This Report is just an overview of how an Inventory Management system will play crucial role in the Level of control of our Material Procurement cost.

Current Scenario: Scenario after implementation of Inventory Management System:

Level of Control: LOW Level of Control: Medium-High

Level of Planning: LOW Level of Planning: High

Inventory Management is the source of Material Procurement cost. 70% of the Procurement cost can be reduced by Effective Inventory Management System.

Current Scenario: 300-400 indents are raised per vessel per year. It is almost every day an indent is raised. It is very important for the Master/Chief Engineer to understand the cost of raising indents. If we observe Logistics cost of raising indent, it is ₹10000-₹15000 per indent.

Number of indents is very much correlated to Logistics cost. After performing a regression analysis, the result showed Correlation of 0.8(High). Hence by Reducing the Number of Indents to Double Digit, Logistics Cost will also reduce.

Steps to improve inventory management

1) Item Master

We need to maintain an Item Master of all the items for all the vessels. The Item Master will contain all the spares, store items, paints, lubes, chemicals, and gases which are to be procured while the ship is in operation. The Item Master will include description, material, handling specification, unit of measure, warehouse, PO/Receiving etc. of all the items.

Inventory Categorization: Categorizing the Inventories into sub classes within the system

Spares Stores

a) Engine Storesb) Deck Storesc) Galley Stores

Paints Lubes Chemicals Gases Urgent/Critical Spares

2) Codification

Once all the items are fed into the system, next step is to codify the same. Just by the code we should be able to identify the exact item and to which unit does it belong. The code should be like a bill of material where the item is easily identified by the concerned departments, ship’s chief Engineer/Master, Forwarders and the Makers.

3) Stock Take

Once the coded items have been identified, a system where physical verification of quantities and condition of items held in an inventory is to be in place for stock discrepancy information.

4) Lead Time

We need to identify and set a lead time for all the coded items in the system. The lead time is determined by the time order is placed to ready to be delivered to the vessel.

5) Ordering

Once the Lead time is determined, we need to set a re-order point. Two main points have to be identified before we determine the re-order point:

a) Safety Stock: Number of days’ worth of inventory kept in case of emergencyb) Basic stock: Number of days’ worth of inventory normally kept on hand

Re-order Point will be calculated using following formula:

Reorder point = (Lead time + Safety stock + Basic stock)*average number of units used per day

Once an item reaches its re-order point, an automatic alert should be given to the ship for replenishment to the basic stock level.

6) Receipts/Issues

Create a system where receipts which are to be credited and issues which are to be debited are tracked. A virtual store manager within the system to issue the items to the ship should be in place.

Once the product is received in the store, the value of the product should be credited to store’s account. Once the product is issued to the ship, the value of the product should be debited from store’s account.

This will help in proper tracking of actual number of items which are being used. Any deviation from basic stock level would be written-off.

7) Periodic Stock Take

Once all the systems are in place, we need to identify items which are to be ordered monthly, bi-monthly, quarterly or annually. The system should reject any emergency orders for the items except for critical spares/spares for part which is creating hindrance for normal operation. Exampl:

Spares: Every Month Items will be reviewed and ordered

Stores: Every 2 Months Items will be reviewed and ordered

Paints/Lubes/Chemicals/Gases: Every Quarterly Items will be reviewed and ordered

Urgent/Critical Spares: As and when Required

Spares: 12 Indents/Year

Stores: 6 Indents/Year

Paints: 4 Indents/Year

Lubes: 4 Indents/Year

Chemicals: 4 Indents/Year

Gases: 4 Indents/Year

Total: 34 Indents/Year/Vessel + Critical/Urgent Spares Indents (Negligible)

8) Reconciliation of Variances

This is the final steps in order to minimise the write-offs (Variances). We need to continuously update the accuracy of inventory records. Inventory reconciliation is needed to ensure that actual and recorded inventory amounts are same at the end of the year. There may be variance in physical count and inventory record. Any variances need to be investigated and written-off. At the end, altering the inventory record in order to match the physical count will reconcile the variance. The goal will be reduce the variances in order to minimize the write-offs. This is directly related to Receipts/Issues system. If the above system works properly, we would definitely be able to reduce the number of indents raised. Hence reducing the logistics cost.

