TOPICS TO BE COVERED IN MATERIALS MANAGEMENTImportance of Materials Management (corporate policy, organization,research, planning, source selection)Value Analysis and Value EngineeringPurchase Management, importance of purchasing, various Rs of Purchasing systemsNeed for forecasting price/policy on seasonal commodities and capital equipmentsInventory Management, its prime importance in our country todayInventory Control Techniques- ABC, FSN,GOLF,VED,SOS,HML,Make or Buy decisions Problems on ABC Analysis*

TOPICSWarehousing and Stores ManagementCentralized and Decentralized StoresMethods of stores accountingNeed for Stock VerificationManagement of scrap/waste/surplus/obsolete materialsJIT,Kanban,Kaizen, Push- Pull conceptMaterial Requirement PlanningExplanation of EOQ, advantages/limitationsTypes of Inventory Systems P & Q systemsSQC, Techniques of SQC, Control charts, X-bar chart, R-chart, P-chart etc

*

Test Paper marks 20

Materials Management Time: 2 hours

Attempt any 10 questions:

Explain the difference between purchasing management and materials managementWhat is letter of credit and state types of LC?Explain how a materials manager can increase the profit of the companyExplain principles of purchasing managementExplain purchasing cycle by a diagramExplain objectives of inventory controlExplain ABC & XYZ analysisDescribe objectives of material managementDescribe qualities required for the position of materials managerDescribe various methods of buying

A*

11. Descibe the functions of a purchasing manager12. Explain the term EOQ13. Describe costs involved in the purchasing of materials14. What are the matters discussed during the negotiation process?15. What are the elements of lead time?16. Describe the contents of an annual report and a balance sheet17. Find Economic order Quantity for an item the unit cost of which is Rs 2 and annual consumption is 32000 units. Assume cost of order as Rs 500 and Cost of carrying as 25% p.a.*

Materials Management Marks 30

Attempt any 6 Questions: Time 1 hour

1. Explain objectives of Materials management and describe functions of material manager.2. What is EOQ? Explain with the help of a diagram and calculate EOQ for an item which has a unit cost of Rs 10 and the annual consumption of 4,000 units. Assume cost of order as Rs 600 and cost of carrying as 30% p.a.3. What ar the methods of buying? Explain each method briefly.4. What are the purchasing policies ? Explain each briefly.5. Draw and describe Purchasing Cycle in detail.6.Explain ABC analysis and XYZ analysis Classify the following items in ABC and XYZ categories (All values in Rs) (put 2 items in each) ITEM no 1 2 3 4 5 6 Annual cons value 400 700 9000 11000 180000 135000 Stock value 1500 2000 8000 1000 3000 85007. Explain the contents of Negotiation8 . What are the conditions under which leasing decisions are taken and explain the leasing procedure.9.Write a short note on any three Buy or Lease Describe the contents working capital Purchasing management and Materials Management. Reorder point Breakeven point with diagram

*

Materials Management Marks 30

Attempt any 6 Questions: Time 1 hour

1. Explain Inventory control and describe objectives of inventory control. How do you exercise inventory control in a mfg co. State types of inventory control.2. What is EOQ? Explain with the help of a diagram and calculate EOQ for an item which has a unit cost of Rs 8 and the annual consumption of 8,000 units. Assume cost of order as Rs 600 and cost of carrying as 30% p.a.3. What is Lead Time and what are the elements of lead time? What steps will you take to cut down the lead time?4. What are the purchasing principles ? Explain each briefly.5. Draw and describe Purchasing Cycle in detail.6.Explain ABC analysis and XYZ analysis Classify the following items in ABC and XYZ categories (All values in Rs) (put 2 items in each) ITEM no 1 2 3 4 5 6 Annual cons value 80 100 5000 8000 100000 200000 Stock value 150 200 3000 2000 16000 80007. Explain the process of Negotiation? Explain the elements of Negotiation.8 .Explain Leasing. Explain the conditions which encourage you to go for Leasing and describe the procedure of Leasing 9.Write a short note on any threeA) Make or BuyB) Methods of BuyingC) Objectives of Material ManagementD) Describe the contents of balance sheet and Profit& loss a/cE) Purchasing management and Materials Management. Highlight the differences.

