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/limitations
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

marks 20
Time: 2 hours

Attempt any 10 questions:

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
3

Descibe the functions of a purchasing

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.
11.

Materials Management
Attempt any 6 Questions:

Marks 30
Time 1 hour

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

Materials Management

Marks 30

Attempt any 6 Questions:

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
6
B) Methods of Buying
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
9

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

10

11

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.
12

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
13

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
15

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

17

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

18

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

19

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

20

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
21

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
22

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)
23

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.

24

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.

25

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

26

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
28

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

29

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
30
lessor since he is the owner.

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 %
32

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
33

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

34

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
If supplier has a loss, quality suffers

36

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

37

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

38

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

39

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
40

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

41

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

44

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

45

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
46

 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

47

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
48

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

49

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 position 50
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

51

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

53

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
54
10. Price, payment and other terms are negotiated
11. The vendor is finalized

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

55

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
56
operation of the company.

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

125

total

8125

57

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

500

total

4917

58

Economic Order Quantity

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)

Inv
Carry
cost

Total
cost
(Rs)

200

3000

100

100

30

3030

500

1200

250

250

75

1275

1000

600

500

500

150

750

2000

0.5

300

1000

1000

300

600

5000

0.2

120

2500

2500

750

870
59

Derivation of EOQ
/ --------------/ 2 M* Co / R* Cc

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

60

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
\/
61

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

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

62

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
64
Items 1,2,3 are always A items

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
65

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

66

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

68

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

69

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

70

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

71

ABC ANALYSIS
Item no

Annual

consumption
10000

Unit price

Annual cons

11

value
110000

2000

11

22000

5000

15000

100

100

10000

10

5000

5000

1000

12

12000

3000

100

300000

600

30

18000

500

200

100000

72

ABC ANALYSIS
Item no

Annual cons

Annual cons

units
3000

Unit price

10000

11

110000

500

200

100000

2000

11

22000

600

30

18000

5000

15000

1000

12

12000

100

100

10000

2000

8000

10

5000

5000

Rs
100

Value Rs
300000

73

ABC ANALYSIS
Item no

Annual cons

Annual cons

Cumm value

units
3000

Unit price

10000

11

110000

410000

500

200

100000

510000

2000

11

22000

532000

600

30

18000

550000

5000

15000

565000

1000

12

12000

577000

100

100

10000

587000

2000

8000

595000

10

5000

5000

600000

Rs
100

Value Rs
300000

Rs
300000

74

ABC ANALYSIS
Item no

Annual cons

Unit price
Rs
100

Annual cons
Value Rs
300000

Cumm value

units
3000

Rs
300000

10000

11

110000

410000

500

200

100000

510000

2000

11

22000

532000

600

30

18000

550000

5000

15000

565000

1000

12

12000

577000

100

100

10000

587000

2000

8000

595000

10

5000

5000

600000

75

XYZ ANALYSIS
Item no

quantity

Unit price

Inventory

5000

50

value
250000

90

100

9000

4000

200

800000

10

500

10

5000

2000

50

100000

400

25

10000

800

100

80000

1000

50

50000

30

400

12000

50

300

15000

Cumm value

76

XYZ ANALYSIS
Item no

quantity

Unit price

Inventory

Cumm value

4000

200

value
800000

5000

50

250000

1050000

2000

50

100000

1150000

800

100

80000

1230000

1000

50

50000

1280000

50

300

15000

1295000

30

400

12000

1307000

400

25

10000

1317000

90

100

9000

1326000

10

500

10

5000

1331000

800000

77

XYZ ANALYSIS
Item no

quantity

Unit price

Inventory

4000

200

value
800000

5000

50

2000

Cumm value
800000

250000

1050000

50

100000

1150000

800

100

80000

1230000

1000

50

50000

1280000

50

300

15000

1295000

30

400

12000

1307000

400

25

10000

1317000

90

100

9000

1326000

10

500

10

5000

1331000

78

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

79

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

80

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

82

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

83

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

87

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

89

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

90

91