(PDF) The impact of Inventory Control on construction industry

The Impact of

Inventory Control on

Protability in the Construction Industry

THE IMPACT OF INVENTORY CONTROL ON

PROFITABILITY IN THE CONSTRUCTION INDUSTRY

ABSTRACT

This research paper is to explore the impact of Inventory Control on

Profitability in the construction industry. There are model of analysis

which can help the construction industry minimize the inventory level

of goods of raw materials or semi-finished products, in order to reduce

the stock holding cost and benefit the company performance. The

analysis also look into the order lead time, consideration of prompt

delivery of right material at the right moment to match the timing of

the construction work schedule, so that inventory of material can fully

utilized the limited storage place at site. The research paper studies the

correlation between the Inventory Control and the effect towards the

profitability of construction industry. It will recommend the inventory

control model to the construction industry for best performance, in

return reduce wastages and get better profitability.

Keywords: Inventory Control, profitability (performance),

correlation, wastages.

The Impact of

Inventory Control on

Protability in the Construction Industry

TABLE OF CONTENTS

CHAPTER 1 INTRODUCTION

1.1 Research Background

1.2 Problem Statement

1.3 Research Objective

1.4 Research Questions/Hypotheses

1.5 Significance of the Research

1.6 Definition of terms

CHAPTER 2 LITERATURE REVIEW

2.1 What is inventory and inventory control analysis

2.2 History of inventory Control studies and researches

2.3 The impact of inventory control towards construction

induestry.

2.4 What is Profitibility?

2.5 Inventory Control and Profitibility.

2.6 Computerized Inventory Control improve tracking efficency

2.7 Discussion on the Tracking device

2.8 Idealogical Inventory Control

2.9 Inventory Control Record

CHAPTER 3 METHODOLOGY

3.1 Research Design

3.2 Data Collection Method

3.3 Data Analysis Method

LIST OF TABLES

LIST OF FIGURES

REFERENCES

APPENDICES

Chapter 1

The Impact of

Inventory Control on

Protability in the Construction Industry

Introduction

1.1 Research Background

The purpose of this research report is meant to explore how the material

and machinery inventory control can effect the profitability of

construction industry. What is Inventory? Inventories are the physical

stocks of items or material that a contractor or organization keeps in

hand for efficient construction works and installation activities at site.

Inventory consists of raw materials, component parts, tools, spares,

finished goods, plant & machineries and in process products which are

recorded and stored at the construction site or storage “go down” for

some period of time. Hence Inventories will cost money on hiring

storage space, equipment idling time, deterioration, wastage, procuring

process and delivery lead time and above all, the cost of the capital

required in financing these stocks. Inventory control is crucial function

in construction industry, well managed inventory control improved site

installation more smoothly and in turn gain better productivity. Ideally,

right material should be supplied at right place, at the right time and of

right quantity so as to have speedy installation and minimize the cost of

craft labor time of the project. The fundamental objective of a good

inventory control system is to be able to determine

1. What to order;

2. When to order and at what interval?;

3. What is the right price;

4. How many (quantity) to order; and

5. How much (quantity) to carry in stock

The right time to purchases at right price and quantity of Materials,

will get the best deal.

The Impact of

Inventory Control on

Protability in the Construction Industry

Construction site usually short of manoeuver space and storage area.

Most materials require proper storage and cover up again weather to

avoid damages and deterioration. Therefore ordered at the right time,

delivered on the right time for use will minimized the holding stock

and wastage. The process will gain economy in purchasing,

maximizing storing capacity at site, reduce wastage, and shorten the

procurement lead time. Failure in managing site inventory will result

in cost overrun, delays in project completion and reduce overall

project performance. As show in Figure 1.1 the flow chart of the

typical site inventory management system. In which not only the

physical flow of management to be adhere to, the analysis of material

and item is also important. Items and materials being analyzed and

keep reasonable stock level will reduce down time during installation.

Hence good inventory control has potential to reduce construction

costs, reduce project delays, improve productivity, reduce labour

working hours and promote time savings. The saving on wastage

alone has significance impact on profitability of the project.

The Impact of

Inventory Control on

Protability in the Construction Industry

Figure 1.1: Flow Chart of Construction Materials Management.