*

Matrerial Management

Terms in Use

Purchasing Function Stores Management Materials Management Supply Chain Management Purchasing Cycle Supplier Evaluation Source Development Sub-contracting Make Or Buy*

10. Breakeven Analysis11. Negotiation12.Forward Auction13.Reverse Auction14. E-commerce15. ROI or IRR16. ABC Analysis17. Self Certification*

Material Management

Terms in Use

18. Tender19. Purchase budget20. Budget v/s Target21. Working Capital22. Current Assets23. Current Liabilities24. Balance Sheet25. Sources Of Fund26. Application Of Fund

*

27. Profit and Loss Account28. Inventory Control29. Inventory carrying Cost30. Cost of Ordering31. Risk Purchasing32. Interpersonal relations33. Internal Customer satisfaction34. SWOT Analysis

*

*

Importance of Materials Management- Profit CentreLet us take a case of an industry with a sales turnover of Rs 100 lacs and profit of Rs 10 lacs.The top mgmt has set a goal of improving the profit to 12 lacs for the next financial year.We have three options:Increase the price of the product by 20% so that the profit goes up by 20% from 10 lacs to 12 lacs. This is not feasible in the competitive market.2. Increase Sales to 120 lacs, keeping the same profit margin of 10% . This will mean you have to produce 20% extra and Marketing has to sell 20% extra. This also is not easy.3. Purchase has to save 2 lacs on the total buying of 50 lacs. This amounts to 4% saving in cost of materials.

Rs 2 lacs saved in materials cost is equal to Rs 20 lacs additional sale.*

Importance of Purchasing Function:

Purchasing Function is given status equal to Production, Sales and Finance for the following reasons:

Higher cost of goods and servicesEscalating costs of stock-outsHigher cost of capitalPurchase is not mere buying- it has a technique Changing nature of purchase techno commercial6. Professionalization of materials function7. Changing concepts of buyer-seller relations

*

Functions of Purchase Department

Locating, selecting and developing sources of supply Scrutinizing purchase indents and deciding suitable method of buying Floating enquiries, processing quotations, conducting negotiations and releasing purchase orders Pre-delivery follow up and shortage chasing Co-ordination with inward inspection including timely return of defective materials back to suppliers Endorsing suppliers invoices for payment Processing suppliers requests for price increases including price negotiations

*

8. Attending to suppliers representatives and travelling salesmen9. Arranging discussion meetings between suppliers representatives and companys officials10. Disposal of surplus, obsolete and scrap materials11. Advising management on new materials, new products, forward buying etc.12. Acting as a link between companys finance department and suppliers for timely payment of bills13. Attending to periodical activities like applying for import licence, quota etc14. Maintaining companys image among suppliers*

Objectives of Materials Management

To maintain steady flow of materials to ensure uninterrupted production or operationTo achieve economy in cost of materials by adopting latest techniques like value analysis, ABC analysis etc.To reduce materials expenditure by arranging purchases of right quality of materials in right quantity at the right price from the right sources on the right terms at the right timeTo reduce working capital through scientific inventory controlTo save foreign exchange through import substitutionTo preserve/conserve materials in stock so that losses due to pilferage, deterioration, obsolescence are restricted to the minimumTo dispose off speedily such materials which are no longer useful to the company

*

Purchasing Principles =Purchase Policies

Right Quality

Right Quantity

Right Price

Right Time

Right Source

Right Terms

*

Right Quality

Quality specification- reasonable/appropriate/ no underdesign/no overdesign

Source selection &source development

3. Vendor quality rating based on inspection results

Vendor upgradation/self certification- based on past performance & internal standards

Value analysis

6. Standardisation avoid purchase to sample

*

Right Quantity

EOQ ( Economic order Quantity)- most economical

Replenishment system ( For items which have a regular consumption)

Buying methods hand to mouth scheduled forward contract4. Forecasting the consumption of vast variety of items

