TECHNIQUES OF MATERIAL CONTROL/INVENTORY MANAGEMENT

·         TECHNIQUES OF MATERIAL CONTROL/INVENTORY MANAGEMENT

·         COST ACCOUNTING

·         FINANCIAL MANAGEMENT

·         WORKING CAPITAL MGMT

·         OPERATION MGMT

·         MGMT ACCOUNTING

• MATERIAL CONTROL
• MATERIAL CONTROL MEANS A SYSTEM WHICH ENSURES THAT RIGHT QUALITY OF MATERIAL IS AVAILABLE IN THE RIGHT QUANTITY AT THE RIGHT TIME AND RIGHT PLACE WITH THE RIGHT AMOUNT OF INVESTMENT
• IN SIMPLE WORDS WE COULD SAY THAT MATERIAL CONTROL IS A SYSTEMATIC CONTROL OVER THE PURCHASING,STORING AND USING OF MATERIALS SO AS TO HAVE THE MINIMUM POSSIBLE COST OF MATERIALS.
• COVERS FOLLOWING OPERATIONS:-

1. PURCHASE OF MATERIALS
2. RECEIVING OF MATERIALS
3. INSPECTION
4. ISSUE
5. STOCK RECORDS
6. STOCK AUDIT
7. DIMENSIONS
8. QUANTITY OR UNIT CONTROL
9. FINANCIAL CONTROL

·         ASPECTS OF MATERIAL CONTROL

1. ACCOUNTING ASPECT:-DOCUMENTARY EVIDENCE
2. OPERATIONAL ASPECT:-MAINTENANCE OF MATERIAL SUPPLY AT A LEVEL SO AS TO ENSURE THE AVAILABILITY OF MATERIALS

• INVENTORY MGMT
• ACTIVITIES EMPLOYED IN MAINTAINING THE OPTIMUM NUMBER OR AMOUNT OF EACH INVENTORY ITEM. THE PURPOSE OF INVENTORY MGMT IS TO KEEP THE STOCKS IN SUCH A WAY THAT NEITHER THERE IS OVERSTOCKING NOR UNDER STOCKING.
• OBJECTS OF INVENTORY MGMT

1. CONTINUOUS SUPPLY
2. OPTIMUM STOCKING
3. TO CHECK ON MATERIAL COST UNDER CONTROL
4. TO MINIMIZE LOSSES
5. PROPER ORGANIZATION FOR INVENTORY MGMT
6. TO ENSURE PERPETUAL INVENTORY CONTROL

• TOOLS AND TECHNIQUES

1. DETERMINATION OF STOCK LEVEL
2. DETERMINATION OF SAFETY STOCK
3. ORDERING SYSTEM OF INVENTORY
4. ECONOMIC ORDER QUANTITY
5. A.B.C ANALYSIS
6. VED ANALYSIS
7. INVENTORIES TURNOVER RATIOS
8. AGING SCHEDULE OF INVENTORIES
9. CLASSIFICATION AND CODIFICATION OF INVENTORIES
10. PREPARATION OF INVENTORY REPORTS
11. LEAD TIME
12. PERPETUAL INVENTORY SYSTEM
13. JIT CONTROL SYSTEM

• DETERMINATION OF STOCK LEVEL

14. MINIMUM LEVEL :- MINIMUM STOCK WHICH MUST BE MAINTAINED AT ALL TIMES. LEAD TIME, RATE OF CONSUMPTION AND NATURE OF MATERIAL ARE CONSIDERING IN FIXING MINIMUM LEVEL.

·         MINIMUM STOCK LEVEL =RE-ORDERING LEVEL-( NORMAL CONSUMPTION NORMAL REORDER PERIOD)

• MAXIMUM LEVEL :- MAXIMUM QUANTITY OF AN ITEM OF MATERIAL WHICH CAN BE HELD IN STOCK AT ANY TIME. THE  FOLLOWING FACTORS ARE CONSIDERING IN FIXING MAXIMUM LEVEL:-

1. AVAILABILITY OF CAPITAL
2. AVAILABILITY OF STORAGE SPACE
3. MAXIMUM REQUIREMENT
4. THE TIME LAG
5. COST OF MAINTAINING STORES
6. LIKELY OF FLUCTUATION IN PRICES
7. THE SEASONAL NATURE OF SUPPLY OF MATERIAL

