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SASTRA UNIVERSITY

SCHOOL OF MECHANICAL ENGINEERING


BMEOME 809, MATERIALS MANAGEMENT
UNIT I

INTRODUCTION TO MATERIALS MANAGEMENT

1.1 Definition & Scope of Materials Management


Material management is an approach for planning, organizing, and controlling all those
activities principally concerned with the flow of materials into an organization.
The scope of Materials Management varies greatly from company to company and may include
material planning and control, production planning, Purchasing, inventory control, in-plant materials
movement, and waste management
It is a business function for planning, purchasing, moving, storing material in a optimum way
which help organisation to minimise the various costs like inventory, purchasing, material handling
and distribution costs.
The fundamental objectives of the Materials Management function, often called the famous 5
Rs of Materials Management, are acquisition of materials and services :
of the right quality,
in the right quantity,
at the right time,
for the right price,
from the right source.
From the management point of view, the key objectives of MM are :
To buy at the lowest price , consistent with desired quality and service
To maintain a high inventory turnover , by reducing excess storage , carrying costs and
inventory losses occurring due to deteriorations , obsolescence and pilferage
To maintain continuity of supply , preventing interruption of the flow of materials and services
to users
To maintain the specified material quality level and a consistency of quality which permits
efficient and effective operation
To develop reliable alternate sources of supply to promote a competitive atmosphere in
performance and pricing
To minimize the overall cost of acquisition by improving the efficiency of operations and
procedures
To hire, develop, motivate and train personnel and to provide a reservoir of talent
To develop and maintain good supplier relationships in order to create a supplier attitude and
desire furnish the organisation with new ideas , products, and better prices and service
To achieve a high degree of cooperation and coordination with user departments
To maintain good records and controls that provide an audit trail and ensure efficiency and
honesty
To participate in Make or Buy decisions

D.VENKATESAN, SoME, SASTRA

MATERIALS MANAGEMENT

2013-14

Materials Management thus can be defined as that function of business that is responsible for
the coordination of planning, sourcing, purchasing, moving, storing and controlling materials in an
optimum manner so as to provide service to the customer, at a pre-decided level at a minimum cost.
Planning and control is done for the materials taking into account the materials not available for
the operation and those in hand or in pipe line. This involves estimating the individual requirements of
parts, preparing materials budget, forecasting the levels of inventories, scheduling the orders and
monitoring the performance in relation to production and sales.
1.2 Scope of Materials Management:
The scope is vast. Its sub functions include Materials planning and control, Purchasing, Stores
and Inventory Management besides others. Basically, under its scope are :
emphasis on the acquisition aspect
inventory control and stores management
material logistics, movement control and handling aspect
purchasing, supply , transportation , materials handling etc
supply management or logistics management
all the interrelated activities concerned with materials
Materials management can thus also be defined as a joint action of various materials activities
directed towards a common goal and that is to achieve an integrated management approach to
planning, acquiring, processing and distributing production materials from the raw material state to
the finished product state.
In its process of managing, materials management has such sub fields as inventory
management , value analysis, receiving, stores and management of obsolete , slow moving and non
moving items. The various activities represent the following four functions:

Planning and control

Purchasing

Value analysis and

Physical distribution
Every organization, big or small, depends on materials and services from other organizations
to varying extents. These materials and services are obtained through exchange of money and the
physical arrangement of it all is called Materials Management or even Material Management.
Various materials used as inputs, such as raw materials, consumables & spares, are required
to be purchased and made available to the shops / users as & when needed to ensure uninterrupted
production. Therefore, efficient management of input materials is of paramount importance in a
business organization for maximizing materials productivity, which ultimately adds to the profitability
of the organization.
The main concern of any Business management is to maximise the Return on Investment
(ROI). The relationship of various entities here can be expressed as:
Profit
Sales
ROI = ---------- X ----------------------------------------Sales
Current Asset + Fixed Asset
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MATERIALS MANAGEMENT

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Thus ROI = profit margin + asset turnover rate


A firm's profit margin reflects management's ability to control costs in relations to revenue. The
asset turnover rate reflects management's ability to effectively utilize the firm's productive assets.
Hence a firm can improve ROI in three ways:

By reducing cost

By getting more sales from available assets or Get Currency converter

By some combination of the above


All the materials related activities such as material planning & indenting, purchase systems &
procedure, variety reduction through standardization & rationalization, reducing uncertainties in
demand & supply, handling & transportation, inspection, proper storage & issue of materials to the
internal customers, inventory management, vendor management & finally disposal of obsolete,
surplus & scrap materials etc. taken together is termed as INTEGRATED MATERIALS
MANAGEMENT
To carry out these functions efficiently, it is essential to have a very good supplier base, order
booking process & inventory management system as well as expert MATERIALS MANAGEMENT
(MM) professionals.
1.3 Organization of Materials Management Functions
The overall objectives of an organisation tend to be achieved most efficiently when the
organisation is structured by grouping similar activities together. The process begins by dividing the
total operation into its basic functional components. Each component , in turn, is divided into a
number of sub-functions.
The process is continued until each individual job encompasses a reasonable number of
related tasks. The basic aim is to have a system that is functionalised , has proper control over the
activities and is well co-ordinated. Materials Management provides an integrated systems approach
to the co-ordination of the materials activities and the control of total material costs.
Once the whole Materials Management function has been divided into its different subfunctions as follows.
Purchasing
Administrative : Purchasing administration involves all the tasks associated with the
management process, with emphasis on the development of policies , procedures, controls and the
mechanics for coordinating purchasing operations with those of other departments.
Buying : It addresses to a wide gamut of activities such as reviewing requisitions , analyzing
specifications, investigating vendors, interviewing sales people studying costs and prices and
negotiating.

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MATERIALS MANAGEMENT

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Expediting : This is basically the order follow up activity involving various types of vendor
relationship work. Reviewing Order status, providing clarifications on transportation, writing and
emailing vendors etc.
Special projects (Non routine) : In order to facilitate smooth purchasing in a highly competitive
business environment , purchasing authorities have to keep building the capacity to do better by
taking up as special projects activities such as vendor development, vendor registration, value
analysis, market studies, system studies etc
Routine : Purchasing process or procedure involving routine or every day activities such as
dealing specific purchase file , placing orders, maintaining records of commodities, vendors etc.
1.4 Material Planning
In any integrated Materials Management environment, planning for getting the materials is the
starting point for the whole MM function. Materials planning sets the procurement function and the
subsequent material functions rolling. Material planning is a scientific way of determining the
requirements starting with raw materials, consumables, spare parts and all other materials that are
required to meet the given production plan for a certain period.
Material planning is derived from the overall organisational planning and hence it is always a sub -plan
of the broad organisational plan. It helps in forecasting and initiating for procurement of materials
Factors affecting Material planning:
1) Macro factors: Global factors such as price trends, business cycles, government's import and
export policies etc are called the Macro factors. Credit policy of the government is a critical factor as
banks follow these guidelines only while extending financial support to a business entity.
2) Micro factors: These are essentially the factors existing within the organisation such as corporate
policy on Inventory holding, production plan, investments etc. For any organisation, factors such as
Lead time of procurement, acceptable inventory levels, working capital, seasonality, delegation of
power are micro factors.
Techniques of planning materials:
There are a few techniques used for planning material for the given period. The following two are,
however, commonly used:
1) Materials Requirement Planning (MRP)
2) Requirement based on past consumption
MRP has, as its starting point, the annual production plan of the manufacturing concern. Once
a firm determines its annual production plan, the overall material requirement, to meet the given
production plan, is worked out. It is a detailed analysis encompassing the materials and quantities
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available for use, materials with quantities not available and hence needing procurement, the actual
lead time of procurement etc.
Since, it is always possible to have a situation where some parts of an assembly are available
and some others not available, Bill of Materials is exploded. It is quantifying all the materials
(components) needed for various assemblies, all needed as per the production plan. BOM is thus a
list displaying the code, nomenclature of an item, its unit and quantity, location of use and also the
estimated price of each component. An explosion chart is a series of bills of materials grouped
together in a matrix form so that combining the requirements for different components can be made.
Once the BOM is ready, the same is handed over to the Purchasing wing which initiates the
purchasing activities. MRP thus keeps in view the Lead time also. Using computers, preparation of
BOM through explosion of lists is quite easy and smooth.
1.5 Purchasing Function in Materials Management
Purchasing function, in a business environment, is one of the most critical functions as it
provides the input for the organisation to convert into output. Materials today are lifeblood of industry.
They must be available at the proper time, in the proper quantity, at the proper place, and the proper
price. Company costs and company profits are greatly affected by them as normally, a manufacturing
organisation spends nearly 50% of its revenue in purchasing.
Purchasing function is a function commonly seen in all those organizations that undertake
purchasing activities. The purchasing function is usually performed by a specialized and centralized
purchasing department, directed by an efficient manager to achieve the performance in an
economical manner. Purchase department is a unit of an organisation that performs purchasing
function.
Purchasing is responsible for spending nearly half of a company's income for buying the input
materials. Obviously, any saving achieved by it results into direct saving for the company and all such
savings are a company's profit. Going by a thumb rule "even 1% saving achieved in Purchasing
results in 5% profit for any organisation".
Procurement vs. Purchasing
It is used to define one of several supply functions involved in logistics activities. In the
broadest sense procurement includes the entire process by which all classes of resources (people,
materials, facilities and services) for a particular project are obtained. Since purchasing is a unique
function, it differs a bit from procurement in the sense that while procurement, with the same objective
has a wider domain, purchasing with the same objective is included in it.
1.6 Objectives of Purchasing:
The classical definition of objectives of purchasing is to buy materials and services of the right
quality, in the right quantity, at the right place, from the right source and at the right time. However, in
general management parlance the objectives of purchasing are:

To support company operations with an uninterrupted flow of materials & services.


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To buy competitively and wisely

To help keep a minimum Inventory

To develop reliable alternate sources of supply

To develop good vendor relationship and a good continuing supplier relationship

To achieve maximum integration with the other departments of the firm

To train & develop highly competent personnel who work for the success of firm/ department.

To develop policies and procedures which permit accomplishment of the preceding seven
objectives at the lowest reasonable operating cost.
The basic objective is to derive the maximum value for each unit of currency spent in buying.
Purchasing is no doubt a vast subject and as the competition among the firms grows this function of
business is expected to see a lot of evolution
1.7 Types of Purchasing:
Considering the nature of business an organisation has there could be different approaches and
hence Purchasing can be any of these types:

Forward Buying
Tender Buying
Speculative Buying
Systems Contracting
Rate Contract
Reciprocity
Zero Stock buying
Blanket Order

Forward Buying
Forward Buying as the name suggests is the system under which buying is done with longer
term in perspective. It is not meant for meeting the present consumption requirement. It is rather a
commitment on part of both the buyer and the seller, normally for a period of one year.
Depending upon the availability of the item, the financial policies, the economic order quantity,
the quantitative discounts, and the staggered delivery, the future commitment is decided. A few
organizations do hedge, particularly in the commodity market by selling or buying contracts.
Forward buying helps a firm in booking capacity of a supplier and thus often results into a
safeguard against a competitor acquiring his capacity. It is usually done for Raw materials but is not
limited to it. With competition becoming globalised these days, such an arrangement is a win-win
situation for both, the buyer and the supplier.
Tender Buying
Tender buying is selecting a supply source (supplier) out of many sources available. That is,
many tenderers are invited to participate in the tendering process and then one or more than one
tender is selected for order placement. Such tenders are also called the Accepted tender/s (A/Ts).