5. Monitor zero stock level frequency

6. Advance or delayed purchases based on need/ circumstances

*

Right Price

Basic elements of price

Competitive bidding

Negotiation

Learning curve

Right place of delivery

Right transportation

Legal aspects

Price renegotiation

9. Payment methods*

Right time

Replenishment method- maintain min at all times

Lead time analysis

Safety stocks

Inventory levels based on working capital

Advance/delay/regulate the deliveries as per circumstances*

*Right Source

Source selection & source developmentVendor RatingPurchase researchShortlist reliable/dependable suppliersSupplier to supply at competitive price on time & right qualityFinancial status of the supplierSupplier to suggest ways to reduce the costSelf certification

Right Terms

Terms should be acceptable to both, the supplier and the buyer

The terms stipulated in the enquiry should be reasonable to attract suppliers

Terms should be reviewed periodically

4. Terms should be mutually beneficial to supplier and the buyer ( win-win situation)*

Costs involved in the management of materials

Basic cost of materials

Govt levies and taxes

Ordering costs

Inventory carrying cost

Packaging or packing cost

Material handling cost

Freight cost

Insurance cost

9. Wastage during receipt, storage, production etc.*

Methods of Buying / Purchase choices

Hand to mouth buying2. Scheduled buying3. Market purchase ( Forward buying)4. Speculative buying5. Contract buying6. Blanket order7. Tender buying8. Seasonal buying9. Group purchasing10. Subcontracting11. Central purchase12. DGS & D Govt - rate contract*

Qualities of a Purchase Manager1. Well qualified preferably engineering graduate

2. Dependability

3. Initiative

4. Co-operation

5. Tactful

6. Integrity

7. Good communication ability

8. Habit of going into details

9. Product knowledge and applications

10. Flair for Market Research*

Make or Buy

Buy or Lease

A purchase manager is always in a dilemma whether to buy the component from outside or make it in house. The main consideration is the cost and sometimes urgency.

Similarly, when he has to buy an equipment, he goes through the same dilemma whether to buy the equipment or lease out. The main consideration is the duration for which the equipment is required. If the equipment is required for a short duration, generally the decision is in favour of leasing. However if the equipment is required for permanent use, it should be bought , if funds are available.

In the event funds are not available for buying the equipment, a decision is taken in favour of leasing in such a manner that after some years, the leased equipment is purchased from the lesser at a depreciated value.

*

Reasons for Make Or Buy ( in favour of making)

Cost studies show that it is cheaper to make it in the plantMaking the equipments fits companys culture , know how and traditionIdle plant capacity available to absorb overheadsDirect supervision is essential for making complex equipmentControl on inventory is betterDelivery can be faster if made in houseEquipment is difficult to transportDesign is confidentialCan not depend on single outside source

*

Reasons for Make Or Buy(in favour of buying)

Cost studies show that it is cheaper to buySuitable infrastructure not available in-houseQuality may turn out inferior if made in-houseInvestment not attractive due to small volumeTaking the benefit of Specialization of the vendorMaking in-house does not fit in core competencyEquipment is patented by the vendorVendor is likely to give delivery fasterExisting facilities can do more value added jobsPeriodic review of Make or Buy decisions

*

Buy Or Lease ( why Lease)

When the equipment is needed only for a short period, leasing becomes obvious choice.

When funds are not available with the company and the equipment is required, leasing is an easy option.However, the lessee can put a condition that after the lease period gets over , he shall buy the equipment at the depreciated value.

Where there is fast changing technology, like computers and electronic items, leasing is resorted to.

During the lease period the depreciation is claimed by the lessor since he is the owner.

*

Leasing Procedure:

Lessor enters into an agreement with the lessee for a specified value. The lessee decides the type of equipment, the vendor, price , delivery and other terms. The Lessor places the order on the vendor as per the terms decided by the lessee.

The vendor sells to Lessor. The vendor offers usual warranties and guarantees in joint names.

The Lessor owns the equipment and leases to the customers as per the lease agreement.

The lessee rents the equipment, expensing the rentals in P & L a/c , insures and maintains the equipment.

At the end of lease period, the lessee has the option to renew the lease or buy the equipment at the predetermined price.

