Upload
matrixworld20
View
216
Download
0
Embed Size (px)
Citation preview
8/12/2019 Material Management & Control
1/146
8/12/2019 Material Management & Control
2/146
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
8/12/2019 Material Management & Control
3/146
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
8/12/2019 Material Management & Control
4/146
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 ?
8/12/2019 Material Management & Control
5/146
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.
8/12/2019 Material Management & Control
6/146
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
8/12/2019 Material Management & Control
7/146
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
8/12/2019 Material Management & Control
8/146
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)
8/12/2019 Material Management & Control
9/146
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
8/12/2019 Material Management & Control
10/146
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
8/12/2019 Material Management & Control
11/146
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
8/12/2019 Material Management & Control
12/146
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.
8/12/2019 Material Management & Control
13/146
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.
8/12/2019 Material Management & Control
14/146
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
8/12/2019 Material Management & Control
15/146
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
8/12/2019 Material Management & Control
16/146
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
8/12/2019 Material Management & Control
17/146
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
8/12/2019 Material Management & Control
18/146
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
8/12/2019 Material Management & Control
19/146
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
8/12/2019 Material Management & Control
20/146
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.
8/12/2019 Material Management & Control
21/146
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
8/12/2019 Material Management & Control
22/146
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
8/12/2019 Material Management & Control
23/146
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
8/12/2019 Material Management & Control
24/146
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.
8/12/2019 Material Management & Control
25/146
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
8/12/2019 Material Management & Control
26/146
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.
8/12/2019 Material Management & Control
27/146
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)
8/12/2019 Material Management & Control
28/146
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.
8/12/2019 Material Management & Control
29/146
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?
8/12/2019 Material Management & Control
30/146
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.
8/12/2019 Material Management & Control
31/146
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
8/12/2019 Material Management & Control
32/146
8/12/2019 Material Management & Control
33/146
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
8/12/2019 Material Management & Control
34/146
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
8/12/2019 Material Management & Control
35/146
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
8/12/2019 Material Management & Control
36/146
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.
8/12/2019 Material Management & Control
37/146
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
8/12/2019 Material Management & Control
38/146
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
8/12/2019 Material Management & Control
39/146
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:-
8/12/2019 Material Management & Control
40/146
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.
8/12/2019 Material Management & Control
41/146
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
8/12/2019 Material Management & Control
42/146
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)
8/12/2019 Material Management & Control
43/146
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
8/12/2019 Material Management & Control
44/146
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
8/12/2019 Material Management & Control
45/146
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
$
8/12/2019 Material Management & Control
46/146
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
Other EOQ assumptions apply
Trade-off is between lower price & increased holding cost
Probabilistic Model Answer how much & when to order
Allow demand to vary
Follows normal distribution
Other EOQ assumptions apply
Consider service level & safety stock
Service level = 1 - Probability of stockout
Higher service level means more safety stock
INVENTORY MANAGEMENT
8/12/2019 Material Management & Control
47/146
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
8/12/2019 Material Management & Control
48/146
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
8/12/2019 Material Management & Control
49/146
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
8/12/2019 Material Management & Control
50/146
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
Classification of inventory
8/12/2019 Material Management & Control
51/146
Classification of inventory
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
8/12/2019 Material Management & Control
52/146
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
8/12/2019 Material Management & Control
53/146
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.