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MATERIALS MANAGEMENT

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The main focus through tender buying is on competition of price and quality. Usually, the best
quality (T1 or Q1) is selected after assessment of the technical offers and then the lowest offered
price (L1) tender is selected for order placement.
Process of tender buying:
A typical purchase function starts with the raising of a requisition (Indent / Material
Procurement Requisition) for an item which is required for a stated purpose. This requisition is then
converted into an enquiry form which is issued to the probable vendors who are asked to respond
within a given date and time (called Tender opening date) as mentioned in the enquiry issued to
them. The interested vendors respond to the tender enquiry by giving their tenders. Tenders thus
received are opened on the Tender opening date at the fixed time.
The tenders are then subjected to evaluation with respect to a tenderer's capability, Financial
as well as Technical and other criteria as laid down in the tender enquiry. This step also witnesses
series of discussions, clarifications and negotiation with the tenderers. Some tenders can be rejected
at this stage as they might not meet the requirement of the purchaser. Finally, the tenders found
suitable are subjected to price comparison and usually the tenderer offering the lowest price (L1) is
selected for placement of order.
The process explained above shows a great deal of variations depending upon a company's
procurement policy. In some places, the best quality offering tenders are accepted for subsequent
price comparison whereas in some other place all the tenderers who meet the minimum requirement
are considered accepted for price comparison and order placement. Similarly, in some places the
order is placed only on L1 (lowest offered price) whereas in some other places it may not be rigidly
followed so.
Types of Tenders:
Since the tenders are sent to the probable vendors , knowledge of vendors for the item in
question is a necessity. It's based on this concept that the types or mode of tendering is decided
against a particular purchase requisition. Most commonly used Types of tendering / tender buying are
as below:
1) Global Tender :
As the name suggests a global tender is floated with a view to elicit offers / response from any
vendor situated anywhere in the world. The need for a global tender arises when the purchaser either
does not know about the vendors for a particular item in question or when he thinks that a wider
choice of vendor is possible through it, irrespective of his nation's boundaries. A few reasons are :

Lack of information on vendors

Only a few vendors known

When there are chances of cartel formation among known vendors

Anticipation that more response may come


What is of importance in this popular mode is the way a global tender is floated. With internet
becoming the most powerful tool transcending the national boundaries, a wide range of applications
are now possible. There are tender portals (www.tendertiger.com, www.indiatenders.com, etc.) on
which one can upload the whole tender enquiry and then ask the interested vendors to make offers.
Besides, this increasingly popular way of inviting tenders , listing the tender in international trade
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journals, leading world newspapers etc. are other ways of putting up a global tender enquiry. The
idea is to give wide publicity of the tender, worldwide and circumstances permitting ,to place the order
on a foreign supplier too.
2) Open Tender :
An Open tender too like a Global tender tends to invite tender from any interested vendor. The
basic difference assumed between an open tender and a global tender enquiry is essentially the
range of its applicability. While a global tender gets the worldwide publicity, an open tender is limited
only within a country. Otherwise, the concept remains the same as it also seeks to elicit better or
wider response.
Since the Open tender enquiry is limited within the country itself , besides the internet mode ,
the enquiry is also printed in the national dailies, internal trade bulletins etc for ensuring its wide
publicity, within the country. Any vendor who meets the tender requirements can make an offer.
3) Limited Tender :
When the issue of tender enquiry is limited only to a selected few vendors ,it is called Limited
Tender Enquiry (LTE). LTE is issued when the capabilities of the vendors is well known to the
purchaser. It is considered better than Global and Open tender modes as there is always an element
of uncertainty in those two modes with respect to the capabilities of the vendors.
For issuing LTE , a purchaser maintains a list of approved / registered vendors whose capabilities are
checked periodically.
4) Single Tender :
An STE is issued only when either the item is proprietary in nature, that is only one supplier
produces that item or where there may be more vendors but due to certain exigencies it is not
possible to devote time on evaluating the vendors' offers / one supplier can ,for sure , fulfill the needs.
Which mode to use and when depends on many factors including company's procurement
policy. For example, for a small value purchase, if the policy does not prohibit, Single tender enquiry
or Limited tender enquiry is considered ideal. These are also ideal for high value and frequently
bought items.
On the other hand, for high value and non frequently bought items / systems , Open / Global
tenders are suited. In many government organizations, whose procurements are also called public
procurements for the reason that they spend public money for the public cause ,all the tenders are to
be invited only through Open / Global tenders.
Speculative Buying
When purchasing is done purely from the point of view of taking advantage of a speculated
rise in price of the commodity it is called Speculative buying. The intent is not to buy for the internal
consumption but to resell the commodity at a later date when the prices have gone up and to make a
profit by selling. The items may be those that are needed for internal consumption but the quantity
shall be much more than the requirement so as to take advantage of the coming price rise.

D.VENKATESAN, SoME, SASTRA

MATERIALS MANAGEMENT

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Systems Contracting
Systems contract ,as the term suggests, is a contract of system of buyer with that of the seller.
It is a release system in which items, usually, commonly available off-the-shelf, are identified and prepriced in anticipation of certain usage.
Delivery releases are made against existing orders placed by purchase. This is a procedure
intended to help the buyer and the seller to reduce administrative expenses and at the same time to
ensure proper controls.
The system authorizes the designated persons of the buyer to place orders directly to the
supplier with the specific materials during a given contract period. The contract is thus finalized only
after it is ensured that an attempt has been made to integrate as many buyer-seller materials
management functions as possible. In this system the original indent, duly approved by competent
authorities, is shipped back with the items and avoiding the usual documents like purchase orders,
materials requisitions, expediting letters and acknowledgements, goods in transit report, etc. The
contract is simple, covering only delivery period, price and invoicing procedure.
Systems contracting is particularly useful for items with low unit price and high consumption
profile as it relieves the buyers from the routine work. While Systems contract has certain features in
common with other purchasing agreements , it is this integration of buyer-seller operations that clearly
distinguishes it from other types of contracts.
Rate Contracts
Rate contracts are mutual agreements between the buyer and the seller to operate a set of
chosen items, during a given period of time, for a fixed price or price variation. Under this system the
rates are fixed and at times even the quantity of the selected items. As and when the need arises the
buyer issues a Purchase order directly on the basis of the rate chart available on the supplier who in
turn supplies the items.
The system of rate contract is prevalent in public sector organizations and government
departments. It is common for the suppliers to advertise that they are on rate contract with the
DGS&D (Directorate General of Supply & Disposal), for the specific period for the given items. After
negotiation, the seller and the buyer agree to the rates of items. Application of rate contract helps
organizations cut down the internal administrative lead time as individual firms need not go through
the central purchasing departments and can place orders directly with the suppliers.
However, suppliers always demand higher prices for prompt delivery, as rate contracts
normally stipulate only the rate and not the schedule on which the item is needed. This difficulty has
been avoided by ensuring the delivery of a minimum quantity at the agreed rates. This procedure of
fixing a minimum quantity is called the running contract and is being practiced by the railways and the
DGS&D.
As mentioned above, this system of buying helps an organisation reduce its internal as well as
the external lead time, reduces administrative work load as the files don't need to go up and down,
helps in building Buyer-supplier relationship as the contract period id usually one year and then there
is always a chance of the same players doing the next contract.
The system works well normally in a situation where the selected items are routinely
consumed. However, there is no compulsion that the demand be uniform over the period of time.

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Reciprocity in Buying
In certain business situations a buyer may give preference to a supplier who also happens to
be his customer. This relationship is known as reciprocity. It is something like "I buy from you if you
buy from me"
One of the main questions for which this, otherwise simple way of buying, is always under the
scanner of purchasing ethics is its undue ability to restrict competition and fair play. One of the major
roles that any purchaser plays for his firm is in cost reduction arena which is attempted by generating
competition among the suppliers.
This principle gets a jolt through reciprocity in buying. However, when factors such as quality,
after sales service, price etc are equal normally a buyer would like to buy from his customer , if for
nothing then at least for having a good working relationship. However, the distinct disadvantages of
reciprocal buying outweigh the limited and narrow advantage that a firm may derive out of it. Some of
the main disadvantages of reciprocity are not being able to follow the well laid criteria of quality, price
and service.
A purchasing executive should not indulge in reciprocity on his initiative when the terms and
conditions are not equal with other suppliers. It is often found that less efficient manufacturers and
distributors gain by reciprocity what they are unable to gain by price and quality. Since this tends to
discourage competition and might lead to higher prices and fewer suppliers, reciprocity should be
practiced on a selective basis.
Zero Stock Buying
Zero stock buying refers to buying in a manner that the system ensures that the material is
delivered by the seller only when it is required and that no prior inventory of the item is maintained by
the buyer.
As the competition becomes more intense the need for a lean manufacturing system becomes
more focused. Keeping inventory thus is blocking huge money that is idle for the firm. Thus Zero
stock buying is more of an inventory safeguard rather than the normal buying. Normally, under this
system the firms try to operate on the basis of zero stock and the supplier holds the stock for these
firms.
Usually, the firms of the buyer and seller are close to each other so that the raw material of
one is the finished product of another. Alternatively, the system could work well if the seller holds the
inventory and if the two parties work in close coordination. However the price per item in this system
is slightly higher as the supplier may include the inventory carrying cost in the price. In this system,
the buyer need not lock up the capital and so the purchasing routine is reduced.
This also significantly reduces obsolescence of inventory, lead time and clerical efforts in
paper work. Thus, the seller can devote his marketing efforts to other customers and production
scheduling becomes easy.
In practice, the buyer is called upon to pay to the supplier only when the material is delivered
as per the need. For example, in India , say the Indian Oil Limited maintains its petrol and diesel
refilling stations inside the manufacturing premises of many companies. As and when petrol or diesel
is required ,say in a lorry, IOL fills that and a coupon is signed by the driver of the lorry. Buyer makes
the payment to IOL against that coupon.

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Zero stock is becoming popular with the concepts such as Just-in-time approach that is similar
to it. However, in situations where the supplier has to transport material from one place to the other
with a fair distance in between, this system needs careful handling as one never knows the road or
weather conditions. Normally, the system caters to those items that are not very critical to
manufacturing. It best suits the situations where the output of one firm is the input of the other firm
with both the firms located nearby.
Blanket Orders
Under the Blanket Order system an agreement is done between the buyer and the supplier to
provide a required quantity of specified items, over a period of time, usually for one year, at an agreed
price. This system minimizes the administrative expenses and is useful for 'C' class items for which
rigid controls are not required.
Deliveries are made depending upon the buyers needs. The system relieves the buyer from
routine work, giving him more time for focusing attention on high value items such as 'A' and part of
'B' class.
Blanket Order system requires fewer purchase orders and thus reduces clerical work. It often
achieves lower prices through quantity discounts by grouping the requirements. The supplier, under
the system, maintains adequate inventory to meet the blanket orders, but he does not incur selling
costs, once the negotiations are finalised.
1.8 Purchasing Systems
For any organization, purchasing function assumes importance for the reason that it fulfills , to
a great extent , the input needs of the organization. Whether product or service, an organization
needs input of right quality, at right price, from the right source in right quantity at the right time.
Often called 5 Rs (right things to do) these determine the broad parameters within which
purchasing functions in any organization. Depending upon the size and nature of operation, the
quantum of purchase of product and services vary. In some organizations the total purchase bill is to
the tune of 60% of its annual expenditure!!
Obviously , for any organization engaged in a continuous set of activities, where inputs are
processed on a regular basis for producing outputs , formalized systems and procedures are
required to run its purchasing function, to ease in operation and accountability. Formal procedures
are required to be laid down for initiating purchase, selecting suppliers, placing purchase orders,
follow-up, receiving materials and so on.
1.9 Purchase Procedure
A typical purchase department is usually engaged in purchasing a number of materials and
services falling in different categories. The activities are performed regularly by purchase
professionals with the objective of fulfilling organisation's materials and services needs.
Naturally, depending upon the nature of procurement, environmental practices etc the
purchasing systems and procedures may also vary substantially. However, purchase procedure can
be seen to have a bit of standardisation across the globe.

