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What to purchase
How much to purchase
From where to purchase
Where to store, etc.
What are inventories?
Inventories are assets:-
• Hold for sale in the ordinary course of business.
• In the process of production for such sale.
• In the form of materials or supplies to be consumed in the production
process or in rendering of services
Assumptions of EOQ:
To be able to calculate a basic EOQ certain assumptions are necessary:
• That there is a known, constant stockholding cost.
• That there is a known, constant ordering cost.
• Those rates of demand are known and constant.
• That there is a known, constant price per unit, i.e., there are no price
discounts.
• That replenishment is made instantaneously, i.e., the whole batch delivered
at once.
2. ABC Analysis
In this technique, the items of inventory are classified according to value of
usage. The higher value items have lower safety stocks, because the cost of
production is very high in respect of higher value items. The lower value items
carry higher safety stocks. ABC analysis divides the total inventory list into
three classes A, B, and C using the rupee volume, as follows:
• Items in class 'A' constitute the most important class of inventories so far
as the proportion in the total value of inventory. The 'A' items consists of
approximately 15% of the total items, accounts for 80% of the total material
usage.
• Items in class B' constitute an intermediate position, which constitute
approximately 35%of the total items, accounts for approximately 15% of the total
material consumption.
• Items in class 'C’ are quite negligible. It consists remaining 50% items,
accounting only 5% of the monetary value of total material usage.
The numbers are just indicative and actual break-up will vary from situation to
situation. The above categorization is represented in the table given below:
Class of items %of items %of value
A 15 80
B 35 15
C 50 5
100 100
The ABC analysis of inventory class 'A' is made up of inventory items which are
either very expensive or used in massive quantities. Thus these items, though few
in number contribute a high proportion of the value of inventories. Class 'B'
items are not so few in number, but also they are not too many either. Value wise
also, they are neither very expensive nor very cheap. Moreover, they are used in
moderate quantities. Class 'C contains a relatively large number of items. But
they are either very inexpensive items or used in very small quantities so that
they do not constitute more than a negligible fraction of the total value of
inventories. The control of inventory through
ABC analysis is exercised as follows:
• 'A' class items merit a tightly controlled inventory system with constant
attention by the purchase and stores management. A larger effort per item on only
a few items w ill cost only moderately, but the effort can result in large
savings.
• 'B' class items merit a formalized inventory system and periodic attention
by the purchase and stores management.
• For 'C class items still relaxed inventory procedures are used.
The table given below shows how an organization treats the various classes of
items according to their consumption value. For 'A' class items, the inventory
policy, i.e. order quantity and re-order point should be carefully determined and
the close control over the usage of materials is desirable. For 'B' class items,
the economic order quantities and reorder level calculations can be done and
larger stocks can be maintained. The review of these items may be done quarterly
or half-yearly. In case of 'C class items, generally one year supply can be
maintained. Periodic review once a year may be sufficient.
3. VED Analysis
VED analysis divides items into three categories in the descending order of their
critically as follows:
• V’ stands for vital items and their stock analysis requires more attention,
because out-of stock situation will result in stoppage of production. Thus, 'V
items must be stored adequately to ensure smooth operation of the plant.
• 'E' means essential items. Such items are considered essential for efficient
running but without these items the system would not fail. Care must be taken to
see that they are always in stock.
• 'D’ stands for desirable items which do not affect the production
immediately but availability of such items will lead to more efficiency and less
fatigue.
4. FNSD Analysis
• 'F' stands for fast moving items and stocks of such items are consumed in a
short span of time. Stocks of fast moving items must be observed constantly and
replenishment orders be placed in time to avoid stock-out situations.
• 'N' means normal moving items and such items are exhausted over a period of
a war or so. The order levels and quantities for such items should be on the basis
of a new estimate of future demand to minimize the risks of a surplus stock.
• 'S' indicates slow moving items, existing stock of which would last for two
years or more at the current rate of usage but it is still expected to be used up.
Slow moving stock must be reviewed very carefully before any replenishment orders
are placed.
• 'D' stands for dead stock and for its existing stock no further demand can
be foreseen. Dead stock figures in the inventory represents money spent that
cannot be realized but it occupies useful space. Hence, once such items are
identified, efforts must be made to find all alternative uses for it. Otherwise,
it must be disposed off.
Some of the bigger players in the ERP outsourcing market are SAP, PeopleSoft, and
J. D. Edwards. New comers include Oracle, IBM, and Microsoft
Software solution that addresses all the needs of an enterprise with the process
view of an organization to meet the organizational goals and integrate all the
functions of the enterprise
VALUE METHODOLOGY
Value Methodology (also called Value Engineering, Value Analysis or Value
Management) is a powerful problem-solving tool that can reduce costs while
maintaining or improving performance and quality requirements.
It is a function-oriented, systematic team approach to providing value in a
product or service.
The value methodology helps organizations compete more effectively in local,
national and international markets by:
Decreasing costs
Increasing profits
Improving quality
Expanding market share
Saving time
Solving problems
Using resources more effectively
Value Analysis
VA is an step by step approach to identify the functions of a product, process,
system or service; to establish a monetary value for that function and then
provide the desired function at an overall minimum cost without affecting any of
the existing parameters like Quality, Maintainability, Productivity, Safety and
other Performance characteristics
Value Engineering
Value Engineering is where the value of all the components used in the
construction of a product from design to final delivery stage are completely
analyzed and pursued.
