labor

materials

overheads

Increase in profits by 30%

Monika kansal

Techniques of material Techniques of material controlcontrol

Learning Objectives Learning Objectives

After going through this module you shall be After going through this module you shall be able toable to

Know meaning of inventories and their need Know meaning of inventories and their need Get a feel of various techniques of material Get a feel of various techniques of material

controlcontrol Judge their applicability in various situationsJudge their applicability in various situations Know their respective advantages and Know their respective advantages and

disadvantagesdisadvantages

What are inventories?What are inventories?

Inventory are stocks of material. It can stored Inventory are stocks of material. It can stored for future use of production .for future use of production .

Today’s inventory is tomorrow production.Today’s inventory is tomorrow production. Semi-finished goods waiting in the line for Semi-finished goods waiting in the line for

use in the next process of for that matter use in the next process of for that matter finished goods waiting for shipment is form of finished goods waiting for shipment is form of inventory.inventory.

Inventory includes Inventory includes TOOLS, RAW TOOLS, RAW MATERIAL,WORK IN PROCESS & FINISHED GOODS.MATERIAL,WORK IN PROCESS & FINISHED GOODS.

No production is possible without the inventories.No production is possible without the inventories.

Companies have to make the buffer stocks for Companies have to make the buffer stocks for production.production.

Why inventoriesWhy inventories

Inventory speaks of stocks means investment, Inventory speaks of stocks means investment, expenses, material losses.expenses, material losses.

What is inventory control ?What is inventory control ?

Inventory control is planning , ordering and Inventory control is planning , ordering and scheduling of material used in manufacturing.scheduling of material used in manufacturing.

It means right quantity of material is available It means right quantity of material is available in right time.in right time.

It means systematic control over the It means systematic control over the purchasing, storing and using of material.so as purchasing, storing and using of material.so as to minimize possible cost.to minimize possible cost.

Inventories are necessary evil.Inventories are necessary evil.

Why selective inventory control`Why selective inventory control`

Extremely large variety of itemsExtremely large variety of items

soso

Neither desirable nor feasible to Neither desirable nor feasible to exercise rigorous control over all exercise rigorous control over all items.items.

Put limited control efforts more Put limited control efforts more judicially over significant itemsjudicially over significant items

Main techniques in selective Main techniques in selective inventory controlinventory control

ABC AnalysisABC Analysis VED AnalysisVED Analysis FSDN AnalysisFSDN Analysis JIT AnalysisJIT Analysis HML analysisHML analysis

ABC-Always ABC-Always better controlbetter control

Basis of classification Basis of classification 1.1. Value of usageValue of usage

OrOr

2. % number of items contributing to proportion 2. % number of items contributing to proportion of total value of inventoriesof total value of inventories

Let us define ABC Let us define ABC AA- - significant fewsignificant few,, items few in number contributing high items few in number contributing high

proportion of value of inventories proportion of value of inventories B- not few, not too manyB- not few, not too many neither very cheap nor very costlyneither very cheap nor very costly

C- C- Insignificant manyInsignificant many relatively large no. of itemsrelatively large no. of items normally inexpensive normally inexpensive

2.2. Mechanism of ABCMechanism of ABC

GroupGroup % of items (number)% of items (number) % of costs% of costs

AA 8%(160)8%(160)75%(7,50,000)75%(7,50,000)

BB 25%(500)25%(500)20%(2,00,000)20%(2,00,000)

C C 67%(1340)67%(1340) 5%(50,000 5%(50,000))

TOTAL TOTAL 2,000 items Rs. 10,00,0002,000 items Rs. 10,00,000

Graphical presentationGraphical presentation

Control mechanism of ABCControl mechanism of ABC

ITEMITEM ““A”A” ““B”B” ““C”C”

Safety stockSafety stock No or very No or very lowlow

Low Low highhigh

Follow upFollow up Maximum Maximum periodicperiodic Expediting Expediting exceptionallyexceptionally

Value Value analysisanalysis

RigorousRigorous moderatemoderate minimumminimum

Handled byHandled by Senior Senior officialsofficials

Middle Middle level level managersmanagers

Fully Fully deleagteddeleagted

Advantages of ABC AnalysisAdvantages of ABC Analysis

1. Strict control is exercised1. Strict control is exercised

2.Investment in inventory is 2.Investment in inventory is

reducedreduced

3. Storage cost is reduced3. Storage cost is reduced

4. Management time is saved4. Management time is saved

Just in time inventory:Just in time inventory: Because of larger carrying Because of larger carrying

cost of inventory in the cost of inventory in the stores & godowns, stores & godowns, manufacturers now manufacturers now interested in Just in time interested in Just in time purchasing.purchasing.

