GRADUATE PROGRAM

Name: JOHN VINCENT R. LOPEZ

Subject Professor: PROF. ELMER M. SANGALANG
1.5 x 1.5 Subject Code: M Arch 611
Course Title: Material Resource Management
PICTURE
Semester: First Semester
School Year: 2021-2022
Topic: STORES & INVENTORY CONTROL

TOPIC 11.

STORES

• These are materials that are kept until needed

• These may be also referred to as stocks, provisions, stockpiles, holdings, reserves, accumulated
materials, banks, or a host of other names.
• A construction company, for example, may buy materials such as sand, paint, consumables and
many others to be used for their construction projects. At the same time, when there are excess
materials, they may also keep them to be used for other projects.
• Another example would be an architectural firm which stores different kinds of paper, printer ink,
writing materials, and other consumables that will be used for their day-to-day activities.
• These act as a buffer between operations – to allow operations to continue normally through
variations and uncertainty in supply and demand

TYPES OF STORES

1. Raw materials, which have arrived from suppliers and are kept until needed for operations (e.g.:
lumber, steel, cement, sand, paint)
2. Work in progress, which are units currently being worked on (e.g.: shop-fabricated doors,
furniture, and other assemblies)
3. Finished Goods, which are waiting to be shipped to customers
4. Items that are needed to support operations, but they do not form a part of the final product such
as Spare parts, for machinery, equipment, and
5. Consumables, such as oil, paper, cleaners.

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The diagram shows how these different type of stores are needed, used and produced during processing

Additionally, one company’s finished goods can be another company’s raw materials. For example, paint
may be the finished good of BOYSEN. At the same, that product of BOYSEN serves as the raw material for
a construction company’s painting job.

STORE CYCLE

Typically, the store cycle starts with the company buying a number of units of an item from a supplier.

At an arranged time, these units are delivered

Unless they are needed immediately, these are stored.

Customers, either internal or external, create demands for this item.

Units are taken from store to meet the demands.

At some points, store level gets low and the company reorders.

Stores are essential in every company. Without these, operations are simply impossible.

Stores affect lead time (the amount of time between the purchase order and when the order is completed)
and availability of materials, which in turn affects customer service, satisfaction, and the perceived value
of products

They also affect the size, location, and type of facilities based on storage requirements, safety, health, and
environmental concern.

Building materials, such as sand and gravel, need fairly large storage areas, but virtually no special
attention. Information can be stored in huge quantities, but it must allow rapid searching, sorting and
retrieval.

Stores also affect operating costs and profit. The rule of thumb is that the cost of holding stores is about
20% of its value a year. Therefore, there is a need to control these costs through careful inventory control.

INVENTORY

Inventory simply refers to a list of items held in store.

Inventory has several entries which represent several distinct items.

For example, stores of paint may have a ‘4 gallons BOYSEN Permacoat Flat Latex’ as a distinct item. Others
items may be ‘4 liters BOYSEN Acrytex Primer’,‘4 liters DAVIES Sun & Rain’, ‘4 liters DAVIES Megacryl’ and
every other distinct products.

The quantities of units of these items are also indicated. With paints, the unit may be pails or cans.

Other information can also be indicated to help manage the inventory such as to which supplier an item
bought, its unit price, the location where it is stored if there are several storages.
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Upon searching, there are various companies offering inventory management systems such as ASTRA,
Quadrant Alpha, Fasttrack, and many more. But for smaller operations, a simple excel worksheet will
suffice.

INVENTORY CONTROL

Now, Inventory Control refers to the function of making decisions for policies, activities, and procedures
to make sure the right amount of each item is held in store at any time.

This is important particularly for companies having multiple projects to manage which can make managing
become very complicated. Delayed, misplaced, or lost items can incur avoidable delays and unnecessary
costs which can be avoided by having a proper inventory.

To simplify inventory control, we can ask these 3 basic questions:

1. What items should we keep in store?

2. When should we place an order with suppliers?

3. How much should we order?

What items should we keep in store?