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A professional purchasing system includes the following steps eventually in a purchasing cycle.:
Recognition and description of need
Transmission of need
Selection of Source to satisfy the need
Contracting with the accepted source
Following up with the source
Receiving and inspecting material
Payment and closure of the case
Recognition and description of need
Procurement activities in an organisation start right since the stage a need is felt for any
material or service. An organisation categorises it's material requirements into two broad ways , viz.
Inventory Control item or Non inventory item.
A department within the organisation may require an item which is non inventory and thus the
department concerned shall have to describe the need. It implies writing down the specification of the
item , the volume (quantity) etc of the item and some other related information to process it further.
For an Inventory item ,usually, there is a forecasting method by which the need for an item is
addressed. The need for an item may be at regular interval , one time or even be sporadic in nature.
This could be an item needed for running a machine , certain raw material needed for production, a
service in terms of maintenance of a machine or for doing certain job needing the employment of
labour, materials, machines etc.
The need, also called materials requirement, must be defined clearly as this is the stage where
the right need description shall ultimately lead to getting the right material / service.
Once the need is made available to the purchaser, through a requisition , he has to check the
requisition for its correctness and completeness and then to ensure that appropriate method has
been used to satisfy the user and also to select the supplier.
Transmission of Need (Indent Raising)
Once need for a specific item or service has been established the next step shall be to transmit
the need to the purchasing people for processing at their end. It may require certain paper work or
electronic media to do this job.
The whole system of purchasing, in terms of phases or grouping of related activities, can be
classified as follows :
(1) Pre-purchase (Ordering) system;
(2) Ordering system;
(3) Post-purchase (Ordering) system
The salient features in each of the systems mentioned are as follows :
(1) Pre-purchase system : Activities such as initiating the purchase through raising requisitions,
requirement programs, selection of suppliers, obtaining quotations and evaluating them, are broadly
the pre-purchase activities.

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(A) Requisitions : The department concerned (within the orgnisation), in need of a material, usually
presents a completed requisition form. Different types of requisitions used are:
1) Standard Purchase Requisition
A Purchase requisition is a document that is used to list down the requirement and is sent to
Purchase department for further processing. In some organizations , especially bigger ones, the cost
estimates also form part of the indent and as such are to be done by the indentor. Estimated values
provide a basis for examining the reasonableness of the prices offered by the parties.

2) Bill of Materials
In brief, all the parts / components needed to make a product ,when listed along with the individual
quantity, are called Bill of materials.
This is basically a list ,structured in the same way a product can be thought of. For example,
when a design personal produces design of a new product then he may be needing a number of parts
that ultimately when assembled shall produce the item concerned.
List of such parts is called Bill of Materials (BOM).All other things remain the same as in case of other
forms of transmission of need of an item
Selection of Source (Supplier)
'Sourcing' or 'Selection of source/s' is a major challenge for any Purchasing manager. Source
of supply of required materials is basically selection of a suitable supplier. The Purchasing manager
has to ensure , getting the material / service from the right source (one of 5 R).
Once the Indent (also called requisition or Material Procurement Requisition/ MPR) is received
in the Purchase department ,the concerned dealing person scrutinizes it , in respect of :
The complete specifications including drawings, if required
Consumption pattern
Stock in hand and dues in
Budget availability
Availability of all prescribed enclosures and certificates,
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Estimates
Inspection guidelines, if any
On being fully satisfied that the next stage activities i.e. sourcing is now called for, the mode of
selection of source , often called mode of tendering is decided.
Contracting with the accepted source
In many firms , if the number of items is not large then the sources are known and on the basis
of suppliers record the Purchase order can be placed.
Tendering is a process by which a potential source is contacted through a notice called Notice
Inviting Tender (NIT). The NIT contains the details of material / service required , the terms and
conditions applicable for entering into an agreement with the seller, offers made in response to NIT by
the probable seller (Bidder) , for finally reaching the point of agreement between the selected bidder
and the buyer.
NIT is issued by the buyer and Tender is submitted by the interested bidders/tenderers.
Depending upon various reasons, mainly emanating from the extent of knowledge about the
existence of a source (supplier), the mode of tendering is decided.

A tendering process addresses itself by clearly describing the need i.e. materials or service
with complete specification (tender specification) so that there is no ambigui ty left between the
purchaser and the seller, identifying the sources (vendors / suppliers )from whom the need can be
satisfied and spelling out the terms and conditions for agreement between the seller and the buyer.
It's basically the urge to get the right price that the concept of competitive buying emerged.
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It implies generating competition among the sellers in respect to the price for their acceptable
materials / service, on the basis of other terms and conditions, by the buyer. It is based on the
tendering process that ultimately the seller is selected for placement of order.
Besides the above , other dimension of the modes of tendering is the tendering steps that is to
be followed while scrutinizing the tenders. The following are popularly used methods :

Single Bid

Two stage Bid

three stage Bid etc.


Following up with the source
Once the order is placed, the purchase department will follow up the process, to ensure proper
supply of material at the right time. Communication will be made through letters, emails, phone calls
and a record will be maintained about the follow up actions taken.
Receiving and inspecting material
On receipt of materials, the count, quality and price are compared with those quoted in the
purchase order. Any discrepancy found will be addressed immediately to the supplier and necessary
actions have been taken. Defective items are separated and communicated to the supplier. Also,
clear details were sent to the finance department to stop payment for the defective ones.
Payment and closure of the case
Once the Procurement process is over and all records updated, the purchase department will
give clearance for the payment to be made for the purchase.

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1.10 Online procurement system


In many business circles, the word procurement gets tossed around a great deal. However,
many people simply don't fully understand what the term means or how it can be carried out efficiently
and effectively in the Internet age. With costs skyrocketing and competition heating up i n all
industries, success depends on developing effective procurement strategies.
To begin with, an understanding of the term procurement is necessary. Procurement, in
general, is simply the act of obtaining something. An individual can procure credit or a new car, for
example. In business, procurement usually refers to purchasing the direct and indirect supplies
needed to keep the company running and for most companies is tightly linked to the supply chain.
At one time, procurement was done either by physically visiting a store and placing an order or
by weeding through several catalogs and phoning in an order. Both of these ways were inefficient.
Today, more businesses have turned their procurement activities toward the Internet because it
provides so many benefits when done correctly.
Online procurement generally involves three main steps. First, a select group of suppliers is
chosen by the buyer to do business with. By using only a few suppliers, the buyer is able to leverage
their purchasing power more effectively and, therefore, can get better deals on their goods. Also, by
limiting the number of suppliers, the buyer is able to focus on building a relationship with those
vendors and to work on developing mutually beneficial arrangements that save both sides money in
the long run. Second, businesses focus on consolidating their purchases. Again, this step allows
businesses to further leverage their purchasing power, particularly if they have a number of separate
departments or locations that used to do their own purchasing. Once this step is put in place, all of
the business's purchases are directed towards the select suppliers. Finally, most of the procurement
processes are automated. With an online procurement system, an employee who needs an office
chair can go to the Internet, browse through the chairs available from the select vendors, place their
order in real-time, have it sent automatically for approval, then delivered to the supplier for fulfillment.
The entire process can be completed in a matter of minutes instead of hours or days.
Online procurement systems are effective simply because they involve a number of features
that make purchasing simpler for businesses. These systems usually support the creation of online
catalogs containing goods from multiple suppliers, so employees only need to consult one place to
find the items they need, instead of dozens. Many of the programs also offer several ways of
communicating with select suppliers so that the buyer can choose the method most appropriate to
their needs. Generally, email, electronic data interchange (EDI), and automated fax are the preferred
options. As mentioned above, online procurement does automate most of the purchasing process,
including approval. Systems can literally send purchase orders directly and automatically to all
individuals who need to approve them, then once approved, they can be automatically sent to the
vendor for fulfillment.
Once a business switches to an online-based procurement system, they can begin seeing
benefits immediately. The administrative costs for each purchase are significantly reduced because
most of the paperwork is handled by the programs running the system and not by employees
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themselves. Plus, the time between the placing of the order and its delivery are also reduced because
the automation streamlines the sharing of the necessary information. Also, since purchases are
consolidated, it makes it easier for businesses to keep track of their purchasing budgets and to track
incoming deliveries since there are fewer transactions and suppliers to follow. Furthermore, when
employees realize firsthand how convenient and cost-effective the new procurement strategy is, they
will be less likely to make purchases through non-contracted suppliers, thus saving businesses even
more money.
Components of an E-Procurement System
Though still in its nascent stage, e-procurement has been able to develop its own body of
language and as such regardless of its model, each has similar components that must be properly
considered and managed to ensure a successful system. These components include Catalog
content, Processes, User maintenance, Establishing buyer/seller relationships, Billing management,
Price establishment, Data transmission, and System maintenance.
Catalogue content
At the heart of every e-procurement process lies an electronic catalog. Similar to a traditional
mail-order catalog, electronic catalogs contain detailed information on products or services available
for sale. Suppliers customize the content to address the specific needs of targeted buyers. This
content is manipulated and imported into a database that the e-procurement application integrates
into web pages
The management of catalog data can be handled using import and aggregation tools or by
outsourcing the task to companies specializing in content management. Content providers generally
offer the following services:

Convert catalog data into a uniform language and format

Gather and aggregate data from multiple suppliers into one catalog

Publish and maintain the product catalog


Once a catalog is created, various cataloging strategies are used to provide access to the content.
Strategies include using a centralized catalog model where the aggregated data is hosted at a central
location, a distributed model where data resides at multiple sites, or a content-retrieval method where
suppliers present catalog data directly to buyers.
There are three types of catalogues that address various buyer needs:
Product catalogs: Contain data on tangible items such as office products, medical supplies, rolls of
steel, etc.
Service catalogs: Offer professional service intangibles such as office maintenance
services, temporary personnel services, etc.
Commodity-specific catalogs: Offer specific product families or groups such as chemicals, paper,
or other raw materials
E-procurement Processes
In addition to creating an electronic catalog, existing procurement processes need to be
electrified end-to-end to support the entire e-procurement process. This includes requisition and
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order management, real-time tracking and receiving, online order fulfillment, automatic billing,
invoicing and payment, as well as workflow management, commerce transactions, and reporting and
analysis tools.
Note that an effective e-procurement platform must support both the buyers and the suppliers
business processes. It should also offer functionality that can easily be customized and configured to
meet specific e-procurement requirements. In general, a successful e-procurement solution will be
founded on an open, component-based model that offers easy configurability and scalability.
User Maintenance
Closely related to the two preceding process management components, user maintenance
includes defining the individuals authorized to use the e-procurement system, how these users will be
enrolled, and how to provide them access to the trading community. This component serves as the
foundation for managing the complex buyer-supplier relationships that will occur within the
marketplace.
E-procurement user maintenance must address two primary tasks:
Establish user profiles, access rules, catalog filters, and workflow
Allow for unique pricing and contractual relationships between a buyer and supplier
The following steps are vital to successful user management:
Creating the buyer organization: Identifying and defining the individual buyers, how they will form
buying groups, and how they will access the e-procurement process
Creating the supplier organization: Identifying sellers, maintaining company profiles, and creating
shipping options and other high-level parameters for supplier activities
E-procurement organization: Aggregating the entire marketplace, including buyer and supplier, to
include such things as hours of operation, billing rates, etc.
Additionally, user maintenance requires establishing authorization levels and associated
procedures to precisely govern buyer and supplier capabilities.
Three authorization levels that must be addressed are:
Access to the electronic catalog: Defines who may access catalogs and how to do so
Creating and editing requisitions: Defines who can create requisitions, who can edit
requisitions, and who can edit accounting codes
Managing orders: Defines who has access to POs and who has authorization to
override shipping or billing information
Establishing Buyer/Seller Relationships
This component has two phases:
managing supplier relationships and
managing pricing.
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Buyers and sellers may be linked based on their previous buying relationship or based on the
buyers unique needs. Buyers may make purchases based on negotiated contracts or choose the
specific commodities they need from customized catalogs. Price lists too may be customized for a
buyer or buying group. For example, prices may be established by adding filters that dynamically
calculate a price as a markup or discount of the list price. Or groups of buyers may be categorized
into classes with filters applied for each group.
Billing Management
E-procurement revenues are generally based on transaction fees. A billing management
system will calculate usage charges and generate and distribute statements or invoices to buyerseller members of the e-procurement network. Suppliers may also use the billing system to calculate
ordering charges or to distribute operating costs for specific orders. These functions must directly
interface with back office invoicing systems to automatically generate bills.
Price Establishment
Effective pricing enables buyers to negotiate the best possible deals and sellers to liquidate
excess inventory. Two major pricing options are used: Dynamic Pricing and Fixed Pricing.
Dynamic pricing: Allows buyers and sellers in an Internet market to trade goods and services
at prices determined by market forces instead of by a predetermined price list or catalog. An example
of dynamic pricing includes business services such as auctions, reverse auctions, and exchanges.
Fixed pricing: Based on a predetermined price list or catalog prices negotiated between a
buyer and seller
Data Transmission
Transmitting data over the Internet involves two facets: messaging agents and security. Data
and messaging tools enable the Internet-based exchange of transactional data between different
buyers and suppliers in the e-procurement marketplace. To do this, transactions are sent via the
Internet as messages and then integrated into a suppliers or buyers back-office system, enabling
financial postings that coincide with the receipt, payment, and invoicing processes. Data messaging
tools are also used to cancel transactions and log failures when messages cant be delivered within a
predefined time period or following a specified number of attempts. The most important aspect of the
messaging tool is that it enables real-time communication between buyers and sellers.
Coincidentally, security is an important aspect of any Internet transaction. Protecting a buyers
confidential financial information and ensuring that only designated buyers have access to supplie r
product information is critical to ensuring confidence in any e-procurement system.
System Management
Maintaining an e-procurement system involves configuring and monitoring performance usage,
average response time, transaction sources, and traffic patterns. To maximize the benefits and
strategic opportunities e-procurement systems offer, this information should be used to analyze
growth patterns, session times, and ultimately to fine-tune the systems performance to fit specific
market communities or technical environments.

