Receiving & Store Keeping

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DEEP-ARCHAN
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MATERIALS AND PURCHASING MANAGEMENT

Author S. A. Chunawalla
Himalaya Publishing House
1

Introduction
a) Receiving & Stores is service function involving lot of paper work.
b) Receiving & Stores is key function of MM because
1) End product quality depends on input materials
2) Smooth & uninterrupted production depends on stores function
3) Stores function act as custodian of stock items.
4) Stores function directly or indirectly affect production cost Directly by its strategic location & by eliminating production
stoppage waiting for materials &
indirectly by reducing inventory carrying cost.
** **

Stores Functions
a) Receipt receives & accounts inventories
b) Storage Stores, preserves from deterioration & protects from
damage & pilferage
c) Retrieval Easy accessibility of materials & optimum space
utilization. Ease in locating & recovering materials.
d) Issue proper issue of inventories on receiving requisitions
e) Records proper records of issues & receipts
f) Housekeeping space is kept neat & clean so as to function
satisfactorily
g) Surplus Stock Scrap & surplus disposal management
h) Verification Physical verification & purchase initiation to avoid
stocks
i) Coordination & Cooperation To interface with production,
inspection, etc.
** **
3

Receiving of Materials
a)
b)
c)
d)
e)
f)
g)
h)
i)

j)

Important control point

Unloads consignments checks its condition -- opens consignments
Verifies contents with packing slip purchase order
Details are recorded in separate statement Goods Receipt Note
(GRN) GRN is basis of invoice payment, order closure, etc.
As required, conditions of goods, weights / physical volumes are
checked & discrepancies are recorded on GRN
Inspection compares quality of goods with specifications with
technical measurement & tests.
Inspection report (IR) may be separate form or combined with GRN
GRN & IR copies sent to Purchase, Accounts, User, etc.
Segregation if rejection Return / scrap / correct at suppliers cost
or accept at reduced price -- inspection report to Stores,
Production, Accounts, Disposal & Purchasing
Sends accepted materials to Stores section with proper records
4

Store-Keeping
a)

b)
c)

d)
e)
f)

Place for everything & everything at its place

Reasons of indispensability Storing function
Raw Materials: Quantum & frequency of use of supply from distant
supplier | Pre-operation seasoning | Price advantage on seasonal
availability | Long lead time & high rate of consumption | Economy
in ordering cost | Imported materials under quota system
Work in progress: Balancing production flow | Using idle capacity |
Even out difference between demand & supply
Consumable Stores: Daily consumption insignificant for daily
purchase
Spares: Low consumption so purchased in bulk & kept for future
Ready made component: purchased in advance for uninterrupted
production flow.
Scrap: disposed off in bulk.
** **
5

Store-Keeping
Disadvantages of High Inventory

Disadvantages of low inventory

Locking working capital

Production stoppage

High Insurance charges

More storage space

Idle production capacity

Idle labor time

Deterioration in material quality

Liability of fixed overheads

Chances of Theft & pilferage

Failure to meet delivery order

Evaporation of volatile materials

** **

Store-Keeping - Responsibilities
1.
2.
3.
4.

5.
6.
7.
8.
9.

Assigning storage locations

Labeling storage locations
Bin cards at each bin
Segregating issue, receipt &
storage areas so that
unauthorized entry avoided
Lock & key arrangement for
pilfer-able / attractive items
Organizations ownership
marking on such items
Surprise checks
Stacking away from compound
walls
Store opening & closing
procedures adequate &
complied

10. Security persons, positions &

practices
11. Fire precautions & Fire Fighting
12. Segregation of hazardous &
non-hazardous goods
13. Maintain adequate space
between stacks
14. Combustible materials -- kept in
open
15. Statutory compliance e.g.
Factories Act 1948, Petroleum
Act 1934, Indian Explosives Act
1884
16. Insurance requirements
17. House keeping
18.
7

Store-Keeping - Responsibilities
18. Identify factors causing
b) Physical / Chemical agents
deterioration
(sunlight, heat, reactive gases,
a) Inherent properties of materials
dirt, dust & grit, salts, etc)
b) Attributes of agencies naturally c) Biological agents (Fungus,
tend to alter conditions of
bacterial, insects, rodents, etc.)
materials
20. Protective measures for
c) Environment governing interplay
deterioration (treatment, shelf
of a & b above
life, order of issue, suppliers
19. Identify agents of deterioration
packages, air conditioned
a) Climate / environment
storage)
(Temperature, rainfall, humidity,
wind, etc)

Identification system of materials

Refer Classification & Codification
8

Location of Stores
1.
2.

3.
4.
5.
6.

7.