• MAXIMUM STOCK LEVEL = REORDERING LEVEL + REORDERING QUANTITY – ( MINIMUM CONSUMPTION X MINIMUM RE ORDERING PERIOD
• AVERAGE STOCK LEVEL =MINIMUM STOCK LEVEL + ½ (OF REORDER QUANTITY) OR
• ½ ( MINIMUM STOCK LEVEL + MAXIMUM STOCK LEVEL)
• DANGER LEVEL: THIS MEANS A LEVEL AT WHICH NORMAL ISSUE OF MATERIALS ARE STOPPED AND ISSUES ARE MADE ONLY UNDER SPECIFIC INSTRUCTIONS. THE PURCHASE OFFICER WILL MAKE SPECIAL ARRANGEMENT TO GET THE MATERIALS WHICH REACH AT THEIR DANGER LEVEL SO THAT THE PRODUCTION MAY NOT STOP DUE TO SHORATGE OF MATERIALS
• DANGER LEVEL = AVERAGE CONSUMPTION X MAXIMUM REORDER PERIOD

• EXAMPLE
• ABC LTD IS MANUFACTURING A PRODUCT BY USING M,N AND Q RAW MATERIALS. A PRODUCT REQUIRES 10 KG,8KG AND 6 KG OF M,N AND Q RESPECTIVELY. THE REORDER LEVEL OF M,N, ARE 15,000 KG AND 10,000 KG RESPECTIVELY WHILE MINIMUM LEVEL OF 2500KG Q. THE WEEKLY PRODUCTION OF A PRODUCT VARIES FROM 300 TO 500 UNITS. WHILE THE WEEKLY AVERAGE PRODUCTION IS 400 UNITS.

• COMPUTE THE FOLLOWING

1. MINIMUM STOCK LEVEL OF M
2. THE REORDER LEVEL OF Q
3. MAXIMUM STOCK LEVEL OF N
4. ADDITIONAL INFORMATION
5. REORDER QUANTITY 20,000 FOR M,15,000 FOR N AND 20,000 FOR Q
6. DELIVERY IN WEEKS MINIMUM DELIVERY ARE 2,4,3 FOR M,N AND Q RESPECTIVELY
7. AVERAGE ARE 3,5 AND 4 FOR M, N AND Q
8. MAXIMUM 4,6,5

• SOLUTION
• MINIMUM STOCK LEVEL OF M
• MINIMUM STOCK LEVEL =RE-ORDERING LEVEL-( NORMAL CONSUMPTION X NORMAL REORDER PERIOD)
• 15,000 KGS –( 400 UNITS OF A X 10 KGS PER UNIT X 3 WEEKS) =15,000=12000 =3000
• AVG CONSUMPTION MEANS =1/2( 300+500) =400

• MAXIMUM STOCK LEVEL OF N
• MAXIMUM STOCK LEVEL = REORDERING LEVEL + REORDERING QUANTITY – ( MINIMUM CONSUMPTION X MINIMUM RE ORDERING PERIOD

·         10,000KGS + 15,000 – ( 300 UNITS OF A X8KGS X 4 WEEKS) =25,000-9600 =15,400 KGS

• RE-ORDER LEVEL OF Q
• RE ORDER LEVEL = MAXIMUM REORDER PERIOD X MAXIMUM CONSUMPTION
• 5 WEEKS X 500UNITS OF A X 6 UNITS OF Q FOR ONE UNIT OF A =15,000 KGS
• DETERMINATION OF SAFETY STOCK : STOCK OUT COSTS AND CARRYING COST
• ORDERING SYSTEMS OF INVENTORY:-

• ECONOMIC ORDER QUANTITY
• ECONOMIC ORDER QUANTITY IS THE SIZE OF THE LOT TO BE PURCHASED WHICH IS ECONOMICALLY VIABLE. THIS IS THE QUANTITY OF MATERIALS WHICH CAN BE PURCHASED AT MINIMUM COST. ECONOMIC ORDER QUANTITY IS THE POINT AT WHICH INVENTORY CARRYING COSTS ARE EQUAL TO ORDER COSTS.
• TOTAL COST OF A MATERIAL =TOTAL  ACQUISITION COST + TOTAL ORDERING COST + TOTAL CARRYING COST
• FORMULA
• Q=√(2 AO/C)
• A= ANNUAL DEMAND
• Q= QUANTITY TO BE ORDERED
• O= COST OF PLACING ONE ORDER
• I OR C =INVENTORY CARRYING COSTS OF ONE UNIT