JIT purchasing is the JIT purchasing is the purchase of material or purchase of material or goods goods in such a way that in such a way that delivery of purchased delivery of purchased items is assured before items is assured before

their use or demandtheir use or demand..

Advantages of JITAdvantages of JIT

1. Investment in inventory is reduced.1. Investment in inventory is reduced.

2.Carrying cost is reduced. 2.Carrying cost is reduced.

3. A reduction in number of suppliers to dealt with is 3. A reduction in number of suppliers to dealt with is possible.possible.

4. Minimum possible wastage4. Minimum possible wastage

Perpetual Inventory SystemPerpetual Inventory System::

It is a system of records. It is a system of records.

It reflects the It reflects the physical movements of stocks & physical movements of stocks & their current balance.their current balance.

Bin cards & the stock ledger help the Bin cards & the stock ledger help the management in maintaining this system.management in maintaining this system.

Records of all issues and balances.Records of all issues and balances.

Also includesAlso includes

Continuous stock taking Continuous stock taking Surprise checksSurprise checks

Merits:Merits:

Provides better controlProvides better control Acts as an internal check Acts as an internal check

mechanismmechanism Assures minimum of Assures minimum of

investment at least costinvestment at least cost

Timely detection of errors & Timely detection of errors & discrepancies.discrepancies.

Preparation of final accounts at any Preparation of final accounts at any time is possible. time is possible.

Demerits:Demerits:

Not suitable for small unitsNot suitable for small units More paper workMore paper work Actual stock taking may not be Actual stock taking may not be

possible in true sensepossible in true sense

VED Analysis:VED Analysis:VED- vital, essential & VED- vital, essential &

desirable- analysis is used desirable- analysis is used primarily for control of spare primarily for control of spare parts. The spare parts can be parts. The spare parts can be divided into 3 categories-divided into 3 categories-

1-Vital1-Vital

2-Essential2-Essential3-Desirable3-DesirableDepending upon their Depending upon their

criticality for production.criticality for production.

The spares, the stock-out of which even for a The spares, the stock-out of which even for a short time will stop production for quite short time will stop production for quite sometime are vital spares.sometime are vital spares.

The spares, the absence of which cannot The spares, the absence of which cannot be tolerated for more than few hours or a day be tolerated for more than few hours or a day & which are essential for the production to & which are essential for the production to continue, are essential spares.continue, are essential spares.

The desirable spares are those spares The desirable spares are those spares which are needed but their absence for even a which are needed but their absence for even a week or so will not lead to stoppage of week or so will not lead to stoppage of production. production.

FNSD Analysis:FNSD Analysis:

FNSD analysis divides the items of stores into 4 FNSD analysis divides the items of stores into 4 categories in the descending order of categories in the descending order of importance of their usage rateimportance of their usage rate..

‘ ‘F’ stands for fast moving items that are F’ stands for fast moving items that are consumed in a short span of time.consumed in a short span of time.

‘ ‘N’ stands for normal moving items N’ stands for normal moving items which are exhausted over a period of a year or which are exhausted over a period of a year or so.so.

‘ ‘S’ indicates slow moving items which S’ indicates slow moving items which are not issued at frequent intervals & are are not issued at frequent intervals & are expected to be exhausted over a period. expected to be exhausted over a period.

D’. means dead items & the consumption of such D’. means dead items & the consumption of such items is almost nil.items is almost nil.

HML ClassificationHML Classification::

The HML classification is similar to the ABC The HML classification is similar to the ABC

classification, except for the fact that instead of classification, except for the fact that instead of

consumption values of items, consumption values of items, their units valuestheir units values are are considered.Items are classified on the basis of their unit considered.Items are classified on the basis of their unit value into:value into:

H= High value itemsH= High value items

M= Medium value itemsM= Medium value items

L=Low value itemsL=Low value items

XYZ ClassificationXYZ Classification::

BBased on the closing inventory value of different ased on the closing inventory value of different items.items.

Such classification is done every year at the time of Such classification is done every year at the time of annual stock taking .annual stock taking .

Items having highest inventory valuation are Items having highest inventory valuation are classified as X, while with low investment are termed classified as X, while with low investment are termed as z. Other items are the y items whose inventory as z. Other items are the y items whose inventory value is neither too high not too low.value is neither too high not too low.