*

Make OR Buy for Capital equipment Payback Period OR Return on Investment (ROI)Payback Period: Time taken to get back the investmentGenerally in no of yearsAnnual Profit is taken into account e.g.: if you spend 100 lacs and the profit is 20 lacs p.a. it will take 5 years to get back the investment.This is called payback periodPayback (years) =investment / profit p.a. Return on Investment:This is a reciprocal of payback period and is expressed in terms of %ROI = annual profit / investment*100 e.g: investment = 100 lacs, & profit = 20 lacs p.a. ROI = (20 /100)*100 = 20 %

*

Topics for Projects

Balance Sheet of a mfg coProfit And Loss account of a mfg coBreak even analysisWorking capitalCurrent assets and current liabilitiesABC And XYZ Analysis Quality Management,quality control, Inspection and self certification8. Negotiation as a Purchaser *

9. Purchasing strategy - single source (sellers mkt) - Ten sources (buyers mkt)10. Learning curve11. Government tender12. Letter of credit13. Use of computer in Materials mgmt14. Purchasing of capital equipment15. Debt- Equity Ratio Evaluation of Financial health of 5 public Ltd companies- Ratios Six Sigma SQC Working Capital JITVendor Selection Vendor Evaluation

*

Negotiation:

Negotiation merely a price reduction exercise- not trueNegotiation- battle ground- not trueForum where buyer and seller discuss mattersReach mutually acceptable solutionNegotiation aims at obtaining best value for moneyNegotiation is a communication between buyer and sellerPrimary focus on quality , quantity and timely suppliesPrice, payment terms important but not at the cost of quality and timely deliveryGoods are purchased by buyer and not sold by a sellerSeller wants highest price (profit). Buyer wants to buy at the least price Buyer does not know the cost of seller Seller does not know the strike price12. Negotiation on logic and knowledge about the cost structure of product13.Preparation of strategy and tactics

*

Elements of NegotiationA) Price Factor

Item available ex-stock and is standard Quantity discounts Staggered deliveries Payment terms

Monopoly sourceTake it or leave itDevelop second sourceShare the experience with other buyers Buyers cartel for rationing among consumers

Multiple suppliers Price and payment terms major consideration Get the best quality at lower price If supplier has a loss, quality suffers *

Negotiation Factors other than Price:

Rates of trade discounts Quantity discounts Taxes, octroi etc..Excise+ST Freight , insurance rates Assured future supplies Payment facilities, early payment/ cash discount Price variation formula Currency fluctuations Contract or agreed terms signed jointly Verbal contract or agreement to be avoided at all costs After- sales service Guarantee and warranty

*

Negotiation

Human Skills

The buyer should not hurt the feelings of the seller If the seller is made to feel that the buyer is letting him have his way, the seller would become the most difficult person to negotiateDo not negotiate with lowest bidder onlyNegotiate with at least two/three lowest biddersGet market information from all vendorsUse the information to get the best deal

*

Negotiation

D) Location of Meeting

Avoid noisy placeAvoid unventilated roomAvoid humid areaAvoid hotel loungeAvoid too early timeAvoid very late evening timeHave proper seating arrangementHave proper lighting in the roomAvoid presence of unwanted peopleAvoid going out for a meeting in between*

*11. Avoid incoming telephone calls12. Avoid talking in the language which is understood by some13. Offer tea/cold drinks during the meeting14. Offer lunch if the meeting goes beyond lunch time15. Offer separate room for consultation 16. Do not whisper among your own people17. Avoid irrelevant discussion18. Keep the discussions light and humorous

Negotiation

E)Authority of person negotiating

Seller and buyer should be at equivalent levelsSeller and buyer should have the authority to take decisionsSeller or buyer should not consult his superior during the meetingBuyer/seller should not use the words we shall think about it and let you know5. Confidence level should be high during negotiation6. If buyer or seller becomes nervous, he is likely to lose out7. One should not change his stand during the negotiation

*

Negotiation

F) Strategy and TacticsStrategy: Basic plan of action to achieve objectiveTactics: Means to translate plan into actionStrategy and Tactics are to be worked out before the meeting

Study SWOT analysis of the opponentStudy your own requirement and stocks, sources and cost of alternativesStudy current market conditionsStudy cost analysis of the productStudy buyers objectiveStudy sellers approachStudy terms of negotiationStudy details of pre-negotiation meetingsStudy buyers strategySpell out role of individuals in negotiating teamPrepare contingency plan