 SCIENTIFIC INVENTORY MANAGEMENT FOR REPLENISHMENT

1. FIXED ORDER QUANTITY SYSTEM:- IN THIS SYSTEM MATERIAL REORDER QUANTITY IS PLACED FOR THIS QUANTITY WHEN EVERT THE STOCK REACHES THE REORDERING POINT. THE FIXED      REORDER QUANTITY IS ECONOMIC ORDER QUANTITY.
2. REPLENISHMENT SYSTEM: THERE IS FIXED ORDERING TIME WHEN THE STOCKS ARE REVIEWED AND LEVEL ORDERS ARE PLACED FOR A VARYING QUANTITY.
3. OPTIONAL OR MODIFIED:MODIFICATION OF THE REPLENISHMENT SYSTEM.THIS METHOD COMBINES THE MAIN FEATURE OF FIXED ORDER QUANTITY AND REPLENISHMENT SYSTEM BECAUSE IT TAKES INTO CONSIDERATION A MAXIMUM LEVEL,A VARIABLE ORDER QUANTITY SUBJECT TO CERTAIN LOWER LIMIT,REORDERING LEVEL AND A SYSTEM TO REVIEW A FIXED ORDERING TIME

• JUST IN TIME INVENTORY SYSTEM

1. JUST TIME PURCHASING RECOGNIZING TOO MUCH CARRYING COSTS ASSOCIATED WITH AND HOLDING HIGH INVENTORY LEVEL.
2. JUST  IN TIME PURCHASING THE PURCHASE OF MATERIAL OR GOODS IN SUCH A WAY THE DELIVERY OF PURCHASE ITEM IS ASSURED BEFORE THEIR USE OR DEMAND.
3. ADVOCATES GOOD RELATIONSHIP WITH THE SUPPLIERS AND MAKING TIMELY PURCHASES FROM PROVEN SUPPLIER WHO CAN MAKE READY DELIVERY OF GOODS AVAILABLE AS AND WHEN THE NEED ARISE.

• BENEFITS OF JIT:-

1. INVESTMENT IN INVENTORY IS REDUCED
2. CARRYING COST IS REDUCED
3. QUALITY COSTS SUCH AS INSPECTION COST IS REDUCED
4. REDUCTION IN WASTE OF TIME

• STOCK CONTROL THROUGH ABC

1. UNDER THE TECHNIQUE OF MATERIALS CONTROL,MATERIALS ARE LISTED IN A,B AND C CATEGORIES IN ASCENDING ORDER BASED ON MONEY VALUE OF CONSUMPTION
2. ABC ANALYSIS MEASURES THE COST SIGNIFICANCE OF EACH ITEM OF MATERIAL. IT CONCENTRATES ON IMPORTANT ITEMS SO IT IS ALSO KNOWN BY THE NAME CONTROL BY IMPORTANCE AND EXCEPTION.

1. A CATEGORIES OF ITEMS CONSISTS ONLY A SMALL PERCENTAGE THAT IS 10% OF  TOTAL ITEMS AND 70 % OF INVENTORY VALUE
2. B CATEGORY OF ITEMS ARE RELATIVELY LESS IMPORTANT 20% THE TOTAL ITEMS AND 20 % OF INVESTMENT VALUE
3. C CATEGORY OF ITEMS 70% OF TOTAL ITEMS HANDLED AND 10% OF VALUE.

• VED ANALYSIS IS USED FOR SPARE PARTS. IT ANALYSES ITEMS BASED ON THEIR  CRITICALLY TO PRODUCTION AND ALSO BENEFICIAL FOR THOSE ITEMS OF MATERIAL WHICH ARE DIFFICULT TO PROCURE.
• V MEANS VITAL , E MEANS ESSENTIAL AND D MEANS DESIRABLE

1. VITAL MEANS THE SPARES THE STOCK OUT OF WHICH EVEN FOR A SHORT TIME WILL STOP PRODUCTION FOR QUITE SOME TIMES AND WHERE THE COST OF STOCK OUT IS VERY HIGH
2. THE SPARES THE ABSENCE OF WHICH CAN NOT BE TOLERATED FOR MORE THAN A FEW HOURS OR A DAY AND COST OF LOST PRODUCTION IS HIGH ARE KNOWN AS ESSENTIAL
3. THE DESIRABLE SPARE ARE THOSE SPARES WHICH ARE NEEDED BUT THEIR ABSENCE FOR EVEN A WEEK WILL NOT LEAD TO STOPPAGE OF PRODUCTION.

