Material Management & Control

8/12/2019 Material Management & Control

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PURPOSE OF MATERIAL MANAGEMENT

To gain economy in purchasing

To satisfy the demand during period of replenishment

To carry reserve stock to avoid stock out

To stabilize fluctuations in consumption To provide reasonable level of client services

Four basic needs of Material management:

1. To have adequate materials on hand when needed

2. To pay the lowest possible prices, consistent with quality and value req

uirement for purchases

materials

3. To minimize the inventory investment4. To operate efficiently

Basic principles of material management

1) Effective management & supervision

It depends on managerial functions of Planning

Organizing

Staffing

Directing

Controlling

Reporting

Budgeting2) Sound purchasing methods

3) Skillful & hard poised negotiations


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Materials PolicyImportance of a Policy Manual

1. Complex nature of the materials management function requires standard set of rules which

should be known to all.

2. Thus policy and procedures are consistently followed leading to efficient achieving of corporate

objectives.

3. Periodic review of the manual is necessary in order to keep up with the chan

ging requirements

of an organisation.

Typical policy aspects w.r.t. the materials management dept.(MMD)

MMD only to serve as a point of contact between suppliers and the company. Any department wishing to contact any supplier directly must do so only after clearance from

the MMD and also keep it informed of the progress.

Source development is the exclusive responsibility of the MMD.

MMD can question the quality, quantity and price of the materials asked by the user

department.

MMD shall be responsible for analysis of requisitions, sending out enquiries, analysis of

quotations, placement of purchase orders, expediting and controlling inventory. MMD shall keep user departments informed of delivery schedules, accounts payable, receipts

etc. in order to ensure smooth operations.

Market price levels, new product developments etc. shall be communicated to the concerned

departments by MMD.

For effective performance of its function the MMD will be assisted by finance department for

supplier bills payment and insuring goods in transit and stores.

Marketing, business development and planning department shall keep the MMD informed offuture plans.

MMD h ll i t th t t i it l i t t th h


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The case of Sobha Developers Limited, Bangalore

Procurement Department

It has a centralized procurement department which is responsible for the procurement of material

(indigenous & imported) including civil, finishes, plumbing, electrical items, plant and machinery and

services for its residential and contractual projects.

The material procured by the procurement division includes items such as steel, ready mixed concrete,granite, cement, blocks, tiles, sanitary fittings, paints, tools and construction equipment.

Its dedicated procurement department ensures that the raw material requirements of each project are

satisfied in a timely and cost effective manner.

The procurement department ensures that raw materials and other goods and ser

vices sourced from

third party vendors are delivered in a timely manner, payment is made to suppliers in a timely manner,

scrap on project sites is effectively disposed and it also develops relationships with vendors.

Ordinarily Sobha conducts procurements on the basis of prevailing market prices, in certain cases, like

that of copper procurement, it has entered into several forward contracts in order to minimize the

impact of market fluctuations in the price.

Some of its procurement arrangements are created by means of agreements while others are entered

into on the basis of letters issued by/to the agencies from which procurement is being done. The said

letters or agreements are intended to ensure the availability of a fixed price for the materials being

procured from the respective vendors for a period of one to six months from the date of their issue.

Some of the above arrangements require that it deposit advance amounts with the vendors and also

require that it ensure guaranteed off-take of certain quantities of materials within a fixed time period. As of June 30, 2006, the procurement department comprised of 41 permanent employees and is

headed by a Procurement Director.

Classification of Materials

Wh h ld l if t i l ?


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Principles of ABC analysis:

1. The analysis does not depend upon the unit cost of the items but only on its annual

consumption value.

2. It is independent of the importance of the item.

3. The limits of ABC analysis are not uniform but depend upon the size of the undertaking, its

inventory as well as the number of items controlled.

Applications of this techniqueFor:

Inventory Control Criticality of items

Obsolete stock control

Purchase orders

Receipt of materials

Inspection

Store-kee

ping Verification of bills

Basis of ABC analysis This technique is based on Paretos

Law( an Italian Economist) which states

the rule of 80:20.

Based on the principle that:

- FEW ARE VITAL

- MANY ARE TRIVIAL

This aims to direct efforts where results are important.

Use of ABC analysis

Helps in rationalizing the number of orders and reduce the overall inventory even though

overall purchase orders are the same, the average inventory can be reduced substantially.


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A ITEMS

Small in number, but consume large amount of

resources

Must have:

Tight control

Rigid estimate of requirements Strict & closer watch

Low safety stocks

Managed by top management

C ITEMSLarger in number, but consume lesser amount

of resources

Must have:

Ordinary control measures

Purchase based on usage estimates

High safety stocks

ABC analysis does not stress on items those

are less costly but may be vital

B ITEMs

Intermediate

Must have: Moderate control

Purchase based on rigid requirements

Reasonably strict watch & control

Moderate safety stocks

Managed by middle level management

17500075005

16750075004

160000200003

140000500002

90000900001

CUMMULATIVECUMMULATIVE

COSTCOST [Rs.]ANNUAL COSTANNUAL COST

[Rs.]ITEMITEM COST %COST %ITEM %ITEM %

70 %70 %

20 %20 %

10 %10 %

20 %20 %

ABC

A

N

A


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ACTION PLAN

Limitations of ABC analysis:

Over reliance on this method tends to overlook the VED nature of items in the inventory.

Items on the border line of the ABC classification need to be scrutinized for placing them underA/B or B/C.

In the face of frequent fluctuation of price of the items accurate data needs to be maintained


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V-E-D Classification

VITAL-ESSENTIAL-DESIRABLE

Focus: To determine the criticality of an item. Mainly useful for the purchase department.

Based on critical value & shortage cost of an item

It is a subjective analysis.

Items are classified into:Vital: ::Shortage cannotbe tolerated.

Essential::Shortage can be tolerated for a short period.

Desirable: :Shortage will not adversely affect, but may be using more resources. These must be strictly

Scrutinized

V E D ITEM COST

A AV AE AD CATEGORY 1 10 70%

B BV BE BD CATEGORY 2 20 20%

C CV CE CD CATEGORY 3 70 10%

CATEGORY 1 - NEEDS CLOSE MONITORING & CONTROL

CATEGORY 2 - MODERATE CONTROL.

CATEGORY 3 - NO NEED FOR CONTROL

VED ANALYSISCategorisation Plan

FACTOR First Degree Second Degree Third Degree

Stock-out in the event

of non-availability (30)

Below

Rs. X (30)

Between

Rs. X & Y (60)

Above

Rs. Y (90)

Lead TimeProcurement (30)

1 to 4 weeks (30) 4 to 8 weeks (60) Over 8 weeks (90)


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S-D-E Classification

Scarce-Difficult to Obtain-Easy to Obtain

Focus: Availability

Useful for the procurement department, vital to the lead time analysis, helps in

determining purchasing strategies.

