Materials Management Overview

External procurement of materials and services ,

Determination of sources of supply for a requirement
Monitoring of deliveries
Invoice Verification of Invoices submitted by vendors
Inventory Management function
Materials Management Overview

What is Materials Management ?

Material
Material
Management Inventory
Inventory
Procurement
Procurement
Procurement
ProcurementManagement
Management
Management

• Requisition Planning • Receiving

• Purchase Requisitions • Disbursement
• RFQs • Materials • Physical Inventory (Raw Material, Semi
• Contracts • Vendors Finished Goods, Finished Goods)
• Purchase Orders • Information Records
 Centralized Vs Decentralized Purchasing
 Company can organize purchasing function in the following ways:
– Centralized purchasing, with just one purchasing organization
– Distributed purchasing, with a number of different purchasing organizations
each responsible for different plants
 Centralized Vs Decentralized purchase

• Centralized Purchase – Single purchase dept

responsible for making all purchases

• Decentralized Purchase – Each branch or

department makes its own purchase. If
branches or plants are located at different
places then decentralized purchase is
preferred.
 Centralized Purchase
Advantages
• Specialized and expert purchasing staff
• A firm policy can be initiated for favorable
terms of purchase
• Standardization of quality of raw material
• Better control over purchase
• Reporting can be eased
 Centralized purchase
Disadvantages
• Higher administration costs not beneficial for
small concerns
• Not suitable for plants and branches located at
different places
Purchase Process
 Procurement Cycle
p
Determine requirements and
potential sources; negotiate with Convert requisitions to
suppliers to set up agreements; Purchase Orders or create
create supply plans replenishment orders

Logistics Invoice
Verification and
payment
Goods delivered

Invoice receipt
 Purchasing - overview

• The Purchasing department has the following tasks:

· external procurement of materials and services
· determination of possible sources of supply for a
requirement identified by the materials planning and
control system
· determination of possible sources of supply for a
requirement arising directly within a user department
· monitoring of deliveries and payments to vendors
 Purchasing Documents
• A purchasing document is an instrument used by Purchasing department to procure
materials or services.
• Types of purchasing documents
– Purchase Requisition
The need to procure a material, product or service originates in a specific department
with a purchase requisition. Internal document used to communicate or request for
Material Procurement from user departments. Purchase requisition can be issued by
Storekeeper, Production Planner, Plant Engineer, Department Heads

– Request for quotation (RFQ)

Transmits a requirement defined in a requisition for a material or service to potential
vendors . If no sources (vendors) are available, quotations are solicited. A request for
quotation (RFQ) transmits the need for materials to potential vendors.

– Quotation
• Contains a vendor's prices and conditions
• It is the basis for vendor selection.
 SELECTION OF SUPPLIER
• A list of suppliers for each type of material
exists with the purchase deptt.
• For specific type of material required
demanded for a job – supplier are searched
• Selection of supplier depends who supply best
quality, lowest possible price, delivery dates,
terms and conditions of purchase
 Selection of Supplier and Purchase Order

• On-line vendor selection simplifies the selection process, and provides for
the continuous tracking of information such as vendor quotations.

• The individual who selects the vendor then creates the purchase order for
the materials. ( Three copies)

• Purchase order (PO)

– The buying entity’s request or instruction to a vendor (external
supplier) to supply certain materials or render/perform certain
services/works,
– It formalizes a purchase transaction .
– Contractual commitment to supplier.
TWO TYPE OF OUTLINE AGREEMENT

Scheduling Agreements –A form of outline agreement under

which materials are procured on predetermined dates within
a certain time period. Delivery of the total quantity of
material specified in a scheduling agreement item is spread
over a certain period in a delivery schedule, consisting of
lines indicating the individual quantities with their
corresponding planned delivery dates. No need to raise
orders against.

Contracts - A type of outline agreement or longer term

buying arrangement against which release orders can be
issued for agreed materials or services as and when required
during a certain overall time frame. The contract is a binding
commitment to procure a certain material or service from a
vendor over a certain period of time.
Blanket PO’s -

Are open orders with a validity period and value limit. Designed
for low value orders, e.g. consumables. Do not require a goods
receipt - invoice okay to pay as long as value limit or validity
periods are not exceeded.
 Follow Up
• The purchasing Officer should be in contact
with the vendor as to when the materials will
be received, shipping conditions, etc.

