TOPICS TO BE COVERED IN MATERIALS MANAGEMENT

Importance of Materials Management (corporate policy, organization,research, planning, source selection) Value Analysis and Value Engineering Purchase Management, importance of purchasing, various Rs of Purchasing systems Need for forecasting price/policy on seasonal commodities and capital equipments Inventory Management, its prime importance in our country today Inventory Control Techniques- ABC, FSN,GOLF,VED,SOS,HML, Make or Buy decisions Problems on ABC Analysis

TOPICS
Warehousing and Stores Management Centralized and Decentralized Stores Methods of stores accounting Need for Stock Verification Management of scrap/waste/surplus/obsolete materials JIT,Kanban,Kaizen, Push- Pull concept Material Requirement Planning Explanation of EOQ, advantages/linmitations Types of Inventory Systems P & Q systems SQC, Techniques of SQC, Control charts, X-bar chart, R-chart, P-chart etc

Test Paper
Materials Management Attempt any 10 questions:

marks 20
Time: 2 hours

1. Explain the difference between purchasing management and materials management 2. What is letter of credit and state types of LC? 3. Explain how a materials manager can increase the profit of the company 4. Explain principles of purchasing management 5. Explain purchasing cycle by a diagram 6. Explain objectives of inventory control 7. Explain ABC & XYZ analysis 8. Describe objectives of material management 9. Describe qualities required for the position of materials manager 10.Describe various methods of buying
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11. Descibe

manager 12. Explain the term EOQ 13. Describe costs involved in the purchasing of materials 14. 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 sheet 17. 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.

the functions of a purchasing

Materials Management

Marks 30 Time 1 hour

Attempt any 6 Questions:

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 8500 7. Explain the contents of Negotiation 8 . 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 5

Materials Management Attempt any 6 Questions:

Marks 30 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 8000 7. 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 three A) Make or Buy B) Methods of Buying 6 C) Objectives of Material Management D) Describe the contents of balance sheet and Profit& loss a/c E) Purchasing management and Materials Management. Highlight the differences.

Matrerial Management
Terms in Use

Purchasing Function 2. Stores Management 3. Materials Management 4. Supply Chain Management 5. Purchasing Cycle 6. Supplier Evaluation 7. Source Development 8. Sub-contracting 9. Make Or Buy
1.

10. Breakeven Analysis 11. Negotiation 12.Forward Auction 13.Reverse Auction 14. E-commerce 15. ROI or IRR 16. ABC Analysis 17. Self Certification

Material Management
Terms in Use

18. Tender 19. Purchase budget 20. Budget v/s Target 21. Working Capital 22. Current Assets 23. Current Liabilities 24. Balance Sheet 25. Sources Of Fund 26. Application Of Fund
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27. Profit and Loss Account 28. Inventory Control 29. Inventory carrying Cost 30. Cost of Ordering 31. Risk Purchasing 32. Interpersonal relations 33. Internal Customer satisfaction 34. SWOT Analysis

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Managing Director

Production Manager

Marketing Manager

Materials Manager

Finance Manager

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Importance of Materials Management- Profit Centre Let 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: 1. 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.
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Importance of Purchasing Function: Purchasing Function is given status equal to Production, Sales and Finance for the following reasons: 1. Higher cost of goods and services 2. Escalating costs of stock-outs 3. Higher cost of capital 4. Purchase is not mere buying- it has a technique 5. Changing nature of purchase techno commercial 6. Professionalization of materials function 7. Changing concepts of buyer-seller relations
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Functions of Purchase Department 1. Locating, selecting and developing sources of supply 2. Scrutinizing purchase indents and deciding suitable method of buying 3. Floating enquiries, processing quotations, conducting negotiations and releasing purchase orders 4. Pre-delivery follow up and shortage chasing 5. Co-ordination with inward inspection including timely return of defective materials back to suppliers 6. Endorsing suppliers invoices for payment 7. Processing suppliers requests for price increases 14 including price negotiations

8. Attending to suppliers representatives and travelling salesmen 9. Arranging discussion meetings between suppliers representatives and companys officials 10. Disposal of surplus, obsolete and scrap materials 11. 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 bills 13. Attending to periodical activities like applying for import licence, quota etc 14. Maintaining companys image among suppliers
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Objectives of Materials Management

