Average Materials Expenditure
Average expenditure of materials percent Above 65 Industry groups

Cotton yarn, earthmoving equipment, sugar,wool,jute,commercial vehicles, fabrication. Cotton textiles, bread. Engineering, non-ferrous. Shipbuilding, chemicals,tyre, machine tools,

60-65 55-60 50-55 cement,electricity. 45-50 40-45

Pharmaceuticals. Steel, newspaper, fertilizer, aircraft.

the follow up required to ensure timely suppliesincludes the travel cost for purchase follow-up. 4. b) Paper and Postage c) Follow-up costs.telephone bills. e-mail etc. . 2. 1. Right Source Right Price Right Quality Right Quantity Right Time COSTS Average Procurement Cost Cost of processing a purchase order through purchase department.KEY ISSUES IN MATERIALS MANAGEMENT 1. 3.telex.fax. 5. a) Salaries and wages of the purchase department. d) Receiving and inspection.

VI) Heat.preservatives etc.refrigeration etc.2) Inventory Carrying Cost a) b) Indirect Cost-COST OF CAPITAL Direct Costs I) Provision of Storage area and facilities like racks. deterioration. bins etc. V) Cost of chemicals. pilferage etc. breakage.light. 3) Shortage Cost a) b) Cost of lost production Downtime Costs c) Extra Cost which may have to be paid for a rush purchase . II) Salaries of stores Staff III) Insurance IV) Obsolescence.

7014 .20 Then Q = 707 units Actual A = Rs 200 ( W1= 2) Actual I ~ 20% = (W2=0.20 x 20= Rs 1414 Rs.5) Then Q -.1414 units Order Quantity 707 units No of orders = Ordering Cost = Inventory Carrying Cost Total Cost = 20.000/707 = 28 200 x 28 = Rs.100 I = 40% C = Rs.000 units A = Rs.Cost K=AD + ICQ Q 2 ICQ 2 AD/Q Q Actual Cost of ordering Actual Inventory Cost - W1A W2 I A and I are estimates D = 20.5600 707/2 x 0.

6. 2.2800 Rs. 3. Economic Purchase Quantity (EPQ) Rounding off Low D and High C Economies of Transport Shelf life for perishable goods Discounts Imports.Order quantity 1414 units Ordering Cost = Inventory Carrying Cost = Total Cost = i.e.25% increase in costs Rs. . 5.2800 Rs. 4.5600 1.

000 B items: between Rs.000 C items: below Rs. .10.100 Cumulative Percent issue value C B 75 90 A 10 25 100 Cumulative Percent number A items: over Rs.1000 and Rs.1000.10.

obsolete and surplus(review every 15 days) Maximum efforts to reduce lead time Must be handled by senior officers Estimates based on past data on present plans Quarterly control over surplus and obsolete items Moderate Can be handled by middle mana- 10. gement . 4. Very strict control No safety stocks (or very slow) Frequent ordering or weekly deliveries Weekly control statement Maximum follow-up and expediting Rigorous value analysis Moderate control Low safety stocks Once in three months Monthly control reports Periodic follow-up Moderate value analysis Loose control High safety stocks Bulk ordering once in 6 months Quarterly control reports Follow-up and expediting in exceptional cases Minimum value analysis Two reliable sources for each item Rough estimates for planning Annual review over surplus and obsolete material Minimum clerical efforts Can be fully delegated As many sources as Two or more possible for each item reliable sources Accurate forecasts in materials planning Minimization of waste. 7. 2.BROAD POLICY GUIDELINES FOR SELECTIVE INVENTORY CONTROL A ITEMS HIGH CONSUMPTION VALUE B ITEMS MODERATE VALUE C ITEMS LOW CONSUMPTION VALUE 1. 6. 9. 3. 5. 8. 11.

000 3.of Orders (Rs.) Average Inventory (Rs.000 1.500 500 250 125 Total: Rs 8.) 1 2 3 60.333 1.) No. Annual Consumption value (Rs.) Value per order (Rs.750 667 500 Total: Rs 4.125 Average Inventory(Rs.000 4 4 4 15.000 4.) Item No.500 1.) 1 2 3 8 3 1 7.917 . No.000 7.An Example on ABC Analysis Item No.of Orders Value per order (Rs.000 1.

based on year –end stores inventory value Fast Fx Inventory Value X Top 10% number 70% Stock value Y Medium 20% Z Low 70% number 10% Stock Value Slow Non-moving Sx Nx Fy Fz Sy Sz Ny Nz . 2. a) Fast b) Movement Availability Criticality Movement Analysis F S N Analysis Slow Non-Moving XYZ Analysis. 3.Limitations of ABC Analysis 1.

Controlled O: Available in open market L: Locally available F: Foreign Supplier or import purchase c) S O S Analysis Seasonal Off -seasonal Long Lead Time Short Lead Time Combining all three .a) S D E Analysis Availability Analysis Scarce b) Difficult Easy G O L F Analysis G: Govt.

Criticality Analysis a) V E I N Analysis for equipment Vital Normal Essential Important b) VED Analysis for components/parts Desirable Vital Essential Combining the two Critical Non-critical .

Service level should be nearly 100% without stock-outs. High inventory as working capital commitment is small.MUSIC –3D ANALYSIS Basis:Consumption value. . availability and criticality HCV items CRITICAL LCV items LLT C LLT 3 LCV NC LLT 7 LCV SLT C SLT 4 LCV NC SLT 8 LCV LLT C LLT 1 HCV CRITICAL SLT C SLT 2 HCV NC SLT 6 HCV NC LLT 5 HCV NON Policy for an item in cell 3 Large purchase quantity with annual ordering (even two years) subject to storage space being available and item not being perishable .

withdrawal. Maximum follow up and expediting with as many reliable sources as possible. delivery. Frequent orders or weekly deliveries.Policy for items falling in Cell 6 These items constitute the opposite of items in cell 3. supply status etc. The purchase quantity will be minimal as the item is non-critical and have high consumption value. The postings to be immediate and up-to-date continuous monitoring of information on stocks status. or these items should be bought as and when needed. consumption. Policy for items falling in cells I and 2 Very strict control to be exercised by very accurate forecasts. . Stock outs to be allowed with low service level as the item is costly but non-critical.

Safety stock: delay. Order EOQ= 2AD IC Reorder level is sum of: 1.This will be computed as:average consumption during maximum delay x probability of such 3. This will depend upon the service level which in turn will depend on the shortage cost. Providing for maximum variation in average demand during average lead time. Buffer stock: Reserve stock: Providing for average demand during average lead time. Providing for maximum delay in average lead time. 2.Q-System Fixed quantity varying interval. .

. 3. 4. Safety stock: Providing for maximum delay in average lead time.P-System Varying quantity fixed interval Fix a review period = EOQ/ D Desirable inventory level (DIL) is sum of 1. Quantity to be ordered=DIL-( on hand inventory plus on order) 2.This will depend upon the service level which in turn will depend on the shortage cost. Buffer stock: Providing for average demand during average lead time plus review period.This will be computed as: average consumption during maximum delay x probability of such delay. Reserve stock: Providing for maximum variation in average demand during average lead time plus review period.

6 7.D CD No.000 1.4 11. 3 Rs.000 57.000 80.60.000 600 Unit Price (C) Rs.0 K= 36 600+400+240 = 1 34.96 C.60.44 . CD I II III 3.20.Item Annual Demand (D) 1.of orders K. 2 Rs.600 600 400 240 17.

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