• To ensure timely delivery

• To prevent stoppage in production

Inventory management involves the receipt, storage, control and disbursement of
materials and supplies.

Goods are Goods are Goods are Goods are

physically stored and controlled either
received movements (physical consumed or
are tracked inventory) dispersed
 Receiving of Goods

Vendor

Goods receipt

Storage Loc 2
Transfer posting

Storage Loc 1
Goods issue

Scrapping Consumption
 Receiving of Goods

• Goods are received by the Receiving

Department
• Unpacking the goods and verifying the
quantities and conditions
• Quantities are checked against the purchase
order and suppliers advice note.
• Goods Received Note is prepared. (4-5 copies)
 Inspection of Goods
• Goods are inspected for quality to ensure that
it complies with the specifications stated in
the purchase order.
• For technical and laboratory inspection goods
are passed to laboratory for quality report.
• An inspection report is prepared separately or
incorporated in the Goods Received Note
• Report is forwarded to the Purchasing Dept.
 Return of Rejected Materials
• Materials damaged or not in accordance with
specifications are returned along with a Debit
Note along with the value of materials.
• Debit Note may be prepared by the Purchase
Dept. on the basis of inspection report (3
copies. –supplier, purchase dept. and Accounts)
• A credit note is issued by the supplier signifying
his acceptance
 Storage
– If the material is an inventoried item, such as a
raw material, finished good or semi finished
goods, the material is shipped to the
warehouse, and stored in inventory by a
warehouse material handler.

– If the material is not inventoried, it is

delivered to the requisitioner.
Documents for Goods Movement

Storage Location

Entry Material Exit

Goods movement

When posting any transaction for goods movement, two types of documents are created:

Material Accounting
document document
 Store Documents
•A material document and accounting documents are
created for movement of goods.
•The material document describes the movement of
goods from the point of view of the warehouse. (Store
Requisition Note (Indent), Bills of Materials (BoM)
Materials Return Note, Materials Transfer Note, etc.)
• The accounting document describes the goods
movement from the point of view of the accounting
department.
 Passing of Invoices for Payment
• Invoices must be verified and matched with
the corresponding purchase order and goods
receipt, for that product/material for payment
to the vendor
Logistics Invoice
Verification and
payment
 Definition of inventory control
Inventory Control is defined as
the supervision of supply,
storage and accessibility of
items in order to ensure an
adequate supply without
excessive oversupply.
Dimensions of inventory control
 Objectives
 No over stocking
 No under-stocking
 Economy in purchasing
 Proper quality
 Minimum wastage
 Information about material
In nutshell The objective of inventory management is
to have the appropriate amounts of materials in the
right place, at the right time, and at low cost.
 Need for inventory control

 To manage inventories effectively and efficiently in

order to avoid unnecessary investment in them.

 If a company's inventory level is too low, it risks

delays in fulfilling it's customers orders.

 If the inventory level is too high, it is using up

money that can be better used in other areas.

 It also risks obsolescence and spoilage.

 ABC Analysis
 ABC analysis is based on pareto prinicple (80-20 rule)

 80% of the overall consumption value is based on 20% of

the total items
 Small proportion of the items may represent bulk of
money value of the total inventory used in production
process
 It is value based system

 It selective control system

 Each item of inventory is given
A,B or C denomination depending upon the amount
spent on the particular item
A ITEMS VALUE IS HIGHEST -70% ONLY 10% OF THE ITEMS

B ITEMS VALUE IS MEDIUM -20% ONLY 20% OF THE ITEMS

C ITEMS VALUE IS LOW -10% ONLY 70% OF THE ITEMS

 ABC Analysis benefits in form of guidance to manager

ACTIVITY A ITEMS B ITEMS C ITEMS

MONITORING VERY STRICT STRICT MODERATE

SAFETY STOCK TO LOW MEDIUM HIGH

MAINTAIN
LEVEL OF CONTROL TIGHT MODERATE LOW

ESTIMATES OF VERY ACCURATE MODERATELY MAY BE LOW

REQUIREMENTS ACCURATE
FREQUENCTY OF MOST FREQUENT LESS FREQUENT LEAST FREQUENT
PURCHASE
TURNOVER MAXIMUM MEDIUM LEAST TURNOVER
TURNOVER
MANAGEMENT TOP LEVEL MIDDLE LEVEL LOWER LEVEL
INVOLVEMENT
Classification of items of ABC category
Classification of items of ABC category
 CATEGORIZATION AND SUMMARY