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Once an e-procurement system is up and running, its important to monitor traffic and system
security on a day-to-day basis. Inadequately designed transaction engines can result in poor
marketplace performance, lack of scalability, breakdowns in security, and, ultimately, frustrated users.
Advantages of implementing E-Procurement
Let us take an example to see the merits of e-procurement, in contrast to traditional purchasing
processes. Let us consider a sales representative who needs Rupees 5000 worth of office supplies to
support a customer presentation.
In a manual, non-e-enabled procurement environment, the purchasing process typically is :
1. Product selection: The sales representative must search numerous vendor catalogs without
knowledge of which vendors offer discounts. The sales representative may even be in the field with
no access to the companys product catalogs.
2. Check availability/prices: Calls may need to be made to the vendor to confirm pricing,
quantity, availability, etc.
3. Create and approve requisition: A paper requisition with correct item numbers and prices
needs to be created and approved, a process that often takes up to 3 days or more.
4. Generate and approve P.O. : Once the requisition is approved, the purchasing department
splits the requisition into several purchase orders because the material requested must be supplied
by multiple vendors.
5. Send P.O. to vendor: Purchase orders are eventually mailed or faxed to the vendors.
6. Vendor confirmation: The vendors confirm receipt of the purchase order and promise
delivery within three business days. Typically, the promised delivery date ranges from 5-7 business
days from the time the requisition is initially filled out. In the interim, our enterprising sales
representative, knowing the delays and accompanying frustrations of the companys purchasing
process, has decided to buy the items at a local office supply superstore. This way, the representative
acquires the necessary equipment without delay and with a lot less effort. Unfortunately, the
companys cost for paying retail price is much higher than necessary.
1.11 The E-enabled Way to Buy...
The benefits of e-procurement over manual purchasing are many and multifaceted. :
Streamlined processes reduce transaction time:
Buyers can search electronic catalogs containing goods and services from multiple suppliers
and compare products and prices on-line.
Real time communication allows buyers to check current prices and quantities.
Suppliers can provide instant PO status.
Greater standardization of procurement processes:
Electronic catalogs provide a standardized listing of items allowing for easier item comparison.
Business rules governing all users and all transactions can be built into the application.
Regardless of where theyre located, buyers can access catalogs using a standard web browser.
Greater access to suppliers:
Using virtual e-procurement portals, buyers have access to suppliers around the globe, which
translates into a wider selection of goods and services.
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Global operability:
E-procurement applications can support multiple languages and currencies, as well as international
financing, taxation, and shipping regulations.
Ease of configurability and scalability:
Web-based procurement applications can be configured to meet the unique needs of buyers and
sellers and be scaled to grow as the organizations grow.
Building of trading communities:
E-procurement allows the development of both horizontal and vertical trading communities offering
consolidated buying power for the purchaser and increased range for new supply chains.
Lower costs:
Cost efficiency results from a variety of factors including reduced time between order creation and
order fulfillment, greater selection of goods and services from which to choose, formation of trading
communities to consolidate buying power, the opportunity to purchase surplus products and services
below market prices, and more.
Increased productivity:
Automated procurement processes can yield significant time savings at all levels across an
enterprise, increasing opportunities for employees to focus on more strategically important tasks and
functions. Increased opportunity to leverage preferred vendor relationships:
According to a leading e-procurement systems vendor, 80% of indirect goods and services are
purchased from vendors classified as other. This results from the frustrations and time delays
inherent in processing paper-based purchases. This practice decreases the volume of purchases
from preferred vendors and consequently drives up costs.
Impact of E-Procurement on bottom line
1. Increased preferred vendor purchases: E-procurement fosters purchasing from preferred
vendors, who in turn offer volume discounts and contract pricing. A typical e-procurement
system can boost preferred vendor transactions by 25%, returning substantial savings
assuming a weighted average preferred-vendor discount of 7%.
2. Preferred vendor consolidation: As volume shifts to preferred vendors, low-volume vendors
will eventually be eliminated from the supplier network, driving more purchases to preferred
vendors and enabling them to increase consumer discounts.
Spot discounts: Because of the dynamic nature of on-line pricing, vendors can offer limitedtime spot discounts on excess inventory. Even a one-percent reduction in purchasing
expenses can yield significant savings for large organizations.
3. Reduced labor time/reduced transaction costs: By far, the greatest e-procurement savings
result from the combination of less time required for the total purchasing cycle and the
subsequent reduced transaction costs. Together, these decreased transactional factors
translate into significant cost savings.

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The table below shows the approximate time it takes to complete each step in a single corporate
purchasing cycle, comparing manual or electronic data interchange (EDI) purchases to eprocurement. This Table demonstrates nearly fivefold reduction in time and nearly 80% reduction in
cost directly attributable to e-procurement.
Process Step
Product Selection
Availability/Price Check
Requisition Creation
Requisition Approval
PO Generation
PO Approval
Send PO to Vendor
PO Confirmation
Status Check
Receive Shipment
Match Invoice, Receipt, etc
Process Exceptions
Payment Approval
Payment Generation
Process Returns
Total Minutes/Purchasing Cycle

Manual/EDI
(Minutes)
3
10
11
21
11
3
14
4
11
12
8
8
4
8
5
150

eProcurement
(Minutes)
20
1
2
3
0
0
0
0
1
2
5
3
3
5
3
31

Cost/Cycle Time (Avg. $0.50/minute) $75 $15.50 Per Purchase, Savings NEARLY $60.
E-procurement Offers Tremendous Opportunity to Save Both
Now project your own potential e-procurement benefit by multiplying the Per Purchase Savings rate
by the number of purchase orders your own organization processes in a single year. D epending on
the size of your enterprise, e-procurement savings could amount to millions of dollars annually. For
suppliers, e-procurement stands to yield significant reductions in inventory holding times and safety
stock levels, and an overall reduction in the purchasing cyclethe time it takes from ordering an item
to receiving it.
1.12 Inventory Overview
Inventory refers to those idle resources which have economic value and thus it may be defined
as usable but idle resources that have economic value. Inventory is a stock of direct or indirect
material , from raw material to finished goods stocked in order to meet an unexpected future demand.
In other words inventory is a physical stock of goods kept for the future purposes.

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Inventory Management or control refers to maintaining , for a given financial investment, an


adequate supply of something to meet an expected demand pattern. It thus deals with determination
of optimal policies and procedures for procurement.
Inventory is expressed in terms of both quantity and monetary value. In terms of quantity , it
can be expressed as the number of units of an item lying where as in monetary terms it is the sum
total of the monetary value of all its items.
Functions of Inventory
Though Inventory is a blocked capital , in the sense that it is not being used in the present, it plays a
distinct role in the life of any organisation for a smooth and efficient running of business. For example,
if a firm does not have any inventory then as soon as it receives a supply order i t will look for raw
material to manufacture the items and thus the customers shall be kept waiting.
It alone may cost the firm its customers who may not like to wait. Further, all the internal agencies
shall have to work in emergency for getting the material, completing the production etc. if there is no
inventory. Inventories decouple individual phases of the total operation.
Thus the functions of inventory are to:

Protect against unpredictable fluctuations in demand and supply


Take the advantage of price discounts through bulk purchases
Take the advantage of batches and longer production run
Provide flexibility to allow changes in production plans to meet changes in demands etc.
Facilitate intermittent production

The basic function of inventory is thus to insulate the production process from changes in the
environment. It decouples various interlinked functions and thus enables each function to conduct
itself independently like Purchasing, Production, Marketing etc. There are several reasons, the most
important for a high inventory being

High Lead time


Tendency to play safe
Stock outs and shortages lead to criticism
Standardization and variety reduction not given emphasis
Uncertainty / scarcity of items triggering over stocking

1.13 Inventory Classifications


Inventory is idle resources that have future economic value. It indicates that it may be available
in different forms depending upon the production cycle stage it is in. Classification of inventory is
done on this basis and thus the different classifications of inventory are as follows:

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Raw materials - Raw materials are input goods intended for combination and/or conversion through
the manufacturing process into semi-finished or finished goods. They change their form and become
part of the finished product.
Components and Parts - Just as raw materials are converted to finished goods in a manufacturing
operation, components and parts are assembled into finished goods in an assembly operation.
Maintenance, repair and operating inventories (MRO) - These include parts, supplies, and
materials used in or consumed by routine maintenance and repair of operating equipment, or in
support of operations.
In-process goods - These are goods in the process of manufacturing and only partially completed.
In-process inventories are usually measured for accounting purposes in between significant
conversion phases. They provide the flexibility necessary to deal with variations in demand between
different phases of manufacturing.
Finished goods - These represent the completed conversion of raw materials into the final product.
They are goods ready for sale and shipment.
Resale goods - These are goods acquired for resale. Such goods may be purchased by a
wholesaler for resale to distributors, or by distributors for resale to consumers, etc.
Capital goods - These are items (such as equipment) that are not used up or consumed during a
single operating period, but have extended useful lives and must be expensed over multiple operating
periods. Tax laws require that such an item be capitalized, and a predetermined percentage of its
cost be recognized as an expense each operating period, over a predetermined time frame,
according to equipment classes.
Construction materials - These are raw materials and components for construction projects such as
a building, bridge, etc.
Hard goods/soft goods - What one identifies as hard goods and soft goods will vary depending on
the industry involved. For example, in data processing, hard goods include apparatus such as
computers and terminals, while soft goods include software, data storage media, and the like.
1.14 Inventory and its control
Periodic Review System (PRS)
The periodic review system of indent raising is also known as calendar based system or P- system.
In this system, the stock position and consumption trends of different commodities are reviewed in a
fixed time period and the indent is generated to cover the requirement up to the next review. Usually
this review is done annually so that indents are raised for annual quantity.
Quantity System / Continuous monitoring / EOQ system
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In the continuous monitoring system also known as Q-System, the stock position of items are
monitored continuously through the system and the indents are raised for the items for which the
stock level has reached a pre-fixed stock level. The quantity for indent raising is usually a fixed
quantity in this system known as Economic Order Quantity (EOQ), which is the quantity to be
procured with minimum total cost (procurement cost +inventory carrying cost etc).
However in practice, the fixed quantity to be procured is the annual requirement quantity and the
stock levels (Inventory) is maintained by scheduling the delivery suitably.
Invent ory Control Systems
Inventory control is concerned with minimizing the total cost of inventory. The three main
factors in inventory control decision making process are:
* The cost of holding the stock (e.g., based on the interest rate).
* The cost of placing an order (e.g., for row material stocks) or the set-up cost of production.
* The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.
The third element is the most difficult to measure and is often handled by establishing a
"service level" policy, e. g, certain percentage of demand will be met from stock without delay. In
designing an inventory control system, we really provide answers to the three questions:
How often should the inventory status be determined?
This is an internal check system to ascertain that timely action is being taken to replenish the stock
When should a replenishment order be placed ? This shows the actual action to be taken to
replenish the stock.
How large should the replenishment order be?
A replenishment order should have a rational about its size. The real problem is to determine the
inventory level at which money invested in inventory produces a higher rate of return than it would
were it invested in some other phase of the business.
Designing Inventory control systems:
The Demand pattern (D) happens to be the soul of any Inventory control mechanism. Basically ,
inventory control is an attempt to balance the consumption and replenishment of stock of an item in
an optimum manner. Obviously, the Demand pattern (D) sets the tone for devising any control
measure and therefore while designing inventory control systems the nature of demand pattern viz.
independent or dependent needs to be determined first. The Control approaches differ on this
differentiation.
Inventory control systems under Independent demand scenario:
Also called the Order-point control systems, Independent demand patterns for an item occur when
future demand for it is not related to and is unaffected by its previous demand.
For example, in case of maintenance, repair, and operating supplies, a given item X may be used by
many operating departments, and demand by each department may depend on many factors over
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which there can't be any control. Therefore, overall demand rates for the item X may vary
unpredictably from period to period. In such cases, inventory levels may include provision for safety
stock, in addition to the the average demand rate, in order to prevent stock-out situation.
For inventories exhibiting independent demand pattern control is exercised based on predetermined
order points. Such systems are so designed that whenever a predetermined point in inventory level or
in time is reached action to re-order is taken.
There are two basic systems of managing or controlling Inventory under the independent demand
pattern:
Cyclical ordering or Fixed period system (Time based)
Order point or Fixed order quantity system (Quantity based)
Material Requirement Planning is one example of a system specifically designed to manage
dependent demand reorders
Material Requirements planning system
Material Requirement Planning (MRP) happens to be the best model of dependent demand
pattern of Inventory. Under it, the requirement of an item is predetermined as it depends upon the
actual need of it, triggered by certain production schedule. Obviously, MRP has two main
characteristics, the known requirement and the known period of requirement (time).
MRP is a set of techniques that takes the Master Production Schedule and other information
from inventory records and product structure records as inputs to determine the requirements and
schedule of timing for each item.
Based on a master production schedule, a Material Requirements Planning system :
Creates schedules identifying the specific parts and materials required to produce end items
Determines exact numbers needed
Determines the dates when orders for those materials should be released, based on lead
times
MRP, by its nature, does not need carrying of any inventory ahead of requirement. It starts with
the finalisation of the production plan in a firm.
The production plan then is used by the Materials management professionals to explode the "Bill
of material" which is a complete detailing of the materials needed including their various components.
It is exploded for the number of units to be produced, to obtain that product's exact requirement.
Since a given common part is used in many items, sub-assemblies etc, total requirement of that
part is summed up to draw a consolidated requirement. After the Bill of material is finalised it's taken
over by the Materials professionals of the firm who check the availability of any item.
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A detailed action plan indicating the materials , quantity to be procured and most importantly the
time these are required at is prepared. Accordingly, the orders are placed and the suppliers are asked
to match the given delivery period.
1.15 Inventory Terminology
Inventory management, over the period has acquired a sound status in the arena of business
management. It has a body of knowledge besides it is having its own language. Vari ous terms have
got into use are explained here too:
Maximum Limit: When devising a suitable Inventory model ,the Maximum limit establishes the upper
limit to which the stock of an inventory item shall be allowed.
Minimum Limit: It is the lower limit to which the stock can be allowed to fall in course of
replenishment of the stock of an item. Normally, this is taken to be the safety stock also.
Safety Stock: This is the stock that is maintained to counter the variation in demand of an item
during the replenishment lead time.
Demand or Usage: Replenishment of stock and usage of an item is an ongoing phenomenon in
inventory control. Demand thus is the rate of usage of an item. Over a period of time demand is
considered to be stable. However , demand can be seasonal or cyclical in nature depending upon an
item's nature.
Expressed in terms of consumption per unit of time, demand or usage of an item is the average
quantity of an item consumed in a particular period of time. Often D is expressed as average
consumption per month and is assumed to be a stable one.
Lead Time (LT) : It is the total time taken from the day procurement action has been initiated to the
day the stock is replenished. Lead Time has two components viz. Internal Lead time and External
Lead time. Internal Lead time is the time taken between raising the materials requisition request and
placing the order. External Lead time is the time taken between placement of an order to actual
receipt of the item.
Thus, Total Lead time (LT) = Internal Lead time + External Lead time.
Maximum Limit (MaxL) : While drawing the Inventory policy, MaxL is the desired highest level to
which an item's inventory can be maintained.
Minimum Limit (MinL) : It is that limit on the lower side for an inventory item to which the level can
go down and by which the stock is to be replenished.
Reorder Level (ROL) : This is the level at which if the stock of an item falls , in course of its
consumption, fresh replenishment action is initiated by way of raising the Materials procurement
requisition or Indent.
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Review Period (RP) : This is the time period defined for an item or a group of similar inventory items,
during which a review on whether to raise procurement requisition or not is done. Often ,it decides the
number of procurement requisitions to be raised during the period.
1.16 Meaning, Functions And Advantages Of Perpetual Inventory System
Meaning of perpetual inventory system
Perpetual inventory system is also known as "Automatic Inventory System". Perpetual inventory
system is a technique of controlling stock items by maintaining store record in a manner such that
stock balances at any point of time are readily available. The terms 'Perpetual Inventory' refer to the
system of record-keeping and a continuous physical verification of stocks, with reference to store
records.
Functions Of Perpetual Inventory System
The main functions of perpetual inventory system are as follows.
1. Recording store receipts and issues to determine the stock in hand at any time, in quantity or value
or both, without the need for physical counting of the stock.
2. Continuous verification of the physical stock with reference to the balance recorded in the store
record is convenient for the management.
Advantages Of Perpetual Inventory System
* Perpetual inventory system provides an opportunity to verify the physical stock of materials.
* Perpetual inventory system helps in rapid stock checking which, in turn, helps in the preparation of
interim accounts.
* A moral check on the store staff to maintain proper stock records.
* The investment in materials and supplies may be kept at the lowest point.
* It is not necessary to stop the production so as to carry out a complete physical stocktaking.
* Perpetual inventory system helps to avoid deterioration, obsolescence etc.
* Perpetual inventory system helps to discover or find out discrepancies and errors and remedial
action can be taken quickly.
* Timely replenishment of stock is facilitated by means of recording the level specified in the bin card.
1.17 Inventory Classification
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The ABC classification process is an analysis of a range of objects, such as finished products ,items
lying in inventory or customers into three categories. It's a system of categorization, with similarities to
Pareto analysis, and the method usually categorizes inventory into three classes with each class
having a different management control associated :
A - outstandingly important;
B - of average importance;
C - relatively unimportant as a basis for a control scheme.
The ABC concept is derived from the Pareto's 80/20 rule. ABC concept is applied to inventory
management as a rule-of-thumb. It says that about 80% of the Rupee value, consumption wise, of an
inventory remains in about 20% of the items. This rule, in general , applies well and is frequently used
by inventory managers to put their efforts where greatest benefits , in terms of cost reduction as well
as maintaining a smooth availability of stock, are attained. Thus, applied in the context of inventory,
it's a determination of the relative ratios between the number of items and the currency value of the
items purchased / consumed on a repetitive basis:
10-20% of the items ('A' class) account for 70-80% of the consumption
the next 15-25% ('B' class) account for 10-20% of the consumption and
the balance 65-75% ('C' class) account for 5-10% of the consumption
High value (A),

Low value (C) ,

intermediary value (B)

Specific items on which efforts can be concentrated profitably provides a sound basis on which
to allocate funds and time. A,B & C , all have a purchasing / storage policy - "A", most critically
reviewed , "B" little less while "C" still less with greater results.

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Percentage of
accumulated
annual revenue

Percentage of Items

ABC Analysis is the basis for material management processes and helps define how stock is
managed. It can form the basis of various activity including leading plans on alternative stocking
arrangements (consignment stock), reorder calculations and can help determine at what intervals
inventory checks are carried out (for example A class items may be required to be checked more
frequently than c class items)
In addition to other management procedures, ABC classifications can be used to design cycle
counting schemes. For example, A items may be counted 3 times per year, B items 1 to 2 times, and
C items only once, or not at all.
A items (High cons. Val)
Very strict cons. control
No or very low safety stock
Phased delivery (Weekly)
Weekly control report
Maximum follow up
As many sources as possible
Accurate forecasts
Central purchasing /storage
Max.efforts to control LT
To be handled by Sr.officers

B items (Moderate cons.Val)


Moderate control
Low safety stock
Once in three months
Monthly control report
Periodic follow up
Two or more reliable
Estimates on past data
Combination purchasing
Moderate
Middle level

C item (Low cons. Val)


Loose control
High safety stock
Once in 6 months
Quarterly report
Exceptional
Two reliable
Rough estimate
Decentralised
Minimum clerical efforts
Can be delegated

Inventory Control Application: The ABC classification system is to grouping items according to annual
issue value, (in terms of money), in an attempt to identify the small number of items that will account
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for most of the issue value and that are the most important ones to control for effective inventory
management. The emphasis is on putting effort where it will have the most effect.
XYZ analysis of Inventory
A system of categorization, with similarities to Pareto analysis, the method usually categorizes
inventory into three bands with each band having a different management control associated.
Although different criteria may be applied to each category the typical method of scoring an
inventory item is that of annual stock value of said item (qty in stock X cost of item) with the result
then ranked and then scored (X, Y or Z).
Bandings may be specific to the industry but typically follow a 70%, 90%, 100% banding in that X
class items represent 70% of the stock value (although they may account for 20% number wise), Y
class items fall between 70% and 90% of the annual stock value with C class the remaining. In
practical terms the complex high cost materials typically fall into the X class items, with the
consumable, low cost (and typically fast moving) classed as X class.
Not all stock is equally valuable and therefore doesnt require the same management focus. The
results of the XYZ analysis provide information that helps evaluate how each inventory part should be
monitored and controlled.
X class items which are critically important and require close monitoring and tight control
Y class are of lower criticality requiring standard controls and periodic reviews of usage.
Z class require the least controls, are sometimes issues as free stock or forward holding.
Classification of inventory in terms of XYZ can form the basis of various activity including leading
plans on alternative stocking arrangements (consignment stock), reorder calculations and can help
determine at what intervals inventory checks are carried out (for example X class items may be
required to be checked more frequently than Z class stores.
VED Vital, Essential, Desirable
FSN Fast moving, Slow moving, Non moving (Ghost) items.
SDE Scarce, Difficult, Easy
HML High, Medium, Low
SOS Seasonal, Off seasonal
1.18 Concept Of Economic Order Quantity(EOQ) And Related Costs While Determining EOQ
Economic order quantity is also known as reorder quantity. Economic order quantity (EOQ) is
a level of inventory where the total cost of holding inventory is at minimum. Economic order quantity
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is the level of quantity at which the cost of ordering will be equal with the storage cost of materials. In
other words, the quantity of materials which is economical to be ordered at one time is known as
economic order quantity. The total costs of materials consists of the ordering cost and carrying cost.
While determining the economic order quantity, the ordering cost and carrying cost should be
considered.
Ordering Cost
The ordering cost is the repurchase cost and is repeated in nature. Purchasing of large
quantities of materials helps reduce the ordering cost. The following costs are included in the ordering
cost.
* Cost of staff appointed in the purchasing, inspection and payment departments.
* Cost of stationary purchases, telephone charge, email charge, fax charge etc.
Ordering costs also includes the cost of floating tenders, the cost of making comparison among
quotations, cost of paper work, cost of transpiration etc.
Carrying Cost
Carrying cost is concerned with the storage of materials. It suggests purchasing in small
quantities. If small quantities of material purchased, the storing cost will below. The following costs
are included in carrying costs.
* Cost of storage ( warehousing, salaries, rent etc.)
* Cost of spoilage in stores and handling
* Insurance cost of materials
* Interest on capital blocked on materials or opportunity cost
* Cost of maintaining the materials to avoid deterioration
* Cost of obsolescence due to a change in the process or product.
Calculation Of Economic Order Quantity (EOQ)
The economic order quantity can be determined in the following ways.
1. Formula Method
With the help of following formula, the economic order quantity can be calculated.