SCARCEitems in short supply.

DIFFICULT items which might be available in the indigenous market but cannot be

procured easily, items from distance places, un-reliable suppliers

EASYitems which are easily available, possibly from the local markets

G-O-L-F Classification Government-Ordinary-Local-Foreign

Focus: source of material

Useful for: Purchase department

F-S-N Classification

Fast MovingSlow movingNon-moving.Focus: Inventories

Useful for: Stores department and inventory control. Enables the adoption of the right

type of inventory policy to suit a particular situation. Also useful for controlling

obsolescence.

Categorisation is based on value, criticality and usage.

To determine the number of months lapsed since the last transaction the date of receiptor the last date of issue is taken whichever is later.

Fast Moving items: most inventory models are aimed at managing the fast moving


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S-O-S Classification

SeasonalOff-Seasonal nature of items.

Focus: Seasonal nature of items

Useful for: Purchase department, stores planning for stocking, finance working capital

cash flows.

X-Y-Z Classification

Based on the value of stocks on hand (i.e. investment in inventory)

- Items whose inventory values are high areX items.

- Items whose inventory values are lowZ items

- Items whose inventory values are moderate areY items.

- XYZ is used in conjunction with ABC or FSN analysisXYZ in conjunction with ABC

Class of items A B C

X

Make efforts to reduce the

stocks to Z category

Make efforts to convert

to Y category

Steps to be taken to

dispose off surplus

stocks

Y-do- ** Control may be further

tightened

Z** Stock levels may be

reviewed twice a year

**

** indicates items are within control, no further action is necessary

XYZ in conjunction with FSN analysis

Class of items F S N

X Tighten Control Deplete stocks to very low Dispose off immediately at


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Classification for accounting and valuation (Type of Inventory)

Raw Materials

In-process or WIP

Finished Goods

Goods in Transit

MRO Maintenance, Repair and Operating. Supplies which are consumed during

the construction process but do not form part of the product itself. (e.g. oil, lubricants,

cutting blades, grinding, polishing wheels).

Source Selection & Vendor Development

What is supply chain management?

A supply chain is a stream of processes that begins with the raw materials needed to make

a product or service and deliver it to customers.

Supply chain management flows can be divided into three main flows

The product flow

The information flow

The finances flow

There are five basic components for SCM

PLAN

SOURCE

MAKE DELIVER

RETURN/RECTIFICATION


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The supplier as an asset

Organizations should view suppliers as potential assets and think of developing them in the

long run.

Apart from the goods or services that they supply they are a good source of information

about:

Market conditions Price trends

General industrial climate

Importance of source development

For:

Import substitution

Cost reduction

Quality improvementSource selection and development should be viewed as a continuous activity by a firm.

Sembawang - a Punj Lloyd Company

Sembawang is renowned for its global advantage in procurement.

With its established relationships with manufacturers, suppliers, and vendors around the world,

it is able to select the best materials at the best price to give customers the best value.

With unsurpassed networking and intimate market knowledge matched by its track record in

construction, its customers are assured of the highest level of service and value.

Vendor development at Simplex

Simplex believes in partnering with their vendors on the road to growth.

Simplex is looking for vendors to partner them in their pursuit of growth and in their search for

excellence in quality and services

To continue to develop the supply chain through closer working relationships, vendors

supplying material and services related to civil engineering are requested to register through theform given below.


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Vendor Registration

Status of the firm

Status of the management

Production facilities General impression

Housekeeping

Type of plant and machinery with

capacity and age

Space available for expansion

Laboratory for Quality Control Certifications

Research & development activity

Other essential facilities

Staff and worker details

Financial Resources

- Bank limits- Turnover

- Associate companies

Licenses and Quotas obtained

Registrations with other companies and

government departments

List of existing customers along withsupply details.

Vendor development

Vendor Development can be defined as any activity that a Buying Firm undertakes to improve

a Supplier's performance and capabilities to meet the Buying Firms' materials or service

needs.

Ways to improve supplier performance

Assessing the suppliers' operations.

Providing incentives to improve performance.Initiating competition among suppliers.

Working directly with suppliers - either through training or other activities.


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Collaboration between Customer and Supplier

Collaboration requires COMMITMENT on the part of the buying firm

to provide financial assistance for suppliers investment needs.

to share all development savings with the supplier.

to educate the supplier on waste management techniques, improve quality, better delivery,

reduce cycle-times, reduce costs etc. to treat supplier as if, they are a department within the buying company.

Collaboration requires COMMUNICATION on the part of the buying firm ,

to ensure that supplier is well informed of all aspects of the supplier development programs.

to provide a very transparent feed-back system available to suppliers on their reaction to all

supplier development initiatives of the buying firm Collaboration requires a MEASUREMENT mechanism

to ensure that all members of the supplier development programs, are benefited

to ensure success of the collaboration efforts, there must be transparency in sharing accurate

costs of both the parties.

Collaboration requires TRUST building measures between the parties

to ensure that mutual beliefs and trust between the two organizations personnel is established.

Vendor Rating

Vendor Rating Index

QUALITY = No. of lots rejected

No. of lots receivedDELIVERY= Delivery on schedule

Total no. of deliveries


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OBJECTIVES OF INDUSTRIAL PURCHASINGThe main objective of industrial purchasing is to contribute to the profitability of the

industrial operation. In specific terms, the objectives are as follows:

I. to obtain the quality of the material best suited for the function intended,

II. to obtain the quantity necessary to keep going the production continuously, andkeep

the inventory levels at its minimum level, consistent with economicordering and market

conditions,

III. to obtain the materials or services at the best price, keeping in mind the quality

IV. to communicate freely internally with all departments to assist in the formulationof

specifications, new techniques, and new products, and externally with outside sources

to gain information that the internal departments can use, such as solving some

engineering or technical problem.and delivery requested.

AUTHORITY AND RESPONSIBILITY OF PURCHASING

The head of purchasing function is referred to as the custodian of a firms purse, and the first and

foremost obligation on his or her part is integrity in spending the firms money. He or she acts as the

legally authorized agent and represents all others in the firm in the acquisition of goods and services

needed by the firm. A typical job description for this position includes duties and responsibilities:1) Authority to commit the funds of the firm for the acquisition of goods and services,

2) Responsibility to satisfy needs of the departments when justified,

3) Responsibility for review of specifications, and authority to challenge the specifications, if found

incomplete or incorrect,

4) Responsibility to interview all vendor representatives, and to arrange for the bidding or

negotiation for goods or services,

5) Authority and responsibility for selection of the source for supplies and no body else has thisauthority to select a source for any item,

6) R ibilit t bt i th t lit th d d tit t th b t i d li t th


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STAGES IN SOURCE SELECTION

Regardless of the buyers ability to provide the technical services, interpret quality requirements,

determine price trends, and provide expertise in all procurement functions, the fact remains that his or

her prime responsibility is to find reliable sources and to secure and maintain their cooperation in all

matters. This purchasing decision directly influences both the economic success of the buyers

company and the financial stability of the supplier, thus contributing to the economic welfare of manyemployees and their families.