1. To maintain steady flow of materials to ensure uninterrupted production or operation 2. To achieve economy in cost of materials by adopting latest techniques like value analysis, ABC analysis etc. 3. 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 time 4. To reduce working capital through scientific inventory control 5. To save foreign exchange through import substitution 6. To preserve/conserve materials in stock so that losses due to pilferage, deterioration, obsolescence are restricted to the minimum 7. To dispose off speedily such materials which are no longer 16 useful to the company

Purchasing Principles = Purchase Policies

1. Right Quality 2. Right Quantity 3. Right Price 4. Right Time 5. Right Source 6. Right Terms
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Right Quality
1. Quality specification- reasonable/appropriate/ no underdesign/no overdesign 2. Source selection &source development 3. Vendor quality rating based on inspection results 4. Vendor upgradation/self certificationbased on past performance & internal standards 5. Value analysis

6. Standardisation avoid purchase to sample

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Right Quantity
1. EOQ ( Economic order Quantity)- most economical

2. Replenishment system ( For items which have a regular consumption)

3. Buying methods hand to mouth scheduled forward contract 4. Forecasting the consumption of vast variety of items 5. Monitor zero stock level frequency 6. Advance or delayed purchases based on need/ circumstances
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Right Price
1. Basic elements of price 2. Competitive bidding 3. Negotiation 4. Learning curve 5. Right place of delivery 6. Right transportation 7. Legal aspects

8. Price renegotiation
9. Payment methods
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Right time
1. Replenishment method- maintain min at all times 2.Lead time analysis

3.Safety stocks
4.Inventory levels based on working capital 5.Advance/delay/regulate the deliveries as per circumstances
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Right Source 1. Source selection & source development 2. Vendor Rating 3. Purchase research 4. Shortlist reliable/dependable suppliers 5. Supplier to supply at competitive price on time & right quality 6. Financial status of the supplier 7. Supplier to suggest ways to reduce the cost 8. Self certification
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Right Terms
1. Terms should be acceptable to both, the supplier and the buyer

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

3. Terms should be reviewed periodically

4. Terms should be mutually beneficial to supplier and the buyer ( win-win situation)
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Costs involved in the management of materials 1. Basic cost of materials 2. Govt levies and taxes 3. Ordering costs

4. Inventory carrying cost

5. Packaging or packing cost

6. Material handling cost

7. Freight cost

8. Insurance cost
9. Wastage during receipt, storage, production etc.
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Methods of Buying / Purchase choices

Hand to mouth buying 2. Scheduled buying 3. Market purchase ( Forward buying) 4. Speculative buying 5. Contract buying 6. Blanket order 7. Tender buying 8. Seasonal buying 9. Group purchasing 10. Subcontracting 11. Central purchase 12. DGS & D Govt - rate contract
1.
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Qualities of a Purchase Manager 1. 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
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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 27 purchased from the lesser at a depreciated value.

Reasons for Make Or Buy ( in favour of making)

1. Cost studies show that it is cheaper to make it in the plant 2. Making the equipments fits companys culture , know how and tradition 3. Idle plant capacity available to absorb overheads 4. Direct supervision is essential for making complex equipment 5. Control on inventory is better 6. Delivery can be faster if made in house 7. Equipment is difficult to transport 8. Design is confidential 9. Can not depend on single outside source
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Reasons for Make Or Buy (in favour of buying)

1. Cost studies show that it is cheaper to buy 2. Suitable infrastructure not available in-house 3. Quality may turn out inferior if made in-house 4. Investment not attractive due to small volume 5. Taking the benefit of Specialization of the vendor 6. Making in-house does not fit in core competency 7. Equipment is patented by the vendor 8. Vendor is likely to give delivery faster 9. Existing facilities can do more value added jobs 10.Periodic review of Make or Buy decisions

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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. 30

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 31 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 investment Generally in no of years Annual 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 period Payback (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 %