*

NegotiationG) Qualities of a negotiator

Clear and rapid thinkerAble to analyze and judge the best course of actionAble to give and take & choose the best alternativeAble to assess the various consequences and take the bestTrained by IQ tests, group decision making processInterpersonal and communication skillsAble to bring diverse interests to a single point of viewMust be patient and tactfulMust give objective hearing to what others have to sayMust have ready sense of humourShould not forget his companys objectiveMust have knowledge of product or service he is buyingMust have knowledge of socio- economic and political environment*

Negotiation H) Process of Negotiation

The buyer takes the offensive , outlines his position, provides supporting points and appeals to supplier to change his point of viewBuyer makes the presentation of each point to convince the supplier that his position is soundSupplier attempts to convince the buyer of validity of his position and the risk he is taking at quoted price

*

*As the negotiation progresses the points of differences gradually come downSupplier and buyer both try to maximize the benefitsDepending on the relative strengths the final outcome emergesStrongest and most logical reasoning generally winThe best negotiation should end with win-win situation

Negotiation I) Guidelines for Negotiation Purchase negotiations to be conducted by committee of officersOne from indenting, one from Finance and third from purchaseThe level of officer to be decided by GM depending on value and type of materialNegotiation should not be held by a single individualAll proceedings of the committee should be recordedNegotiation to be conducted with two/three lowest bidders

*

*Technical differences should be normalized before negotiation startsIf the negotiation with three lowest bidders is unsuccessful ,extend it to fourth and fifthIf a ring is suspected , non tenderers can be invited by asking them to submit the offer beyond due dateIf there is a single response to a limited tender, re-tendering is resorted to

Negotiation J) Negotiating Technique

Before sitting at a negotiating table, the purchasing team must have a clear understanding of their authority and the authority of opposite teamGenerally purchaser starts probing the supplier team about market knowledge, details on manufacturing facilities, suppliers workload, previous price history, cost analysis, different types of discounts and contracts

*

*As a good strategy, the purchaser may agree to all minor points initially to gain the confidence of the supplier

Haggling, bickering, horse trading and taking position without data is avoided Many organizations adopt the strategy of tiring the opponent and striking the deal

Once the proper ground is created, an offensive based on sound calculations can be undertaken to clinch the deal

NegotiationTheory of Bargaining

Price bargaining being a major constituent of negotiation, each party is guided by his own expectationIf both the parties stick to their stance , a settlement is not possibleSomeone has to make a concession to close the dealTake an example of a seller who has his expectation of price between Rs 20 and Rs 30The buyer also has his expectation for a price below Rs 30The settlement at Rs 25 is possible if both know each others expectationsIn real life such ideal conditions do not exist and there will be several parameters complicating the negotiating processIt is essential for the negotiator to know his position from an ideal solution and then apply the correction factor

*

Negotiation

L) Precautions in Negotiation

Negotiation is resorted to in the following circumstances:All tenderers considered to be unreasonable in pricesRetendering would not secure better advantageLowest tender is technically not acceptable or is rejected for his credentials, inadequacy of capacity or unworkable rates with next higher offer unreasonably highIn case of proprietory items, the quoted price is unreasonably highSome public sector companies insist on negotiating with at least two parties, in case of open tender, for the purpose of accountability

Conclusion:Negotiation is not a merely price reduction exercise

*

Lead Time

The total duration that elapses between the recognition of the need for an item and its fulfillment is known as lead time for that item.Lead time is the time that elapses between ordering goods, receiving them and placing them into use at the point of order.Lead time has four components a) Internal lead time.indent to orderExternal supplier. Manufacturing timeTransportation or shipping timed) Inspection and approval before use

There is a direct relationship between the lead time and inventories. Longer the lead time, the more will be the inventory required, as there is no delivery of material during lead time and the consumption department will have to be served from the inventories held in the stores*

Lead time

Both lead time and consumption rate can increase without notice and the stock will have to be geared for this contingency.