In general, the source selection process consists of four main stages:

1) Searching:

At realisation for the need for a material or product is the starting point. The search process

begins with the finalisation of specifications in consultation with technical departments.

Identifying the sources of supply as exhaustively as possible is the next activity.

The buyer may have information on the past performances of the set of suppliers already Icontact

Salespersons are extremely valuable sources of information about suppliers. In most cases

their information relates to their own company, but many professional salespersons will

suggest other sources of supply.

A valuable source of supplier information is catalogues supplied by the suppliers,which

describe the various items they handle. For standard production items,such catalogues are the

most effective and efficient sources for potential suppliers.

2)Selection:

The process of search thus provides a list of all possible sources. At the selection stage,

specific information on the suppliers financial strength, quality, facilities, efficiency, industrial

relations, technical excellence and position in industry is sought. Actually, the possible sources

need to be identified and selected on the basis of their ability to meet the delivery and quality

requirements in the long run at competitive price levels. The selection of suppliers starts with the floating of enquiries by the buyer to the possible

sources that are made available through the search process. Certain progressive suppliers


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4) Experience:After the trial orders are executed, it becomes necessary for the buyer to quantify his

or her experience in the form of rating the vendors. This activity enables him or her to determine how

the total requirements can be apportioned among the vendors. Thus, the basic responsibility of the

purchase manager is not only to locate the sources but also to preserve them through continuous

rating.

The key to successful analysis is to identify the important characteristics of the particular

purchase.

Usually, three important factors are evaluated.

Quali ty Evaluation is simply reviewing the suppliers record in respect to meeting the required

specifications, which is measured as a percentage of acceptable shipments or delivery. It should be

the policy for the quality-control section to inform the purchasing department of the facts concerning

each shipment/delivery.

Price Evaluation in its simplest form is the net price quoted in each instance for conforming goods

compared to the prices quoted by competitors. Consistency of success and integrity in price behavior

would provide a measure criterion.

Service Evaluationincludes prompt submission of data, response to inquiries, delivery performance,

special services rendered, and other intangibles. Most of the elements in this factor are subjective in

nature.

The objective of the supply chain network is to minimize the end customers total level of

dissatisfaction, composed of price and delivery lead time.

PURCHASING PERFORMANCE AND SUPPLIER DEVELOPMENT

Facing increasingly competitive challenges, many organizations view supplier performance as animportant contributor to their competitive advantage. They work closely with suppliers and expect to

improve performance and capabilities by engaging supplier development programs


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INFLUENCING FACTORS OF SUPPLIER DEVELOPMENT:

The important elements of supplier development may be identified from the buying

firms perspective. The following factors are worth mentioning:

1. Long-term Strategic Gal: Supplier development efforts should focus on developing supplier

future capabilities in technology and product development rather than focusing only on current

quality and cost. The clarity of long-term strategic goals is the key to the success of supplierdevelopment programme.

2. Effective Communication: Open and frequent communication between buying firm personnel

and their suppliers is identified as a key approach in motivating suppliers. Early involvement and

open channels of communication increase both parties understanding and encourage problem

solving between both parties.

3. Partnership Strategy: The majority of buying firms involved in supplier development may

perceive their suppliers as partners. Adopting a partnership strategy means that a buying firmpursues a long-term relationship with suppliers and they would like to show their commitment.

Without buyers commitment, the suppliers may be unwilling to make changes in their operation to

accommodate and desires of that.

4. Top Management Support: It is top management who recognizes the need to initiate a supplier

development programme based on the firms competitive strategy. Purchasing management

needs the encouragement and support from top management to expend their resources within a

suppliers operation.

5. Supplier Evaluation: Not all selected suppliers qualify for development assistance and a buying

firm must carefully identify where to focus its supplier development efforts. Supplier evaluation

results can provide valuable information about general areas of weakness where performance

improvements are required.

6. Direct Supplier Development: In order to pursue excellence and develop best practices, the

suppliers need the encouragement or expertise of their buyers. Direct supplier developmentactivities include providing support personnel, capital, equipment, technology, or direct

involvement with suppliers in identifying and eliminating non-value or duplicate costs, processes


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PURCHASING

What is Purchasing? :Purchasing is a service function

Definition

Purchasing implies the act of exchange of goods and services for money.OR

Purchasing is the process of buying - learning a need , selecting a supplier , negotiating a price

and fixing the terms of delivery and payment.

Procurement Vs Purchasing

Procurement is a generic term for the total responsibility of acquiring goods or services.

It includes all additional functions such as inspection, receipts etc.

Procurement is related to acquisition of materials including purchasing

Basic Principles of Purchasing

Buying the right quality

Buying the right quantity

Buying at the right price

Buying from the right source

Buying at the right time and place

Basic objectives of Purchasing

1. To maintain continuity of supply to support construction schedules.

2. To ensure minimum investment in stores and materials inventory, consistent with supply and

economy.3. To avoid duplication of purchases and costly delays.

4 T i t i lit t d d b d it bilit it i


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Purchase Procedure

1. Purchase Requisition or Indent from user.

2. Verification of current stock levels by the Stores department.

3. Assessing exact procurement required with detailed specifications.

4. Enquiry / RFQ.

5. Evaluation of Bids received, preparation of comparative statement.6. Negotiations.

7. Placing of the Purchase Order.

Material Indent - Definition

Document generated by a user department or storeroom-personnel to notify the purchasing

department of items it needs to order, their quantity, and the timeframe. It may also contain the

authorization to proceed with the purchase. Also called purchase request or requisition.

Requisition/ indentkey information check list

1. Date & time

2. Material Description

3. Detailed specification, standards or make.

4. Quantity

5. Suggested supplier

6. Purpose

7. Approximate date when required

8. Originating department

9. Authorisation

Request for quotations (RFQ)

It is a document used in soliciting price and delivery quotations that meet minimum quality

specifications for a specific quantity of specific goods and/or services.


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Purchase Order - definition

A purchase order is a buyer-generated document that authorizes a purchase transaction.

It sets forth the descriptions, quantities, prices, discounts, payment terms, date of performance or

shipment, other associated terms and conditions, and identifies a specific seller.

When accepted by the seller, it becomes a contract binding on both parties. Also called order.

Purchase Orderkey information check list

1. P.O. reference no.

2. Date

3. No. of copies

4. Quotation / Offer for supply ref.

5. Description of material6. Detailed specification detailed description of characteristics, blue print, drawing, market

grades, brand names or trade names, commercial standards, preference characteristics.