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Topics for Projects

1. Balance Sheet of a mfg co 2.Profit And Loss account of a mfg co 3.Break even analysis 4.Working capital 5.Current assets and current liabilities 6.ABC And XYZ Analysis 7. Quality Management,quality control, Inspection and self certification 8. Negotiation as a Purchaser
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9. Purchasing strategy - single source (sellers mkt) - Ten sources (buyers mkt) 10. Learning curve 11. Government tender 12. Letter of credit 13. Use of computer in Materials mgmt 14. Purchasing of capital equipment 15. Debt- Equity Ratio 16. Evaluation of Financial health of 5 public Ltd companies- Ratios 17. Six Sigma 18. SQC 19. Working Capital 20. JIT 21.Vendor Selection 22. Vendor Evaluation

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Negotiation: 1. Negotiation merely a price reduction exercise- not true 2. Negotiation- battle ground- not true 3. Forum where buyer and seller discuss matters 4. Reach mutually acceptable solution 5. Negotiation aims at obtaining best value for money 6. Negotiation is a communication between buyer and seller 7. Primary focus on quality , quantity and timely supplies 8. Price, payment terms important but not at the cost of quality and timely delivery 9. Goods are purchased by buyer and not sold by a seller 10.Seller wants highest price (profit). Buyer wants to buy at the least price 11.Buyer does not know the cost of seller Seller does not know the strike price 12. Negotiation on logic and knowledge about the cost structure of product 35 13.Preparation of strategy and tactics

Elements of Negotiation
A) Price Factor 1) Item available ex-stock and is standard Quantity discounts Staggered deliveries Payment terms

2) Monopoly source Take it or leave it Develop second source Share the experience with other buyers Buyers cartel for rationing among consumers
3) Multiple suppliers Price and payment terms major consideration Get the best quality at lower price

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Negotiation
B) 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

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Negotiation
C) 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 negotiate Do not negotiate with lowest bidder only Negotiate with at least two/three lowest bidders Get market information from all vendors Use the information to get the best deal

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Negotiation D) Location of Meeting 1. Avoid noisy place 2. Avoid unventilated room 3. Avoid humid area 4. Avoid hotel lounge 5. Avoid too early time 6. Avoid very late evening time 7. Have proper seating arrangement 8. Have proper lighting in the room 9. Avoid presence of unwanted people 10.Avoid going out for a meeting in between

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11. Avoid incoming telephone calls 12. Avoid talking in the language which is understood by some 13. Offer tea/cold drinks during the meeting 14. Offer lunch if the meeting goes beyond lunch time 15. Offer separate room for consultation 16. Do not whisper among your own people 17. Avoid irrelevant discussion 18. Keep the discussions light and humorous
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Negotiation E)Authority of person negotiating

1. Seller and buyer should be at equivalent levels 2. Seller and buyer should have the authority to take decisions 3. Seller or buyer should not consult his superior during the meeting 4. Buyer/seller should not use the words we shall think about it and let you know 5. Confidence level should be high during negotiation 6. If buyer or seller becomes nervous, he is likely to lose out 7. One should not change his stand during the negotiation

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Negotiation F) Strategy and Tactics

Strategy: Basic plan of action to achieve objective Tactics: Means to translate plan into action Strategy and Tactics are to be worked out before the meeting 1. Study SWOT analysis of the opponent 2. Study your own requirement and stocks, sources and cost of alternatives 3. Study current market conditions 4. Study cost analysis of the product 5. Study buyers objective 6. Study sellers approach 7. Study terms of negotiation 8. Study details of pre-negotiation meetings 42 9. Study buyers strategy 10.Spell out role of individuals in negotiating team 11.Prepare contingency plan

Negotiation G) Qualities of a negotiator 1. Clear and rapid thinker 2. Able to analyze and judge the best course of action 3. Able to give and take & choose the best alternative 4. Able to assess the various consequences and take the best 5. Trained by IQ tests, group decision making process 6. Interpersonal and communication skills 7. Able to bring diverse interests to a single point of view 8. Must be patient and tactful 9. Must give objective hearing to what others have to say 10.Must have ready sense of humour 11.Should not forget his companys objective 12.Must have knowledge of product or service he is buying 13.Must have knowledge of socio- economic and political 43 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 view Buyer makes the presentation of each point to convince the supplier that his position is sound Supplier attempts to convince the buyer of validity of his position and the risk he is taking at quoted price
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As the negotiation progresses the points of differences gradually come down Supplier and buyer both try to maximize the benefits Depending on the relative strengths the final outcome emerges Strongest and most logical reasoning generally win The best negotiation should end with win-win situation