It has direct bearing on product costs

Basic principles of stores location:
Straight line movement with minimum of back tracking
Minimization of handling, re-handling & internal transportation costs
Minimization of waste motion of personnel & reduced human hazard
Efficient utilization of storage space & provision for flexibility &
expansion of stores area
One central godown or in distantly located godown
Distantly located godowns for receiving materials for remotely
located production centers
Optimum stores location is decided based on objective function with
help of quantitative techniques
Stores location differs as per (a) divisibility of total storage space,
(b) type of business activity (multi-product, multi-plants, multilocation, etc), (c) type of production process, etc.

Location of Stores
7.

Fundamental Locations:
Raw materials at beginning of production process shop,
work-in-process between previous & following operation,
finished goods near shipping area,
spares, tool, etc in central stores

Layout of Stores
1.
2.

3.

4.
5.

Place for everything & everything at its place

Point of receipt & point of use may not be same
In between, stores provides space for materials in form of
constructed building / godown, temporary structure, open yard, etc.
Type of storage space depends on quantity, characteristic of
materials such as liquid, fragile, weight, dimension, cost, volatility,
etc.
Due space consideration required for movement of material
handling equipment in stores

10

Layout of Stores
5. Ways inside are divided into main tracks & side streets. Main tracks
for 2 way movement & side streets for 1 way
6. For economy in use of space, vertical stacking is done within limits of
height of ceiling, weight of material & capacity of container, etc.
7. Types of material handling equipment
Pallet & Skids
Open & Closed Shelving
Cabinet with or without countertop
Bins
Stacking boxes
Special Storage racks
Gravity feed racks
Outdoor platforms & racks
***

11

Principles of Efficient Layout of Stores

1. Floor area shall be adequate & suiting specific characteristic of
materials
2. Floor load must be adequate
3. Wide enough gangways to allow material handling & withdrawal
from bins & racks
4. Weighty item shall be stored as low as possible
5. Frequently used items shall be located near issuing windows
6. Obstructions (pole, partition, staircase, etc) shall be reduced /
eliminated.
7. Racking shall allow normal movement of air & temperature
distribution.
8. Waterproofing to be assured as may go unnoticed unlike production
area
9. Evenly distributed load in vertical stacking by intervening shelves.
It shall provide clearance from ceiling height to allow in case of fire
fighting
10.
12

Principles of Efficient Layout of Stores

10. Equipped with material handling, computing & weighing scales
11. Safety to personnel & security to items stored.
12. Location system shall pin point any item stored inside.

Approaches to Locations within Stores

Placing materials inside stores room is tackled by 3 approaches
I. Fixed Location:
Specific fixed place is assigned to each item on any following basis
(a) supplier (b) similarity of item (c) joint issue of items (d) size &
frequency of use.
Last basis (d) is more efficient & economical as fast moving items
near point of issue & slow moving in remote area.
II. Random Location:
Materials are stored at any vacant place available in store room.
Workable approach, of few items, operated by 1 or 2 persons.
Location is memorized by store-keeper.
Most unscientific method with many drawbacks
13

Approaches to Locations within Stores

III. Zoned location:
Total storage space is divided into different zones.
Popularly 3 zones for
(a) bulk stock
(b) reserve stock
(c) indirect materials like spares & consumables.
Zones can be on other basis also like Liquids, metal bars,
inflammables, costly materials, dangerous materials, etc.
This approach is for maximum benefit from available space & other
facilities.
Location coding
Similar to material codification
Desirable where large # of items in godowns at different locations
Location is identified in terms of number for warehouse, row,
column, racks, shelf, bin, etc.
***
14

Merits of Centralized Stores

1. Bulk buying few orders Quantity discount low transportation
costs
2. Possibility of standardization of materials reducing variety of items
3. Reduced investment in inventory
4. Reduction in administrative costs
5. Reduction in requirement of personnel
6. Reduced storage space & other incidental expenses
7. Greater safeguard against pilferage & theft

Demerits of Centralized Stores

1.
2.
3.
4.

Increase in material handling costs

Possibility of bottle neck & resultant delays
Possibility of communication gap between user of item & its supplier
In absence of proper design of routine work , administrative cost
may go up
5. Greater danger of loss by fire
** **
15

Record Keeping of Materials

1.
2.
3.
4.
5.

Because value in materials

Record keeping Quantity & Value proper & efficient
Inevitable for accounting & costing purpose
Guides fresh purchase or disposal
Basis of charging production processes or jobs according to asset
value locked in inventory received for process / job.
6. Two classes (a) Bin Card (b) Stores Ledger
***

16

Bin Card
1.
2.
3.
4.
5.