2. Graphical Method
Under this method, the carrying cost, ordering cost and total cost are shown on graph. It is based on
the principle that the total carrying cost increases as the order size increases. However, the ordering
cost decreases if the order size increases. The point at which the ordering cost and carrying cost
intersects each other, total cost is minimum.

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1.19 Methods Of Pricing Materials Issued


There are various methods in use of pricing issues of materials from store. The selection of
suitable method is significant from the viewpoint of cost absorbed and consequently on profit.
Therefore, the method should be selected in the light of probable effects on profit over a period of
years.
Material is purchased specially for a job. The material issued is charged to the job at its landed
cost. Landed cost includes the invoice price, freight, cartage and insurance charges on materials.
Issue of such items cannot be linked with a particular 'lot' and therefore, exact landed cost of the
particular unit issued cannot be identified. If the purchase price for each lot is different from that of the
others, the question arises as to which purchase should be taken into consideration for pricing
material issues.
Some important and mostly used methods of pricing are.
1. First In First Out (FIFO) Method
2. Last In First Out (LIFO) Method
3. Simple Average Method (SAM)
4. Standard Cost Method
Concept Of First In First Out (FIFO) Method, Its Advantages And Disadvantages
The method in which materials are issued from the stores on a first come first serve basis is
called FIFO method. In FIFO method, materials are issued strictly on a chronological order. The units
of opening stocks of materials are issued first, the units from the first purchase are issued next and
the closing stock that remains in stock is always from the latest purchase. The value of the closing
stock of materials is at the price of the latest purchase.
Advantages Of FIFO
1. FIFO method is easy to understand and operate.
2. FIFO method is useful where transactions are not voluminous and prices of materials are falling.
3. FIFO method is suitable for bulky materials with high unit prices.
4. FIFO method helps to avoid deterioration and obsolescence.
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5. Value of closing stock of materials will reflect the current market price.I
Disadvantages Of FIFO
1. FIFO method is improper if many lots are purchased during the period at different prices.
2. The objective of matching current costs with current revenues can not be achieved under FIFO
method.
3. If the prices of materials are rising rapidly, the current production cost may be understated.
4. FIFO method overstates profit especially in inflation.
Concept Of Last In First Out (LIFO) Method, Its Advantages And Disadvantages
Last-In-First-Out (LIFO) method follows the principle that the last items of materials purchased
are issued at first. The valuation of the materials issued is made according to the latest purchase
price of materials. The closing stocks of materials are valued always on the earliest prices of
materials. In case of a rising price, LIFO method is suitable because material is issued at current
market price.
Advantages Of LIFO Method
1. LIFO method is appropriate for matching cost and revenue.
2. LIFO method is simple to operate and easy to understand.
3. LIFO method facilitates complete recovery of material cost.
4. LIFO method is most suitable when prices are rising.
Disadvantages Of LIFO Method
1. Inventory valuation does not reflect the current prices and therefore are useless in the context of
current conditions.
2. Due to variation of prices, comparison of cost of similar job is not possible.
3. Calculations become complicated and cumbersome when rates of receipts are highly fluctuating.
4. LIFO involves considerable clerical work.
Concept Of Simple Average Method, Its Advantages And Disadvantages
In simple average method, issue price of materials are fixed at average unit price. Simple
average is an average of price without considering the quantities involved. The average price is
calculated by dividing the total of the rates of the materials in the stores by the number of rates of
prices.
Advantages Of Simple Average Method
1. Simple average method is very suitable when materials are received in uniform lot quantities.
2. Simple average method is very easy to operate.
3. Simple average method reduces clerical work.
Disadvantages Of Simple Average Method
1. If the quantity in each lot varies widely, the average price will lead to erroneous costs.
2. Costs are not fully recovered.
3. Closing stock is not valued at the current assets.
1.20 Inventory Turnover Ratio

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Inventory turnover is the ratio of cost of goods sold to average inventory. It is an activity /
efficiency ratio and it measures how many times per period, a business sells and replaces its
inventory again.
Inventory turnover ratio is calculated using the following formula:
Inventory Turnover

Cost of Goods Sold / Average Inventory

Average Inventory is calculated as the sum of the inventory at the beginning and at the end of the
period divided by 2.
Cost of goods sold is obtained from the income statement and the values of beginning and
ending inventory are obtained from the balance sheets at the start and at the end of the accounting
period.
Analysis
Inventory turnover ratio is used to measure the inventory management efficiency of a
business. In general, a higher value indicates better performance and lower value means inefficiency
in controlling inventory levels. A lower inventory turnover ratio may be an indication of overstocking
which may pose risk of obsolescence and increased inventory holding costs. However, a very high
turnover may result in loss of sales due to inventory shortage. Inventory turnover is different for
different industries. Businesses which trade in perishable goods have very higher turnover with
comparison to those dealing in durables. A comparison would be fair only if made between
businesses of same industry.
Example
During the year ended December 31, 2010 ABC Corporation sold goods costing
Rs.324,000. Its average stock of goods during the same period was Rs.23,432. Calculate the
company's inventory turnover ratio.
Inventory Turnover Ratio = 324,000 / 23,432 = 13.83

UNIT II
2.1 Stores ........where materials are managed
The very essence of Materials Management gathers its relevance from Stores , a place that
keeps the materials in a way that the materials are well accounted for and are maintained safe.
Store-Keeping
A store refers to raw materials, work-in-progress and finished goods remaining in stock. Storekeeping means the activities relating to purchasing, issuing, protecting, storing and recording of the
materials. Store-keeping includes the receipts and issues of materials, their recording, movements in
and out of the store and safeguarding of materials. The store is a service department headed by a
store-keeper who is responsible for a proper storage, protection and issue of all kinds of materials.
A typical Store has a process and a space within, to receive the incoming materials (Receiving Bay),
keep them for as long as they are required for use (Custody) and then to move them out of stores for
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use (Issue). In a manufacturing firm this process forms a cycle to maintain and run the activities of
Stores.
Objectives Of Store-keeping
* To avoid over and under-stocking of materials.
* To maintain systematic records of materials.
* To protect materials from losses and damages.
* To minimize the storage costs of materials
The basic responsibilities of stores are to act as custodian and controlling agent for parts,
supplies, and materials, and to provide service to users of those goods. Well-designed systems
provide flexibility to absorb the shock demand variation, and enable purchasing to plan ahead,
practice forward buying, and so forth.
An organization usually has different types of stores like which it refers by different names on
the basis of material nature such as:
Raw Materials Store
Processed or Semi-Finishing Materials Store
Finished Goods Store
Yard Store
Such stores range from ordinary ones with shelves and bins to cold or dehumidified storages,
huge silos for storage of food grains or bonded stores for keeping goods on which customs and
excise duties have not been paid. Storage is an essential and most vital part of the economic cycle
and Storage Management is a specialized function, which can contribute significantly to the overall
efficiency and effectiveness of the materials function.
2.2 Stores' Systems and Procedures
Any Stores system starts with planning the need for materials. It is assumed here that the need
itself has been forecast with a considerable degree of accuracy. The forecast also must be subjected
to periodic review. The art of storekeeping is largely that of optimizing the use of resources to meet
actual needs in an efficient manner.
Efficiency of Stores function is measured by the number of times the stocks have turned over.
That is how much time material spends in the stores. The lesser time it spends the better it is.
As money is a scarce resource , once it is converted into materials, then only it is useful. This is the
essence of stock turnover.
Stores is a very broad word that indicates a wide variety of materials stored such as chemical,
metals, liquids, gases, spare parts, equipment, or finished goods, ranging from engineering
components to drugs and pharmaceuticals. Each of these items will require a specific type of storage
and their handling and preservation methods will vary accordingly. There is a high degree of
specialization required to store and handle these products and in many cases special storage
licenses need to be obtained from the Government, e.g., the storage of petroleum products or
explosive products. It is hence mandatory for Stores personnel to understand thoroughly all of these
requirements and implications The understanding of these principles is most important in the efficient
practice of the art of storekeeping.

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The services rendered by Stores can be arranged into five broad activities:

To make available a balanced and uninterrupted flow of raw materials, components, tools,
equipment and any other material needed to meet operational requirements

To provide maintenance materials, spare parts and general stores as requirements

To receive and issue finished products

To accept and store scrap and other discarded material as they arise

To effectively dispose of the unwanted materials


The interesting facet of the whole situation is that Demand comes bundled while supplies
unbundled. That is demand is usually from Production which will give Stores a BOM (Bill of Materials)
and probably different materials (which come from different suppliers) are required at the same time.
While supply comes from different suppliers from different regions which may or may not (in all
possibility may not) come at the same time. Hence balancing all these is a considerably demanding
job, which is required to be performed by stores personnel. In the face of a challenging situation faced
by stores personnel, one of the main responsibilities for them is to:

Properly account for every item received in the stores

Preserve the material till its issue from stores and

Issue the material when demanded


To have effective control and proper accounting of materials, a professionally managed Stores has
the following main functions:

Receiving

Custody

Inventory Control

Disposal
To discharge the functions effectively, a typical stores division consists of several physical structure
(building) known as Receiving bays, Custody storage, Quarantine space etc
Incoming Materials Control
Any organization, big or small, shall look for quality input (materials) from suppliers to have the
desired output or use. For this reason, it devises ways to control the incoming materials by having a
check system on quantity, quality and readiness for use. Control on incoming materials is exercised
through Inspection by the purchaser.
Need For Inspection:
Inspection is an important aspect of Integrated Materials Management. It is an adjunct to the
purchase function to ensure that the incoming materials of right quality are procured for use. The
word quality has numerous meanings. The most appropriate meaning of quality in the present context
is CONFORMANCE TO ORDERED SPECIFICATION & FITNESS FOR USE, whether for products
or services. Depending upon the nature, criticality & value of items, inspection is conducted either at
suppliers premises or at plant stores after receipt. There are several ways of carrying out inspection
Pre Dispatch Inspection:
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This is inspection before dispatch of material. Usually specified in the Purchase Order (PO) ,
the inspection is carried out at suppliers premises (works). Supplier gives an Inspection Request (IR)
to the inspection agency mentioned in the PO. On receipt of IR, the inspecting officer visits the
suppliers premises along with documents necessary for inspecting such as copy of PO, drawing,
specification etc.
The following checks are conducted depending on the nature of item:
Visual check
Dimensional check
Functional check
Physical testing such as hardness, pressure test, load test etc
Electrical and other on-bed testings such as High voltage test, Insulation resistance test etc.
Stage Inspection / Final Inspection :
The accepted materials are marked by stamping/punching/stickers/ seal/tag etc as a mark of
acceptance, The supplier is asked to deliver the same to the consignee as mentioned in the PO. For
critical items, it is required to conduct stage inspection of semi-finished items (such as castings,
forgings etc) at suppliers premises. In such cases, the supplier gives an interim Inspection Request to
the inspection agency.
During stage inspection, sample is collected by the inspecting officer for Chemical analysis /
Physical testing at either their own facility or at 3rd party locations. On receipt of test results,
conformance to specification is verified & clearance is given to the supplier for further processing of
the item. After readiness of the material in all respect & internal checking, the supplier gives the final
Inspection Request to the inspection agency. In some critical cases, joint inspection by Indenter &
Inspection is carried out at suppliers premises.
Document Inspection:
Sometimes and usually for very standard ,off the shelf items, inspection can be carried out
through the verification of supplier given certificates such as Material Test Certificate (MTC),
Manufacturing Certificate (Mfg. TC), Guarantee Certificate (GC) etc. After ensuring conformance of
materials to the ordered specification in all respect, Inspection Certificate (IC) is issued by the
inspecting officer to the supplier.
Stores / Receipt Inspection:
Majority of items are inspected through this route. Materials are received in the receiving bays
of Stores. Such items are usually accepted based on visual examination & verification of documents.
Materials in the receiving bay are segregated into several categories, based on their quality control
status and destination. Procedures in receiving provide for storage and transport of material in each
category.
The major categories are:

Awaiting inspection This category consists of material that has been received and is awaiting
inspection before being moved into stock.
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Acceptance upon certification This category consists of material that may be accepted
pending certification.