Source: Adapted from Stukhart (1995)

1.2 Problem Statement

As Kini (1999) pointed out that 50~60% of the total construction cost

goes to materials and equipment. Some construction Project may

experience project cost for material ranged from 30 to 80% of the total

construction cost (Proverb, et al., 1999) It is therefore vital to control

this large portion of tangible cost, and every penny save will contribute

to the profitability of the project. Inventory Control and waste Control

on site remains a low priority for the majority of the contractors

(Begum, 2009). When construction site is less concerned on inventory

control more materials and labour times are wasted. An estimated about

The Impact of

Inventory Control on

Protability in the Construction Industry

10 to 30 per cent of wastes disposed of for landfills originate from

construction site (Fishbein, 1998). Many contractor and developer do

not take advantage on this saving and look for other meant of getting

extra earning and risk to be penalized for using inferior materials or

maybe cut corner here and there. This research is to give awareness for

builders to look seriously on inventory control where saving of

materials and labour times can impact the profitability of the project.

1.3 Research Objective

A. To establish the need of inventory control in building project;

B. To propose inventory control model best suit in building project, keep

pace with changing market conditions and trigger buying on right time

before price increase;

1.4 Research Question/ Hypotheses

Research Question

This research paper is to test the questions pertaining to Inventory

Control and the ability to perform the expected role and prove that it

will impact on profitability by the survey and analysis.

1. Can Project Manager and Contractor implementing Inventory Control

using Inventory tools or model improve the profitability in the

Construction Induestry?

2. Can Inventory Control keeping track of scheduled requirement stock of

material and equipment just in time able to reduce downtime and

improve the project schedule?

The Impact of

Inventory Control on

Protability in the Construction Industry

3. Can Inventory Control system organized stock efficiently and no man-

hour wasted to look for stock and able to reduce management

manpower?

4. Can Inventory Control improves craft labour productivity?

5. Can Inventory Control helps to organize site storage and handling

problem?

6. Can Inventory Control reduces/eliminates theft and deterioration of

material at site?

Base on the above research questions, The following hypotheses are

formulated and tested:

H1 – Inventory Control improves profitability in the construction

induestry;

H2 – Inventory Control supply material and equipment just in time of

the scheduled works;

H3 – Inventory Control able to reduce management manpower;

H4 – Inventory Control improves craft labour productivity;

H5 – Inventory Control lowering materials holding cost; and

H6 - Inventory Control reduces/eliminates theft and deterioration of

material at site.

1.5 Significance of the Research

This research will generate the awearness of importance of Inventory

Control at the construction site. It serves to awake the Project

Management team to space some effort to imphasis on Material

Inventory Contral so as to increase the profitability of the project

concerned.

The Impact of

Inventory Control on

Protability in the Construction Industry

Inventory control is something that should be front-of-mind in building

project. Many Project Manager neglected the importance of site

Inventory control, which lead to lot of wastages in term of material

wastage, labour working hour wasted due to “stock out” or search for

material, pay higher price to require immediate supply of specific

material. Poor storage give rise to materials deteriorate, damage due to

poor storage method, and lost (theft)

The significance of this research paper is to look for solution, method,

and means of control to tighten up the inventory process for the benefit

of the building industry. From theoretical point of view, when applying

Inventory Control, there are saving in this area:

1. Provides organized inventory storage area and well planned procuring

system;

2. Materials received and drawing process is in order;

3. Easy locating materials, vital items are securely stored;

4. Prevents theft and reduced materials deterioration and less wastages;

5. Provides up-to-date information regarding on-site stock (Navon &

Berkovich, 2006);

6. Reduce holding cost and less burden on project’s financial; and

7. Saving from wastage and deterioration of material, will increase

profitability of the project and environmental friendly.

1.6 Definition of Terms

The definitions of terms in this research report are as follow:-

The Impact of

Inventory Control on

Protability in the Construction Industry

Impact: Originally from Latin “impactus” means pushed against,

fastened on. To drive or press (an object) firmly into (another object,

thing, etc) or to be driven or pressed firmly together. The force of a

collision; ‘shock’. To have an impact or strong effect (on), Adapted

from Collins English Dictionary.