CATEGORY ITEM % OF ITEMS IN TOTAL % OF TOTAL

INVENTORY MONEY MONEY VALUE
VALUE

A 6 10% 5950 70

B 2,7 20% 1615 19

C 1,3,4,5,8,9,10 70% 935 11

TOTAL 10 100% 8500 100

ABC analysis chart
ECONOMIC ORDER QUANTITY
 Definition & Meaning of EOQ.

• EOQ, or Economic Order Quantity, is defined

as the optimal quantity of orders that
minimizes total variable costs required to
order and hold inventory.
 Definition & Meaning of EOQ.

• The quantity, which is ordered when the stock

of an item falls to the reorder level, is known
as the reorder quantity or the EOQ or the
economic lot size.
• The re-order quantity should be such that,
when it is added to the minimum quantity, the
maximum level is not exceeded.
 Definition & Meaning of EOQ.

• The re-order quantity depends upon two

important factors viz, order costs and inventory
carrying costs.
• The above two types of cost are of opposing
nature.
 Importance of EOQ :-
• Proper Co-ordination
• Centralized Purchasing
• Proper Scheduling
• Proper Classification
• Use of Standard Forms
• Safe Storage
• Reduce Cost
 Ordering Cost
 Cost of procurement form a part of Ordering
Cost. Ordering Cost is dependant and varies
based on two factors - The cost of ordering excess
and the Cost of ordering too less.
 Both these factors move in opposite directions to
each other. Ordering excess quantity will result in
carrying cost of inventory. Where as ordering less
will result in increase of replenishment cost and
ordering costs.
 Ordering Cost- Examples

• The costs of preparing a requisition, a

purchase order,
• Freight in case of order quantity vary,
• Receiving and inspection inventories,
• Stocking the items when they arrive,
• Processing the supplier's invoice,
• Remitting the payment to the supplier.
 Carrying Cost

Inventory storage and maintenance involves

various types of costs namely:

 Inventory Storage Cost.

 Cost of Capital.
 Inventory Storage Cost
 Cost of Building Rental and facility maintenance and
related costs.
 Cost of Material Handling Equipments,
 IT Hardware and applications,
 Depreciation or rental or lease as the case may be.
 Operational costs,
 Cost of Consumables,
 Communication costs and utilities,
 Cost of human resources employed in operations as
well as management.
 Theft
 Obsolescence
 Cost of Capital

 Includes the costs of investments,

 Interest on working capital,
 Taxes on inventory paid,
 Insurance costs
 Costs associated with legal liabilities.
The basic model makes the following assumptions

Demand is uniform, constant and continuous over time;

The lead time is constant;

There is no limit on order size due either to stores capacity;

The cost of placing an order is independent of size of order; (Cost is constant)

The cost of holding a unit of stock does not depend on the quantity in stock;(based on fixed

percentage of value of inventory)

Exactly the same quantity is ordered each time that a purchase is made.

Instantaneous receipt of material

No quantity discounts

No stockouts
 EOQ-Determination.

• Demand is known and deterministic: D units/year

• We have a known ordering cost, S, and immediate replenishment
• Annual holding cost of average inventory is H per unit
• Purchasing cost C per unit
 What is the optimal quantity to order?

Total Cost = Purchasing Cost + Ordering Cost + Inventory Cost

Purchasing Cost = (Total units) x (Cost per unit)

Ordering Cost = (Number of orders) x (Cost per order)

Inventory Cost = (Average inventory) x (Holding cost)

 Finding the optimal quantity to order…
Let’s say we decide to order in batches of Q…

Inventory position D
Number of orders will
be Q

The average Q
inventory for each
period is… 2

Time
Period over which demand for Q has occurred

Total Time
Finding the optimal quantity to order…

Purchasing Cost = D x C

D
Ordering Cost = x S
Q

Q
Inventory Carrying Cost = x H
2
 So what is the total cost?