Rework In this category are materials that are defective and must be reworked.

Return This category contains materials that are defective and will be returned to the supplier
for credit or replacement.

Materials to be tested This category consists of materials which have been received and are
awaiting delivery to the using/testing department.
Third Party Inspection:
In case of specialized items, which require special proficiency for inspection, help of third party
inspection agencies is taken. e.g Statutory Compliances ( IBR, EXPLOSIVE) : In case of items, which
require approval of statutory authority such as IBR (Indian Boiler Regulation), CCE (Chief Controller
of Explosives) etc, verification & correlation of documents with the materi als is done by the inspection
agency before acceptance.
Quality Complaint Redressal :
If the materials issued to the user department is found to be having defects such as
dimensional deviation, fitness problem etc, the supplier is asked to supply free replacement against
such defects. If there is a pre-mature failure of the material, joint investigation is carried out by the
indenter & inspection agency. If it is established that, the pre-mature failure has occurred due to use
of wrong material or faulty workmanship, the supplier is asked to either rectify the defects (if feasible)
or supply free replacement.
2.3 Stores Management
A professionally managed store has a process and a space within, to receive the incoming
materials (Receiving Bay), keep them for as long as they are not required for use (Custody) and then
to move them out of stores for use (Issue). In a manufacturing firm this process forms a cycle to
maintain and run the activities of Stores.
The basic responsibilities of stores are to act as custodian and controlling agent for parts,
supplies, and materials, and to provide service to users of those goods. Typically and at times
essentially, a Stores has to follow certain activities that are managed through use of various
resources and are thus called Stores Management.
The task of storekeeping relates to safe custody and preservation of the materials stocked, to their
receipts, issue and accounting.
The objective is to efficiently and economically provide the right materials at the time when it i s
required and in the condition in which it is required.
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The basic job of the Stores Manager hence is to receive the goods and act as a caretaker of the
materials and issue them as and when Production demands it. Needless to say storekeeping activity
does not add any value to the product. In fact it only adds to the cost. The organization has to spend
money on space ie. expenditure on land, building and roads, equipment, machinery and other
facilities provided such as electricity, people i.e. salaries and wages, insurance, maintenance costs,
stationary, communication expenses and the cost to maintain the inventory etc. All of these get added
to the organisational overheads and finally get reflected in the costing of the finished product.
However, it is an essential function in any manufacturing or marketing organization. This basic reason
has propelled the evolution of philisophies such as JIT, JIT II etc.
Thus , the basic functions , to manage a stores, carried out are:
Receiving of incoming consignments (goods)
Safe keeping of goods (Custody)
Disposal of undesirable goods
Inventory Management
House keeping and record maintenance
It all starts with a suitable Lay out design of stores. Depending upon the nature of items used for
processing by the organisation the lay out and type of stores are selected. For example , a process
that requires use of raw materials , not costly enough, an open and nearby stores with truck / rail
inside movement possibility can be adequate. Similarly, for storing costly material, a closed and
restricted type of stores shall be needed.
However, irrespective of the type and lay out , any Stores would have , as its starting activity ,
receiving and accounting of the incoming goods. This part of Stores is known as Receiving Bay.
Once the material has been received and cleared through inspection and accepted for use, it needs
safe custody till it's actually used. It calls for a separate physical storage space , open or closed, as
per need. It maintains all documents that are able to trace an item , show all its details and preserve it
up to its shelf life in the manner prescribed or till it is issued for use. This part of Stores is called
Custody.
Thus the role of Custody is to receive and preserve the material and then to issue it to the user, as
and when needed. A stage comes when the material is needed for use. Stores thus releases the
material from its custody to the user department and the process is called 'issue of goods. It might
also happen that after partial use , some materials having useable value in future are returned to the
stores and thus they also become part of the custody again.
In the long drawn process of preserving the materials till its use ,some materials might get obsolete
and unserviceable and may require removal from stores , in order to clear space for other incoming
goods. This activity is known as Disposal of goods for which auction etc is done.
Since the material has a cost , the organisation would definitely like to incur optimum cost on this
account and thus there is a need to manage the materials within a stores such that the total cost of
maintaining materials remains optimum.
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The materials , lying unused but have future economic value are said to form inventory which needs
professional handling. Inventory control / management thus is a vitally important aspect of any stores
function. One of the basic functions of stores is to account for every material received in Stores by
maintaining proper records of all the incoming, stored and outgoing materials so that proper
accounting and audit trail is maintained.
Hence , record keeping is a vital function of stores . Of course , it also goes along the various
activities and with development in the information technology domain, the record keeping in stores
too is through electronic medium making the whole process smooth and efficient. Any Stores as
such is a physical entity which deals with material receipt, preservation and issue. Material handling
therefore is another vital function. Just as Lay out of a Stores is designed considering the nature of
material Stores has to handle, material movement equipment and implements also are important.
Within a typical manufacturing organisation, its Stores is seen having Forklifts, Over head Cranes,
Trolleys etc inside the Stores and trucks, Dumpers and Railway wagons as outside Stores equipment
to handle materials.
2.4 Types of Stores
Different types of Stores on the basis of storage nature are :
A) Closed stores Closed systems are utilized when close control and accounting for inventories
are desirable. In such cases, storage area are kept locked and entry is limited to stores employees, or
to others only on an authorized basis. Goods enter inventory through a formal receiving process and
leave through an authorized requisition or bill of materials. Closed systems typically include industrial
or business stores operations, and involve repair parts, consumables, tools, and materials or
components for assembly where ongoing control and accuracy is essential.
B) Open stores There are instances where the cost of closely controlling inventories outweighs
expected losses in an uncontrolled environment. In such cases, inventory storage areas may be left
open or kept close to the point of use for efficient user access. Such inventories are available for use
as needed, with emphasis on expediting production, or operations rather than on security.
C) Random access In random access systems, goods are stored without regard for commodity
groupings. Instead, goods are stored in the next or nearest available space of suitable size. However,
it is good planning to select from available storage spaces with consideration for the anticipated
frequency of issue. Locating items in random access storage usually requires a computerized
system. Random access systems tend to be used in conjunction with a closed stores system.
D) Automated warehouse A large variety of automatic storage and retrieval systems (ASRS) are
being used today. ASRS systems have the capability of bringing goods from storage or placing goods
into storage upon computer entry of the item identification and/or storage location. Such systems may
range in size from small rooms to whole warehouses, and may handle items ranging form small parts
in tote pans to large materials on pallets.
E) Contractor operated system, or integrated supplier systems Where business volume is
sufficiently large, suppliers may operate a firm's supply or inventory storage facility using supplier
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personnel, under contract with the using organization. Depending on the agreement, a contractor may
either acquire on-site inventories or just manage them.
In some cases, supply contractors have branches built next door to industrial plants, for the sole
purpose of supplying all needs of the plant. In some cases, the two facilities are separated by a
common wall and supplies are issued through an opening in the wall. This is an emerging trend for
MRO and office supply goods.
Depending upon the nature of business, location of action, raw material, market place etc. there are
basically two broad classes :
Functional Stores: It depends on the use to which the material is put chemicals, tools, raw
materials stores, etc.
Physical Stores: It depends on the size and location Central stores, Sub-stores, Transit stores,
Site stores etc.
Functional Stores can be further classified as:
Raw materials store:
This is where raw materials used in the factory are stored. Usually, this is the largest kind and
the location should be such that it is situated alongside a railway, canal or river. Where the deliveries
are by road, there must be adequate space for trucks to move, turn and park. If sufficient provision is
not made for quick and easy loading or unloading, heavy demurrage can result.
Not all such stores need covered sheds. For example, an engineering company whose raw material
is steel will store the steel plates in an open yard. Similarly, a powerhouse using coal or a fertili zer
plant using sulphur will store material in the open. A refinery will store its crude-oil in tanks. In certain
cases where the raw materials may be explosive dangerous or poisonous in nature, complete
segregation will be necessary.
Production Store:
Production also requires a large number of materials, generally called "consumables", - eyeshields, cutting oils, abrasives, gloves, aprons, jigs, small tools etc. A store stocking such items is
called a Production Store.
General Store:
Various kinds of miscellaneous items like paints, brushes, cleaning materials, wood and spirit
are kept here. In some cases where there is no Production Store, the materials mentioned in (ii) are
kept in the General Store.
Tools Store:
All kinds of tools files, measuring instruments, saws, small tools like hammers, pliers, etc. or
sell them as scrap. Steel scrap is usually kept separately, preferably in the open. Some metal scrap
like copper can be very costly and should, therefore, be kept safely in covered stores.

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Salvage Store:
Here materials rejected on the factory floor are stored either with a view to salvage them or to
sell them as scrap. Steel scrap is usually kept separately, preperably in the open. Some metal scrap
like copper can be very costly and should, therefore, be kept safely in covered stores.
Packing store:
Packing materials are kept here and these include wood for making crates, cardboard cartons
or bottles, as in a pharmaceutical company, or empty cylinders.
Spare parts store:
These spares are usually required by Maintenance for repair or overhauling of equipment and
machinery in the factory. Such a store can also have spares and components, which have been
manufactured in plant or purchased from outside and meant for production. This is also called a
finished parts store, semi-finished parts store or component store.
Receipt Store:
This is where goods are received from vendors or those cleared from the railway station,
airport or the docks. The materials arriving here have to be retained until they are inspected, finally
accepted and sent on to the respective places for storage, or directly to where they will be used.
Quarantine Store:
Here materials received from outside awaiting inspection, and this is usually a part of the
receipt store. The term quarantine is used because often inspection may not be completed in a day;
e.g., a lab test may be required for specific items. In such cases, these materials are placed in the
Quarantine Store.
Finished Goods store:
Finished products of the company meant for despatch to customers or for transfer to another
stock point or distribution center are kept here.
Work-in-progress Store:
In many cases a particular shops produce an item in batches, e.g., 1000 units. The other
shops might not be able to reach this figure or the actual quantity required might only be 200. Here
rest of the 800 units in semi-finished from are kept in the WIP Store for future use. This is neither raw
materials nor finished goods. It is in an intermediate state. In some instances the Spare Parts Store
can also be a WIP Store.
Stationary store:
Keeps office stationary for issued to various departments of the company.
Bonded store:
This is a store is goods on which customs or excise duty has not been paid.