7. Quantity required.

8. Delivery schedule.

9. Price and discounts + taxes and duties.

10. Packing Instructions.

11. Shipping instructions.

12. Place of delivery (Location where material required).

13. Detailed terms and conditions - vendor rating.

14. Payment terms.

15. Price variation / escalation or reduction.

16. Exit termsorder cancellation


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PURCHASING- II

Types of buying

1. Forward buyingbuying materials exceeding current requirement of quantity

2. Speculative Buyingbuying and selling at a higher price.

3. HedgingBuyer protects himself by entering into 2 contracts.4. Hand to mouth buyingstockless purchase, zero stock

5. Tender buying

6. Rate ContractGovt. item rate is fixed.

7. Systems Contracting covers only delivery period, price, invoicing procedure, users can

obtain the material directly from Supplieruseful for low unit price but high consumption value

items.

8. Blanket order an incomplete contract with a vendor to purchase certain items but not anauthorisation to ship materials. Suitable for low value items.

Purchasing Organizationrefers to how purchasing is organized in the firm

Central ized Purchasin g- one purchasing department located at the firms corporate office

Decentral ized Purch asing- many individual, local purchasing departments making their own

purchasing decisions.

Centralised purchase organisation of GOI

DGS&D Directorate General of Supplies and Disposals under Dept. Of Commerce,

Ministry of Commerce and Industry.

Role of DGS&D

To conclude the rate contracts to be operated by the consuming departments of the

Government for items of common use.

For items whose anticipated annual purchase by Government Organisations is normally more


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Advantages of The Rate Contract Scheme:

1.To Buyers:

Facility of bulk rate at lowest competitive price.

Saves time and effort in tedious and frequent tendering at multiple user locations.

Enables buying as and when required.

Just in time availability of supplies reduces inventory carrying cost. Availability of quality goods with full quality assurance back up.

.

2.To Suppliers

Access to large volume of purchase without going through tendering and follow up at multiple

user locationssaving in administrative and marketing efforts and overheads.

Rate contract lends respectability and image enhancement

What is a Rate Contract (RC)?

A rate contract is an agreement between the Purchaser and Supplier to supply stores at

specified prices during the period covered by the contract.

No quantities are mentioned in the contract.

Nor any minimum drawal is guaranteed.

The rate contract is in the nature of a standing offer from the supplier firm. A legal contract

would come into existence with the placement of individual order (Supply Order) and each

such supply order will constitute a separate contract.

EXISTING RATE CONTRACT HOLDERS QUOTING PRICES LOWER THAN THEIR EXISTING

RATE CONTRACT RATES

13.13.1 If lower rates are quoted by the existing rate contract holders themselves for the fresh rate

contract, they may be asked if they are prepared to reduce the rates against the existing rate contracts.

13.13.2 In case, the existing rate contract holders do not reduce the prices against the current ratecontracts and quotations have been received at lower rates from new firms, who are likely to be brought


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Centralized vs. Decentralized

Advantages- Central ization

Leveraging purchase volume

Avoid duplication of effort

Specialization

Lower transportation costs No competition within units

Common supply base

Ad vantages - Decentral ization

Better knowledge of user requirements

Local sourcing Less bureaucracy

Govt.buying

1. Purchase by tender

2. Purchase by repeat order

3. Purchase by negotiation

1.Open Tender

This is the usual method of purchase.

Involves issue of an invitation to tender by the buyer.

This invitation requests the seller to offer to sell the stores described in the tender schedule on

terms and conditions stipulated in invitation to the tender.

The seller submits his offer including price.

With the issue of the acceptance of tender or offer, the contract is concluded.

Tender enquiry Of two types:

I. Advertised Tender

II. Limited Tender

Advertised Tender

In government purchasing usually when the:

Quantity is large

Value of procurement is high

Delivery schedule allows sufficient lead time for procurement.


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STORES MANAGEMENTImportance

Stores is considered the least important and least glamorous function of an organisation.

Challenge to the stores managerplays a pivotal role in ensuring smooth project construction

besides assisting purchase activities by providing timely information.STORES FUNCTIONS

To receive goods raw materials, components, tools & equipments and other items and

account for them.

To provide adequate and proper storage and preservation of the goods in store.

To meet the demands of the consuming departments.

To minimize obsolescence, surplus and scrap.

To highlight stock accumulation, discrepancies, abnormal consumption and effect controlmeasures.

To ensure good housekeeping.

Design factors for good stores management

Locationideally should be as near to the point of consumption as possible so as to reduce

handling and to have timely despatch.

Layoutshould ensure easy movement of materials. Ensure easy retrieval, ergonomically. Sufficient space(for men and material handling equipment) shelves, racks, pallets.

Proper preservationrain, light, heat, cold storage, air conditioning.

Lightingadequate lighting is essential

Safety - training safety consciousness, safety appliances, Personal Protective Equipment

(PPE)

good house keeping

keep stores equipment in good order, forklifts, cranes, trolleys, conveyors.

fire fighting equipment


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The Purchase order indicating quantity and delivery date is the starting point. Records should

me maintained in a chronological order to show expected daily receipts. So that the handling

and storage can be planned in advance.

This helps in planning labour contracts for uploading, stocking etc. and when to take delivery

demurrage.

Suppliers send despatch note or advise note to the stores in advance i.e. Date of despatch,carrier details, description, value etc.

Document of transport departmentLR/RR or consignment note

Packaging slip detailing contents in the package.

Insurance

Actual physical receipts (delivery challan

a. verification for quantity, shortages, damages, claims preference.

b. take open delivery with transporters get shortage or excess or damage endorsed.Provisional Goods Inward (PGI) physically received, pending inspection note/report.

Final goods inward note (FGI)

INTERNAL RECEIPTStransfer note/ return to stores, stock transfer (no sale), Debit/Credit

note, Internal DC (delivery challan) . Where to integrate the quality inspection dept?

B) .STOCKING

Sorting and storing issues

when volumes are high, provide separate areas for:-

1) Stores awaiting inspection.

2) Stores which are QC inspected, passed and accepted for use.

3) Storage of rejected materials.

( FG not applicable to construction activity directly)

C) .ISSUES

For consumption by internal departments as per order or indent.


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Less inspection effort( e.g. - no routine checking of ISI marked items) helps reducing

inventory items.

Codification and Standardisation

We deal with thousands and sometimes even lakhs of different items in inventory.

The problem is of how to ensure unique product identification?a. suppler gives it a different name, different departments may give it different names,

trade names may be many.

Hence codification is necessary for easy identification of materials.

a. It should be simple to implement

b. It should be capable of being understood by all.

c. It should be compact, concise, consistent and flexible.