Inventory: Originally from Latin inventorium or inventarium. It means

“a list of what is found”. A complete list and quantity of material

instore, components, work in progress, contents of property etc. As

Collins Dictionary (2005) defines Inventory as Stocks of finished

goods, work in progress and raw materials held by business.

Control: Tighten,

Profitability: Business’s activities or operating performance show sign

of able to make profit from its operational efficiency. Profit is the

revenue of a business made after paying off all the expenses during

specified period of time. Profitability is a relative concept and profit is

an absolute connotation.

Stock-out: Or Out- of- Stock (OOS). There is no more stock for a

specific spare or material in current inventory of the construction site,

store, along the supply chain or from the retailer , Financial Glossary.

(2011). Stock-out’s opposite is to carry to much stock or inventory that

is called “ Overstock”.

Just-in-time (JIT): The idea of JIT was first developed in during

1970s. It cut waste by supplying parts and components only as and

when the process required them. It reduces holding buffer stocks and

save on holding cost.

The Impact of

Inventory Control on

Protability in the Construction Industry

Chapter 2

Literature review

2.1 What is inventory and inventory control ( IC ) analysis ?

The study by Song, 2005 and Nasir, 2008 have elaborated that

construction materials contributed 50 to 60% of the total project costs.

It is obvious that if there is some saving from the material inventory

control than the Project will gain profitability. The Construction

Industry Cost Effectiveness Committee (CICE) of the Business

Roundtable (1982) asserted that materials inventory control is a

“Distinct management system that can make the significant contribution

to the cost effectiveness of construction projects”. Previous research

highlighted the effect of materials inventory control demonstrated the

cost effectiveness of materials inventory control systems (Bell and

Stukhart 1986, Bell and Stukhart 1987, Thomas et al. 1989). The first

research on materials inventory management in the construction

industry (building project) was initiated by the Business Roundtable in

1982. The report from Business Roundtable Construction Industry Cost

Effectiveness Committee ( CICE ) also stated that the cost of

construction materials and equipment usually makes up 60% of the total

project cost. Construction labor cost attributes only 25% of the total

project cost. Kini (1999), states that for a typical industrial facility, the

cost for engineering design is 10% to 15% of the total cost and the cost

for equipment and materials is 50% to 60% of the total cost. Studies by

The Impact of

Inventory Control on

Protability in the Construction Industry

the Construction Industry Cost Effectiveness Committee (CICE) and

the Construction Industry Institute (CII) together confirmed that raw

materials management (MM) system can contributes a 6% improvement

in craft labor productivity (CII 1986). An additional 4-6 % in craft labor

savings is expected when the craft labor uses the materials inventory

control system to plan their work when there is available raw materials

(CII 1986). This 10-12 % reduction in labor cost essentially originates

from avoiding non-productive idle time or down time of the manpower

due to searching for materials waiting for new arrival of material..

In 1996, Construction Industry Institute (CII) Implementation Team was

setup to revise the “Project Materials Management Handbook” which

was published in 1988. The CII team conducted a questionnaire survey

from their member firms on how the use of new concepts and

technologies in materials management can benefits their company’s

profitability and performance. The average percent improvements

reported by the respondents were:

1. Reduced bulk surplus, 40%;

2. Reduced site storage and handling, 21%;

3. Improved supplier performance, 24%;

4. Improved craft labor productivity, 16%;

5. Improved project schedule, 16%;

6. Reduced management manpower, 15%; and

7. Reduced risk, 5% (CII 1999).

Dr. G. Brindha, “Inventory Management”, International Journal of

Innovative Researching Science Engineering and Technology, Vol.3.

Issue 1, January 2014. Dr. Brindha (2014) pointed out that the

inventory and material management is common problem faced by all

The Impact of

Inventory Control on

Protability in the Construction Industry

organizations in any sector of the economy. This paper discusses the

effective use of company’s available resources to avoid the “out of

stock” situation. The proposed reduction of risk and avoidance of high

obsolescence is also discussed. In construction site there are hundreds

and thousands of materials going into store, draw from store, installing /

fixing at site, mixing the ingredient at site. But all in all they can be

classified into three main categories of inventory:

1. Raw materials;

2. Work in progress; and

3. Finished goods.

From this three categories of inventory, one can further divided into

high level and low level goods depending on their usage on site.