Let us recaptualiseLet us recaptualise

ABC - emphasizes % value of consumptionABC - emphasizes % value of consumption JIT - purchase only when demandedJIT - purchase only when demanded VED - criticality for productionVED - criticality for production FSDN - frequency of useFSDN - frequency of use HML – unit value of stockHML – unit value of stock XYZ – closing value of different items XYZ – closing value of different items

Perpetual Inventory systemPerpetual Inventory system

Maintenance of records of all physical Maintenance of records of all physical movements of stockmovements of stock

Continuous stock -taking Continuous stock -taking Surprise checks Surprise checks

An automobile assembling companyAn automobile assembling company(requires 20,000 to 22,000 components(requires 20,000 to 22,000 components))

A case study

Bibliography:Bibliography:

COST ACCOUNTINGCOST ACCOUNTING

OPERATION RESEARCHOPERATION RESEARCH

PRODUCTION MANAGEMENTPRODUCTION MANAGEMENT

Types of inventoryTypes of inventory

Anticipation inventoryAnticipation inventory::when firm anticipates rise in prices when firm anticipates rise in prices It may purchase bulk quantity & hold it until price rise.It may purchase bulk quantity & hold it until price rise.

Fluctuation inventoriesFluctuation inventories:Business organization maintain :Business organization maintain reserve capacity to meet unexpected demand and avoid the reserve capacity to meet unexpected demand and avoid the risk of losing customers.risk of losing customers.

Lot size inventoriesLot size inventories: Large amount of goods are purchased : Large amount of goods are purchased to avail the benefit of discount.the goods are purchased and to avail the benefit of discount.the goods are purchased and stocked until sold.stocked until sold.

Transportation InventoriesTransportation Inventories:Raw material & finished goods :Raw material & finished goods are sent from one place to another.some amount of are sent from one place to another.some amount of inventory are always in transit.so longer the transportation inventory are always in transit.so longer the transportation period greater the transportation inventories. period greater the transportation inventories.

Functions of InventoryFunctions of Inventory controlcontrol Effective use of financial resourcesEffective use of financial resources: Effective inventory : Effective inventory

control system and its use lessens the investment in control system and its use lessens the investment in inventories, inventory carrying cost.inventories, inventory carrying cost.

Protection against all material lossesProtection against all material losses:A firm might have :A firm might have obtain the sufficient amount of material but there is a fear obtain the sufficient amount of material but there is a fear of losses also so there is a good inventory control policy to of losses also so there is a good inventory control policy to get safety from losses.get safety from losses.

Proper calculation of cost of productionProper calculation of cost of production:Inventory mgt. :Inventory mgt. has to do with the material at the stage of the acquisition to has to do with the material at the stage of the acquisition to the stage of the shipment .it makes possible for the the stage of the shipment .it makes possible for the calculation of the calculation of the material cost.material cost.

Ascertainment of resultsAscertainment of results: Ready valuation of stock is there : Ready valuation of stock is there as perpetual inventory system this help in taking many as perpetual inventory system this help in taking many important decisions which could have been taken important decisions which could have been taken otherwise post mortem decisions.otherwise post mortem decisions.

Economies in purchasingEconomies in purchasing: : Any Tom Dick and Any Tom Dick and Harry cannot be the scientific purchaser. it is an art and Harry cannot be the scientific purchaser. it is an art and science needs negotiation skills to buy at least effective science needs negotiation skills to buy at least effective cost by using the techniques of inventory control.cost by using the techniques of inventory control.

Keep the ball of production bouncingKeep the ball of production bouncing: : Inventory control, like a balancing wheel in a watch or a Inventory control, like a balancing wheel in a watch or a clock with springs acts as an agent to supply adequate clock with springs acts as an agent to supply adequate materials, stores spares,supplies,cutting of stock outs and materials, stores spares,supplies,cutting of stock outs and shortages and avoiding costly hurdles in operationsshortages and avoiding costly hurdles in operations

Lesser amount and rate of deteriorationLesser amount and rate of deterioration: inventory : inventory control system has it techniques like STR-Stock – turn control system has it techniques like STR-Stock – turn over ratio – and ABC analysis that help in derating the rate over ratio – and ABC analysis that help in derating the rate movement of input items as to whether they are fast movement of input items as to whether they are fast moving or slow moving or not at all moving.moving or slow moving or not at all moving.

Keeping prompt delivery to customersKeeping prompt delivery to customers::In the present In the present world firm cannot afford to lose customers because of lack world firm cannot afford to lose customers because of lack of supply.so there is need of proper system to keep of supply.so there is need of proper system to keep delivery in time.delivery in time.