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Negotiation I) Guidelines for Negotiation

Purchase negotiations to be conducted by committee of officers One from indenting, one from Finance and third from purchase The level of officer to be decided by GM depending on value and type of material Negotiation should not be held by a single individual All proceedings of the committee should be recorded Negotiation to be conducted with two/three lowest bidders
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 Technical differences should be normalized before negotiation starts If the negotiation with three lowest bidders is unsuccessful ,extend it to fourth and fifth If a ring is suspected , non tenderers can be invited by asking them to submit the offer beyond due date If there is a single response to a limited tender, retendering is resorted to

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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 team Generally 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
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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

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Negotiation K) Theory of Bargaining

Price bargaining being a major constituent of negotiation, each party is guided by his own expectation If both the parties stick to their stance , a settlement is not possible Someone has to make a concession to close the deal Take an example of a seller who has his expectation of price between Rs 20 and Rs 30 The buyer also has his expectation for a price below Rs 30 The settlement at Rs 25 is possible if both know each others expectations In real life such ideal conditions do not exist and there will be several parameters complicating the negotiating process It is essential for the negotiator to know his position50 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 prices Retendering would not secure better advantage Lowest tender is technically not acceptable or is rejected for his credentials, inadequacy of capacity or unworkable rates with next higher offer unreasonably high In case of proprietory items, the quoted price is unreasonably high Some 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

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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 order b) External supplier. Manufacturing time c) Transportation or shipping time d) 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 52 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

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Lead time Elements of Lead time

1. The need for purchase of an item is recognized 2. Specifications are firmed up 3. Indent is raised 4. Indent needs to be approved 5. Indent is passed on to purchase section for action 6. Inquiries are sent and quotations are obtained 7. Prices, source, terms & conditions are finalized 8. If a new source is to be developed, quotes are invited through open tender, limited tender or a global tender 9. Comparative statement is made to identify the most suitable vendor 10. Price, payment and other terms are negotiated 54 11. The vendor is finalized 12. Purchase order is released

13. 14. 15. 16. 17. 18.

Acceptance of purchase order is obtained Manufacture of item is started Follow up on delivery schedule is done Stage-wise inspection is carried out Identify mode of transport The item is dispatched by ship/train/ truck 19. Item is received in stores 20. MR (material receipt) is prepared 21. Inspection before use is carried out 22. Accepted items are stored for issue to the indenting department 23. Rejected items are sent back to supplier 24. Payment is made to the supplier

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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. 56

Order Quantity Table

Item no

annual consumption value

no of orders per year

value per order

average inventory

60000

15000

7500

4000

1000

500

1000

250 total

125 8125
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Order Quantity Table

Item no annual consumption value no of orders per year value per order average inventory

60000

7500

3750

4000

1333

667

1000

1000 total

500 4917

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unit price Re 1, cost per order Rs 600 Order No of order Avg Inv Quantity orders Cost Inv Value units Per yr Per yr units (Rs) (Rs)

Economic Order Quantity

Inv Carry cost

Total cost (Rs)

200 500

5 2

3000 1200

100 250

100 250

30 75

3030 1275

1000
2000 5000

1
0.5 0.2

600
300 120

500
1000 2500

500
1000 2500

150
300 750

750
600 870
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Derivation of EOQ
EOQ= Q = \/ 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

/ --------------/ 2 M* Co / R* Cc

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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 \/

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Calculate EOQ Cc=30% (30/100) Cc= 2.5% pm Co= Rs 600 per order