D Q
TC = D C + S + H
Q 2

In order now to find the optimal quantity we need to optimize the total cost
with respect to the decision variable (the variable we control)

Which one is
the decision
variable?
 What is the main insight from EOQ?
There is a tradeoff between holding costs and ordering costs

Total Storage Cost

Cost
Holding /Carrying
Costs

Ordering Costs

Order Quantity (Q*)

Economic Order Quantity - EOQ
2DS
Q =
*

Example:
Assume a car dealer that faces demand for 5,000 cars per year, and that it costs Rs
15,000 to have the cars shipped to the dealership. Holding cost is estimated at Rs 500 per
car per year. How many times should the dealer order, and what should be the order
size?

2(15,000)(5,000)
Q 
*
 548
500
 If delivery is not instantaneous, but there is a lead time L:
When to order? How much to order?

Order
Quantity
Q
Inventory

Lead Time
Time
Place Receive
order order
 If demand is known exactly, place an order when
inventory equals demand during lead time.

Order Q: When shall we order?

Quantity A: When inventory = ROP
Q Q: How much shall we order?
A: Q = EOQ
Inventory

Reorder
Point
(ROP)
ROP = LxD

Lead Time
Time
D: demand per period
Place Receive
L: Lead time in periods
order order
Example (continued)…

What if the lead time to receive cars is 10 days? (when should you
place your order?)

Since D is given in years, first convert: 10 days = 10/365yrs

10 10
R = D = 5000 = 137
365 365

So, when the number of cars on the lot reaches 137, order 548 more
cars.
Tabular Method
Q- Estimated uses 24000 per annum, price per unit is Rs.6. ordering Cost Rs.
50/order. Carrying Cost as percentage of average stock value is 10%. Determine
EOQ by preparing a schedule.

No. of Average Average Stock

Order Size Carrying Cost Ordering Cost Total Cost
Orders Stock Value

1 24000 12000 72000 7200 50 7250

2 12000 6000 36000 3600 100 3700
4 6000 3000 18000 1800 200 2000
6 4000 2000 12000 1200 300 1500
8 3000 1500 9000 900 400 1300
10 2400 1200 7200 720 500 1220
12 2000 1000 6000 600 600 1200
16 1500 750 4500 450 800 1250
20 1200 600 3600 360 1000 1360
1. Shagoon India Ltd. provides the following
information in respect of material ‘X’ :
Supply period : 5 to 15 days
Rate of Consumption
Average : 15 units per day
Maximum : 20 units per day
Yearly : 5,000 units
Ordering cost is : Rs. 20 per order
Purchase price : per unit is Rs. 50
Storage costs are 10% of unit value
Compute: (I) Reorder Level, (ii) Minimum Level, (iii)
Maximum Level .
2. From the following information, calculate
Economic Order Quantity and the number of orders
to be placed in one quarter of the year.
(i) Quarterly consumption of materials : 2,000 kg
(ii) Cost of placing one order : Rs. 50
(iii) Cost per unit : Rs. 40
(iv) Storage and carrying cost is 8% of average
inventory
3. About 50 items are required every day for a
machine. A fixed cost of Rs. 50 per order is incurred
for placing an order. The inventory carrying cost per
item amounts to Rs. 0.02 per day. The lead period is
32 days.
Compute:
(i) Economic Order Quantity
(ii) Re-order Level
4. Medical Aids Co. manufactures a special product A. the
following particulars were collected for the year 2013.
(a) Monthly demand of A 1000 units
(b) Cost of placing an order Rs. 100
(c) Annual carrying cost per unit Rs. 15
(d) Normal usage 50 units per week
(e) Minimum usage 25 units per week
(f) Maximum usage 75 units per week
(g) Re-order period 4 to 6 weeks
Compute from the above: (i) Re-order Quantity, (ii) Reorder
Level, (iii) Minimum Level, (iv) Maximum Level, (v) Average
Stock Level.
5. Charlie Pump Company uses about 75,000 valves per year
and the usage is fairly constant at 6,250 per month. The valves
cost Rs. 1.50 per unit and carrying cost is estimated to be 20% of
average inventory investment on an annual basis. The cost to
place an order and to process the delivery is Rs. 18.
It takes 45 days to receive delivery from the date of an order
and a safety stock of 3,250 valves is desired. You are required to
determine:

(i) The most economical order quantity and frequency of orders.

