2.

SELECTIVE CONTROL
Introduction:
Inventory is usable but idle resource; a dead stock. The challenge of inventory management is of
maintaining adequate supply of the raw material, goods, spares or other indirect materials to meet an
expected demand for a given financial investment. Inventory is often seen as one of the indicators of
management effectiveness on the material management front. Inventory turnover ratio which is annual
demand/average inventory is an index of business performance. Higher the ratio, better is the
management effectiveness and vice versa. Inventory management deals with the determination of
optimal policies and procedures for procurement of materials.
Since it is quite difficult to imagine a real work situation in which the required material will be made
available at the point of use instantaneously, maintaining inventories becomes almost necessary.

Inventory related costs:

1. Cost of carrying inventories (holding cost)
This is expressed as Rs/item held in stock per unit time. This is the opportunity cost of booking material
in the non-productive form as inventories. Some of the cost elements to consider here are: Interest rates,
cost of insurance, storage cost and cost due to obsolescence, pilferage, deterioration, etc. it is generally
expressed as the fraction of the value of the goods stocked per year (10%,20%).
2. Cost of incurring shortages (shortage cost)
It is the opportunity cost of not having an item in stock when one is in demand. It may be due to lost
sales or backlogging (or backordering). In case of backlogging, the order is not lost but backlogged to
be cleared as soon as the item is available in stock. In lost sales, the order is lost. Both cases are
characterized by demand, penalty cost, emergency replenishment, loss of goodwill etc. this is generally
expressed as Rs/order.
3. Cost of replenishing inventories (ordering or set-up cost)
This is the amount of money and efforts expended in procurement or acquisition of stock, generally
called ordering cost. This cost is assumed to be independent of the quantity ordered. Expressed as
Rs/order.

Functions of Inventory:

Selective Control:
 Source: Construction Project Management Theory and Practices- Kumar Neeraj Jha

Background:
Objective of Integrated Material Management is to minimize the expenditure on materials with the
constraints of timely supply of quality and quantity of material as demanded by project site (Optimizing
Cost). The practical way of achieving such objectives is to strictly monitor and control the materials
cost, quality, and quantity requirements of the site demand. But in each project, hundreds of material
items will be used to successfully complete the project. Strict monitoring & control of hundreds of
materials demand large number of personnel. Employing such required number of personnel for
monitoring and controlling each material item results in high monitoring and control cost which will be
added to cost of material item. This results in increase in cost of materials rather than minimizing it.
Thus, applying scientific inventory control for all these items is neither feasible nor desirable.

What is Selective inventory control?

The way out of the conflict is to choose handful number of monitor and control few material items
which keeps monitoring and controlling costs within limits such that overall expenditure on material
items is minimized. Selective inventory control, thus, plays a crucial role in applying limited control
efforts more judiciously to the more significant group of items.

Selective inventory control is the methodology of identifying handful number of material items which
in terms of significance in production process are most, moderate, and least important. Based on which,
degree of monitoring and controlling of material items per level of significance attached to them will be
exercised, accordingly making the classification of material items.

ABC (Always Better Control) Analysis:

This is based on Pareto’s Law, which says that in any large group there are ‘significant few’ and
‘insignificant many’. Ex: Only 20% of the items may be accounting for 80% of the total material cost
produced by a construction company. Upon classification of material into A, B and C types, suitable
inventory policies can be decided.
Implication of each type on inventory policy:
Accurate forecast of quantities needed
Type A item: Type B item: Type C item:
 Involvement of senior level  Approximate forecast of  No need of forecasting; even
of purchasing quantities needed rough quantity estimate is
 Ordering is on requirement  Involvement of middle level of sufficient
 basis
 Enquiries for procurement
needed to be sent to a large
number of suppliers
 Strict degree of control is
required, preferably
monitoring on a weekly basis
 Low safety stock is needed
Procedure for ABC analysis:
purchasing
 Order is on EOQ basis
 Enquiries for procurement needed
to be sent to three to five suppliers
 Moderate degree of control is
required, preferably monitoring
on a monthly basis
 Moderate safety stock is needed
Figure 11.6
 Junior level staff is authorized
to order purchase
 Bulk ordering is preferred
 Quotations from even two to
three reliable suppliers are
sufficient
 A relatively relaxed degree of
control is sufficient, and
monitoring can be done on a
quarterly basis
 Adequate safety stock can be
maintained
 ITEM UNIT UNITS % OF CUMUL AUV % CUMULATIVE
NO. COST USED PER TOTAL ATIVE (2 X 3) OF AUV % OF
(1) (2) ANNUM UNITS % [(6) / ∑(6)] AUV
[(3)/ ∑(3)] UNITS (6) x100
(3) X100 (5) (7) (8)
(4)

XYZ Analysis:
This method is based on annual inventory holding value (AIHV) of a material item.
Inventory holding value = [unit cost+ ordering cost per unit X no. of order + carrying cost per unit].
Assuming that ordering and carrying costs can be approximated as certain % of unit cost, say p1 and p2
respectively.
AIHV = {[1+no.of orderxp1+p2] x unit cost x average units of inventory held}
Rest of the mechanism is same as ABC analysis; no. of units consumed annually is replaced by no. Of
units of inventory held annually and annual usage value (AUV) is replaced by annual inventory holding
value (AIHV).
Stage-1
Item Unit Cost No.of Unit Inventory holding Average units AIHV
No. (Rs/unit) order (n) cost(Rs/unit)- C(1+np1+p2) of inventory (6)=(4)X(5)
(1) C (3) (4) held
(2) (5)
Stage-2
Item No. Average % of Total Cumulative % AIHV % of AIHV Cumulative %
(1) units of Inventory of Total (5) (5/∑5) X 100 of Total AIHV
inventory held Inventory held (6) (7)
held (2/∑2)X 100 (4)
(2) (3)

Other types of selective control methods:

Type of Expansion Basis of Remarks

Classification Classification

VED VITAL, ESSENTIAL, Criticality of the Classification depends on the consequence

DESIRABLE item of material stock-out when demanded
FSN FAST, SLOW, Consumption rate of It is helpful in controlling obsolescence
NORMAL the inventory
HML HIGH, MEDIUM, LOW Unit price of the It is mainly used to control the inventory of
material purchased material

SDE SCARCE, DEFICULT, Level of difficulty in It is useful in lead-time analysis and decision
EASY to obtain purchase of related to the procurement and purchasing
inventory strategies
GOLF GOVERNMENT, Based on the It is useful for decisions related to the
ORDINARY, LOCAL inventory procurement strategy
and FOREIGN

HML HIGH, MEDIUM, LOW Prices of the It is useful for delegating the purchasing
materials responsibilities
 Study questions:

Q1. What is ‘selective control’? How is that significant to construction industry? (3 marks).

Q2. Mention the functions of inventory (3 marks).

Q3. Prepare an explanatory note on ‘inventory related costs’.

Q4. Prepare explanatory notes on FSN, HML, VED, SOS and GOLF methods of selective control
considering basis for classification and areas of application. (2 marks each).
Refer: Shah N.M., ‘Integrated Concept of Material Management’, TMH,1988

Q5. Discuss the limitations of ABC analysis

Refer: Materials Management an integrated approach P Gopalakrishnan and M Sundaresan., Prentice-
Hall of India Pvt Ltd.2000

Q6. Differentiate between ANY TWO selective control methods considering basis for classification
and areas of application. (4 marks each).

Q7. Practice problems on ABC and XYZ analysis. (5 marks each)