Various tools of inventory management such as ABC analysis,

Economic Order Quantity (EOQ) , FSN, VED, SDE, GOLF and 3 D

MUSIC analysis model are explained below and the combine use of

these two analysis matric will give greater performance on Inventory

Control. There are many analysis models able to contribute the

formulation of improving inventory control and management so that it

can maximize the profitability of the project.

Appended below a brief introduction of various inventory control

analysis model.

2.1.1 ABC Analysis :

This analysis is based on Pareto principle. The classification of items

or materials by their quantity usage during specific time period.

The Impact of

Inventory Control on

Protability in the Construction Industry

Depending on the construction schedule, at every stage of construction,

the type of material used is varying as well as the quantity of material

used. So they are segregated into three categories:

1. A - Approximated 5 % to 10 % of the items accounting for 60% to

70% of the consumption value;

2. B - Approximated 10 % to 30 % of the items accounting for 10 % to

30% of the consumption value; and

3. C - Approximated 60 % to 85 % of the items accounting for 5% to

15% of the consumption value.

ABC analysis is commonly used together with other model such as

HML, VED and EOQ.

2.1.2 EOQ Analysis :

EOQ was originally developed by Ford W. Harris (1913). Economic

Order Quantity (EOQ) is a analysis considering the point of ordering and

the quantity of material order is the most economical. Maintaining low or

no inventory costs, holding costs, ordering costs, stock-out costs, and

other associated cost. Ford W. Harris (1913) developed formula to

calculate the EOQ:

EOQ = most economic order quantity (units);

D = the demand, quantity per annual or specific period of time;

S = every ordering cost per single purchase;

The Impact of

Inventory Control on

Protability in the Construction Industry

H = carrying stock cost or holding costs per unit; and

C = material unit cost.

From the calculation, it is possible to plot out the graph as per Figure 1

showing the most economical reorder point and the quantity to order.

Figure 2.1 : Example of EOQ graph

Source : Adapted from eazystock

The other technique used together with EOQ is the Reorder Point

(ROP). Fangruo Chen (1998) pointed out that the Re-Order Point

(ROP) quantity reflects the level of inventory that triggers the

placement of an order for additional units. If the demand is constant and

the lead time is known, then the reorder point is written as follow:

Reorder point = Daily usage * Lead time(in days)

When a safety stock is maintained, then the reorder point is written as

follow (Gonzales, 2010):

The Impact of

Inventory Control on

Protability in the Construction Industry

Reorder point = {Daily usage * Lead time (in days)}+ safety stock

Required quantity per day depended on the speed of installation. Lead

time to order the material have to work out with the vendor or supplier.

Management policy has to set the minimum quantity to stock or safety

stock level.

A computer program is coded and a graphic user interface (GUI) is

developed in MATLAB 2008 to calculate optimum Re-Order Quantity

(ROQ) and Re-Order Point (ROP) using simulation technique for most

critical items. When the inventory of some items storage level reduced

to ROP as this point is preset by considering the supply lead time. The

computer system will triggers ordering process.

The Impact of

Inventory Control on

Protability in the Construction Industry

Figure 2.2 : Shows EOQ’s Reorder Point cycle

Source : Adapted from ResearchGate

L = ordering lead time

T = time taken to exhaust the stock

Q = quantity to order

r = reorder point

The Impact of

Inventory Control on

Protability in the Construction Industry

2.1.3 FSN Analysis :

The classification of items or material in accordant to their rate of

consumption. FSN analyzed and classified the items or materials into

three groupings:

1. Fast moving : item under this grouping is an “active” item, fast

moving or fast installing material. Items has to review and reorder

more frequent;

2. Slow moving : item at stock is not consume fast or used up fast

enough, not so “active” item. Periodic review is necessary to keep

track stock level; and

3. Non-moving : not “active” item. The usage is almost insignificant.

2.1.4 VED Analysis :

an acronym which stands for “ Vital, Essential, Desirable”.