(ii) The re-order level.
(iii) The most economical order quantity if valves cost Rs. 4.50
each instead of Rs. 1.50 each.
6. Tubes Ltd. Are the manufacturers of picture tubes for T.V. the
following are the details of their operation during 2013:
Average monthly market demand : 2,000 tubes
Ordering cost : Rs. 100 per order
Inventory carrying cost : 20% per annum
Cost of tubes : Rs. 500 per tube
Normal usage : 100 tubes per week
Minimum usage : 50 tubes per week
Maximum usage : 150 tubes per week
Lead time to supply : 6-8 weeks
Compute from the above:
(i) Economic Order Quantity. If the supplier is willing to supply
1,500 units quarterly at a discount of 5%, is it worth accepting?
(ii) Maximum level of stock (iii) Minimum level of stock
(iv) Reorder level.
 PRACTICES QUESTIONS:

1. ABC Company Ltd. Gives the following details about its material RM3. Annual
consumption: 2,400 units. Average cost per order Rs. 40. Average price per unit Rs.
20. Holding cost 24% per year. Determine EOQ.
2. Following details are with respect to a Raw Material: Monthly usage 250 units, Cost
of placing and receiving one order Rs. 60. Cost of material per unit Rs. 10. Carrying
cost 10% of inventory value. Calculate EOQ.
3. A manufacturer uses 200 units of a component every month and he buys them
entirely from an outside supplier. The order placing and receiving cost is Rs. 100 and
annual carrying cost is Rs. 12. From this set of data, calculate EOQ.
4. An engineering company consumes 50,000 components a year. The ordering,
receiving and handling costs are Rs. 3 per order details. Interest Rs. 0.06 per unit per
year. Deterioration cost Rs. 0.004 per unit per year. Storage cost Rs. 1000 per year for
50000 units. Calculate EOQ.
5. X ltd. Has agreed to supply 24000 bearings per year to Y Ltd. The estimated cost of
holding inventory per bearing per month is 10 paise. The set up cost per unit of
bearing manufacture is Rs. 324.
* What would be the optimum run size for bearing manufacturer?
* Assuring that the company decides to manufacture 6,000 bearing per run,
how much extra cost is incurred compared to optimum size?
* What is the minimum inventory holding cost?
6. An auto parts supplier sells Hardy-brand batteries to car dealers and auto
mechanics. The annual demand is approximately 1,200 batteries. The supplier
pays Rs.28 for each battery and estimates that the annual holding cost is 30
percent of the battery's value. It costs approximately Rs. 20 to place an order
(managerial and clerical costs). The supplier currently orders 100 batteries per
month.

a. Determine the ordering, holding, and total inventory costs for the current order
quantity.
b. Determine the economic order quantity (EOQ).
c. How many orders will be placed per year using the EOQ?
d. Determine the ordering, holding, and total inventory costs for the EOQ. How has
ordering cost
changed? Holding cost? Total inventory cost?
Determination of Stock Levels
 Determination of Stock Levels
• Either by the top management or by the materials
department could set the norms for inventories.
• The top management usually sets monetary limits for
investment in inventories.
• The materials department allocate this investment
to the various items and ensure the smooth
operation of the concern.
• Worthwhile if norms of inventories be set by the
management after consultation with the materials
department.
Factors For Consideration In The Determination
Of Stock Levels
 Lead time for deliveries.
 The rate of consumption.
 Requirements of funds.
 Keeping qualities, deterioration, evaporation
etc.
 Storage cost.
 Availability of space.
 Factors For Consideration In The
Determination Of Stock Levels
 Price fluctuations.
 Insurance cost.
 Obsolescence price.
 Seasonal consideration of price and
availability.
 EOQ (Economic Order Quantity), and
 Government and other statuary restriction
 Stock Level Setting

• It is to determine the correct or most optimal

stock level so as to avoid overstocking or
under stocking of materials

• Further, failure to keep up delivery schedules

results in the loss of customers and goodwill
Different stock levels:

Minimum
level

Average Re –order
level level

Maximum Safety
level level
 Re-order Level
• The level of stock of material at which a new order for
the material should be placed for replenish the current
stock .