Hence the stock needs to take care of the normal consumption and higher consumption if lead time gets extended, also the stock needs to take care of higher rate of consumption if production is increased without any notice

Hence the buyer has to reduce the total lead time in order to reduce the working capital blocked in inventory

Inventory consists of normal stock+ reserve stock +safety stock

*

Lead time Elements of Lead time The need for purchase of an item is recognized Specifications are firmed up3. Indent is raised4. Indent needs to be approved5. Indent is passed on to purchase section for action6. Inquiries are sent and quotations are obtained7. Prices, source, terms & conditions are finalized8. If a new source is to be developed, quotes are invited through open tender, limited tender or a global tender9. Comparative statement is made to identify the most suitable vendor10. Price, payment and other terms are negotiated 11. The vendor is finalized12. Purchase order is released*

*13. Acceptance of purchase order is obtained14. Manufacture of item is started 15. Follow up on delivery schedule is done16. Stage-wise inspection is carried out17. Identify mode of transport18. The item is dispatched by ship/train/ truck19. Item is received in stores20. MR (material receipt) is prepared21. Inspection before use is carried out22. Accepted items are stored for issue to the indenting department23. Rejected items are sent back to supplier24. Payment is made to the supplier

Inventory Management and Economic Order Quantity

Inventory is defined as an idle resource of any kind, having an economic value in the sense, that raw material can be converted into semi-finished goods and with additional value, becomes finished goods. In all these cases , the companys working capital is tied up which has to be serviced @ 30% p.a.Conversely , if the item is not kept in the stock, there will be a stockout, if the demand arises.

Thus larger quantum of inventories do not necessarily lead to higher volume of output, while lack of inventories will hamper production.

The top management usually sets monetary limits for investment in inventories and the material department has to allocate this investment to various items for the smooth operation of the company.*

Order Quantity Table

*

Item noannual consumption value no of orders per year value perorderaverage inventory A 60000 4150007500 B 4000 4 1000 500 C 1000 4 250

total 125

8125

Order Quantity Table*

Item noannual consumption value no of orders per year value perorderaverage inventory A 60000 8 75003750 B 4000 3 1333 667 C 1000 1 1000

total 500

4917

Economic Order Quantity unit price Re 1, cost per order Rs 600*

OrderQuantityunitsNo of ordersPer yrorderCostPer yr(Rs)AvgInvunitsInvValue(Rs)InvCarrycostTotal cost(Rs) 200 53000 100 100 303030 500 21200 250 250 7512751000 1 600 500 500 150 75020000.5 30010001000 300 60050000.2 12025002500 750 870

Derivation of EOQ

/ ---------------EOQ= Q = / 2 M* Co / R* Cc \ / M = annual consumption in units Co = cost per order (Assume Rs 600 per order) Cc = cost of carrying (Assume 30% p.a.) R = price per unit Q = quantity to be ordered Average inventory = Q/2 Cost of ordering p.a. =( M/Q) *Co Value of average inventory = R * Q/2 Inventory carrying cost p.a. = Q/2* R * Cc Total cost = cost of ordering + cost of carrying Total cost= (M/Q)* Co + (Q/2) * R * Cc *

*We get EOQ when

cost of order = cost of carrying

So (M/Q)* Co = (Q/2) * R * Cc

Multiply both sides by 2Q 2M*Co = Q*Q *R*Cc /--------------- q= / 2M*Co / R*Cc \/

Calculate EOQ

Cc=30% (30/100)Cc= 2.5% pmCo= Rs 600 per order

M R

10,000 1,00025,000 2,500100,000 10,000500,000 50,0001000 pm 1200

*

Inventory Control in Practice

Staggered DeliveriesReady Reckoner for EOQABC analysis of itemsA items controlled DailyB items controlled weeklyC items controlled monthlyCancellations of orders where the consumption is slowDelay of deliveries where the consumption suspended for some technical reasonDecide min max for all items and adhere to limitsRevise the min max once a year for fine tuningMake the list of non moving inventoryMake the list of slow moving itemsRevise the current orders if necessaryConsult the functional heads for advance intimation of change in consumption patternConsult functional heads for new items requiredStart research for these items