Vessel Type Indents Raised Forwarders cost/Indent Agency Cost/indent Total Logistics Cost/indent Total CostCrude(Aframax) 416 ₹ 4,381.27 ₹ 10,675.87 ₹ 15,057.14 ₹ 6,263,769.93Crude(Suezmax) 339 ₹ 10,565.72 ₹ 2,947.47 ₹ 13,513.19 ₹ 4,580,972.62

LPG Carrier 240 ₹ 4,704.42 ₹ 2,886.28 ₹ 7,590.70 ₹ 1,821,768.21Product Tanker (LR) 208 ₹ 8,103.30 ₹ 6,922.34 ₹ 15,025.64 ₹ 3,125,333.67

Product Tanker (MR) 355 ₹ 4,848.56 ₹ 3,501.68 ₹ 8,350.23 ₹ 2,964,332.87Kamsarmax 310 ₹ 5,860.63 ₹ 5,085.22 ₹ 10,945.86 ₹ 3,393,215.39Supramax 385 ₹ 4,852.11 ₹ 12,047.62 ₹ 16,899.73 ₹ 6,506,396.56

Vessel Type Indents Raised1 Total cost1 %save1 Indents Raised2 Total Cost2 %save2 Indents Raised3 Total Cost3 %save3Crude(Aframax) 50 ₹ 752,856.96 88% 75 ₹ 1,129,285.44 82% 100 ₹ 1,505,713.93 76%Crude(Suezmax) 50 ₹ 675,659.68 85% 75 ₹ 1,013,489.52 78% 100 ₹ 1,351,319.36 71%LPG Carrier 50 ₹ 379,535.04 79% 75 ₹ 569,302.57 69% 100 ₹ 759,070.09 58%Product Tanker (LR) 50 ₹ 751,282.13 76% 75 ₹ 1,126,923.20 64% 100 ₹ 1,502,564.26 52%Product Tanker (MR) 50 ₹ 417,511.67 86% 75 ₹ 626,267.51 79% 100 ₹ 835,023.34 72%Kamsarmax 50 ₹ 547,292.80 84% 75 ₹ 820,939.21 76% 100 ₹ 1,094,585.61 68%Supramax 50 ₹ 844,986.57 87% 75 ₹ 1,267,479.85 81% 100 ₹ 1,689,973.13 74%

INVENTORY MANAGEMENT SYSTEM

If we achieve all of the above we would be generating around 34 Indents/Year/Vessel Excluding Urgent/Critical Spares. There should be no urgent requirements for stores and other items except for critical spares.

As we can see in above Tables:

Reducing Indents to 50, our Logistics cost reduces around 85% Reducing Indents to 75, our Logistics cost reduces around 80% Reducing Indents to 100, our Logistics cost reduces around 75%

SUMMARY

Create a system where receipts which are to be credited and issues which are to be debited are tracked. A virtual store manager within the system to issue the items to the ship should be in place. Once the product is received in the store, the value of the product should be credited to store’s account. Once the product is issued to the ship, the value of the product should be debited from store’s account. This will help in proper tracking of actual number of items which are being used. Any deviation from basic stock level would be written-off.

Periodic Stock TakeOnce all the systems are in place, we need to identify items which are to be ordered monthly, bi-monthly, quarterly or annually. The system should reject any emergency orders for the items except for critical spares/spares for part which is creating hindrance for normal operation.

Reconciliation of VariancesThis is the final steps in order to minimise the write-offs (Variances). We need to continuously update the accuracy of inventory records. Inventory reconciliation is needed to ensure that actual and recorded inventory amounts are same at the end of the year. There may be variance in physical count and inventory record. Any variances need to be investigated and written-off. At the end, altering the inventory record in order to match the physical count will reconcile the variance. The goal will be to reduce the variances in order to minimize the write-offs. This is directly related to Receipts/Issues system. If the above system works properly, we would definitely be able to reduce the number of indents raised. Hence reducing the logistics cost.

b) Basic stock: Number of days’ worth of inventory normally kept on handRe-order Point will be calculated using following formula:Reorder point = (Lead time + Safety stock + Basic stock)*average number of units used per dayOnce an item reaches its re-order point, an automatic alert should be given to the ship for replenishment to the basic stock level.

Receipts/Issues

Once the coded items have been identified, a system where physical verification of quantities and condition of items held in an inventory is to be in place for stock discrepancy information.

Lead Time

We need to identify and set a lead time for all the coded items in the system. The lead time is determined by the time order is placed to ready to be delivered to the vessel.

OrderingOnce the Lead time is determined, we need to set a re-order point. Two main points have to be identified before we determine the re-order point:a)  Safety Stock: Number of days’ worth of inventory kept in case of emergency

We need to maintain an Item Master of all the items for all the vessels. The Item Master will contain all the spares, store items, paints, lubes, chemicals, and gases which are to be procured while the ship is in operation. The Item Master will include description, material, handling specification, unit of measure, warehouse, PO/Receiving etc. of all the items.

Item Master

Steps to improve inventory management

CodificationOnce all the items are fed into the system, next step is to codify the same. Just by the code we should be able to identify the exact item and to which unit does it belong. The code should be like a bill of material where the item is easily identified by the concerned departments, ship’s chief Engineer/Master, Forwarders and the Makers.

Stock Take