• PERPETUAL INVENTORY SYSTEM

1. PERPETUAL INVENTORY MEANS THE SYSTEM OF RECORDS WHEREAS CONTINUOUS STOCK TAKING MEANS THE PHYSICAL CHECKING OF THOSE RECORDS WITH THE ACTUAL STOCK.
2. THE CHARTERED INSTITUTE OF MANAGEMENT ACCOUNTANTS,LONDON,”DEFINES PERPETUAL INVENTORY AS SYSTEM OF RECORD MAINTAINED BY THE CONTROLLING DEPARTMENT WHICH REFLECT THE PHYSICAL MOVEMENT OF STOCKS AND THEIR CURRENT BALANCE.
3. BIN CARDS AND STORES LEDGER ARE THE RECORD OF PHYSICAL MOVEMENTS OF THE STOCKS WHICH SHOWS THE RECEIPT,ISSUE AND BALANCES

• CAUSES OF VARIATION BETWEEN STOCK RECORD AND PHYSICAL VERIFICATION
• AVOIDABLE CAUSES:-

1. CLERICAL MISTAKE: WRONG POSTING,NON POSTING,WRONG CASTING ETC
2. PILFERAGE AND THEFT
3. CARELESSNESS IN MATERIAL HANDLING
4. SHORT OR OVER ISSUE OF MATERIALS

• UNAVOIDABLE CAUSES

1. DUE TO SHRINKAGE AND EVAPORATION ACTUAL BALANCE IS LESS
2. MORE DUE TO ABSORPTION OF MOISTURE
3. MAY BE LOST DUE TO BREAKING BULK MATERIALS INTO SMALLER PARTS FOR ISSUE

• DOUBLE BIN SYSTEM

1. FOLLOWED BY SMALL ORGANISATION
2. SUITABLE FOR MATERIALS OF COMPARATIVELY LESS VALUE
3. SORES IN BIN WHICH ARE DIVIDED INTO TWO COMPARTMENT
4. MATERIALS ARE ISSUED FOR PRODUCTION FROM FIRST COMPARTMENT AND SECOND IS NOT USED.
5. WHEN THE MATERIALS ARE IN THE FIRST COMPARTMENT IS CONSUMED FULLY THEN AN ORDER IS PLACED. THE MEAN TIME SECOND BIN IS USED.

• OTHER TECHNIQUES
• INPUT OUTPUT RATIO IS USED TO JUDGE THE EFFICIENCY IN THE USAGE OF MATERIALS. INDICATES THE RELATION BETWEEN THE UNITS OF MATERIAL PUT IN FOR PRODUCTION AND UNITS OF FINISHED PRODUCT.
• INPUT OUT PUT RATION=(UNITS OF INPTUT/UNITS OF OUTPUT)X100. COMPARED WITH THE STANDARD RATION TO KNOW THE EFFICIENY OR INEFFICIENCY
• INVENTORY RATIOS
• INVENTORY RATIO =COST OF GOODS SOLD OR( NET SALES)/AVERAGE INVENTORY
• INVENTORY TURNOVER IN DAYS=DAYS DURING THE PERIOD/ITR
• SLOW MOVING GOODS
• DORMANT STOCK: RARELY ISSUED
• OBSOLETE STOCK:-OUTDATED

• FNSD

1. F STANDS FOR FAST MOVING THAT ARE CONSUMED IN SHORT SPAN OF TIME
2. N STANDS FOR NORMAL MOVING GOODS WHICH ARE EXHAUSTED OVER A PERIOD OF YEAR
3. S INDICATES SLOW MOVING GOODS WHICH ARE NOT ISSUED FREQUENTLY
4. D MEANS DEAD ITEMS AND THE CONSUMPTION OF SUCH ITEMS IS ALMOST NIL

• MATERIAL INVENTORY COST REPORTS

1. HELP THE MGMT IN EXERCISING EFFECTIVE MATERIAL CONTROL AND TAKING APPROPRIATE DECISIONS
2. SERVE AS MEANS OF COMMUNICATIONS USUALLY IN THE WRITTEN FORM OF FACTS RELATING TO MATERIALS WHICH SHOULD BE BROUGHT TO THE VARIOUS LEVELS OF MGMT
3. MATERIAL CONTROL IS DIVIDED INTO : PURCHASE CONTROL,STORE CONTROL AND CONSUMPTION CONTROL

• FOR EXAMPLE:
• MATERIAL USAGE  AND WASTAGE REPORT IS SENT TO WORKS MANAGER
• MATERIAL PRICE VARIANCE REPORT(MONTHLY) TO PURCHASE COMMITTEE