Holding any stock is expensive, so companies have to make sure that their stocks remain at the lowest
level that allows acceptable service. This means:

• Keeping stock of existing items at reasonable levels;

Unless tightly controlled, there is a tendency for store holdings to drift upwards.
Especially for companies that are not particularly short of money or storage space,
this rise can be quite fast.
• Not adding unnecessary items to the inventory;
• Removing all items which are no longer used from the inventory.

As a company’s operations evolve or takes on a new project, its requirements for

stores may change, and adds new items to replace older ones that it no longer
needs.

Often times, new items are often introduced without much planning, while old
ones are left in store on the off-chance that they are needed again.

If stores continue to grow, they eventually cause concern, perhaps when supplies of space or money
become scarcer. Managers should monitor the use of items already on the inventory, and when it
becomes cheaper to no longer stock them, they should be removed as quickly as possible.

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When should we place an order with suppliers?

Periodic: place orders of variable size at regular intervals of time. Any variation in demand is
allowed for by the changing order size.

This system is often used in shops, where stores are reviewed at the end of a day and any units
sold are replaced.

Fixed: Store levels are continuously monitored and when they fall to a specified level a fixed
amount is ordered. Any variation in demand is allowed for by changing the time between orders.

Supply and demand: orders enough stock to meet known demand over a specified period. Then
both the time and quantity ordered depend directly on demand.

How much should we order?

Every time we place an order, there are associated costs for administration, delivery, and so on.
If we place large, infrequent orders, the costs of ordering and delivery are kept low, but stock
levels and average inventory value are high.

If we place small frequent orders, costs of ordering and delivery are high, but average stock level
is low.

In general, managers must look for a compromise between these two extremes that minimizes
overall cost.

We have 2 categories of methods based on the ways of assessing demand

1. Independent demand methods

Uses forecasts to define optimal order quantities and times.

Economic Order Quantity and Periodic Review methods are under this category

2. Dependent demand methods

Uses the correlation of the demand for different items. A simple example would be that the demand for
masonry works can be properly identified through the building plans.

Material requirements planning and Just-in-time methods are under this category

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Economic Order Quantity

This refers to the optimal order size that should be held in store to balance the various costs of
stores. This is a method where we order a fixed amount at varying intervals.

As seen in the diagram, holding costs increases as the order size increases. While reordering costs
decreases as the order size increases. EOQ aims to find the optimal balance between holding costs
and reordering costs.

EOQ makes the following assumptions:

• the demand is known exactly, is continuous and is constant over time;

• all costs are known exactly and do not vary;
• no shortages are allowed;
• a single delivery is made for each order;
Since we are looking for the fixed order quantity that will minimize costs, so we always
place orders of exactly this size

The formula for EOQ is:

where:

Qo = Economic order quantity

RC = Fixed Reorder Cost (cost of telephone, delivery, receiving, quality checks per order)

D = Demand (annual number of units to be sold)

HC = Holding Cost (annual cost of holding 1 unit of an item in store)

Annual number of Order = D / Qo

Annual Order Interval = Qo / D

where:

Qo = Economic order quantity

D = Demand (annual number of units to be sold)

ROL = LT x Demand per unit time

where:

ROL = Reorder level (amount of store on hand to cover the demand)

LT = Lead time (time before the delivery is needed)

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EXAMPLE:

A COMPANY SUPPLYING STEEL DOORS HAS AN ANNUAL DEMAND OF 1,000 UNITS AT A PRICE OF P20,000
PER UNIT. THE COMPANY HAS ESTIMATED THAT THE ANNUAL HOLDING COST IS 20% OF THE UNIT PRICE
AND ITS REORDERING COST AT P50,000 PER ORDER.