*

Types of Inventories

Raw MaterialWork in ProgressFinished GoodsFuel oilsProduction stores & ToolsConsumablesSpares- MRO itemsa) Maint sparesb) Overhauling spares Insurance spares Rotable spares

For ABC analysis item 1,2,3 are generally not taken , as they may constitute 90% of total inventoryItems 1,2,3 are always A items

*

Aims/Objectives of Inventory Control

Inventory is generally considered as locked up capital, But the departments clamour for more

It is in the interest of the organization to keep inventories at lowest possible level so that the inventory carrying cost is lowest and working capital is managed well

Low inventories will result in less payment of interest Efficient control will ensure improved and better service to usersOptimum inventories will ensure optimum service levelLow inventories will ensure release of much needed and scarce funds for expansionTo increase inventory turnover ratio

*

*6. Reduce cost by taking best buying decisions of when to buy and how much to buy7. Efficient control ensures optimum inventory carrying cost and acquisition cost8. Improve management controls 9. Reduce risk due to obsolescence10. Ensures effective inter departmental co- ordination11. Increases profit

Inventory Control

Theoritically EOQ is to be ordered at regular intervals in such a way that the stock at the time of ordering gets consumed during the lead time.

However practically it so happens that there is delay in supply by a few days or the consumption rate goes up during lead time period. Due to this there is a good possibility of stock touching zero level before the expected time.In order to avoid zero stock level we have a concept of buffer stock, safety stock and reserve stockReorder point=Buffer stock+Safety stock+Reserve stock

Buffer stock=average demand during average lead timeSafety stock= average demand during delivery delayReserve stock= variation in demand during average lead time

*

( SELECTIVE CONTROLS)All the items in the inventory need a periodic reviewMore important items should receive greater attentionHow to classify these thousands of items in order to ensure that important items receive greater attention and not so important items do not take our valuable timeThere are many ways to classify these items in inventory, the most important techniques are:ABC AnalysisXYZ Analysis*Techniques of Inventory Control:

TECHNIQUES OF INVENTORY CONTROLABC Analysis.Annual usage valueXYZ Analysis. Inventory valueHML AnalysisHigh, medium, low unit priceVED.vital,essential,desirable (importance)FSN.fast moving,slow moving, non movingSDE .scarce, difficult, easy to produceSOSseasonal or off seasonalGOLF.Govt, ord,local,foreign*

ABC ANALYSISItems are classified according to annual usage valueVery few items which have large annual consumption value contribute significantly to the total inventory holdingThere are very large no of items which have very small annual consumption value and their contribution to total inventory is neglibleUsually 10% of the items account for 70% of the total annual usage valueThe next 20% of the items account for next 20% of annual usage valueRemaining 70% contribute just 10% of the total annual usage value*

ABC ANALYSIS : CONTROL PROCEDUREFor simplicity one can select:A items : having annual consumption value of over Rs 50,000B items : having annual consumption between Rs 10,000 and Rs 50,000C Items : having annual consumption value less than Rs 10,000 Once this classification is done, the frequency of monitoring these items is decided:A items :..everydayB items : ..every monthC items : every 3/6 months *

ABC ANALYSIS*

Item noAnnual consumptionUnit priceAnnual cons value21000011110000420001122000650003150008100100100001050001500071000121200013000100300000560030180003500200100000

ABC ANALYSIS*

Item noAnnual cons unitsUnit price RsAnnual consValue Rs130001003000002100001111000035002001000004200011220005600301800065000315000710001212000810010010000920004800010500015000

ABC ANALYSIS*

Item noAnnual cons unitsUnit price RsAnnual consValue RsCumm value Rs13000100300000300000 21000011110000410000 3500200100000510000 420001122000532000 56003018000550000 65000315000565000 710001212000577000 810010010000587000 9200048000595000 10500015000600000

ABC ANALYSIS*

Item noAnnual cons unitsUnit price RsAnnual consValue RsCumm value Rs13000100300000300000 A21000011110000410000 A3500200100000510000 B420001122000532000 B56003018000550000 C65000315000565000 C710001212000577000 C 810010010000587000 C9200048000595000 C10500015000600000 C

XYZ ANALYSIS*

Item noquantityUnit priceInventory valueCumm value2500050250000990100900014000200800000105001050003200050100000840025100004800100800005100050500007304001200065030015000