• It is the point at which if stock of the material in store

approaches, the store keeper should initiate the
purchase requisition for fresh supply of material.

• This level is fixed some where between maximum and

minimum level.
 Re order level
Re-order Level
Re-order level is set in such a way so as to guard
against:
 Normal Circumstances
 Abnormal Circumstances - Abnormal use of
item and Abnormal delay in supply.

The fixation of ordering level depends upon two

important factors viz, the maximum delivery
period and the maximum rate of consumption.
 
 RE ORDER LEVEL -FORMULA

Re-order Maximum Maximum Reorder

Level =
usage/ X
period/
Consumption lead time
 Maximum Stock Level
• Quantity of inventory above which Stock should
not be allowed to be kept.
• The maximum stock level is highest level of
stock planned to be held
• Level of stock beyond which the firm should not
maintain the stock.
• Stock Beyond maximum level is called
overstocking.
• This quantity is fixed keeping in view the
disadvantages of overstocking
 Maximum
det
Stock Level
Factors to be considered:

Amount of capital available.

Possibility of loss.
Cost of maintaining stores;
Likely fluctuation in prices;
Seasonal nature of supply of material;
Restriction imposed by Govt.;
Possibility of change in fashion and habit
.
 Maximum Stock Level-Formula

[
Minimum Reorder

]
Maximum Re-order Re-Order Minimum
= + – x Period or
level Level Quantity(EOQ) Consumption
Minimum Supply
/ Usage
Period *

*Minimum Delivery Time or Minimum lead time.

 Minimum Stock Level
 Its the lower limit below which the stock of any
item should not normally be allowed to fall

 The main purpose of determination of this limit is

to protect against the possibility of particular item
going out of stock and there is further danger of
stoppage of its production and supplies.

The level is fixed taking into consideration:

Average rate of consumption and Lead-time.
 Minimum Stock Level

Minimum = Re-order Average usage in

–
Level level average lead time
OR

Minimum
Level
= Re-order
level
–
{ Normal Usage/
Consumption X
Normal re-order
Period*
}
*Normal Supply Period or Normal Lead Time

If Information of Normal usage and Normal re-order period is not available then
average consumption and average reorder can be used depending upon
information supplied.
 Average Stock Level
Average Stock level shows the average stock
held by a firm. The average stock level can be
calculated with the help of following formula.
Average = Minimum Level + ½(Re-order Quantity)
Stock Level

OR

Average
Stock Level = (Minimum Level + Maximum Level)/2
 Danger Level
This is generally below the minimum stock level. If it
reaches this level, urgent action must be taken to
prevent the stock-out.

Max. Re- Order Period

Danger = Normal x under emergency
Level Consumption Conditions
methods
methods of
of inventory
inventory control
control

83
 V-E-D Classification
(Vital, Essential and Desirable)

Materials classified according to their

criticality to the production - how and to what
extent it will effect the production.

Analysis is used to manage the spare parts.

Say a spare for a machine on which many

other processes depends could be vital &
procurement lead time could be very high – its
non availability may lead to heavy loss.
84
 V-E-D Classification
(Vital, Essential and Desirable)
V-Vital : is the item critically needed for the survival of the
business. On account of its non availability high loss due to
production downtime/or high cost will be involved if the part
is procured on emergency basis.

E-Essential : Low criticality need . If these items are not

available then moderate loss is incurred and stockout cost is
very high.

D-Desirable : Lowest criticality. If these items are not

available then there is not going to be immediate production
loss; stock out cost is very less.
 H-M-L Classification
(High, Medium, Low)

This analysis is done for classifying the materials based on

their Unit prices

H -High Price Materials

M-Medium Price Material
L – Low price materials

Procurement department is more concerned with prices of

materials so this analysis helps them to take the decisions
such as, who will procure and price of material .

