MATERIALS MANAGEMENT

Compiled by Gwizu K
OBJECTIVES
 By the end of the lecture, you should be able to;
1 explain the purchasing procedure of materials
2 explain cost of holding stock and ordering costs .
3 calculate economic order quantity
4. Calculate three levels of controlling inventory
ORIGINAL DEMAND

 Various departments demand various materials

 Demand can come from production, inventory control,

storekeepers and departmental mangers.
PURCHASE REQUISITION

 A purchase requisition is then raised by procurement

department
 It specifies the quantity and quality of materials

 It also specifies delivery requirements

SUPPLIER SEARCH
 A search for possible suppliers is then done using own
records, directotories and trade associations etc
 Can search suppliers in newspapers by inviting suppliers
to submit various tenders to supply goods
REQUEST FOR TENDERS AND
QUOTATIONS
 Request for tenders from potential
suppliers
 Suppliers then provide various quotations
for supplying requested materials
SUPPLIER SELECTION

 The right suppliers is then selected from a pool of

suppliers
PURCHASE OF ORDER

 A purchase order is the drafted.

 Purchase order is then dispatched and distributed to
various persons in the organization e.g fiancé director,
finance manager and cost and management accountant
MONITORING AND RECEIPT OF GOODS

 Progress should focus on chasing deliveries

 Make follow ups on supplies to speed up the delivery of
materials purchased.
RAISE GRN (GOODS RECEIVED NOTE)
 Check the goods to ensure they are the right quantities
and quality
 Raise GRN after inspecting the goods

 Use the purchase order to check against the goods

received.
STORING
 Goods taken to stores and the inspection note / GRN
note signed.
COST ASSOCIATED WITH MATERIALS
 There are two types of costs which are
associated with inventory; the cost of
making a purchase and the cost of keeping
the goods in inventory.
 These are known as the ordering costs and
the carrying costs respectively
ORDERING COST

Ordering costs of inventory include the

costs of placing a purchase order
including the clerical costs of preparing
a purchase order, cost of receiving the
material and the costs involved in the
inspection of the material.
Examples include
 costs of correspondence and communication,

 advertising costs for inviting tenders,

 tender evaluation costs etc.

 clerical costs of preparing a purchase order

 cost incurred on the transport of material from

the supplier to the factory or depot.
 inspection cost of material affects the total
ordering costs
COST OF HOLDING INVENTORY/CARRYING
COST OF HOLDING INVENTORY
COST OF HOLDING INVENTORY/CARRYING
COST OF HOLDING INVENTORY

The following costs make up the cost of holding

inventory:
 interest costs e.g a loan from the bank to finance the
purchase of raw materials
 costs relating to renting the premises, insurance for
the premises and for the inventory.
 Other costs include risk of obsolescence, deterioration
and theft.
ECONOMIC ORDER QUANTITY (EOQ) /
OPTIMAL ORDER QUANTITY
 a size of order for which the total of the ordering and
carrying costs is at the lowest possible.
 Economic order quantity can be understood with the help
of a graph:
ASSUMPTIONS OF EOQ
 a) The annual demand is certain and known.
 b) The time required for the receipt of material (known
as lead time) ordered is certain.
 c) There is no situation of stock outs.

 d) The entire material ordered is received in a single

batch.
 e) The per unit costs of material does not change.

 f) The costs are always known with precision.

GRAPHICAL METHOD
DETERMINING EOQ USING THE
FORMULAE METHOD
(CONT)
 Co= cost of ordering per order / consignment from
supplier
 Ch = cost of holding per unit of inventory per
annum / time period
 D = total demand during the period
EXAMPLE 1
 Calculate the economic order quantity from
the following information. Also state the
number of orders to be placed in a year .
 Consumption of material per annum 10,000
Kilograms
 Order placing cost per order $50
 Cost per kilogram of raw material $2
 Storage cost 8% of raw material cost per kg
EXAMPLE 2
 Tubes Plc manufactures picture tubes for televisions’
Details of their operation during 20X8 are as follows:
 Normal weekly usage 100 tubes

 Ordering cost $50 per order

 Inventory holding cost 20% per annum on cost of a tube

 Cost of tubes $300 per tube

 Calculate the optimal re-order quantity.