Bin card or Stock Card attached to each bin / shelf / other container
It is kept on desk of store keeper for item (like coal) stored in open yard
Used as record of Qty of each material, received, issued & on hand daily
Have only Qty column & not considered for accounting price of materials
It specifies location, description, maximum, minimum & reorder level,
date, receipt, issue & balance Qty.
Bin Card

Bin No.

...

Maximum Qty

...

Material Code No.

...

Ordering Level

...

Stores Ledger Folio

...

Minimum Qty

...

Date

Qty
Received

Qty
Issued

Balance

Remarks

... | |

...

...

...

...

... | |

...

...

...

...
17

Stores Ledger
1. Its objective keep proper record of Qty & value of each type of
materials
2. This record charges respective dept. & jobs at price of materials issued
3. It is maintained as loose leaf card basis with separate card for each item
4. It specifies account number, location, item description, measurement
unit, maximum, minimum & reorder level, receipt, issue, balance in Qty
& value.
5. It also maintains columns for outstanding order, unit reserved /
appropriated for special jobs.
6. Outstanding order column helps in reviewing actual & probable supply
for guiding production schedule.
7. Reserved column materials for strategic need not considered for
ascertaining stock in hand for recording
8. Appropriated column for uninterrupted execution of certain orders
9. Provision of such columns on basis of organizational need
10. Material Requisition Issue of materials copy to stores ledger clerk
entry in issue section of ledger card with date, dept., Qty, unit cost
& total cost New balance calculated & entered

18

Issue of Materials
1. Against authorized materials requisitions
MATERIAL REQUISITION
Material required for ..<Specify job/process>..

No..

Department ..

Date ...|...|...

Sr.
#

Description Code #

Qty
Demand

Requisitioned by

2.
3.
4.
5.
6.
7.

Approved by

Rate

Amount Stock Ledger Page #

Supplied
Material Issued by

Received by

issues are recorded in stores ledger

Respective depts. / jobs are debited with price of materials issued
Time of purchase & time of issue mostly differ
Market price of materials vary with time
So, policy required to deal with problem of pricing issued materials
Fundamental consideration price the issues at historical (original
purchase) price or at replacement (prevailing market) price
19

Principles & Methods of Pricing the Issues

1. Issues are priced on basis of acquisition cost of materials Visible
acquisition cost includes price of material, freight, etc. Invisible
acquisition cost includes ordering, receiving, inspection, storing, etc.

First In First Out (FIFO) Method

1. Principle materials received first are issued first
2. Issues are priced at cost price of oldest consignment till it gets exhausted
3. On exhausting oldest lot, issues are priced at cost price of next oldest lot
in sequence.
4. E.g. transactions occurred during September 2014
September
2014

Purchased

Issued

Qty
units

Rate
Rs/unit

Value
Rs

1st

200

1000

1000

3rd

500

3000

4000

5th

Qty
units

Balance

Rate
Rs/unit

Value
Rs

Qty
Units

Value
Rs

200

1000

100

600

400

2400

20

Last In First Out (LIFO) Method

1. Principle materials received last are issued first reverse of FIFO
2. Issues are priced at cost price of Latest consignment till it gets
exhausted
3. On exhausting Latest lot, issues are priced at cost price of next latest
lot in sequence -- Issues to carry cost of most recent materials So,
replacement cost method
4. Like FIFO, physical movement of materials in storage in sequence of
purchase is imaginary
5. E.g. transactions occurred during September 2014
September
2014

Purchased

Issued

Qty
units

Rate
Rs/unit

Value
Rs

1st

500

2500

2500

3rd

300

1800

4300

5th

Qty
units

Balance

Rate
Rs/unit

Value
Rs

Qty
Units

Value
Rs

300

1800

100

500

400

2000
21

Average Cost Method

1.
2.
3.
4.
5.
a)
b)
c)
d)

Issues are charged at price from varied prices of several lots

Advantageous to use when prices are constantly changing
It evens out extreme price changes when prices are rising / falling
Upward & downward trends are moderated unlike FIFO / LIFO
Different ways
Simple average of stock on hand at price of issue
Simple average at close of month & apply it to all in following month
Simple moving average
weighted average

September

Purchased

2014

Qty units

Rate Rs/unit

Value Rs

Lot 1

1000

3000

Lot 2

5000

25000

Total

6000

28000

Simple Average Cost

Weighted Average Cost

= 8/2 = 4
= 28000/6000 = 4.67

22

Replacement Price Method

1. Also, known as market price method issues are priced at prevailing
market price on date of issue
2. Principle issues shall be charged the price at which they could be
replaced immediately with fresh purchase
3. Applicable to standardize raw materials traded at commodity exchanges
(e.g. cotton, cereal, certain metals, etc.) as ease in ascertaining in media
4. Advantage is consideration of significance of current market price
5. It enables comparison of operating efficiencies with competing units
6. Comparison between purchase price & issue price reflects on efficiency
or other wise purchase department
7. Drawback is distortion of data for accounting purpose necessitates
adjustment in stores ledger
8. There is bound to be discrepancy between purchase price & issue price
9. Difference between purchase price & market price is adjusted to Price
Fluctuation Reservation Account which indicates efficiency / inefficiency
of purchase departments
***
23