How Can it be Done?

a. representing each item by a number (numerical code)

b. the digits may represent a group, sub group, type, dimension etc.

c. In big organisations these codes may vary from 8 to 13 digits ( Railways, Defence etc)

d. Major groupsraw materials, spare parts, sub contracted items, hardware items, paints

and furnishing materials, electricals, HVAC, tools, oils & lubricants, stationary etc.

e. sub groups

How Can it be Done?

Codification can be as per nature of items e.g. Ferrous, non ferrous

or as per end use

or as per source of purchasing

There can be other methods of codification like:-

Alphabetical systemsingle or double

combination i.e. Alpha numeric

colour code ( either exclusive or in conjunction)


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STORES ACCOUNTINGAny inventory item has both physical and financial characteristics. Whereas the physical

characteristics (flow of goods) are factual and measurable, financialcharacteristics (flow of costs) are

mainly subjective in nature. The financialcharacteristics associated with the flow of costs are usuallyemphasized in stores accounting and valuation.

WHY STORES ACCOUNTING?

Stores accounting plays a very important role for the estimation of the cost of a product for pricing

decisions. Material costing is very important in terms of the valuation of the cost of materials

consumed by say, the production department during a given period of time as well as in terms of the

estimation of the value of materials held in stock. In this context, two important aspects, viz., costing

of the materials receipt and of materials issue, are considered in stores accounting.

1 Costing of the Receipt of Materials

The factors that are to be included in building up the cost of the materials received are material price,

freight charges, insurance, and taxes. Price usually refers to the price quoted and accepted in the

purchase orders. Prices may often be stated in various ways, such as net prices, prices with discount

terms, free on board (FOB) and cost insurance and freight (CIF). For costing purposes the actual cost

incurred needs to be calculated by taking price quoted by supplier as the basis, subtracting the

discounts and adding any other expenses not covered.

2 Costing of the Issues of Materials to Production

There are several methods that are in use for costing the issues of materials to the production and

other departments of an organization. First in first out (FIFO), last in first out (LIFO), average cost,

standard cost, base stock method, market price at the time of issue, latest purchase price, andreplacement or current cost methods are a few of the methods used for this purpose.


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FIFO Method

Assumption: Oldest stock is depleted first.

At the time of issue the rate pertaining to that will be applied. Since actual prices are used

there cannot be any profit or loss in the pricing arrangement.

The value of stock on hand is the money that has been paid for that amount of stock at latestprice levels and hence can be straight away used in the balance sheet, truly reflecting value.

Example 1

The periodic inventory record shown in Table 13.1 is available on an item. A physical count of

the items on 1 April reveals an ending inventory of 300 units. What is the value of the ending

inventory? What is the cost of goods sold for the period?


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Method of valuation is accepted under standard accounting practice

Inventory valuation is nearest to recent market prices.

Limitations

Process becomes unwieldy when too many changes in price occur.

Problem in accounting for returns to stores.

2 LIFO Method

In the LIFO method, it is assumed that the most current cost of goods should be charged to the cost

of goods sold, and hence, in LIFO, the cost of units remaining in inventory represents the oldest costs

available, while the units issued are valued at the latest costs available. The underlying purpose of

LIFO is to match current revenues against current costs, so the method charges current revenues

with amounts approximating replacement costs.

Assumption:Most recent receipts are issued first.Advantages:

a. In a period of rising prices, latest (higher) prices are charged to issues, thereby leading to

lower reported profits and hence savings in tax.

b. When there are wide fluctuations in price levels, LIFO tends to minimise unrealised gains or

losses in inventory.

- Limitationssame as that of FIFO.


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3 Average Cost Method

In an attempt to provide a better estimate of the ending inventory and cost of goods sold, the average

cost method is proposed. This method does not attempt to indicate which unit goes out first or last.

Instead, it determines the average cost for each itemduring a time period. The following three types of

average method are in use:

i)Simple average,ii)Weighted average, and

iii) Moving average.

While all three types are suitable for with a periodic inventory system, the moving average is best

suited to the perpetual inventory system.

The simple averageis determined by dividing the sum of production or purchase unit costs by

the number of production runs or orders. The simple average does not consider the size of the lot

or the number of units and assigns equal weight to the unit production or purchase cost of eachlot. The weighted average corrects the distortion of the simple average by considering quantity as

well as unit cost.

The weighted averagedivides the cost of goods available during the period.

The moving average computes an average unit cost after each purchase or addition to stock,

making it better suited for computerized inventory operations. Since the simple average and the

weighted average cannot be calculated until the period is over, they are not well suited to

perpetual inventory systems. All of the averages are suitable for periodic inventory systems,since costs are not allocated till the end of the period.

With the average cost method, the costs of all like items available during the period are

averaged to obtain the ending inventory value. The unit cost cannot be equated to any tangible

figure, and it does not reveal price changes as clearly as may be desired.

Example 5

The periodic inventory record

shown in Table 5 is available for


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3.Specific Cost Method

Of all the inventory flow assumptions, the specific cost method provides the most realistic valuation of

ending inventory and cost of goods sold. The procedure consists of tagging or numbering each item

as it is placed into inventory so its exact cost is readily discernable. Since an item is both valued and

expensed at its specific cost, the cost flow and the physical flow are identical with this method. The

cost of maintaining records under this method can mount very quickly, so it is most appropriate forgoods of significant value, which is few in number. The specific cost method has the added flexibility

of being suitable for either perpetual or periodic inventory items used in custom-made products. If the

number of custom orders being processed is large, its implementation can be extremely expensive

and difficult. Thus, its use is more commonly confined to small operations.

A number of methods are included in this category. They are as follows:

i)Market Value, ii)Standard Cost, iii) Closing Stock

A brief description of each of this method is given below.

i) Market Value: This method is also known as replacement rate costing. Herethe materials that are

issued are costed at the market rate prevailing at the time of issue. Hence, when prices increase, the

stock on hand is continuously underestimated, because receipts are costed at actual rates and issued

at higher rates. Conversely, when the prices are falling, the stock on hand is grossly overestimated.

This may in turn lead to writing off huge amounts to make it realistic. Besides, this system requires

continuous monitoring of market rates for all materials and hence, is very unwieldy and unreliable.

ii) Standard Cost:Here, a standard rate is determined based on detailed analysis of market prices

and trends. This standard rate is kept fixed for a definite period of six months or so. During this period

costing is done on the basis of this standard rate, irrespective of the actual rates. At the end of the

period, a review is done and fresh standards are set for a further period of six months.

Efficient use of materials is truly reflected by adopting this method, as the accounting is

divorced from fluctuations in rates. Moreover, it is not necessary to obtain fresh rates at every point of

time This means greater clerical efficiency and quicker estimation of costs However in this method


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Steps to avoid discrepancies

Restrict entry to stores to authorized personnel only.

Materail requisition to be signed by authorized persons only, and issue material only then.

Proper maintenance of store recordsBin Card, Stock Card, Stores Ledger etc.

Regular checks by independent staff to detect and correct mistakes. Record all movements of stock.