1. Vital : items falls in this category are those items which are the core

item. Without them the installation works or production activities could

not proceed or come to a standstill. The progress will be drastically

affected. Therefore enough stocking of this item is important. It is too

expensive to allow “Stock-out” to happen and delay the whole

operation.

2. Essential : items in this category are those items which is crucial item,

but not vital. The “stock-out” will causes down time while waiting for

new supply. The cost of down time is high for the organization, but it

won’t cause standstill to installation work.

The Impact of

Inventory Control on

Protability in the Construction Industry

3. Desirable : items in this category are items needed and their stock-out

or shortage will not burden to the company and the disruption on

installation is minimum. Low “stock-out” cost items.

2.1.5 SDE Analysis :

the classification is done on materials or items which is difficult to

obtain or purchase. Purchasing department at site has to be careful on

item which is classified under SDE.

1. S class materials - those materials are scarce, and hardly available.

Some may require licensing or import license. For example dynamic

and gun powder. Strategic planning and special storage is required for

this item;

2. D class materials – those materials are available, but may need longer

time to procure. It may be “made to order” item. Schedule the items to

suit the installation time;

3. E class materials – common materials, available in the market and

easily procured.

2.1.6 GOLF Analysis :

an acronym which stand for “Government suppliers; Ordinary

suppliers; Local suppliers; and Foreign suppliers.”.

The Impact of

Inventory Control on

Protability in the Construction Industry

HML Analysis ; HML stand for - High, Medium, Low. This analysis

classify materials by the purchase price. It is useful to use this analysis

together with ABC analysis. Since ABC works on “Quantity”, but HML

uses “Price” or “Usage Value” as analysis criteria. The items or

materials under this analysis are classified into three groups which are:

H - High price items or materials. Accounting for 10-15% of total

quantity;

M - Medium price items or materials. Accounting to 20-25% of total

quantity; and

L - Low price items or materials. Accounting to 60-70% of total

quantity.

2.1.7 XYZ Analysis :

Forecasting the frequency of items used or to be install over a period of

time span or the whole duration of the construction period.

X - items less or very little variation and usage and turnover over time

is steady and constant. The demand pattern can be reliably forecast and

estimate.

Y - items has some variation. Demand pattern is not steady, but able to

predict the demand variation. The cause of the demand variation and

fluctuations can be predicted. The known cause factors for fluctuations

can be seasonal, competitor action, economic factors, and due to

product lifecycles.

Z - items which is highly fluctuate. The variation is difficult to predict

and there is no recorded trend or predictable cause factors. Therefore

The Impact of

Inventory Control on

Protability in the Construction Industry

not able to forecast a reliable demand pattern for this items since it can

fluctuate strongly and occur sporadically.

2.1.8 3 D MUSIC Analysis :

Three Dimensional Multi Unit Selective Inventory Control Analysis (3

D MUSIC Analysis ) is a combination of all the selective analysis

simultaneously and enable Inventory Manager to decide the purchase

quantities, inventory levels of materials and item on a scientific basis.

The 3 D MUSIC approach is based on three dimensions view of:

1. Cost (High or Low Consumption Value);

2. Criticality ( Critical or Non-critical ); and

3. Availability ( Short or Long- lead time).

Using Pareto principle of 80/20 concept to determines the High/Low

consumption value. The 20% of materials constitute 80% of

consumption values and considered having a High consumption value.

The next 80% of materials constitute 20% of the consumption value are

of Low consumption value. These materials segregated to eight (8)

categories based on their criticality and order lead time. Table 1 also

proposed the “K” factors for 8 categories. The “K” factors have to be

reviewed and adjusted periodically.

Table 2.1: Proposed “K” factors again 8 categories

Source : Derive from the research, 3D MUSIC

The Impact of

Inventory Control on

Protability in the Construction Industry

Categories Proposed

K Factor

Action plan

1 Critical-High consumption

value

-Long order lead

time

1.6

To

2.0

-No “Stock Out” items

-Keep low stock level, reorder

level maintained

-Close tracking & strict control on

consumption.

-No bulk purchase

2 Critical-High consumption

value

-Short order lead

time

1.5

To

1.7

Same as above.