86
 H-M-L Classification
(High, Medium, Low)

Analysis helps in exercising control at the use point. (Shop floor

level)

Helps in taking the decision such as whether to procure in exact

requirement or opt for EOQ or purchase only when needed.

To apply the techniques of value analysis to find out a less

expensive substitute
 H-M-L Classification
(High, Medium, Low)
To keep control over consumption at the department
level then authorization to draw materials from the
stores will be given to senior staff for H item, next lower
level in seniority for M class item and junior level staff for
L class items

Cycle counting can also be planned based on HML

analysis. H class items shall be counted very frequently,
M class shall be counted at lesser frequency and L class
shall be counted at least frequency as compared to H &
M class
 F-S-N Classification
(Fast, Slow and Non moving)

Classification of materials based on Frequency of

Issues/ Movement/Use
 Fast Moving (Frequently issued- More than once a
month)
 Slow Moving ( Issued Less than once a month)
 Non Moving (Not issued/used for more than 2 years
Some times also called as FNS (Fast Moving, Normal
Moving and slow moving).
 F-S-N Classification
(Fast, Slow and Non moving)

 Classification helps management in establishing most

suitable stores layout ( by locating all the fast moving items
near the dispensing window i.e. distribution and reducing
handling patterns of items from stores).
 To focus on the Non Moving items to enable decisions
whether required or salvaged. (May be a change in
technology or an item is no longer in use. At such time
information must be given to managers so that they can act
on it).
 Dispose of certain items and release locked up working
capital.
 Used when obsolescence is to be controlled.
 S-D-E Classification

Its based on lead time analysis and availability.

S- Scarce : Scarce Material i.e. hardly available and require more

than 6 months lead time. ( Imported goods)

D- Difficult : Difficult material i.e. difficult in sourcing and require

more than a fortnight but less than 6 months lead time.

E-Easy Available : Easily available i.e. less than a fortnights lead

time
.
91
 S-D-E Classification

 Scarce Materials, Always in shortage and difficult in

procurement.

 Sometimes require government approvals.

 Procurement through government agencies.

 To make the payment in advance for sourcing these

materials.

 Purchase policies are very liberal for such materials.

 S-D-E Classification

D Class Materials
 Though not easy to procure but are available at a longer
lead times
 Source of supply may be very far from the Ordering or
consumption location.
 Procurement of these materials requires planning and
scheduling in advance.

E Class Materials
 These materials are normally standard items and easily
available in the market and can be purchased anytime.
 S-O-S Classification

Seasonal, Off Seasonal Report helps you to view seasonal

required items.

S- For seasonal Materials

OS - For non-seasonal Materials

Purchase planning has to be done if the material is seasonal as

material shall be available for a particular time period of the
year.
 S-O-S Classification
• Seasonal Items can be further classified into two groups

1. Seasonal fruit which is available only for one month in year

“ If any Juice and pulp company wants to buy a seasonal fruit

then the procurement department shall have to plan in
advance the requirement and procurement job becomes
concentrated only for one month.
Other than this issue, shelf life and storage is also a big
problem as the plan to consume is throughout the year while
the buying time available is only one month.”
 S-O-S Classification

2. Some materials are seasonal but are available throughout

the year.

These items are bought during season and these items are
cheaply available during season. The company can take the
advantage of economies of scale in buying these materials
in bulk. But at the same time the inventory carrying cost
should not go beyond the profit margins while holding the
large inventory.
 S-O-S Classification

• Non-seasonal materials are available

throughout the year without any significant
price variation. Non seasonal items can be
Plastics, Metals etc. The prices of these
materials are independent of the season.
 G-O-L-F Classification

Government, Ordinary, Local, and Foreign

Report help you to do material analysis based
on location and type of organization.

G -Government suppliers
O- Ordinary or non government suppliers
L - Local suppliers
F - Foreign suppliers
 JUST IN TIME(JIT)
It is the process of receiving the material, transforming them into parts,
converting the material into sub assemblies, assemblies and the finished
products for sale.

Product supply is matched with the market demand.

It is an attempt to reduce the working capital to the minimum.

ADVANTAGES
Employees are motivated and better quality of the goods are produced.