Origin:
Value Engineering began at General Electric Co. during World War II. Because
of the war, there were shortages of skilled labor, raw materials, and component
parts. Lawrence Miles and Harry Erlicher at G.E. looked for acceptable
substitutes. They noticed that these substitutions often reduced costs, improved
the product, or both. What started out as an accident of necessity was turned into
a systematic process. They called their technique as “Value Analysis”.
In the year 1954, US Navy Bureau of ships adopted same technique in their
effort at ‘cost avoidance’ during the design stage and saved millions of dollars.
They named it as “Value Engineering”. VE follows thought process that is based
exclusively on “function”, i.e. what something ‘does’ not what it is.
Organisation of the purchase function will vary with conditions and ideas.
Purchase may be centralized or decentralsied.There is a separate department
entrusted with task of making all purchases of all types of materials in
centralised purchasing. The person one who heads the purchase department is known
as ‘Purchase Manager’.
Disadvantages:
1. The creation and maintenance of a special purchasing department leads to higher
administration costs. The small firms may not be in a position to afford.
2. Centralised purchasing is not suitable for plants located at different places,
which are far afar.
Disadvantage:
1. It offers lesser economy of scale in purchasing.
2. There are problems of co-ordination among various departments of the
organisation and it usually leads to unplanned buying
3. Uniformity in prices may not be experienced because every branch head may not
posses the calibre of an expert buyer.
It can be arrived from the above analysis that centralised purchasing is decidedly
better than decentralised purchasing. However, the methods may be decided based on
the nature of the organisations. A manufacturing firm, which operates several
branches at different places can have decentralised purchasing.
1. Purchase Requisition:
A form known as Purchase Requisition is commonly used as a formal request to
the purchasing department to buy materials specified therein. The requisition is
received from certain authorised persons. They are storekeeper, purchase planner,
plant engineer, department heads.
3. Purchase order:
When the supplier is identified, the most common procedure is the preparation of a
purchase order. The purchase order is the form used by the purchase department
authorising the supplier to supply the specified materials at an agreed price and
terms. The purchase order should be carefully prepared as it forms a basis of
legal contract between parties concerned.
The number of copies of the purchase order depends on the size of the
organisation. A bigger concern usually issues 5 copies. The supplier receives the
original order. Purchase department retains the second copy. The receiving
department gets the third copy. Accounting department files the fourth copy to
make an entry in the stores ledger. Last copy is sent to the department
requisitioning the material as an intimation of the order and expected date of
receipt of materials.
4. Receipt of Materials:
Receiving Department receives all incoming materials. When the packages are
received, the receiving official gets them and makes a detailed verification of
the contents. The details of the materials received are entered in a Goods
received note. Five copies of the note are prepared. Receiving department keeps
one copy. The remaining copies are routed to the purchase department, the
department originating the purchase requisition, the stores department and the
accounting department.
Layout of Stores:
Layout of stores should facilitate easy flow of goods in and out with out any
barrier. Layout refers to the internal arrangement or placement of material inside
the stores. It aims at effective utilization of space available for storage of
materials. The stores should be divided into racks, which should be sub-divided
into small spaces. All these spaces are know as bins. A bin is allotted for every
kind of material. All bins should be serially numbered.
The stores should be equipped with racks, bins, shelves, boxes, barrels, jars,
drums, cylinders etc. The receptacles should be arranged in such a way as to make
the fullest utilization of available space. They should be easily accessible at
the same time. Sufficient space should be provided for the movement of trucks,
conveyors, lifts and other mechanical devices.
Importance of Classification:
The stores department of big organizations carries a number of items of different
grades and specifications. It generally faces the problem of locating and
identifying the items at the time of storage and issue. Delay due to difficulty in
locating an item causes production hold-ups. There is also possibility of the same
item of two different grades getting mixed up, thereby providing a wrong account
of the stocks of both the items. Therefore, everyone feels to have his or her
goods properly classified.
Classification:
Classification is the process of arranging items into groups according to their
likeness.
12. How a manufacturing concern is to be cautious while procuring materials?
13. How does purchase department effectively control purchases of raw materials?
14. Who is in charge of purchase department? What are the qualifications of a
purchase manager?
15. What are the procedures generally followed by purchase department?
16. What do you mean by the following inventory levels? How is computed?
1. Economic order quantity
2. Maximum level
3. Minimum level
4. Re-order level
10. Danger level (problems)
17. What do you mean by stores control and issues control?
18. What are the functions and duties of storekeeper?
19. What do you man by Bin Card? Or Bin tag or stock card? Bring out the specimen
of Bin card
20. What is meant by store ledger? What are the advantages of maintaining stores
ledger? Give specimen of a stores ledger.
21. What do you mean by perpetual inventory system? What are its advantages?
22. What do you mean by ABC method of stores control? Illustrate.
23. What do you mean y material requisition note? What are its contents?
24. Critically evaluate the various methods of pricing materials issues.
Problems: 1. Inventory Level 2. Pricing of Material Issues.
Stores Management
It is serving facility, inside an org., responsible for proper storage of the
material and then issuing it to respective departments on proper requisition. The
custodian of stores is generally known as store-keeper or store controller
Those item which are not in use for some specific duration e.g. spare parts and
the raw- materials are called as stores and building space where these are kept is
known as Store Room