3 Critical-Low consumption

value

-Long order lead

time

2.5

To

3.0

-Safety stock maintained on long

lead time

-Bulk discount

-Stockless purchasing

4 Critical-Low consumption

value

-Short order lead

time

2.5

To

3.0

Same as above.

5 Non-Critical-High

consumption value

-Long order lead

time

0.6

To

1.0

-Consult reorder plan, low

inventory level.

-Frequent ordering, may face

“stock out”

-Strict inventory control

-Service level - moderate

6 Non-Critical-High

consumption value

-Short lead time

0.5

To

1.0

-Purchases on just-in-time basis,

face with “stock out” and “0”

inventory.

-Service level - Minimum

7 Non-Critical-Low

consumption value

-Long order lead

time

0.8 -Bulk purchase

-Average inventory level, may face

“Stock-out”

8 Non-Critical-Low 0.8 -Bulk purchase

The Impact of

Inventory Control on

Protability in the Construction Industry

consumption value

-Short order lead

time

-Avoid expiry date

-Low inventory level, may face

“Stock out”

2.2 History of Inventory Control studies and researches

Materials Inventory is generally the largest current asset Materials

inventory management is important as materials constitute a large

amount in construction costs (Lu et al., 2011). This is because the poor

inventory management can affect not only to the increase in costs, but

also contribute to schedule and project delays.. It is to ensure that the

right quantity and quality of materials and equipment to be easily

specified in a timely manner, obtained at reasonable cost and are

available when needed (Bell & Stukhart, 1987). Inventory management

in construction project could be affected by several factors such as;

inadequate storage space (Sardroud, 2012), over ordering and double

handling (Donyavi & Flanagan, 2009); The lack and incomplete of up-

to-date information regarding on-site stock is caused by the poor

tracking and locating of materials in construction sites. Thus, there is a

need for a proper inventory management in order for the materials to be

tracked and located easily; and without employing additional costs.

Tracking of materials and components in construction project is not an

easy task. Navon & Berkovich (2006) agreed that materials tracking

still remain as a big problem in construction jobsites. The difficulty in

tracking over materials and components is contributed by the large

amounts of materials and components involved in the construction

The Impact of

Inventory Control on

Protability in the Construction Industry

process. Besides that, an on-site material tracking is also bound with the

traditional-manual method (El-Gahzali et al., 2011; Kasim, 2010; Jang

& Skibniewski, 2008; Navon & Berkovich, 2006), which has several

limitations.. Navon & Berkovich (2006) in their study has highlight

several limitations of traditional inventory control and tracking method

which is; labour intensive, inaccurate and subjected to error prone

which further leads to waste and surplus of materials, schedule delays,

decrease in productivity, and the lack of up-to-date information

regarding the status of materials. This manual process is labour

intensive and data collected using this method is not reliable as they are

dependent on workers motivations and skills to track the materials

(Sardroud et al., 2010). Therefore computerized Inventory Control

System is strongly recommended for efficient control and tracking of

material inventory management.

2.3 The impact of inventory control towards construction induestry.

Contruction Industry involves multi echelon and multi item “Material

Supply Chain”. There are many items of materials involves in every

stage of the construction, and the timing to use the same materials are

different at every give stage of construction schedule. When the

materials, plants and machinaries are poorly managed, the time lost for

plants and machinaries, and materials wastage will over run the

construction budget. The literature review clearly indicated that material

management is one of the critical aspect of construction industry

(Akintoye, McIntosh et al. 2000, Zou, Zhang et al. 2007). One of the

critical reason for cost over run is poor material management (M. Abas

2016). According to (Zou 2012) proper inventory mechanism able to

The Impact of

Inventory Control on

Protability in the Construction Industry

reduce construction cost. The tracking of ordering and reordering cycle,

quantity stocking level, ordering lead time and safety stock level need

to be control and manage for inventory cost minimization.

Construction profitability may vary depending on the usage of

material, fully ultilised plant and machinery, manpower deployment,

the efficiency of subcontractor, overhead cost and other general issues.