M
10,000 25,000 100,000 500,000 1000 pm

R
1,000 2,500 10,000 50,000 1200

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Inventory Control in Practice 1. Staggered Deliveries 2. Ready Reckoner for EOQ 3. ABC analysis of items 4. A items controlled Daily 5. B items controlled weekly 6. C items controlled monthly 7. Cancellations of orders where the consumption is slow 8. Delay of deliveries where the consumption suspended for some technical reason 9. Decide min max for all items and adhere to limits 10.Revise the min max once a year for fine tuning 11.Make the list of non moving inventory 12.Make the list of slow moving items 13.Revise the current orders if necessary 14.Consult the functional heads for advance intimation of change in consumption pattern 63 15.Consult functional heads for new items required 16.Start research for these items

Types of Inventories 1. Raw Material 2. Work in Progress 3. Finished Goods 4. Fuel oils 5. Production stores & Tools 6. Consumables 7. Spares- MRO items a) Maint spares b) Overhauling spares c) Insurance spares d) Rotable spares For ABC analysis item 1,2,3 are generally not taken , as they may constitute 90% of total inventory Items 1,2,3 are always A items 64

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
1. Low inventories will result in less payment of interest 2. Efficient control will ensure improved and better service to users 3. Optimum inventories will ensure optimum service level 4. Low inventories will ensure release of much needed and scarce funds for expansion 5. To increase inventory turnover ratio
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6. Reduce cost by taking best buying decisions of when to buy and how much to buy 7. Efficient control ensures optimum inventory carrying cost and acquisition cost 8. Improve management controls 9. Reduce risk due to obsolescence 10. Ensures effective inter departmental coordination 11. Increases profit

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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 stock Reorder point= Buffer stock+Safety stock+Reserve stock Buffer stock=average demand during average lead time Safety stock= average demand during delivery delay 67 Reserve stock= variation in demand during average lead time

Techniques of Inventory Control:

( SELECTIVE CONTROLS)
All the items in the inventory need a periodic review More important items should receive greater attention How 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 time There are many ways to classify these items in inventory, the most important techniques are: ABC Analysis XYZ Analysis

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TECHNIQUES OF INVENTORY CONTROL

ABC Analysis.Annual usage value XYZ Analysis. Inventory value HML AnalysisHigh, medium, low unit price VED.vital,essential,desirable (importance) FSN.fast moving,slow moving, non moving SDE .scarce, difficult, easy to produce SOSseasonal or off seasonal GOLF.Govt, ord,local,foreign

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ABC ANALYSIS
Items are classified according to annual usage value Very few items which have large annual consumption value contribute significantly to the total inventory holding There are very large no of items which have very small annual consumption value and their contribution to total inventory is neglible Usually 10% of the items account for 70% of the total annual usage value The next 20% of the items account for next 20% of annual usage value Remaining 70% contribute just 10% of the total annual usage value

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ABC ANALYSIS : CONTROL PROCEDURE

For simplicity one can select: A items : having annual consumption value of over Rs 50,000 B items : having annual consumption between Rs 10,000 and Rs 50,000 C 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 :..everyday B items : ..every month C items : every 3/6 months

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ABC ANALYSIS

Item no

Annual consumption

Unit price

Annual cons value

2
4 6 8 10 7 1 5 3

10000
2000 5000 100 5000 1000 3000 600 500

11
11 3 100 1 12 100 30 200

110000
22000 15000 10000 5000 12000 300000 18000 100000

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ABC ANALYSIS
Item no Annual cons units Unit price Rs Annual cons Value Rs

1
2 3 4 5 6 7 8 9 10

3000
10000 500 2000 600 5000 1000 100 2000 5000

100
11 200 11 30 3 12 100 4 1

300000
110000 100000 22000 18000 15000 12000 10000 8000 5000

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ABC ANALYSIS

Item no 1 2 3 4 5 6 7 8 9 10

Annual cons units 3000 10000 500 2000 600 5000 1000 100 2000 5000

Unit price Rs 100 11 200 11 30 3 12 100 4 1

Annual cons Value Rs 300000 110000 100000 22000 18000 15000 12000 10000 8000 5000

Cumm value Rs 300000 410000 510000 532000 550000 565000 577000 587000 595000 600000
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ABC ANALYSIS
Item no 1 2 3 4 Annual cons units 3000 10000 500 2000 Unit price Rs 100 11 200 11 Annual cons Value Rs 300000 110000 100000 22000 Cumm value Rs 300000 410000 510000 532000 A A B B