1. WHAT IS THE ECONOMIC ORDER QUANTITY?

Qo = √((2 x 50,000 x 1,000)/(20,000 x 0.20))

Qo = √(100,000,000/4,000)

Qo = √25,000

Qo = 159 units

2. HOW MANY ORDERS SHOULD BE PLACED IN A YEAR?

Annual No. of Orders = 1,000 units / 159 units

Annual No. of Orders = 6 orders approximately

3. HOW OFTEN SHOULD AN ORDER BE PLACED IN MONTHS?

Order Interval = 159 units / (1,000 units / year)

Order Interval = 0.159 year x 12 months / year = approximately 2 months

4. ASSUMING A LEAD TIME OF 1 WEEK AND DEMAND RATE OF 14 UNITS PER WEEK,
WHAT IS THE REORDER LEVEL?

ROL = 1 week x 14 units / week

ROL = 14 units

When the store level reaches 14 units, the company must place an order for 159
units. These remaining 14 units will cover for the demand while waiting for the
delivery of new supplies.

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Periodic Review

This is a method where we order varying amounts at regular intervals.

The store level is examined at a specified time, and the amount needed to bring this up to a target level
is ordered unlike in EQO where we continuously monitor the store levels and order a fixed quantity.

Periodic review basically deals with 2 questions:

How long should the interval between orders be?

In practice, the order interval can be any convenient period (e.g. end of every week or month;
every morning).

What should the target store level be?

In order to identify the target store level be, we should first identify some terms:

Service level – is the maximum acceptable probability that a demand can be met from store which
relies on the manager’s judgement (95% service level means that it will meet 95% of the demand
from store, but will not meet the remaining 5% of the demand)

Safety stock is the additional store to avoid shortages such as when deliveries are late or demand
is higher than expected)

This is the formula for determining the quantity of safety stock

Safety Stock = Z x σ x √(T+LT)

Where: Z = z-score corresponding to the service level

Using MS Excel:

Z = NORMSINV(0.95) = 1.64

σ = standard deviation of demand

T = order interval

LT = lead time

Target store level = D x (T + LT) + SS

Where: D = average demand

T = order interval

LT = lead time

SS = safety stock

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Order size = Target store level - Store on hand

Example:

A ceramic floor tile manufacturer has an average demand of 10,000 units per month and a standard
deviation of 1,000 units. The company checks stores every 3 months, has an ordering policy of 95% service
level and has a constant lead time of 1 month.

1. What is the quantity of the safety stock?

SS = Z x σ x √LT

SS = 1.64 x 1,000 units x √(3 mos. + 1 mo.)

SS = 3,280 units

2. What is the target store level?

Target store level = D x (T+LT)

Target store level = 10,000 units/month x (3 mos. + 1 mo.) + 3,280 units

Target store level = 10,000 units/month x 4 months + 3,280 units

Target store level = 43,280 units

The company must have a store level of 43,280 which will be used for the
demand during the 4 months cycle.

3. Assuming that upon checking, the company has 20,000 units in store. What is
the quantity of the order to be placed?

Order size = Target store level – Store in hand

Order size = 43,280 units – 20,000 units

Order size = 23,280 units

The company has to place an order of 23,280 units for this interval to
bring the store level back to 43,280 units

Comparing periodic review to EOQ, we can say that

The main advantage of periodic review is its simplicity and convenience to administer since there is a
routine where the store is only checked periodically.

Since the order size may vary, there may be a possibility of combining orders for several items into a large
order, encouraging suppliers to give discounts.

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The disadvantage of this method, however, is the lack of knowledge and detail on the store levels which
can result in loss of profit because factors such as holding and reordering costs are not optimized. Without
monitoring the store levels, theft, damage, and errors may go unnoticed.

The advantage of EOQ is its constant order size which is easier to administer since suppliers will know how
much to send and the administration and transport can be tailored to specific needs

EOQ also lowers store level. Safety stock levels in EOQ only has to cover for the lead time, while for
periodic review, safety stock levels have to cover for the uncertainty in a cycle plus the lead time.