Since Materials, plants and machineries are the major cost ranging

from 50 to 60% of the total construction cost, therefore emphasis on

dynamic materials inventory control will impact the profitability of

the project. As S. Sindhu (2014) advocates that material procurement

variance is the major contributor to cost variance. As M. Abas (2016)

also states that poor material inventory management lead to

construction cost over run.

2.4 What is Profitability?

As Oxford Dictionary define “Profitability” : The degree to which a

business or activity yields profit or financial gain.

Other define Profitability as the ability of employing resources to

generate revenues in excess of its expenses or the capabilty of

generating profits from one’s operations. The “Profit” is an absolute

number which is equal to revenue minus expenses. But “Profitability”

is an accounting concept or a relative number (a percentage) and

expression ratio between profit and revene.

Profitability = ( Profit / revenue ) x 100

The Impact of

Inventory Control on

Protability in the Construction Industry

This literaly meants Profit is the total revenue sum deduct expenses

such as materials, labour employed, management charges, payment

made to authorities, plant and machinery usage. Therefore the more

saving and less wastage from expenses items the more the Profit will

be, and it will be more profitable. Profit is measured by how much

money a business or project is earning ( in cash) while Profitability is

measured by how efficient that project is. The profitability is much

more important than profit. Therefore the well managed Inventory

will impact the profitability of the project.

2.5 Inventory Control and Profitability.

The inventory of raw materials in stock represent an assets which is

idling until they been generated into product. This represents one of

the primary sources of revenue. In most industries, nearly 60% to 70%

of the total funds employed are tied up in current assets, of which

inventory is the most significant component ( Carter, 2002). Therefore

industries especially construction industry beginning to focus on

invenetory contraol, trying to convert this idle resource into an

economic value in the shortest possible time period. Inventory control

means the coordination of materials control, storage, utilization and

purchasing at the right place, the right quantity and for the time

schedule. According to Pandey (2005) management through their

policies, coordination, decision and control mechanisms must

maximize the return on investment (ROI). Pandey (2005) states that it

is clear that ROI can be maximized either by increasing profit margin

or by reducing the capital employed or by both. In the market

situation, sales price cannot be increased (rather there is a demand to

The Impact of

Inventory Control on

Protability in the Construction Industry

reduce it) and as such profit can be increased only by reducing the raw

material costs, or reducing the current assets by way of inventory

control of raw materials which can be optimized by increasing profits..

The opportunity to reduce the overheads and capital employed is more

by inventory reduction (Drury, 2002)

2.6 Computerized Inventory Control improve tracking efficiency

The are only two way of performing Inventory Control,

Computerized the Inventory Control System; or

Manully recording all transection of inbond and outbond of materials

flow.

The Computerized Inventory Control System is designed to track all

materials inbond or outbond and automatically record the stock level

advice the lower reordering time. The old practices of manual

operated inventory contraol which is labour intensive, time consuming

and subject to error (Navon & Berkovich, 2006 ). With the

introduction of computerized system the inventory control can

synchronized with the handheld devices such as smartphones, tablets

and other scanner. The system can use Barcode system or the latest

system of QR code (Quick Response code ) system. In recent year,

the smartphones have been commonly used by all trade, applying

Barcode system or QR code is possible. And each craftman with

individual code and identification which will be recorded when

withdraw the raw material. The software can work using wireless

technology, it will transmit the real-time information to a centralised

Computer System anytime when transaction occurred.

The Impact of

Inventory Control on

Protability in the Construction Industry

Inventory Control in construction site faced with several problem such

as:

a. Inadequate storage space ( Sardroud, 2012 );

b. Over ordering and double handling ( Donyavi & Flanagan, 2009 );

and

c. Lack of up-to-date Inventory Control data of on-site stock ( Navon &

Berkovich, 20063 )

The need to improve and update a proper inventory control data is

crucial so that the materials can be tack and locate as needed without

employing additional cost or have to place a fresh order since there is

inneed of that particular material to complete the work task. So it is

urgently needed to apply information and communication technology

(ICT) to aid inventory control. ICT implementation could expedite the

process of data transfer (Kasim, 2008) and facilitate the effective and

efficient control over materials on-site (Kasim, 2005). Molnar et al.

(2007) also agreed that ICT plays an important role in construction,

which is to make the sector more efficient and customer oriented.