8/12/2019 Material Management & Control
54/146
779
01
5996
997
8/12/2019 Material Management & Control
55/146
3 4567875789684 565 67
69675686577878747575
757568968474478665869676785
87877875687486458986
86786755657555686455667575786847
5686868478756577478657676967
67545958558758657789556645457
44786
58678969676755
754678678446
678578767975686967785557775
47867
69676767476644686747
57854747865767475647674586
7486874786785875756575
78785477865785
69676787586758665
7786775667
0 47578578689487567
74486564757857868875777
4877748747586787
458757877887647448669676786
58986785
1 6566967677556
8
696767757565786
44558657
8/12/2019 Material Management & Control
56/146
34564789 86
6897479696647864564789
847987676847647847664746696466984464
96697647766698446866697476964468774
766
769678469878469764786
668769866767649878484876
786
0 78446477848456478968774
986986469786764988684678776987
96894874464
1 749898668774489784
466478697647744876
7868464466464797786
6675646845647898479876
6764689469686767
6669869447676769676966
76766786669476974674448
769789687848646766476966976474
98784697647877878476947948977844646
46647456478984798466776476446
8986945647899689474897849694497976
845647896764989689
69686689464768769
87798784986848769
2788784867644776
2247865678656968969
8476765667869667694678649676847478887
98784
284889694778
66769467846768784564789
8/12/2019 Material Management & Control
57/146
3 4567875789684 565 67
46868745658658867869678867
5657857886465645745657456
958788788486774865878674786
757954867486748656877879
86456
887745875578577486589684
7857
886769547875785645457
4788674567875878778
8888787455686768678954
8789784567878
894754668677557954568787675656767
84758646978676757775
9875657878467575564587875
5467755675777595478775656776
8597755886576757775954777564
878597956578
55
5658645679787
565785647679578775875
8697679869674
2 768456588567868
565677865656486558878478657
7696867467567787869676775898
867757
8/12/2019 Material Management & Control
58/146
34564789 86
8968
59664746876949678478966567676989696
556896789
54767646476846946697647
568478496947656876769496768984784
7
2 64778489664
7768996679876598678489697647787696
697647788969886966764969689787696
697647766976474664768878947696
69764789989476886976678456447676
76647846847
89 76
8764796
669689697647
3768868 69784 477696 69
696669856
89686976474 896896697647
796784
3768477 84784 477 96 69 6569
478 698479696 896948 76
8/12/2019 Material Management & Control
59/146
2 3456764678995739 4549 956
1694756979959695996996
89579794569993794697436467574967
34997949759796934994695645
9566698954367757634977934567645347669
4697446696734696946696794549956759699759594
349946975754675
749693499745454699
77498954549
777396474697434567696
7843994694569495696
87945499789
877967594754754594675
877754639349
8777963
49
9959
469
9
39
949369757697544597669694557675
9567599975
69 97675 2345676 79 576 356 94
8/12/2019 Material Management & Control
60/146
234536789 75
87
58 7
65
537788456598565354589
738578563536573653676558555
965855435866578585965835865366765
45378658875853777554585676578678978
35673586536778554537658585585
3533985397385867
693366926756595855885676583586536
766658539956578659565367856836555645
7857735357875869658738563765
65885853567356385786
53667857587536667953675865838585
5368536585786658536555895367586785736
8/12/2019 Material Management & Control
61/146
3 4567875789684 565 67
57854887868
5767 57
567865785
56 86
78 746
7 7
776785767
0 7586967786
4
4865767 85
89865767 57
8/12/2019 Material Management & Control
62/146
34564789 86
88479876687697569
466977497896847989689478966699666
96944964849869899675678486764
2 7864478968
6846789656477698769647676446
84666847677864647656978487
4774789664868469948979483
496484489967567848676478966896476
7676869684669476987698978488796
6589784769667678998496894678676
676788456478984798
345647897894986964897479784564789847984664789
7694664788498696886445647897894
6789666699665676769847
768896656487698769665467846769967646
89478764796876769676986994644
66647897676949776764899
476647784989864489694656
87694966764468769448777667
878464847476646569696
69784 656
76986 4656
8/12/2019 Material Management & Control
63/146
3 4567875789684 565 67
55767457857875676
8774675785777468567568775785
588578656758578558968674685
76786864887868874685
58778567775767567887
774686576787767675467
5767474887868567468578677
8678758
0 7565785657677567
5767865675857548757865785
674778678677565785
6576777576785576775686
75785548578575688786777
657675687578565678856777
5767565467576778865786
1 68864787545875785589
84567565857855757857687
767786967859885786456787867567
57678657855757
756856846868598857864567878677
576778478677678756567787
559875678686967674578557578545
57858984567565896788
57575867895986696767
8456587684
5874568675896
5747645744874
8/12/2019 Material Management & Control
64/146
34564789 86
669688
767696967887476656989663
7768967476445647896566
37676978689776476676
689644456478965678667
376769487656764764
7865678667
0 37698784986887
764767867694676478656798784487887
6788696847968696764748767848767
6568478
1 7697796969789674744
6563847869896967687697869648
4656969678668977
37484766668469766767686976