Physical verification and counting at the time of receipts and issues.

Use of FIFO method for stock issue to avoid deterioration and obsolescence.

STOCK VERIFICATION

It is the process of physically counting, measuring or weighing the entire range of items in the stores

and recording the results in a systematic manner. Stock Verification is usually carried out by thematerials audit department, reporting to either the materials manager or the internal audit. One

person is usually given the exclusive responsibility with adequate facilities and authority. The main

objectives of stock verification are as follows:

a. To reconcile the stock records and documents for their accuracy and usefulness,Systems

b. To identify areas which require more disciplined document control,

c. To back up the balance sheet stock figures, and

d. To minimize pilferage and fraudulent practices.

The physical verification of stock may be carried out either as a periodic or continuous

basis. These two methods are briefly discussed below.

Periodic Verification and Continuous Verification


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InventoryDefinition:A stock of items held to meet future demand. Inventory is a list for goods and materials, or those goods and

materials themselves, held available in stock by a business.

Introduction

Constitute significant part of current assets

On an average approximately 60% of current assets in Public LimitedCompanies in India

A considerable amount of fund is required

Effective and efficient management is imperative to avoid unnecessary investment

Improper inventory management affects long term profitability and may fail ultimately

10 to 20% of inventory can be reduced without any adverse effect on production and sales by

using simple inventory planning and control techniques


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Negative aspects of inventory:

Large inventories hide operational problems

Financial cost in carrying excess inventories

Risk of damage to goods held in inventory

Risk of product obsolescence

Types of Inventory: Raw material

Purchasedbut not processed

Example Iron oresteel mill ,Flourbakery

Work-in-process

Undergone some change but not completed

A function of cycle time for a product

ExampleRadiatorauto manufacturer .Draft contractattorney Maintenance/repair/operating (MRO)

Necessary to keep machinery and processes productive

ExampleLubricating oilmachine shop .Soap and shampoohotel

Finished goods

Completed product awaiting shipment ExampleCandy barconfectioner ,Policyinsurance company

SuppliesOffice and plant cleaning materials not directly enter production but are necessary

for production process and do not involve significant investment.


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An effective inventory management should

Ensure a continuous supply of raw materials to facilitate uninterrupted production

Maintain sufficient stocks of raw materials in periods of short supply and anticipate price

changes

Maintain sufficient finished goods inventory for smooth sales operation, and efficient customer

service Minimize the carrying cost and time

Control investment in inventories and keep it at an optimum level

Opposing Views of Inventory

l Why We Want to Hold Inventories

l Why We Not Want to Hold Inventories

Why We Want to Hold Inventories ?

l Improve customer service

l Reduce certain costs such as

l ordering costs

l stockout costs

l acquisition costs

l start-up quality costsl Contribute to the efficient and effective operation of the production system

l Finished Goods

l Essential in produce-to-stock positioning strategies

l Necessary in level aggregate capacity plans

l Products can be displayed to customers

l Work-in-Process

l Necessary in process-focused production

l May reduce material-handling & production costs


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Nature of Inventory

1. Two Fundamental Inventory Decisions

2. Terminology of Inventories

3. Independent Demand Inventory Systems

4. Dependent Demand Inventory Systems

5. Inventory Costs

Two Fundamental Inventory Decisions

l How much to order of each material when orders are placed with either outside suppliers or

production departments within organizations

l Whento place the orders

Independent Demand Inventory Systemsl Demand for an item carried in inventory is independent of the demand for any other item in

inventory

l Finished goods inventory is an example

l Demands are estimated from forecasts and/or customer orders

Dependent Demand Inventory Systems

l Items whose demand depends on the demands for other itemsl For example, the demand for raw materials and components can be calculated from the

demand for finished goods

l The systems used to manage these inventories are different from those used to manage

independent demand items

l


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l This cost behavior is the basis for answering the first fundamental question: how much to order

l It is known as the economic order quantity (EOQ)

An optimum inventory level involves three types of costs

Ordering costs:- Quotation or tendering

Requisitioning

Order placing

Transportation

Receiving, inspecting andstoring

Quality control

Clerical and staff

Stock-out cost

Loss of sale

Failure to meet delivery commitments

Carrying costs:-


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Dangers of under-investment

Production hold-upsloss of labor hours

Failure to meet delivery commitments

Customers may shift to competitors which will amount to a permanent loss to the firm

May affect the goodwill and image of the firm

Functions of Inventory Management Track inventory

How much to order

When to order

Classification of inventory

ABC Classification

HML Classification

XYZ Classification

VED Classification

FSN Classification

SDF Classification

GOLF Classification

SOS Classification

ABC Classification In most of the cases 10 to 20 % of the inventory account for 70 to 80% of the annual activity.

A typical manufacturing operation shows that the top 15% of the line items, in terms of annual

rupees usage, represent 80% of total annual rupees usage.

Next 15% of items reflect 15% of annual rupees

Next 70% accounts only for 5% usage

XYZ Classification

On the basis of value of inventory stored Whereas ABC was on the basis of value of consumption to value.


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SSlow moving

NNon Moving

SDF & GOLF Classification

Based on source of procurement

SScarce, D- Difficult, E- Easy.

GOLF GGovernment, OOrdinary, LLocal, FForeign.

SOS Classification

Raw materials especially for agriculture units

SSeasonal

OSOff seasonal

Deciding on the inventory model Assume an analyst applies an inventory model that does not allow for spoilage to a grocery

chains ordering policy for lettuce and formulates the strategy of ordering lettuce in large

amounts every 14 days. A little thought will show that this is obliviously foolish. This strategy

implies that lettuce will be spoiled. However it is not a failure of inventory, it is a failure to apply

the correct model.

Different approaches Certainty approach

Uncertain variables and risk are addressed separately

Uncertainty approach

Uncertain variables and risk are addressed simultaneously

Deterministic approach

Probabilistic approach

Independent Demand Models


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l The amount ordered each time an order is placed is fixed or constant

l When the ordered quantity is received, the inventory level increases

l An application of this type system is the two-bin system

l A perpetual inventory accounting system is usually associated with this type of system

l

Determining Order Quantitiesl Basic EOQ

l EOQ for Production Lots

l EOQ with Quantity Discounts

Model I: Basic EOQ

l Typical assumptions made

l annual demand (D), carrying cost (C) and ordering cost (S) can be estimatedl average inventory level is the fixed order quantity (Q) divided by 2 which implies

l no safety stock

l orders are received all at once

l demand occurs at a uniform rate

l no inventory when an order arrives

l Stockout, customer responsiveness, and other costs are inconsequentiall acquisition cost is fixed, i.e., no quantity discounts

l Annual carrying cost = (average inventory level) x (carrying cost) = (Q/2)C

l Annual ordering cost = (average number of orders per year) x (ordering cost) = (D/Q)S

l Total annual stocking cost (TSC) = annual carrying cost + annual ordering cost = (Q/2)C +

