Inventory Management - Mahindra & Mahindra Ltd India - Assignment Example

Inventory Management: Mahindra & Mahindra Ltd. India Executive Summary Inventory Management must be designed to meet the dictates of the marketplace and support the company's strategic plan. The many changes in market demand, new opportunities due to worldwide marketing, global sourcing of materials and new manufacturing technology, means many companies need to change their Inventory Management approach and change the process for Inventory Control. Despite the many changes that companies go through, the basic principles of Inventory Management remain the same. Some of the new approaches and techniques are wrapped in new terminology, but the underlying principles for accomplishing good Inventory Management and inventory activities have not changed. Mahindra and Mahindra Limited has fluctuations in its production system. Due to this the company needs to maintain a high level of inventory which adds to its costs. Therefore it was decided to study the system and suggest improvements which could be incorporated into the system to reduce the fluctuations in the production system and reduce the levels of the inventory. The data required for the study were mainly collected through website of Mahindra and Mahindra Limited and various articles and journals. This study reveals the following: Inventory Control Method prevalent at Mahindra and Mahindra Limited. Improvements that could be incorporated in the inventory control system. Fluctuations in the present production system of Mahindra and Mahindra Limited. Feasibility for the adoption of a flat production system. Logistic System prevalent at Mahindra and Mahindra Limited and its effect on inventory. Improvements that could be incorporated into the logistic system. Introduction to Inventory Control One of the largest costs to any business is that of inventory or stock at hand. Whether it’s a manufacturer, retailer or distributor, the amount of inventory held directly impacts the bottom line in more number of ways than one can imagine. Having too much cash tied up by not stocking up on items that customers need, can have a major impact on your business. A product that is in excessive demand is usually extremely difficult to manage. Supplying the right amount of products implies that an accurate demand forecast is essential. This impacts the entire supply chain. A similar situation exists at the warehouse level and even the manufacturer end. Continuous replenishment in a warehouse can become a mammoth task if consumer response is not studied accurately. To facilitate efficient consumer response based on consumer demands, warehouse data, sales forecasts, and inventory planning, it becomes imperative that such companies consider inventory management seriously. Making accurate demand and supply predictions is an ideal situation that anyone in the supply chain management arena could dream off. Inventory control is the process of managing the time and the quantities of goods to be ordered and stocked, so that demands can be met satisfactorily and economically. Inventory control policies are decision rules that focus on the trade-off between the costs and benefits of alternative solutions to questions of when and how much to order for each different type of item. The possible reasons for carrying inventories are: uncertainty about the size of future demands; uncertainty about the duration of lead time for deliveries; provision for greater assurance of continuing production, using work-in-process inventories as a hedge against the failure of some of the machines feeding other machines; and speculation on future prices of commodities. Some of the other important benefits of carrying inventories are: reduction of ordering costs and production setup costs (these costs are less frequently incurred as the size of the orders are made larger which in turn creates higher inventories); price discounts for ordering large quantities; shipping economies; and maintenance of stable production rates and work-force levels which otherwise could fluctuate excessively due to variations in seasonal demand. The benefits of carrying inventories have to be compared with the costs of holding them. Holding costs include the following elements: cost of capital for money tied up in the inventories; cost of owning or renting the warehouse or other storage spaces; materials handling equipment and labour costs; costs of potential obsolescence, pilferage, and deterioration; property taxes levied on inventories; and cost of installing and operating an inventory control policy. Uncertainties of future demand play a major role in the cost of inventories. That is why the ability to better-forecast future demand can substantially reduce the inventory expenditures of a firm. Conversely, using ineffective forecasting methods can lead to excessive shortages of needed items and to high levels of unnecessary ones. Objectives of the Study To study the practices involved in inventory management at Mahindra and Mahindra Limited. To find out if there is any short comings in the practices followed. To give suggestions for improvements in the currents methods to reduce the inventory holding cost. A New Model for Inventory Monitoring A combination of ABC and XYZ in place of ABC method which is currently used. In ABC, ‘A’ and ‘B’ are given importance but ‘C’ items are given less importance when inventory management is done. Some of the items which are not consumed in high value can be piled up in huge amount, because of various reasons like price discounts. XYZ method focuses on the inventory closing stock during a given period. The combination of both these method will help manage inventory considering both aspects. The items which falls under ‘C’ category in ABC if falls in X category, then it becomes important to control and manage that item. Thus the combination results in better inventory management. Developing a new Inventory Control Method Before developing a new model for inventory control, we would like to discuss the existing inventory control system prevalent at Mahindra and Mahindra. The inventory control system being followed by the company was ABC analysis wherein the components used in the manufacturing were classified according to their periodic consumption. We studied the literature of the XYZ system in which the components were classified according to the total inventory left at the end of a particular period. We combined the existing ABC system and the new XYZ system to develop a new model wherein we divided the components in nine different categories. Each category had different lead times depending upon their consumption pattern and the inventory at the end of a particular period. This new model gave us a better understanding of the criticality of various components and which items required better management. ABC METHOD Category Items (in percent) Value (in percent) A 10 20 B 20 20 C 70 10 Table 3: Break-up of items as per ABC method XYZ METHOD Category Items (in percent) Description X 60 Items with maximum inventory at the end of certain period. Y 30 Items with moderate inventory at the end of certain period. Z 10 Items with minimum inventory at the end of certain period. Table 4: Break-up of items as per XYZ method Combination of ABC and XYZ Method Sl. No. Classification Safety stock as per ABC Safety stock as per XYZ Safety stock for the combination 1 AX LT+0 LT+0 LT+0 2 AY LT+0 LT+1 LT+0 3 AZ LT+0 LT+2 LT+0 4 BX LT+1 LT+0 LT+0 5 BY LT+1 LT+1 LT+1 6 BZ LT+1 LT+2 LT+1 7 CX LT+2 LT+0 LT+0 8 CY LT+2 LT+1 LT+1 9 CZ LT+2 LT+2 LT+2 Table 5: Combination of ABC and XYZ methods CATEGORY ECONOMIC VALUE AX High value and High criticality AY High value and Medium criticality AZ High value and low criticality BX Medium value and High criticality BY Medium value and Medium criticality BZ Medium value and Low criticality CX Low value and High criticality CY Low value and Medium criticality CZ Low value and Low criticality Table 6: Description of different categories as per new method Concepts/Models Used ABC Method In any inventory, which contains more than one stocked item, some items, will be more important to the organisation than others. Some items might have a very high usage rate, so if they ran out many customers would be disappointed. Other items may be of particularly high value, so excessively high inventory levels would be particularly expensive. One common way of discriminating different stock items is to rank them by the value of their usage. Items with a particularly high value of usage are deemed to warrant careful control, whereas those with low usage values need not be controlled so rigorously. Maintaining inventory through counting, placing orders, receiving stock and so on takes personal time and costs money. When there are arc limits on these resources, the logical move is to try to use the available resources to control inventory in the most efficient way; to achieve this, an ABC analysis is one way to control the inventory effectively. Conclusion From the discussion we had above, the following conclusions can be made: Each organisation should tailor its inventory system to its own peculiarities. Organisations may choose to group their inventory more than three classifications, but the principle is the same: high value items receive the most attention and low value items the least. By adopting the newer way of inventory control which is a combination of 'ABC' and 'XYZ' models, the items which falls under 'C' category of ABC method can be controlled in a better way. Recommendations Better monitoring of C class items using a new model: Presently Mahindra and Mahindra Limited have adopted ABC method for selective inventory control. The ABC method when combined with XYZ method helps in further dividing the inventory according to their usage and importance. The ‘A’ and ‘B’ category items are strictly monitored by the company but the ‘C’ class items are not strictly monitored. To have a better inventory control for the ‘C’ class items we recommend that the inventory control system developed by the combination of ABC and XYZ method could be used. This new method would divide the ‘C’ class items into further subcategories, that is, ‘CX’, ‘CY’ and ‘CZ’ depending upon their inventory levels at the end of a certain period and the cost incurred by the company on these items. The new method would help the company in having a better knowledge about the usage and cost of each of ‘C’ class of items. Bibliography Websites Referred http://www.allbusiness.com/management/607917-1.html; Closure efficiency index: a new method for inventory management, by Beaumariage, Terrence; Publication: Industrial Management; Wednesday, January 1 1997. http://www.quest.edu.pk/Rjournals/SampleCopy/P8_PDF.pdf; ABC Analysis as a Inventory Control Technique, by Anwaruddin Tanwari (Assistant Professor, Department of Industrial Engineering and Management, Mchran University of Engineering and Technology, Jamshoro), Abdul Qayoom Lakhiar (Lecturer, Department of Industrial Engineering and Management, Mchran University of Engineering and Technology, Jamshoro) and Ghulam Yasin Shekh (Assistant Professor, Department of Industrial Engineering and Management, Mchran University of Engineering and Technology, Jamshoro). http://www.sagesoftware.com/PDF/bw/spec/BW_IC_Spec.pdf, Inventory Control; SAGE Businesswork. http://www.mahindra.com/productsandservices/products_services.html, Products & Services http://www.mahindra.com/OurGroup/Overview.html, Group Overview Read More