Eliminates redundant inventoryEliminates redundant inventory:Every organization has a :Every organization has a dead inventory which is not used by it again so money is dead inventory which is not used by it again so money is blocked in it.Firm should try to eliminates it.blocked in it.Firm should try to eliminates it.

Records for future referencesRecords for future references:Each shrewd management :Each shrewd management can use information for taking decisions. A well inventory can use information for taking decisions. A well inventory system provide mgt. a detail and up to date information system provide mgt. a detail and up to date information which helps in taking decisions.which helps in taking decisions.

Why business units have Why business units have inventories?inventories?

To enjoy economies in buyingTo enjoy economies in buying: It is impossible to buy and : It is impossible to buy and manufacture on the day to day basis. so firm orders beyond manufacture on the day to day basis. so firm orders beyond its immediate needs.it gives a benefit of discount.its immediate needs.it gives a benefit of discount.

To move in tune with the changing shades of marketTo move in tune with the changing shades of market conditionsconditions:There is uncertainty about the future. So firm :There is uncertainty about the future. So firm purchased in bulk quantity.stock in for the future.purchased in bulk quantity.stock in for the future.

To meet the demand during the period of replenishmentTo meet the demand during the period of replenishment: : There is always a time gap between placing order and There is always a time gap between placing order and receiving goods.so company can make the inventories for receiving goods.so company can make the inventories for smooth running of business.smooth running of business.

To carry buffer stocks to do away with danger of stocks-To carry buffer stocks to do away with danger of stocks-outsouts:there is a danger of stock outs so company can :there is a danger of stock outs so company can maintain some safety stock to eliminate the danger.maintain some safety stock to eliminate the danger.

To stabilize the production and production To stabilize the production and production processprocess:Hardly a company has a continuos orders they are :Hardly a company has a continuos orders they are subject to the fluctuations in case of seasonable goods but subject to the fluctuations in case of seasonable goods but company can produce it on a uniform basis.the inventories company can produce it on a uniform basis.the inventories reach at the peak before the season and finally sells in reach at the peak before the season and finally sells in marketmarket

To curb loss of saleTo curb loss of sale: inventories are maintained to curb the : inventories are maintained to curb the loss of sale and the goods are available to customers when loss of sale and the goods are available to customers when needed.needed.

To meet other requirementTo meet other requirement: : Seasonal availability such as Seasonal availability such as oil seeds , coconutoil seeds , coconut , ,

mangoes mangoes , tomatoes which are seasonable goods and , tomatoes which are seasonable goods and not available in market during off seasonnot available in market during off season

Government regulationGovernment regulation

Scope of inventory Scope of inventory controlcontrol

Formulation of relevant policiesFormulation of relevant policies:there are certain policies are :there are certain policies are framed by the company.I.e what , when, how,,how much, from framed by the company.I.e what , when, how,,how much, from whom at what price it should be bought and fixation of stock whom at what price it should be bought and fixation of stock levels.levels.

Determining economic order quantityDetermining economic order quantity: In this economic lot : In this economic lot size buying is done .In this how many orders is placed in a size buying is done .In this how many orders is placed in a year is decided to minimized the cost.year is decided to minimized the cost.

Determining lead timeDetermining lead time: lead time is the time span between : lead time is the time span between planning an order and actual receipt of material so ordered.planning an order and actual receipt of material so ordered.

Minimization of material-handling andMinimization of material-handling and storage coststorage cost:: The activities of the stores are to be so arranged to bring the The activities of the stores are to be so arranged to bring the cost reduction that relates to bringing the material to stores and cost reduction that relates to bringing the material to stores and issues to production department.issues to production department.

Ascertaining Safety Stock :-Ascertaining Safety Stock :- Safety Stock is provided to Safety Stock is provided to grant protection against depletion. In case of demand remain grant protection against depletion. In case of demand remain constant and lead time in variable there is no fear or danger of constant and lead time in variable there is no fear or danger of stock-outs. stock-outs.

Factors determining the Factors determining the optimum level of inventoryoptimum level of inventory

The rate of inventory turnoverThe rate of inventory turnover: The time period within which : The time period within which

inventory completes the cycle of productioninventory completes the cycle of production.. Cost :Cost : there are certain cost which effects the level of there are certain cost which effects the level of

inventory.inventory. Financial position of the firmFinancial position of the firm: a financial sound company : a financial sound company

has bulk quantity of materials.has bulk quantity of materials. Inventory policy and attitude of the managementInventory policy and attitude of the management: the : the

inventory policy and attitude of the management also inventory policy and attitude of the management also influences the level of inventory.influences the level of inventory.

Type of productType of product:Type of product also :Type of product also determine the level of inventory.determine the level of inventory.