465698567696896984796484747
64976769764
76489976884784967867644788469784
78656969664776477845647894667
47896747647766644568547688569
784
6884896
6566896965668969477484784
8/12/2019 Material Management & Control
65/146
3 4567875789684 565 67
659865785758498
568654898657858788
274846758675849458
58
5849568668
45678754467867586857768
45678787456787566875849
8878867767584795686847957
8787674578596876
88586646757
5758445
5848584898
47578686994585
8699
5844555848584898
584954595576478695
895898
78895868
5785868
595576478657856756
8/12/2019 Material Management & Control
66/146
34564789 86
8684694469656687696896946567856764
656378489967648847678966769689694656
764696566948897466677764767896676469
656748767764656966964666787696697647
78649677656996656689676778966764656
647646965666876476496676778
7666747676647648996756696686466964
7646965668567647649667677896564756
6967867648777678487868764656
377684789656878767697884656968678
9663764696566876465688476788769
966784796477844666899664647878
67694784846965684688
4696568848984784
64778969679689698476968969
47767694684768478656478
65648964487784868488969477
2 6964776
478656478656569678656446978656
768969656976784896974468969847
97689469476656468
668798766846789886789
46947
8/12/2019 Material Management & Control
67/146
3 4567875789684 565 67
8958455848
66710687
6670687
8886849955958
66702687
667687
958667
958667
88858499345678786845
86848
667020
1687
66722
687
786578455457598684
95849959
55 46875
86845 146875
5845 46875
683465787 4687
8 275
8/12/2019 Material Management & Control
68/146
34564789 86
4796987466479887669269
47874446696476884756
4467948434567647
6473494667694769696
878448969
676946848969477
696848969477
44696647834564789
878448969
448499948769476969
56447
0
647
826260
9676676969696479784
876996447699487876569645647896
8496884768684889694777664
869684784766896567669695676
84676978674686989487
56446
8/12/2019 Material Management & Control
69/146
2 3456764678995739 4549 956
6467549949749797356
7646974
779756
7774756
64589566
999999
9
5694748945476993949694767489
4493674465394553414974
6759475949645694756719
94948949758956756957923456764569664
7589566
94647549469399566797445496
675699975645473454894975895679989
693799473565696794759945534
93799563694649676
8/12/2019 Material Management & Control
70/146
34564789 86
68969847
2
78656 689698476896947789
46468969698
22
2
89 78656
6778
47865668969656896569668969698
22
2
896
569678656
8/12/2019 Material Management & Control
71/146
2 3456764678995739 4549 956
6475459966979375697594
969797966754799474569
97567099756957923456763769
7649669456496473569547599994
96756567537569979994
2
78953576
0
2
3576
645895667
3576
00
7475997494673567579
8/12/2019 Material Management & Control
72/146
34564789 86
694746889698967447
8646889698989896
47767447
28646889698989896
47
88569645647896
6947694446889698967447
800694769
444688969894789896767447
82694769
444688969898989647
346889698967447
28947
3
11
469677866
8/12/2019 Material Management & Control
73/146
3 4567875789684 565 67
654687
6878
1
14687
768781468787567868486456787
468775645757468777846786458
48
4687
11202
67585956588675778868486
657657896756457785765789
6785775888966786967677586
768445658596847578778657
568475786
8/12/2019 Material Management & Control
74/146
34564789 86
646767769475687
6786566478976676
84784
345647894664676776888
46496768684798856976768476896
64696966477647784564789
7698479867846886886646
68969656
478656
78656
469656
6569678656
8676466847984764564789456764484
84
647676987766566786967568
4696566856764
69686689464768769
8/12/2019 Material Management & Control
75/146
3 4567875789684 565 67
56478646875
3456787224687
86848898615
584889865
58898625
5645744867557858225664
458878286782256
58678595869675645745648756645
4867557858866867860222222
22456787868745678788768
345678748675457
566454867547865882224687458
4687828678256758674687
59586967885648756645486787
8668678695845765789722222224687786
768345678758575687777
495739865658675455677578
8684
25457683456787786865786486545
75857565757857
664545 22224687
4867 2
74687 2
758686967 2956967
564856645222585872
58657756256758678
77595869675664
8/12/2019 Material Management & Control
76/146
34564789 86
69948769476944876569645647894
878489694778769876787646477867
8478698284468969696934767678948769
476969496678187656964564789
2479699696478976969847689694
8769896969948747847869476776
786285696456478969476969696968769
76906947476848876476873456478987
647969869684749696898969824789
896767447976984756898969889
8964787679668966887
96 96 6 96
797844
86
7676947
676984569
6689
746996476834
44484
I
8/12/2019 Material Management & Control
77/146
Inventory
(Valuation, Reconciliation& Records)
MCM311Construction Materials Management
Prof. Rajiv Gupta
FIFO Method ofValuation of
8/12/2019 Material Management & Control
78/146
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
8/12/2019 Material Management & Control
79/146
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
3MCM311- Prof.Rajiv Gupta
LIFO Method ofValuation of
8/12/2019 Material Management & Control
80/146
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.
4MCM311- Prof.Rajiv Gupta
LIFO