XYZ ANALYSIS*

Item noquantityUnit priceInventory valueCumm value1400020080000080000025000502500001050000320005010000011500004800100800001230000510005050000128000065030015000129500073040012000130700084002510000131700099010090001326000105001050001331000

XYZ ANALYSIS*

Item noquantityUnit priceInventory valueCumm value14000200800000800000 X25000502500001050000 X32000501000001150000 Y4800100800001230000 Y5100050500001280000 Z650300150001295000 Z730400120001307000 Z840025100001317000 Z99010090001326000 Z105001050001331000 Z

INVENTORY CONTROL PROCEDUREKeep a watch on ABC and XYZ analysis simultaneouslyGenerally A items should be in Z categoryB items should be in Y categoryC items should be in X categoryContinuous monitoring is required to ensure that A items remain in Z category or at the most in Y categoryIn case A items are in X category, we need to review the ordering pattern of A items and get staggered deliveries so that the inventory at any time is not high as these items block maximum of funds*

Types of Inventory Control

P and Q System

Fixed Quantity = Q system

Periodic Review = P system

Q system- Ordered quantity is fixed - Order period is varied

P system- The period between two orders is fixed - Quantity ordered is varied

*

STORES MANAGEMENTThe main objective of Stores function is to provide efficient service to all operating functions such as : production, maintenance, construction, projects etc.Stores manager oversees the entire stores function and controls inventory apart from giving efficient service to all operating functionsStores manager reports to Materials ManagerPurchase Manager also reports to Materials Manager*

ORGANIZATION STRUCTURE OF MATERIALS DEPARTMENT*

OBJECTIVES OF STORES MANAGEMENTMake available a balanced and timely flow of all materialsReceive, inspect and issue the materialsSore all the materials at predetermined rack for each of the itemAccept, store and arrange disposal of scrap and unwanted materialsOptimize inventory level of all materials in stock so as to manage working capital efficiently*

FUNCTIONS OF STORES MANAGEMENT1. Monitor inventory on daily basis to ensure timely availability of materials to the internal customers 2. Identification, codification and describing all items3. Standardize all items in order to reduce the variety4. Receipt of all materials5. Inspection of all materials received6. Storing all materials in warehouses7. Stock control: receipt, issue and balance stock*

FUNCTIONS OF STORES MANAGEMENT8. Receive requirements from consumers and issuing materials as per the requirement 9. Stock records10. Stock valuation and Stores accounting11. Stock Taking12. Stock verification*

SECTIONS OF STORESIdentificationReceipt and inspectionStocking and issuesDespatchLedgerStock verification*

CENTRALIZED & DECENTRALIZED STORESIf a co has 4/5 plants in the country and they have a centralized stores at their head quarters it is called centralized stores and all plants are serviced by this central storesThe purchasing is done centrally in bulk and the supplier is directed to deliver required quantity to every plant as per their scheduleWhile the economy in cost of aquisition is achieved by this method, there are quite a few administrative problems due to which this system is not very popular in private sector*

DECENTRALIZED STORESThe co having 4/5 plants in the country will have their independent stores and the purchasing is also done independently, it is called decentralized systemHere the co has both advantages of economy as well as independent efficient workingEach store has networking due to which they can see the stocks and prices of various items in other decentralized stores and get urgent requirements from each other in emergenciesThey only need to ensure that the codification of items is common in all stores *

STORES ACCOUNTING, STOCK VERIFICATION & VALUATIONThere are two aspects of stores accounting:Physical stock verificationStock valuation On a regular basis storekeeper records receipts, issues and the book stock, however it is likely that the physical stock may be different from book stock due to human errors in recording Hence physical stock verification is carried out in one of the three ways:Periodic verification or annual inventoryPerpetual or continuous inventoryLow point inventory

*

STOCK VALUATIONStock valuation is essential due to:Inventory valuation: converting physical quantities of materials into monetary valueMaterial costing: cost of material consumed in order to evaluate the cost of productsMethods of valuation of stocks:First in first outLast in first outAverage price or weighted averageActual priceReplacement priceStandard cost

*

*