The disadvantage of this method however is that it is based on assumptions which does not account
seasonal or economic fluctuations.

To balance these pros and cons, hybrid methods were devised such as:

Periodic review with reorder level which similar to the standard periodic review method, but we only
place an order if stock on hand is below a specified reorder level. If the store on hand is above the reorder
level, we do not place an order this period, but wait until the next period.

Reorder level and target stock (min-max system) is a variation of EOQ. When store falls below the reorder
level, we do not order for the economic order quantity, but order an amount that will raise current stock
to a target level.

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Material Requirements Planning

In its basic form, material requirements planning (MRP) uses planned production to find the demand for
materials.

This method requires a lot of information, which can be obtained from: the schedule of work, inventory
records, and bill of materials.

With MRP stocks are generally low, but rise as deliveries are made just before production starts. Stock
is then used during production and the amount held declines until it returns to a normal, low level.

In contrast with independent methods which keep stores of materials that are high enough to cover any
likely demand.

A CONTRACTOR NEEDS TO FABRICATE 5 SETS OF FLUSH DOORS. BASED ON THE BILL OF

MATERIALS, THESE WILL REQUIRE: 5 BOARDS OF PLYWOOD WHICH IS IN STORE, 5 SHEETS OF VENEER,
AND 13 PCS OF LUMBER FOR THE FRAME. IF THESE MUST BE FINISHED WITHIN 2 WEEKS, AND THE
CARPENTER CAN FINISH 1 DOOR A DAY, WHEN SHOULD THE COMPANY PLACE AN ORDER FOR THE
MATERIALS?

1. VERIFY THE MATERIAL AVAILABILITY:

PLYWOOD – 5 BOARDS ON HAND

VENEER – 5 SHEETS TO BE ORDERED

LUMBER – 13 PCS TO BE ORDERED

2. DETERMINE WHEN THESE ORDERS MUST ARRIVE:

TARGET TIME – ASSEMBLY DURATION = ORDER ARRIVAL

14 days – 5 days = 9 days after the initial date

3. SUPPOSE THAT THE LUMBER SUPPLIER GAVE A LEAD TIME OF 2 DAYS AND THE VENEER
SUPPLIER GAVE A LEAD TIME OF 7 DAYS, WHEN SHOULD THESE ORDERS BE PLACED?

PLYWOOD: 9 days – 2 days = 7 days after initial date

VENEER: 9 days – 7 days = 2 days after initial date

This is just a basic example for a single product. Of course, this will be more complex when we apply MRP
for a product which has several components such as a building. In such cases, MRP can benefit from the
help of other project management scheduling techniques such as gantt charts, PERT-CPM, and others.

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Just-in-time

The basic principle of Just-in-time is that materials must be supplied in the right order, in the right amount
at the right time.

JIT considers stores as a waste with no useful purpose. Products are not done too early (which would leave
products and materials hanging around until they were actually needed) and they are not done too late
(which would give poor customer service).

The basic question of JIT then is how can we eliminate the need for stores?

If stores are held to cope with variations in supply, the answer is to find ways of reducing the variation.

If stores are held to cover uncertain demand, the answer is to remove the uncertainty.

An example would be the use of a diesel driven pump which will require you to store a certain amount of
diesel in case the pump runs out. An alternative could be the use of an electric driven pump to eliminate
the need for stored diesel.

Another example would be ready-mixed concrete which must be mixed to the correct ordered specification,
delivered in the right time and quantity. At the same time, the construction site will eliminate the need to
store large amounts of materials such as cement, sand, and gravel.

Here are some companies which use JIT

Toyota pioneered the practice of JIT. This is believed due to Japan’s post-war lack of money, natural
resources, and space.

Their method, also known as the Toyota production strategy, sees that raw materials are not brought to the
production floor until the order is received from the customer and the product is ready to be built.

