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Six Essential Areas for Controlling Construction Inventory

Construction inventory management is a means by which construction companies and suppliers can keep track of materials, workforce, equipment and plant. This is particularly important when a construction company has multiple projects to manage, as efficient scheduling can become very complicated.

A well-managed inventory can be critical to profitability as delayed, misplaced or lost items can incur avoidable delays and unnecessary costs. A project timeline, planned in advance, with a full inventory of the required materials, labour, equipment and so on is a vital part of the project planning process.

Controlling Construction Inventory allows a company to manage the intricacies associated with maintaining costs, optimal stock levels and effective reporting. The inventory management software keeps track of inventory on hand, the minimum and maximum inventory counts, bill of materials, and tracks what a construction company purchases from multiple suppliers.

construction inventory management
Picture taken from http://www.techvicity.com/2018/10/construction-inventory-management.html

Setting up the various Stock Levels

Management must decide the maximum and minimum level of stocks and supplies that need to be kept in the warehouse or across the network of warehouse locations. Management must also set optimized re-order levels, safety stock levels (below which supply must not be allowed to fall) and an average inventory level to ensure costs are contained.

(1) Maximum Level:

Maximum level is the level above which stock should never reach. It is also known as maximum limit or maximum stock. The function of maximum level is essential to avoid unnecessary blocking up of capital in inventories, losses on account of deterioration and obsolescence of materials, extra overheads and temptation to thefts etc.

(2) Minimum Level:

It represents the lowest quantity of a particular material below which stock should not be allowed to fall. This level must be maintained at every time so that production is not held up due to shortage of any material. It is that level of inventories of which a fresh order must be placed to replenish the stock.

Preparations of Inventory Budget

Many organizations have an annual inventory budget and they are usually prepared well in advance before inventory is procured. Budgets should include the total cost of ownership to keep inventory on hand during that year’s account period. This includes materials cost, fixed operational costs, carrying costs, logistic costs, redistribution costs and additional miscellaneous costs that contribute to the total cost of ownership.

Maintaining a Perpetual Inventory System

This is another technique to exercise control over inventory. It is also known as automatic inventory system. The basic objective of this system is to make available details about the quantity and value of stock of each item at all times. Thus, this system provides a rigid control over stock of materials as physical stock can be regularly verified with the stock records kept in the stores and the cost office.

Establishing Proper Purchase Procedures

In order to ensure that inventory is under adequate control, management must adopt purchasing procedures that align with actual sales history and demand pattern data.
The following steps are involved:

(1) Purchase Requisition

This is the requisition made by the various departmental heads or storekeeper for their various material requirements. The initiation of purchase begins with the receipts of a purchase requisition by the purchase department.

(2) Inviting Quotations

The purchase department will invite quotations for supply of goods on the receipt of purchase requisition.

(3) Schedule of Quotations

The schedule of quotations will be prepared by the purchase department on the basis of quotations received.

(4) Approving the supplier:

The schedule of quotations is put before the purchase committee who selects the supplier by considering factors like price, quality of materials, terms of payment, delivery schedule etc.

(5) Purchase Order:

It is the last step and the purchase order is prepared by the purchase department. It is a written authorisation to the supplier to supply a specified quality and quantity of material at the specified time and place mentioned at the stipulated terms.

Inventory Turnover Ratios

The inventory turnover is the number of times the inventory must be replaced during a given period of time, typically a year. It is one of the most commonly used ratio in inventory management, as it reflects the overall efficiency of the supply chain, from supplier to customer. This ratio can be computed for any type of inventory (materials and supplies, work in progress, finished products or all combined), and it can be used for retail as well as manufacturing.

This is a calculation used to determine how quickly inventory is used up or “turned over” in a given time period. The higher the ratio the shorter the shelf life of the inventory and typically leads to higher sales volume and profitability for companies with lower profit margins. Inventory turnover should be closely watched for every item in the warehouse. Over the course of the product’s life cycle, demand will fluctuate and cause variability in the supply chain. Tracking demand patterns are one way to ensure product replenishment calculations are accurate and optimized.


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References

Daniel Fritsch (2015). “6 Inventory Control Techniques for Stock Optimization”. Retrieved from https://www.eazystock.com/blog/2015/08/03/6-inventory-control-techniques-for-stock-optimization,accessed 10/12/2018.

ERPFM. (2018). “ERP for construction companies”. Retrieved from https://erpfm.com/erp-for-construction-companies, accessed 12/12/2018.

Nicole Pontius. (2018). “4 Types of Inventory Control Systems: Perpetual vs. Periodic Inventory Control and the Inventory Management Systems”. Retrieved from https://www.camcode.com//asset-tags/inventory-control-systems-types, accessed 10/12/2018.

Smriti Chand. (2018). “6 Most Important Techniques of Inventory Control System”. Retrieved from http://www.yourarticlelibrary.com/inventory-control/6-most-important-techniques-of-inventory-control-system/26159,accessed 10/12/2018.

Terese Ong Yee Chiat, DLSM. (2018). “Five important techniques for effective inventory control”. Retrieved from SIPMM: https://publication.sipmm.edu.sg/five-important-techniques-for-effective-inventory-control, accessed 10/12/2018.

Veron Wong Sook Wei, DPSM. (2018). “Effective Technique for Inventory Control Stock”. Retrieved from SIPMM: https://publication.sipmm.edu.sg/effective-techniques-inventory-stock-control, accessed 10/12/2018.

Tai Cheoh Wei, DPSM
Tai Cheoh Wei, DPSM
Tai Cheoh Wei has substantive experiences in the furniture and exhibition industry, specifically in the field of inventory planning and control. She is a member of the Singapore Institute of Purchasing and Materials Management (SIPMM). Cheoh Wei completed the Diploma in Procurement and Supply Management (DPSM) course on December 2018 at SIPMM Institute.
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