5
6 7 8 9 10

600
5000 1000 100 2000 5000

30
3 12 100 4 1

18000
15000 12000 10000 8000 5000

550000
565000 577000 587000 595000 600000

C
C C C C C

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XYZ ANALYSIS
Item no quantity Unit price Inventory value Cumm value

2
9 1 10 3 8 4 5 7 6

5000
90 4000 500 2000 400 800 1000 30 50

50
100 200 10 50 25 100 50 400 300

250000
9000 800000 5000 100000 10000 80000 50000 12000 15000

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XYZ ANALYSIS
Item no quantity Unit price Inventory value Cumm value

1
2 3 4 5 6 7 8 9 10

4000
5000 2000 800 1000 50 30 400 90 500

200
50 50 100 50 300 400 25 100 10

800000
250000 100000 80000 50000 15000 12000 10000 9000 5000

800000
1050000 1150000 1230000 1280000 1295000 1307000 1317000 1326000 1331000

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XYZ ANALYSIS
Item no quantity Unit price Inventory value Cumm value

1
2 3 4 5 6 7 8 9 10

4000
5000 2000 800 1000 50 30 400 90 500

200
50 50 100 50 300 400 25 100 10

800000
250000 100000 80000 50000 15000 12000 10000 9000 5000

800000
1050000 1150000 1230000 1280000 1295000 1307000 1317000 1326000 1331000

X
X Y Y Z Z Z Z Z Z

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INVENTORY CONTROL PROCEDURE

Keep a watch on ABC and XYZ analysis simultaneously Generally A items should be in Z category B items should be in Y category C items should be in X category Continuous monitoring is required to ensure that A items remain in Z category or at the most in Y category In 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

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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

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STORES MANAGEMENT
The 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 functions Stores manager reports to Materials Manager Purchase Manager also reports to Materials Manager

81

ORGANIZATION STRUCTURE OF MATERIALS

DEPARTMENT

Matls Manager

Purchase manager

Stores Manager

Purchase Officer

Purchase Officer

Inventory Control

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OBJECTIVES OF STORES MANAGEMENT

Make available a balanced and timely flow of all materials Receive, inspect and issue the materials Sore all the materials at predetermined rack for each of the item Accept, store and arrange disposal of scrap and unwanted materials Optimize inventory level of all materials in stock so as to manage working capital efficiently

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FUNCTIONS OF STORES MANAGEMENT

1. Monitor inventory on daily basis to ensure timely availability of materials to the internal customers 2. Identification, codification and describing all items 3. Standardize all items in order to reduce the variety 4. Receipt of all materials 5. Inspection of all materials received 6. Storing all materials in warehouses 7. Stock control: receipt, issue and balance stock

84

FUNCTIONS OF STORES MANAGEMENT

8. Receive requirements from consumers and issuing materials as per the requirement 9. Stock records 10. Stock valuation and Stores accounting 11. Stock Taking 12. Stock verification

85

SECTIONS OF STORES
1. 2.

3.
4. 5. 6.

Identification Receipt and inspection Stocking and issues Despatch Ledger Stock verification

86

CENTRALIZED & DECENTRALIZED STORES

If 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 stores The purchasing is done centrally in bulk and the supplier is directed to deliver required quantity to every plant as per their schedule While 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

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DECENTRALIZED STORES
The co having 4/5 plants in the country will have their independent stores and the purchasing is also done independently, it is called decentralized system Here the co has both advantages of economy as well as independent efficient working Each 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 emergencies They only need to ensure that the codification of items is common in all stores

88

STORES ACCOUNTING, STOCK VERIFICATION & VALUATION

There are two aspects of stores accounting: 1. Physical stock verification 2. Stock 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: 1. Periodic verification or annual inventory 2. Perpetual or continuous inventory 3. Low point inventory

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STOCK VALUATION
Stock valuation is essential due to: 1. Inventory valuation: converting physical quantities of materials into monetary value 2. Material costing: cost of material consumed in order to evaluate the cost of products Methods of valuation of stocks: 1. First in first out 2. Last in first out 3. Average price or weighted average 4. Actual price 5. Replacement price 6. Standard cost

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