During the production process, no parts are included in the next node or station unless they are required to. This
keeps the amount of inventory to a minimum which as a result, lowers costs. This also allows Toyota to adapt
quickly to customer’s demands, significantly reducing the risk of having excessive inventory at its disposal.

Apple, with only one central warehouse in the US, has most of their inventory at their retail stores.

Apple also took advantage of dropshipping, a strategy also used for internet businesses, where these
businesses purchase items straight from a 3rd party when a customer makes an order, then these items
are shipped directly to the customer.

McDonald’s and other fast-food chains don’t start assembling and making their hamburgers and sundaes
until the order has been taken, (except for a few finished products at peak times). This standardizes the process,
so that every time a customer receives an order, they are getting the same consistent experience.

On-demand publishing keeps the manuscript of books on hand, but texts are only printed and assembled
as needed.

Therefore, the key elements for the successful implementation of JIT are:

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 • stable environment
• standardized products
• continuous fixed production
• automated, high volume operations
• reliable equipment
• minimum stores
• small batches and lead time for supply
• reliable suppliers

Comparing the discussed 2 dependent demand methods,

MRP:

1. PUSHES MATERIALS THROUGH A PRE-DEFINED SCHEDULE

2. PLANNING-ORIENTED
3. FOCUS ON INFORMATION SYSTEM
4. INCREASED CLERICAL EFFORT
5. AS MUCH DATA AS POSSIBLE
6. VARYING RATE OF PRODUCTION
7. INCREASED BATCH SIZESMINIMAL
8. DAYS’ STORE OF MATERIAL

JIT:

1. PULLS MATERIALS THROUGH A PROCESS

2. CONTROL-ORIENTED
3. FOCUS ON PHYSICAL OPERATIONS
4. REDUCED CLERICAL EFFORT
5. MINIMAL DATA NEEDED
6. FIXED RATE OF PRODUCTION
7. ORDER BATCHES
8. HOURS’ STORE OF MATERIAL

Of course, JIT and MRP can also work together. For example, MRP can be used for the overall planning to
ensure that materials will arrive to support the process, while JIT controls the processing of these
materials.

These methods, based on the pros and cons discussed, can be combined depending on what a company
offers. For example, independent demand methods are more appropriate for retail operations, while
dependent demand methods are more appropriate for manufacturing and construction.

JIT, however, has only selected applications for construction (such as in shop fabrications, or in some
materials as mentioned). This is because design modifications, delivery slips, and unforeseen
complications are most likely to happen.

Nevertheless, proper inventory control is important to ensure an efficient and cost-effective operation.

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 REFERENCES

Counttuts. (2019). Economic Order Quantity (EOQ) Explained With Example. Retrieved from
https://www.youtube.com/watch?v=uhMcWdlkWxE

Designing Buildings. (2021). Construction Inventory Management. Retrieved from

https://www.designingbuildings.co.uk/wiki/Construction_inventory_management

Designing Buildings. (2021) Just in time. Retrieved from

https://www.designingbuildings.co.uk/wiki/Just_in_time

Graphic Products. (n.d.). Periodic Inventory System. Retrieved from

https://www.graphicproducts.com/articles/periodic-inventory-system/

Harbour, S. (2019). The Advantages & Disadvantages of Economic Order Quantity. Retrieved from
https://smallbusiness.chron.com/advantages-disadvantages-economic-order-quantity-eoq-
35025.html

Inventopedia. (2021). What Are Some Examples of Just-In-Time Inventory Processes?. Retrievede from
https://www.investopedia.com/ask/answers/051215/what-are-some-examples-just-time-jit-
inventory-processes.asp

NEHP. (2018). Just In Time In Construction (JIT Delivery). Retrieved from

https://blog.cpsgrp.com/nehp/just-in-time-in-construction

Waters, D. (2003). Inventory Control and Management. John Wiley & Sons, Ltd.

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Submitted by:

JOHN VINCENT R. LOPEZ

M. Arch-CTM

Submitted to:

ELMER M. SANGALANG
Professor, M. Arch-611

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