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 R’s 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,
1
 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/linmitations
 Types of Inventory Systems P & Q systems
 SQC, Techniques of SQC, Control charts,

X-bar chart, R-chart, P-chart etc 2

Test Paper marks 20

Materials Management 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
11.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
4
of carrying as 25% p.a.
Materials Management Marks 30

Attempt any 6 Questions:

Time 1½ 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
5
Materials Management Marks 30

Attempt any 6 Questions:

Time 1½ 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
B) Methods of Buying 6
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

1.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 7
10. Breakeven Analysis
11. Negotiation
12.Forward Auction
13.Reverse Auction
14. E-commerce
15. ROI or IRR
16. ABC Analysis
17. Self Certification

8
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 company’s 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 company’s finance
department and suppliers for timely payment of
bills
13. Attending to periodical activities like applying
for import licence, quota etc
14. Maintaining company’s 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
useful to the company 16
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 certification-

based 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/ 19

circumstances
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 20

9. Payment methods
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
24

9. Wastage during receipt, storage, production etc.

Methods of Buying / Purchase choices
1. 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
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

26

9. Product knowledge and applications

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 company’s 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

lessor since he is the owner. 30
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 (seller’s mkt)
- Ten sources (buyer’s 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 34

21.Vendor Selection
22. Vendor Evaluation
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
• Buyer’s cartel for rationing among
consumers

3) Multiple suppliers
• Price and payment terms major 36
consideration
• Get the best quality at lower price
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 37
• After- sales service
• Guarantee and warranty
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 company’s 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
45
•The best negotiation should end with
win-win situation
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, re-
tendering 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,
supplier’s 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
other’s 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. Acceptance of purchase order is obtained
14. Manufacture of item is started
15. Follow up on delivery schedule is done
16. Stage-wise inspection is carried out
17. Identify mode of transport
18. 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 company’s
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
operation of the company. 56
Order Quantity Table

Item no annual no of orders value per average

consumption per year order inventory
value

A 60000 4 15000 7500

B 4000 4 1000 500

C 1000 4 250 125

57
total 8125
 Order Quantity Table

Item no annual no of orders value per average

consumption per year order inventory
value

A 60000 8 7500 3750

B 4000 3 1333 667

C 1000 1 1000 500

total 4917
58
 Economic Order Quantity
unit price Re 1, cost per order Rs 600
Order No of order Avg Inv Inv Total
Quantity orders Cost Inv Value Carry cost
units Per yr (Rs)
Per yr units (Rs) cost
(Rs)

200 5 3000 100 100 30 3030

500 2 1200 250 250 75 1275

1000 1 600 500 500 150 750

2000 0.5 300 1000 1000 300 600

5000 0.2 120 2500 2500 750 870

59
Derivation of EOQ

/ ---------------
EOQ= Q = / 2 M* Co / R* Cc
\/
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)
Co= Rs 600 per order

M R

10,000 1,000
25,000 2,500
100,000 10,000
500,000 50,000

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
Items 1,2,3 are always A items 64
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 co-
ordination
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
Reserve stock= variation in demand during average lead time
67
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 Analysis…High, medium, low unit price

 VED….vital,essential,desirable (importance)

 FSN….fast moving,slow moving, non moving

 SDE… .scarce, difficult, easy to produce

 SOS……seasonal 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

71
 C items : ……every 3/6 months
ABC ANALYSIS

Item no Annual Unit price Annual cons

consumption value
2 10000 11 110000
4 2000 11 22000
6 5000 3 15000
8 100 100 10000
10 5000 1 5000
7 1000 12 12000
1 3000 100 300000
5 600 30 18000
3 500 200 100000

72
 ABC ANALYSIS
Item no Annual cons Unit price Annual cons
units Rs Value Rs
1 3000 100 300000
2 10000 11 110000
3 500 200 100000
4 2000 11 22000
5 600 30 18000
6 5000 3 15000
7 1000 12 12000
8 100 100 10000
9 2000 4 8000
10 5000 1 5000

73
ABC ANALYSIS

Item no Annual cons Unit price Annual cons Cumm value

units Rs Value Rs Rs
1 3000 100 300000 300000
2 10000 11 110000 410000
3 500 200 100000 510000
4 2000 11 22000 532000
5 600 30 18000 550000
6 5000 3 15000 565000
7 1000 12 12000 577000
8 100 100 10000 587000
9 2000 4 8000 595000
10 5000 1 5000 600000

74
 ABC ANALYSIS
Item no Annual cons Unit price Annual cons Cumm value
units Rs Value Rs Rs
1 3000 100 300000 300000 A
2 10000 11 110000 410000 A
3 500 200 100000 510000 B
4 2000 11 22000 532000 B
5 600 30 18000 550000 C
6 5000 3 15000 565000 C
7 1000 12 12000 577000 C
8 100 100 10000 587000 C
9 2000 4 8000 595000 C
10 5000 1 5000 600000 C

75
 XYZ ANALYSIS
Item no quantity Unit price Inventory value Cumm value

2 5000 50 250000
9 90 100 9000
1 4000 200 800000
10 500 10 5000
3 2000 50 100000
8 400 25 10000
4 800 100 80000
5 1000 50 50000
7 30 400 12000
6 50 300 15000

76
 XYZ ANALYSIS
Item no quantity Unit price Inventory value Cumm value

1 4000 200 800000 800000

2 5000 50 250000 1050000
3 2000 50 100000 1150000
4 800 100 80000 1230000
5 1000 50 50000 1280000
6 50 300 15000 1295000
7 30 400 12000 1307000
8 400 25 10000 1317000
9 90 100 9000 1326000
10 500 10 5000 1331000

77
 XYZ ANALYSIS
Item no quantity Unit price Inventory value Cumm value

1 4000 200 800000 800000 X

2 5000 50 250000 1050000 X
3 2000 50 100000 1150000 Y
4 800 100 80000 1230000 Y
5 1000 50 50000 1280000 Z
6 50 300 15000 1295000 Z
7 30 400 12000 1307000 Z
8 400 25 10000 1317000 Z
9 90 100 9000 1326000 Z
10 500 10 5000 1331000 Z

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. Identification
2. Receipt and inspection
3. Stocking and issues
4. Despatch
5. Ledger
6. 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
90
6. Standard cost
91