USING THE TABULAR FORM
 Ordering cost=AD/OQ x OCO

WHERE AD-ANNUUAL DEMAND

OQ-ORDERING QUANTITY
OCO-ODERING COST PER ORDER
TABULAR FORM (CONTINUED)
 COST OF HOLDING STOCK
=order quantity/2 x cost of holding stock per unit
EXAMPLE 3
 A firm is planning to purchase its orders of material as
follows: 100, 500, 1500, 3000, 6000 (tonnes)
 The annual demand for the material is 6,000 tonnes.

 Inventory holding costs are $1.20 per unit of material

cost per annum.
 The delivery cost per order is $7.

 You are required to calculate the best quantity to order.

 SOLUTION

100 500 1500 3000 6000

Average stock(A) 50 250 750 1500 3000
Number of orders(B) 60 12 4 2 1
Carrying costs 60 300 900 1800 3600
($1.20*A)
Ordering costs($7*B) 420 84 28 14 7
Total annual 480 384 928 1814 3607
costs(OC+CC)
EXAMPLE 4
 A firm is planning to purchase its orders of material(kgs)
as follows: 50,100,200,300,400,1000
 The annual demand is 3000 kgs

 Ordering cost per order is $10

 Carrying cost per unit of inventory is $0.80

 You are required to calculate the best quantity to order.

 Solution the best quantity to order is 300 kgs

 SOLUTION

50 100 200 300 400 1000

Average stock(A) 25 50 100 150 200 500
Number of orders(B) 60 30 15 10 7.5 3
Carrying costs 20 40 80 120 160 400
($0.80*A)
Ordering costs($10*B) 600 300 150 100 75 30
Total annual costs 620 340 230 220 235 430
INVENTORY CONTROL
 Inventory control includes recording and monitoring of
stock levels.
 Setting pre-determined inventory levels is an integral
part of the inventory system.
 Improper management of levels of inventory result in
stock outs.
INVENTORY CONTROL TERMINOLOGY
 Lead or procurement time
 Economic Order Quantity (EOQ)

 Buffer Stock/minimum Stock/Safety stock

 Reorder level

 Maximum level
INVENTORY CONTROL
THREE LEVELS OF INVENTORY
CONTROL
Typical methods of calculating major controls levels are
1. Reorder level
2. Minimum level
3. Maximum level
REORDER LEVEL
 Maximum usage x maximum lead time
MINIMUM LEVEL
 Reorder level-(average lead time x average
usage)
MAXIMUM LEVEL
Reorder level+ EOQ-(min lead time x min usage)
 EOQ is sometimes in other texts is referred as reorder
quantity
EXAMPLE 1
 Average usage 100kgs per day
 Minimum usage 60 kgs per day

 Maximum usage 140kgs per day

 Lead time 20-26 days

 EOQ 4000 kgs

Calculate the 3 normal levels of controlling stock

SOLUTION
 Reorder level=130 x =3380kgs
 Minimum level= 3380-(100 x 23)=1080kgs

 Maximum level=3380+400(60x20)=6180
EXAMPLE 2
 In Excellent Plc, two components of raw material i.e.
plastic and zygon, a chemical, are used for production.
The details of the use are given below:
 Normal usage 50 units per week of each

 Maximum usage 75 units per week of each

 Minimum usage 25 units per week of each

 Reorder quantity plastic: 300 units; zygon: 500 units

 Reorder period plastic: 4 to 6 weeks zygon: 2 to 4 weeks

REQUIRED
 Calculate the following for each component:
 (a) Reordering level

 (b) Minimum level

 (c) Maximum level

Reorder level = Maximum usage xMaximum lead time
 Reorder level for component plastic = 75 units x6 =
=450
 Reorder level for component xygon = 75 units x 4 = 300

Manimum level = Reorder level – (Average usage x

Average lead time)
 Minimum level for component plastic = 450 units – (50
units x 5) = 200 units
 Minimum level for component xygon = 300 units – (50
units x 3) = 150 units
 Maximum level = Reorder level + Reorder quantity -
(Minimum usage x Minimum lead time)
 Maximum level for component plastic = 450 units+ 300
units – (25 units x 4) =650 units
 Maximum level for component xygon = 300 units + 500
units – (25 units X 2) = 700 units