Inventory levels are reduced and buffer stocks are also reduced .

Additional stock buying is not required

99
• In a manufacturing its products a company uses three raw
materials, A B and C in respect of which the following apply:

Raw Mat Usage Re order Price Delivery Order Minimu

per unit quantity per( lbs) period Level m level
of (lbs)
product
(lbs)
A 10 10,000 10 1 to 3 8,000
B 4 5,000 30 3 to 5 4,750
c 6 10,000 15 2 to 4 2,000

Weekly production varies from 175 to 225 units, averaging 200. What would
you expect the quantities of the following. Minimum stock of A, Max. stock of
B, Reorder level of C, and average stock of A.
• The following information is provided

Super Grow Fertilizer Nature’s own Fertilizer

Annual Demand 2000 bags 1,280
Relevant ordering cost Rs. 1,200 Rs. 1,400
per purchase order
Annual Relevant Rs. 480 Rs. 560
Carrying Cost per bag

Required
(a) Compute EOQ for both the brands
(b) For the EOQ, what is the sum of the total annual relevant ordering
costs and total annual relevant carrying costs for both the brands
• Annual demand for a particular item of
inventory is 10,000 units. Inventory carrying
cost per unit per year is 20% and ordering cost
is Rs. 40 per order. The price quoated by the
supplier is Rs 4 per unit. However, the supplier
is willing to give discount of 5% for orders of
1,500 units or more. Is it worthwhile to avail
of the discount offer.
• PQR limited produces a product which has a monthly
demand of 52,000 units. The product requires a
component X which is purchased at Rs. 15 per unit. For
every finished product, 2 unit of component X are
required. The ordering cost is Rs. 350 per order and the
carrying cost is 12% p.a.

• Calculate the EOQ?

1. If the minimum lot size to be supplied is 52,000 units.
What is the extra cost the company has to incur?
2. What is the minimum carrying cost the company has
to incur?
• A whole seller supplies 30 dolls ach week day to various
shops. Dolls are purchased from the manufacturer in lots
of 120 each of Rs. 1200 per lot. Every order inurs a
handling charge of Rs. 60 plus a freight charge of Rs. 250
per order. Multiple and fractional lots can be ordered
and all orders are filled the next day. The incremental
cost is Rs. 0.60 per year to store a doll in inventory. The
whole seller finances inventory investment by paying its
holding company 2% monthly for borrowed funds.
(a) How many dolls should be ordered at a time to
minimize the total inventory cost?
(b) How frequently should he order.
 Inventory Control Ratio
• Input- output ratio
• Material turnover ratio
 Input- Output Ratio
• Indicates the relationship between the quantity of
material used in the production and the quantity
of the final output.

• Input- output ratio= Input Units

___________ X 100
Output units

• Actual input- output ratio is compared with

standard input- output ratio.
• Actual ratio if higher is consider as inefficient.
 Input Output ratio
• Advantages

• Helps in material planning by estimation of output and its

raw material requirement
• Input-output ratio act as guide in control of materials
used in the process by minimization of waste, scrap etc
• Its act as performance indicator of production cost centre
• Investigation and Analysis of any variations in materials
consumption
 Stock Turnover Ratio
• It indicates the movement of Average stock
holdings

• Stock Turnover Ratio :

Cost of material used during the period
________________________________
Average stock of materials used during
the period

A low turnover ratio indicates slow movement of stock, accumulation of obsolete

stock and carrying of too much stock.
A higher ratio is indicator of fast moving stock.
 Stock Turnover Ratio

Days during the period

Inventory turnover in days = ______________________
Inventory turnover ratio
 Stock Turnover Ratio

• Advantages
• Highlights slow/ dormant & obsolete stocks.
 Stock Turnover Ratio
• Advantages
• Highlights slow/ dormant & obsolete stocks.
Question.
The following data is available from a manufacturing Co. The valuation of
inventory is done at Rs. 2.00 per kg. Calculate Material Turnover and
express in number of days the average inventory to be held.

Opening Purchase Closing Stock

Stock
Mat x 1400 kg 23000 kg 400 kg

Mat y 2000 kg 3600 kg 2400 kg