MUSIC – 3D – A scientific approach to Inventory Control –

“Take care of the pound, and penny will take care of itself” must be the motto of an inventory controller. This is also known as “vital-few, trivial-many” principle. The common sense approach to solving any problem is to tackle the important aspects more rigorously. Here classification of item is so done that major portion of effective managerial time is spent on those materials which are most important. The objective behind any selective approach is that equally critical analysis of all items will be very expensive. Moreover, such a concentration of attention on all items will have a diffused effect regardless of the priorities. The importance of a material may be due to its value, criticality, reliability, availability, consumption, etc. There are various method of classifying items, but the well known method is the ABC approach or “always better control” method. This method is based on annual consumption value which is obtained by the multiplication of unit price by quantity consumed annually. For example on an ad hoc basis, the items accounting for an annual consumption of more than Rupees one lakh may be classified as A category, the items below Rs. 10000 may be the C category and the in-between items will then be the B category. The conventional ABC analysis of inventory takes into account only the annual consumption values of the items, ignoring two other important factors, namely, criticality and lead time. The author presents a classification system, known as Music-3D i.e. Multi Unit Selective Inventory Control- a three dimensional approach, which combines all the selective approaches simultaneously & thus enables inventory manager to fix purchase quantities and inventory levels on a scientific basis. A detailed discussion of Music-3D (Multi Unit Selective Inventory Control) - a three dimensional approach recommended for Inventory Management is presented below:This approach is based on: Cost (High/Low Annual Consumption Value-80/20 Rule) Criticality (Critical/Non-critical) Availability (Short/Long-lead Time) Under this method of inventory control high/low consumption value are determined based on 80/20 concept. Top 20% of item, accounting for about 80% of consumption values shall be deemed as high consumption value and balance 80% of the items accounting for about 20% of the consumption value shall be deemed as low consumption value item. Both high and low consumption value items are further classified based on their criticality and lead time, resulting in eight categories of items which facilitate attention to critical, high consumption value items (Group 1 & 2) to ensure no stock out. It also focuses on non-critical, high consumption items (Group 5 & 6), where cost reduction techniques may be applied.

Therefore, this approach ensures maximum plant availability with minimum working capital commitment. This Approach also provides a simple method of fixing ideal stock level of each item taking into account critically, availability and consumption value as follows: Ideal Stock Level = 1 + K * (Lead Time Consumption) Where “K” is the safety factor varying between 0.5 to 3 is assigned to each of the eight groups based on its consumption in value, criticality and lead time. “K” factor proposed to be used initially is suggested in the MUSIC-3D Table. To arrive at the ideal stock level “K” is multiplied by lead time consumption & unit 1 is added to the above. Unit 1 is added to signify no stock out even if lead time is zero for an item. MUSIC – 3D TABLE ATTRIBUTE HIGH CONSUMPTION VALUE Long lead time (1.8) (1) 1.5-1.8 (0.8) NON-CRITICAL (5) 0.8 (6) 0.5-0.8 LOW CONSUMPTION VALUE

CRITICAL

Short lead time Long lead time Short lead time (1.5) (2.5) (2.4) (2) (3) (4) 1.2-1.5 (0.5) (7) 1.5-2.0 2.5-2.8 (2.0) (8) 1.5-1.8 1.8-2.4 (1.8)

Interpretation of Music – 3D table In the above table Cell 1 contains items which are of high consumption value, long lead time and critical. Cell 2 consists of items with high consumption value, short lead time and critical. continuing like this, Cell 8 contains items with low consumption value, short lead time and non critical. It may be noted that the total consumption value of items in cell 3,4,7,8 is small (around 20%), but the number is large (around 80%). Hence no cost reduction techniques need to be applied for these items. Now, let us start with items falling in cell 3 from action point of view. These are long lead time, low consumption value and critical items. For these items, the order quantity should be very large with annual ordering. The coverage can even be for two years provided the items are not perishable or fast obsolescence and there is adequate storage space.

In view of the low consumption value and criticality of the items, the powers of delegation should be such these are purchased decentrally at the lowest level. Inventory level should be high as the working capital commitment is small for this group of items. The stocking point should be nearest to the user with minimum control as the cost of control is more than the cost of the items. the service levels or issues should be hundred percent without stock outs. The postings could be on a group basis with minimum clerical effects. Let us now consider the items falling in cell 6 which constitute items the nature of which is just opposite to those in cell 3 as they are high consumption value, short lead time and non critical. The stock quantity should be practically zero as the items are non critical and high consumption value. They can be bought as and when needed. In other words the purchase will be on just – in – time basis (JIT) basis. The real problem areas for an inventory controller are items in cell 1 and 2 which are critical and of high consumption value. He has to exercise strictest consumption norms for these items. Ordering may be on a staggered basis with frequent deliveries. Expediting and follow up efforts must be maximum with full materials intelligence system for these items. It is worth having multiple supply sources for these items. Postings for these items should be immediate, accurate and up-to-date. The information on stocks, consumption, delivery, pending orders, pipeline stocks etc must be analyzed to determine the minimum working capital commitments without any stock out for these items. It should be possible to use eight different color cards for kardex or bin cards for eight different categories of these items so that employees with lowest education can know the relevance of the items from the total organization point of view.

MUSIC -3D – GROUPS & SUGGESTED “K” FACTORS Sl. Category No. 1. Critical Suggested K Factor - High consumption value 1.8 - Long lead time to 2.0 Control & Action Plan 1. Strict control on consumption norms. 2. Useful material intelligence system. (expediting & follow up efforts maximum) 3. Multiple Sources. 4. Minimum working capital. (stock as low as possible) 5. No stock outs. Same as above.

2. Critical 3. Critical

- High consumption value - Short lead time - Low consumption value - Long lead time - Low consumption value - Short lead time

1.5 to 1.7 2.5 to 3.0 2.5 to

1. Large quantity to be ordered – orders for annual or two years requirement. 2. Adequate level of inventory (qty-plenty) 3. No stock out (100% Service Level)

4. Critical

Same as 3 above except order quantity may be

3.0 5. Non-Critical - High consumption value - Long lead time 0.8 to 1.0 0.5 to 1.0 2.0

for quarter to six month’s requirement, being short lead time. 1. All cost reduction techniques to be supplied. 2. Stock out possible. 3. Delegation of power – Highest level. 4. Low inventory level. 5. Service level – moderate. Same as 5 above except 1. Purchases on just-in-time basis. 2. ‘0’ Inventory or very low inventory. 3. Service level – Minimum. 1. Moderate inventory level. 2. Stock out possible. 3. Service level – moderate. 4. Routine efforts. Same as 7 above

6. Non-Critical

- High consumption value - Short lead time

7. Non-Critical

- Low consumption value - Long lead time - Low consumption value - Short lead time

8. Non-Critical

1.8

K factor shall be subject to periodic review. Music- 3D is helpful to the inventory controller in the following area of operation:a) Application of cost reduction techniques selectively, b) Effective follow up and chasing, c) Powers of delegation to all levels, d) Lower inventory levels, e) Selective information and intelligence by continuously monitoring of high consumption value items, f) Development of new sources of supply for high value critical items, g) Different service levels for different categories, h) Development of consumption norms for high value items, i) Allocating inventory controller’s time in best possible manner where the efforts are worth the result.

Sign up to vote on this title
UsefulNot useful