Standard Price Method

1. Materials issues are charged at predetermined / budgeted /
estimated price reflecting normal / effected future price.
2. Standard price is fixed after careful examination of current market
price, price trend, market condition, etc.
3. It is applicable for a definite period say month / quarter / year
4. Material receipts are recorded at actual price & issues at standard
price
5. So, discrepancies between actual & standard price
6. This difference is recorded to a separate Price Variation Account
7. Standard price is revised periodically if discrepancies go beyond limit
8. Advantage of method pricing of issues is simplified unlike FIFO,
LIFO, Average Cost method in which issue price need to be ascertain
after each issue.
9. However, this method is not advisable if materials prices are
fluctuating frequently & substantially.
24

Actual Price Method

1. Material issues are priced at actual acquisition cost of respective
materials
2. It is applicable when purchases are for specific jobs & kept physically
separate in storage
3. Each material receipt is recorded in separate stores ledger card.
4. This method is relatively awkward. However, advised for few costly items
used in processing & non-standardized items to meet customers specs.
5. It is more suitable for jobbing industries.

Inflated Price Method

1. Pricing is based on uniform spread of normal wastage on residual units
2. Normal wastage incidental to materials usage e.g. loss of breaking the
bulk, evaporation, etc.
3. Cost of normal wastage is absorbed by good units through charging
issues at inflated price
Recd Qty Recd Price
100

15

Recd Value
1500

Loss Residual Qty

10%

90

Issue Price
16.67 = 1500/90

25

Replacement of Materials
1. Reorder Level
= (Lead Time X average consumption rate) + Safety Stock
Minimum Level = Safety Stock
Maximum Level = Safety Stock + Reorder Quantity
2. Two-Bin System :
Inventory is divided in 2 parts
Issues are made from 1st part
2nd part is kept reserved till 1st part is exhausted
On exhausting 1st part, order is placed for replenishment for fixed
quantity
Reserve part serves as reordering level
2 parts are segregated even by line
It is for low cost, high volume & consistently used items without
record keeping
3.
26

Replacement of Materials
3. Mini-Max System
When inventory reaches predetermined minimum level,
replenishment up-to predetermined maximum level.
Minimum level serves as reordering point.
Fresh order qty is as per deficiency in maximum level.
So, order quantity is variable.
It is for low cost, high volume & consistently used items.
3. Imprest System
Reordering is at regular time intervals.
Predetermined maximum level of each item.
At a particular fixed period, collective order for all items.
Order or Replenishment Qty =
= Shortage from maximum level = Qty consumed during period.
Order Qty vary considerably
** **
27

Physical Verification of Materials

a) Need for physical verification of stock of materials as Stock records
in bin cards / stores ledger do not tally with physical Qty due to
Wrong recording in bin Card,
Placement of material in wrong bin,
Mixing in adjacent bin,
Loss due to breaking the bulk,
Evaporation of volatile materials, Pilferage, etc
b) Two methods of inventory verification
1. Periodic Inventory Verification
All items in storage are verified through counting, weighing,
measuring, etc. at end of specific period (Quarterly / 6 monthly /
yearly).
It is huge task. Additional staff is employed.
It is also required for annual accounts to value stock-in-hand. Issues
are not made during verification.
This method gives correct picture.
2.
28

Physical Verification of Materials

b)
2.

Two methods of inventory verification

Perpetual Inventory Verification :
continuous rather than end of period function.
Each item verified in rotation twice / thrice during year.
Items at minimum level are generally selected for verification
reducing burden of verification.
Storekeeper does it at convenience without additional staff.
It easily & promptly locates reasons for discrepancies & serves as
deterrent to pilferage.
Such control not possible in periodic verification.
However, in it valuation of inventory is on book value at end of
accounting period
** **

29

Disposal of Waste & Scrap

1. Waste & Scrap consists of following a) Spoiled raw materials b)
Rejected Components c) Defective parts d) Obsolete Stores &
equipments e) waste from production f) non returnable containers
& packing cases
2. Such waste & scrap may have commercial value
3. So, they are disposed periodically & proper credit of realization is
taken in books of accounts.
4. Such disposal releases storage space.
5. Disposal by auction or by tender

** ** ** **

30