Moselhi and El-Omari (2006) has conducted a research on integrates

barcodes and Radio Frequency Identification (RFID) to automate the

data collection process for building material on construction sites. In

another study, barcodes were integrated with Geographic Information

System (GIS) to control the location and erection sequence of

prefabricated components (Caldas et al., 2004). Besides that, the latest

study on the integrated RFID with other digital tracking technology in

construction, there are other on-site support system (Yabuki et al.,

2002), for example the tracking of pipe spools (Song, 2005), tracking

The Impact of

Inventory Control on

Protability in the Construction Industry

the movements and location of materials (Song et al., 2006); Sardroud

et al. (2010) has integrated GPS (Globle Positioning System) with

GIS ( Geographic Information System ) and RFID (Radio-frequency

Identification ) to track and locate construction resources, such as steel

I beam, tracking tools, plants and equipement (Goodrum et al., 2006),

all these data will be automatic collected. With the new technology

which makes easy to implement inventory control system for

construction site.

2.7 Discussion on the Tracking device:

RFID: Radio-frequency Identification

An automatic identify system using “Electomagnetic fields to detect the

track tags which was attached to object. Passive tags collect energy from

a nearby RFID reader’s interrogating radio waves. The RFID reader can

locates the tags at a distance of hundreds of meters away from the active

tags. As for barcode, the tag needs to be within the line of sight of the

reader. The RFID tag can be embedded in the tracked object, and the size

is as small as a rice grain. Small RFID chips, here compared to a grain of

rice, are incorporated in consumer products, or can be implanted in pets

for identification purposes

Figure 2.7.1: Small RFID Chip

The Impact of

Inventory Control on

Protability in the Construction Industry

Figure 2.7.2: Typical RFID sencer

RFID sencer or reader usally installed at the exist points and strategic

location or can be hand held. Goods or products passing by the exist

points will be recorded. Over ride signer has to be make before goods or

products passing throught exist points, otherwise the silence will be

alerted. This is another way of preventing theft, or unauthorised

exporting goods or products.

The research of RFID beginning as early as 1945 during world was II.

Until 1973, the first and true ancesto of moden RFID was patented by

Mario Cardullo. This initial device was passive, powered by the

interrogating signal and consisted of a transponder with 16 bit memory

for use as a toll device. The basic device uses Radio-frequency (RF),

sound and light as transmission media. It is widely used in

Transportation – Automotive vehicle identification, automatic toll

system, electronic license plate, electronic manfest,

vehicle routing, vehicle performance monitoring

.Banking - Electronic check book, electronic credit card.

Security - Personnel identification, automatic gates, surveillance

system.

Medical - Patient identification, patient history.

The Impact of

Inventory Control on

Protability in the Construction Industry

RFID system is classified by the type of tag and reader used.

a. Passive Reader Active Tag ( PRAT ) system :

Active tags transmit signal and passive reader only receiveing radio

signal from active tags only. The active range of PRAT system has a

effective range from 1-2000 feet (adjeustable).

b. Active Reader Passive Tag (ARPT) system:

This system using an active Reader which can receives authentication

replies and transmits interrogator signals. The tags is passive and

only sending signal. Passive tag not equipe with power it has to be

“powered up” by the RFID reader before it can transmit data.

c. Active Reader Active Tag ( ARAT ) system:

The active tags avoken with an interrogator signal from the active

reader which can send out interrogator signals.

Readers of either active or passive type are installed at strategic

interrogation zone. This allow tightly controlled site with readers detect

tags moving in and out of the interrogation zone.

Table 2.7.1 RFID’s Frequencies bands

Band Regulations Range Data speed Remarks

120-150 kHz(LF) Unregulated 10cm low Animal identification, factory data

collection

13.56MHZ ISM band

worldwide

10cm-1m Low to

moderate

Smart cards(ISO/IEC15693,&

14443A,B). NonISO compatible

memory cards (Mifare Classic,k

iCLASS, legic, Felica) Micro

processor ISO compatible

cards(Desfire EV1, Seos)

433MHz(UHF) Short range 1-100m Moderate Defense applications, with active

The impact of Inventory Control on construction industry

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