorithm is proposed instead of human assistance who uses past experiences in inventory control and transportation. Finally, the system is tested for its sensitivity and some recommendations are given to serve as guidelines for further study as well.