(D/Q)S

l The order quantity where the TSC is at a minimum (EOQ) can be found using calculus (take

the first derivative, set it equal to zero and solve for Q)


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S = $595/order

= 27,573.135 tons per order

l Total Annual Stocking Cost(TSC)

TSC = (Q/2)C + (D/Q)S= (27,573.135/2)(9.00)

+ (5,750,000/27,573.135)(595)

= 124,079.11 + 124,079.11

= $248,158.22

l Number of Orders Per Year

= D/Q

= 5,750,000/27,573.135= 208.5 orders/year

l Time Between Orders

= Q/D

= 1/208.5

= .004796 years/order

= .004796(365 days/year) = 1.75 days/order

Model II: EOQ for Production Lots

l Used to determine the order size, production lot, if an item is produced at one stage of

production, stored in inventory, and then sent to the next stage or the customer

l Differs from Model I because orders are assumed to be supplied or produced at a uniform rate

(p) rate rather than the order being received all at once

l It is also assumed that the supply rate, p, is greater than the demand rate, dl The change in maximum inventory level requires modification of the TSC equation

l TSC (Q/2)[(p d)/p]C + (D/Q)S


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l Total Annual Stocking Cost (TSC)

TSC = (Q/2)((p-d)/p)C + (D/Q)S

= (42,455.5/2)((3,500-800)/3,500)(2.10)

+ (292,000/42,455.5)(5,000)

= 34,388.95 + 34,388.95

= $68,777.90l Maximum Inventory Level

= Q(p-d)/p

= 42,455.5(3,500800)/3,500

= 42,455.5(.771429)

= 32,751.4 tons

Model III: EOQ with Quantity Discountsl Under quantity discounts, a supplier offers a lower unit price if larger quantities are ordered at

one time

l This is presented as a price or discount schedule, i.e., a certain unit price over a certain order

quantity range

l This means this model differs from Model I because the acquisition cost (ac) may vary with the

quantity ordered, i.e., it is not necessarily constant

l Under this condition, acquisition cost becomes an incremental cost and must be considered inthe determination of the EOQ

l The total annual material costs (TMC) = Total annual stocking costs (TSC) + annual

acquisition cost

TSC = (Q/2)C + (D/Q)S + (D)ac

To find the EOQ, the following procedure is used:

1.Compute the EOQ using the lowest acquisition cost.

l If the resulting EOQ is feasible (the quantity can be purchased at the acquisition cost

used), this quantity is optimal and you are finished.

500 999 20 95


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500999 20.95

1,000 + 20.90

l Compare Total Annual Material Costs (TMCs)

TMC = (Q/2)C + (D/Q)S + (D)ac

Compute TMC for Q = 891.93 and ac = $20.95

TMC2= (891.93/2)(.3)(20.95) + (25,000/891.93)100

+ (25,000)20.95

= 2,802.89 + 2,802.91 + 523,750

= $529,355.80

Compute TMC for Q = 1,000 and ac = $20.90

TMC3= (1,000/2)(.3)(20.90) + (25,000/1,000)100

+ (25,000)20.90= 3,135.00 + 2,500.00 + 522,500

$


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POQ Model

Answers how much to order and when to order

Allows partial receipt of material

Other EOQ assumptions apply

Suited for production environment

Material produced, used immediately

Provides production lot size

Lower holding cost than EOQ model

Quantity Discount Model

Answers how much to order & when to order Allows quantity discounts

Reduced price when item is purchased in larger quantities


Trade-off is between lower price & increased holding cost

Probabilistic Model Answer how much & when to order

Allow demand to vary

Follows normal distribution


Consider service level & safety stock

Service level = 1 - Probability of stockout

Higher service level means more safety stock

INVENTORY MANAGEMENT


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INVENTORY MANAGEMENT PERTApplications to Material Management

Numericals

InventoryImportance and Classification

Various costsSafety stock ,Reorder level and lead time service level

Economic Order QuantityAdvantages and limitations Numericals

PERT APPLIED TO MATERIALS MANAGEMENT

Purchasing ,Planning and Research can be aided by use of PERT and CPM techniques.

Both are control techniques designed to make planning more effective.

These are principally scheduling and cost controlling devices.

These techniques can be used in other areas of purchasing research where complexrelationship are involved.

Primary advantages of these techniques

Providing a means for careful planning by specifying all the variables involved

Providing a clear understanding of the inert relationship involved in projects

Assuring a constant review to see that projects are progressing in schedule

Making it possible to predict the completion time of projects with reasonable accuracy.

Application of PERT in Materials Management

Pert represents planning of materials ensuring that the various stages of work are brought

forward in a logical sequence with minimum cost and least delay.

Pert is extremely useful for precise planning and buying

To plan in advance and allocate responsibilities to the different Each executive knows what precisely his responsibilities are and what he has to do in such

situations without having to wait instructions Th t i d i th f f ti it i di id d i t 3 bh d


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The cost incurred in the performance of an activity is divided into 3 subheads

Direct costThe cost incurred in compressing the activity completion time. Each of the activity

in network can be performed in a shorter time than early expected time by providing additional

resources. So the direct cost has the tendency to increase with decrease in time.

Indirect cost All overheads such as interest on capital, rent for various equipments, cost of

supervising cost of storing materials etc. comes under indirect cost. Total costIt is the sum of direct and Indirect cost.

INVENTORY MANAGEMENT

The pressure for operating capital has made business an increasingly aware of inventory as a

form of earning investment.

Why are we always out of stock?

Why do we have inventories?

The basic problem of inventory policy is to strike a balance between operating savings andcosts of capital investment associated with larger stocks.

Defn of inventory

Inventory is defined as any idle resource of an enterprise.

It is commonly used to indicate materials-raw, in progress, finished etc stocked in order to

meet an expected demand.

Inventory is made of all those items ready for sale or of items which keeps the project running. Every business man must have faced the problem of either being out of stock or a large

amount of money tied up in the form of inventories.

Inventory is an evil which cannot be eliminated.

On the other hand large level of inventories hamper the growth of companies.

Inventory control is to determine the optimum level of inventory which is essential to carry out

the various operations of the organization efficiently and effectively.

What is inventory

Why Inventories are essential


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Why Inventories are essential

Inventories are thought as a sign of wealth, even excess inventories in relation to the

magnitude of production and distribution function are considered advantageous.

On the other hand the wise business man place more emphasis on having working capital in

the form of cash and securities.

In recent years a greater emphasis has been placed on having the means of purchasingmaterials than having the material themselves.

Excessive inventories have been the death of many a business and very high inventory levels

have tipped the scale in our economy.

The finished product after packaging are first stored and sent to the market as the need

arises.

Also the raw materials needed for the finished product cannot be directly fed to the production

department from the market. These have to be stored first after procurement and when the need arises it is utilized. This

process of storing is called Inventory.

Factors influencing inventory

Materials account for over 50% of the production costs

One thirds of the companies total investment is in the form of work in progress, finished goods

and stores inventory The stores inventory usually represents the largest share and this is the area in which the

purchase department can contribute significantly in company profit by efficient management of

quantity and timing of purchases.

There is one right quantity to buy for any given transaction but since there are many different

kind of transaction the ,the determination of correct quantity is complicated.

The issue is important because if too small quantity is purchased the unit cost will usually

higher and shortages are likely to increase.

On the other hand if too large quantity is purchased the excess inventory will raise costs

Inventory control can be justified if


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Inventory control can be justified if

It provides the means for effective co-ordination of the production department with other

department of the business.

Advantages

Ensures availability of materials by providing adequate protection against uncertainties of

supply and consumption of materials. Reduces chances of going out of stock.

Leads to reduction in inventory levels

Advantages of price discounts by bulk positioning.

Even out the workloads on the shops in the face of fluctuation demands.

Evils of excess inventory

Essential though they are ,Inventories also mean lock of capital More store space ,equipment and personal ,insurances taxes etc for excess inventory

Invites risks of deterioration

Chances in the price of inventory materials sometimes go unfavourable.

Control aspects of inventory

There are 3 general methods of control to choose from

Elimination of certain inventories. Semi automatic routines

Periodic review.

Elimination of inventories

Elimination of inventory may found strange

It is more feasible to eliminate the inventory entirely if little absence information is available on

exact specifications and quantities

Example is of a steel plate of absence of actual specifications



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Raw mater ials and pro duc t ion inventor ies -Parts and components which enter into the

product direct during the production process

In process invento r iesSemi finished parts ,work in progress and finally finished products

formed at various stages of production

M.R.O Invent oriesMaintenance, repairs and operating supplies which are consumed duringthe production process and generally do not form of the product itself. Example POL

Finished goods inventor iesComplete finished products ready for sale.

Inventory costThe classical inventory analysis identifies four major cost components-

1.Purchase cost

This refers to the nominal cost of inventory. It is the purchase price for the items that are brought from outside sources ,and the production

cost if the items are produced within the organisation.

This may be constant per unit or it may vary as the quantity purchased increased or decreases

If the unit cost is constant it does not affect the inventory control decisions, because whether

all the requirements are bought just once ,or whether they are obtained in installments ,the

total amount of money involved is same.

However we do consider the quantity discounts when they occur, because they affect thesedecisions.

2.Ordering cost

Ordering cost is incurred whenever the inventory is replenished.

It includes costs associated with the processing of purchase order, transportation, inspection

for quality etc. It is also known as procurement cost.

The parallel of ordering cost when units are produced within the organization is the setup cost.

3. Carrying cost

Also known as the holding cost or the storage cost carrying cost represents the cost that is EOQ model Here it is discussed to find what should be the quantity Q ordered each time to keep


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EOQ modelHere it is discussed to find what should be the quantity Q ordered each time to keep

down both the inventory carrying cost and the ordering cost in this consumption and procurement

cycle.

Consider the procurement of the entire annual requirement of an item under the procurement

and consumption cycle.

For keeping the inventory and the inventory carrying costs low it will be better to procure theitem in as small consignment as possible.

But this would mean large number of orders and so more ordering costs.

The requirements are thus conflicting and there is a particular quantity at which the sum of

both the ordering and inventory carrying costs is minimum and this very quantity is called

EOQ.

Assumptions in EOQ formula The demand for the term is certain, continuous and constant.

The lead time ie the time between placing an order and its delivery is known and fixed.

Within the range of the quantities to be ordered ,the unit holding cost and the ordering cost are

constant and thus independent of the quantity ordered.

The purchase price of the item is constant that is to say no discount is available on the

purchase of large lots.

The inventory is replenished immediately as the stock level reaches exactly equal to zero.Consequently there are no stock surplus or shortages.

Limitation of EOQ

The cost analysis on the basis of which the formula is developed are merely notional rather

than actual in some cases.

In practice unit cost of purchase of an item varies ,lead times are uncertain and also

requirements or demands of inventory items are not perfectly predictable in advance.

Rate of consumption varies greatly in many cases.

Obviously in order to receive supply before the stock reaches zero level it is necessary to


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Obviously ,in order to receive supply before the stock reaches zero level, it is necessary to

order the materials much in advance ie when the stock available is sufficient to last during the

lead time.

Safety stock (reserve stock) It is well known that neither the consumption rate of the

material is constant throughout the year nor is the lead time.

In either case a stock out would be experienced resulting into hampering of production toguard mainly against these uncertainties in consumption rate and lead time, an extra stock is

maintained all along and this is called buffer stock or safety stock.

This stock also comes in use when

Any excess in project rejections

Rejection at the time of receipt due to damages

Before deciding how much the safety stock should be ,analysis of the following aspect is

essential. Is the variation in consumption more predominant in the lead time

If the variation in lead time is more predominant ,is it restricted to a particular period or spread

all over the year.

In most cases it is found that the variation in consumptions can be predicted fairly in advance

accurately by good production and maintenance planning and does not provide much of a

problem.

Re order point

The order or reorder point should be set at such a level that the stock on hand plus on orders

should last till fresh supplies are received.

This will require to ascertain the usage rate of the particular item.

If the rate of consumption greatly varies and there is an upward surge in the construction

pattern suddenly, this will lead ultimately to the stock out condition.


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Inventory

(Valuation, Reconciliation& Records)

MCM311Construction Materials Management

Prof. Rajiv Gupta

FIFO Method ofValuation of


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FIFO Method of Valuation of

Inventories

FIFOFirst In First Out Oldest stock is depleted first

The value of stocks on hand is the money

that has been paid for that amount, thisreflects the true value of inventory

Becomes unwieldy when too many

changes in price levels occur Encounters problem in costing of returns

to store

2MCM311- Prof.Rajiv Gupta


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FIFO

FIFO

Date Receipts Issues Stock on Hand

Qty. Rate Value Qty. Rate Value Qty. Rate Value

01-Feb 1000 1 1000 0 0 0 1000 1 1000

14-Feb 2000 1.1 2200 0 0 01000 1

32002000 1.1

20-Feb 0 0 0 500 1 500500 1

27002000 1.128-Feb 0 0 0 1500

1 500

1000 1.1 11001.1 1100


LIFO Method ofValuation of


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LIFO Method of Valuation of

Inventories

Latest prices are charged to the issues,thereby leading to lower reported profits

During wide fluctuations in price levels,

LIFO tends to minimise unrealised gainsor losses in inventory

Applied in a period of rising price.


LIFO

Material Management & Control

Documents

Transcript of Material Management & Control