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Refrigerated store:
This type of store is used for storage of perishable items like fruit, meat, chemicals, medicine,
vegetable, etc. it further comprises:
Chilled space store, where the temperature can be controlled between 32 F and 50 F.
Freeze space store, where the temperature can be controlled below 32 F
Flammable materials store:
This is used for the storage of highly combustive material like oil, paints, etc. this store consists
of separate compartments partitioned by fire walls, which is done with a view to prevent movement of
flames from one area to another in the event of a fire. These fire walls will normally have a four hour
fire resistance rating. The main dependence for fire protection is placed on an automatic deluge type
sprinkler system connected to an adequate water supply.
Dehumidified store:
It meets the need of materials or equipment to be stored in a moisture-free atmosphere
(humidity free condition). When properly sealed and conditioned almost any type of item can be
stored here efficiently.
Transit Sheds:
These are normally roofed sheds without any walls and open on four sides and are mainly
intended to protect goods from sun and rain. One can find such sheds in ports, adjacent to berthed
cargo ships. They are specially adapted for the items are handling of material shipped or received by
sea. Here the items are handled and stored in bulk quantities. In certain cases, the Food Corporation
of India stores bags of rice or wheat in such open sheds. Transit signifies that storage is temporary
and that the goods are to be moved out soon.
Dry Tanks:
Dry tanks are used for long term storage and are constructed entirely with steel, except for a
concrete floor. Because of the size and shape of dry tanks, there is no operating aisle for materials
handling equipment. There is no direct access into the tanks, which are sealed after materials are
stored in them. The dry tanks can be temperature controlled and dehumidified.
Shed storage:
A shed is a roofed structure without complete side and end walls, and is used for the storage
of materials that require maximum ventilation or those that do not require protection from weather.
This type of building is a compromise between a yardstore and a closed stores building, because it
offers more protection to materials than former but less than the latter. If necessary, tarpaulins, can
be used on the side for protection during the monsoon. It is built at ground level with a concrete floor.
Open Yard:
This is used for storing bulk items, which do not require specialised storage. Even though there
is no protection from sun and rain, the surface of the open yard is normally levelled and is covered by
sheets or steel mats.
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The organization set-up of the stores will depend upon the requirements, and have to be tailormade to meet the specific needs of an enterprise. It may also be stated here that separate bui ldings
are not necessary for these stores. They can all be in one building in the manner described above.
The afore mentioned list is by no means complete; one can have an infinite variety. For example, one
a military establishment or a very big shipping or Airlines Company can have a large number of
sepcialized types of stores.
Centralized store:
There can be a central store serving three or four factories or several shops in a large factory
or it can be a central warehouse containing finished goods. The word central only denotes that it
severs various units each of which may have separate sub-stores or departmental stores. Central
stores also exist in multi-plant situations. One of the problems in having a central store is the handling
costs involved in transferring materials to the sub-stores or shop floor. Usually, therefore, the central
stores located at the point of greater usage.
One of the main control factors in the establishment of a central store is to ensure that unnecessary
inventories are not built up by the sub-stores, or that matter by the sub-stores and the central stores
should be considered as one.
Decentralized Sub-store:
A sub-store is located at the place of usage. It can be even within the shop floor
Departmental Store:
This serves a particular department of a factory. For example, in a textile mill there can be several
departments like spinning, weaving, bleaching, printing, etc. each of which can be served by a
separate store. The reason behind this is that each requires sparate kinds of materials. This store,
then becomes a specialised store. Actually. There need be little difference between this category of
store and a sub-store.
Group Stores:
In some companies it can happen that several factories belonging to the same group are all in one
compound. For example the J. K. Group of Industries has several factories belonging to the same
owner, which have been set up in one big industrial estate. There can be a garment factory, a
chemical plant, a radio factory and a foundry all belonging to one group and located at the same
place. The group stores can serve all these units.
Site store:
This is usually at a project site containing building or construction materials like cement, steel, tools,
etc.

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Transit store:
As its name implies, this is where goods are stored for a temporary period.
Advantages Of Centralized Stores
The followings are the main advantages of centralized stores.
1. A better supervision of store is possible because the store is located under a single supervision.
2. A better layout of store and its control are possible.
3. Less space is occupied.
4. Investment in stock is minimized.
5. It is economical for storing materials.
6. Safety of materials is possible according to the nature of materials.
7. Trained and specialized persons can be appointed.
8. Wastage of materials can be minimized.
Disadvantages Of Centralized Store
The followings are the main disadvantages of centralized stores.
1. Delay in sending materials to the departments and branches.
2. Increase in material handling cost.
3. Greater risk of loss by fire.
4. Not suitable for a large company.
Advantages Of Decentralized Stores
1. Controlling a and storing function can be accomplished easily.
2. Delay in material handling will be eliminated.
3. Minimizes the chances of loss by fire.
4. No need of internal transportation costs.
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5. Specific needs of individual departments can be easily fulfilled.


6. Saving in material handling cost.
Disadvantages Of Decentralized Stores
1. Higher cost of supervision.
2. More space is required for individual departments.
3. Higher amount of investment is required.
4. More time for stock taking and taking.
5. Higher cost of staff and stationary.
6. Improved technique is less possible for controlling of materials.
Concept Of Central Store With Sub-stores, Its Advantages And Disadvantages
This is a mixed store system, a mix of centralized and decentralized stores. Under this store system,
sub-stores are established in different departments according to the requirement of the company.
Sub-stores are maintained at each department when the central store is at a distance from the
production department. Such sub-stores are managed and controlled bu the central store itself. At the
beginning of a period, the central store issues a fixed quantity of materials to the sub-stores. At the
end of the period, sub-stores send a filled requisition form to the central store to maintain the stock to
a predetermined level.
Advantages Of Central Stores With Sub-stores
1. Overcoming the demerits of centralized stores.
2. Offering an easier location for storing of materials.
3. Avoiding delay in issuing materials.
4. Providing services to meet the special needs of individual departments.
5. Reducing the internal transportation cost.
Disadvantages Of central stores with sub-stores
1. High cost for stationary and staffing.
2. High material handling cost.
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3. More time in stock taking.


4. Extra set-up cost.
5. Complicated store control.
Meaning of storekeeper
A storekeeper is a person who is the chief of stores and who is given the responsibility of store
management. Storekeeper is responsible for safeguarding the materials and supplies in proper place
until they are required for production activities. A storekeeper should be well-experienced, welltrained, honest and familiar with the tricks of store-keeping.
The main functions of storekeeper are as follows.
* Maintaining the proper record of materials relating to the receipt and issue of materials.
* Checking the physical quantity of materials and verify with a bin card.
* Preventing unauthorized entrance into the store room.
* Maintaining the stock registers, entering therein all receipts, issues and balance of materials.
* Checking and controlling losses due to evaporation, leakage, theft and so on.
* Arranging for physical verification of store items periodically.
* Keeping the store always neat, clean and tidy.
* Supplying information of materials, stock position and so on whenever needed.
Record Keeping of Materials Received
1. Bin Card : Bin card is also known as a bin tag or stock card. A bin is a place, rack or cupboard
where materials have been kept. Quantitative records of receipts, issues and closing balance
of items of store are shown in a bin card. Separate bin cards are maintained for each item and
are placed in shelves or bins or are suitably hung up as it convenient.
Bin card is the document in the stores custody where the history of transactions of an item is
maintained. There are separate bin cards maintained for each of the stores item under
separate catalogue number. Each receipt and issue transactions are posted in the bin card
giving the up to date stock position of the item. The item description, unit of transaction and
location of items are also maintained in the Bin card. Functionally, when an item is received in
the stores, its receipt details are written on the top of the card and thus its history of receiving
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gets maintained. Similarly, when it is issued from stores , the issue details are written on the
bottom of the card to maintain its issue history.
With increasing use of computers now a days, the role of Bin cards is slowly and gradually
diminishing and in most of the stores the manual handling of this vital information database
has given way to a highly sophisticated computerised system.

2. Two Bin System


In some manufacturing companies, a bin is divided into two parts: a smaller and larger one. The
smaller bin stores the quantity equal to the minimum quantity and the larger part stores the remaining
quantity. The quantity in the smaller part is not issued so long as the quantity is available in the larger
part. New supply is ordered as soon as the larger bin is empty. Thus, the two bin system facilitates a
physical review of stock by the storekeeper for the purpose of purchase requisitions.
3. Store Ledger
A store ledger is a record of stocks, both in quantity and value and is maintained by the store
accounting section. Store ledger consists of the same column of a bin card, but in addition, there is an
amount column, in which the values are entered. Thus this ledger provides information for the pricing
of materials issued and the value of materials at any time.
Differences Between Bin Card And Store Ledger
1.User
Bin card is maintained by the storekeeper.
Store ledger is prepared by cost accounting department.
2. Nature
Bin card is a record of quantity only.
Store ledger is a record of quantities and values.
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3. Period
In bin card, entries are made immediately after each transaction.
In store ledger, entries are made periodically.
4. Posting
Postings are made before a transaction in bin card.
Postings are made after a transaction in store ledger.
5. Using Department
Bin card is kept inside the store.
Store ledger is kept outside the store.
Duties of store keeper:
These can be briefly set out as follows :
1. To exercise general control over all activities in Stores Department
2. To ensure safe keeping both as to quality and quantity of materials.
3. To maintain proper records.
4. To initiate purchase requisitions for the replacement of stock of all regular stores items whenever
the stock level of any item of store approaches the minimum limit fixed in respect thereof.
5. To initiate action for stoppage of further purchasing when the stock level reaches maximum limit.
6. To check and receive purchased materials forwarded by the receiving department and to arrange
for the storage in appropriate places.
7. To reserve a particular material for a specific job when so required.
8. To issue materials only in required quantities against authorised requisition notes/material lists.
9. To check the book balances, with the actual physical stock at frequent intervals by way of internal
control over wrong issues, pilferage, etc.
2.5 Materials Receipt and Accounting
Materials required for manufacturing process to run are received from various sources from outside
which are verified and accounted for in the Stores.
Different modes of receipt :
Materials required are received from various sources through various modes of transportation. The
major mode of transportation are Rail and Road. Other than this the materials are received through
air, sea , courier, registered post or by hand also (Door delivery).
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By Rail:
The bulky material required in huge quantity like Raw materials are received by Rail in rake load. A
rake is the multiple number of wagons received together. In such cases the whole rake is received
inside the plants and the wagons are returned back to railways after unloading. When the quantity
received is less than a rake load, materials are received in wagons which are transferred inside the
plant by the Railways and empty wagons are returned to railways after unloading. The consignments
received in rake load or wagon load are accompanied by the carriers( Railways) document called
Railway receipt (RR). The wagons / rakes are to be unloaded within the stipulated time limit given by
the Railways known as Free Time. For any delay in releasing the wagons beyond the free time
Railways charge extra amount based on the extra time the wagons are held, known as Demurrage.
Material less than a wagon load are received in smaller consignments also known as Smalls. The
railway documents accompanying such small consignment is also know as Parcel Way Bill (PWB).
These small consignments/ Parcels are received from the railways from their godown within the
stipulated time. For any delay in collection of such material from Railway godown Railways charge
extra amount known as warfage.
By Road:
The materials are also received through the Road transportation by trucks. The material received by
truck are accompanied by a transporters document know as consignment note. Depending on the
terms of the Purchase Orders, the material by road are received in the Plant Stores or in the
transporters local godown in which case Stores collects the material from the transportation godown.
The materials sourced from the foreign countries are received by Ship or through Air Carrier up to the
nearest Sea port/ Airport respectively which is further transported to Plants by Road.
Verification of Consignments :
When the materials are received by Rail the wagons received are verified for any pilferage / shortage
and also weighed for ascertaining the receipt of correct quantity. Any discrepancy in the quantity
found or the damages observed is recorded on the RR / PWB. A Railway claim is lodged against this
discrepancy. This Railway claims become a prerequisite for lodging insurance claim with
underwriters.
The material received through trucks are verified at the point of receipt for the correctness against our
Purchase order and the suppliers challan and outward damages or shortages in quantity if any. If any
shortage or outward damage in the received material/consignment is observed the remarks is made
on the transporters document and a carrier claim is lodged. Acknowledgement for the receipt of
consignment/material was given on the transporters document like consignment note or on the
delivery challan of the firm.
Receipt, Accounting & Documentation :
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Once the consignments/materials are received in the Stores from the transporters/railways, actual
quantity received & the condition of the material received are further checked in detail after unpacking
the packages and matching the quantities with the suppliers delivery challan and the Purchase
orders. Weighment is resorted to wherever the weight is to be ascertained.
The correctness/completeness and the quality of material received is checked as per the terms of
Purchase Orders. Then the document for receipt accounting is prepared which is known as Goods
receipt note (GRN) or Stores Receipt Voucher (SRV). GRN/ SRV is the document through which
the received materials are taken on charge in the plant, also the document which communicates the
acceptance/rejection of the material supplied and a document enabling the payment to the supplier
against the supply.
Direct delivery to users or central storages :
The materials against the various Purchase Orders are generally received centrally by stores and
stored after verification and accounting. However in case of certain items where there is no central
facility of storage in the Stores the material is directly transferred to the storage facility available with
the user departments. After ascertaining the quantity and the quality of such materials received at the
user departments and their certification the material receipt is accounted for by raising GRN/SRV.
Excise documentation :
Against most of the materials we procure from the suppliers we reimburse excise duty/Central VAT
(CenVAT) and State VAT (Value added tax) paid by the suppliers. The corresponding CenVAT
gatepass VAT document is sent by the supplier along with the materials. For the materials used i n the
direct production or enabling production, we get CenVAT/ VAT credit benefit from the concerned
Government. For claiming this CenVAT/ VAT benefit from the Govt. Authority the CenVat document
(Excise Gate pass) and Vat documents received along with the consignment are required. Therefore
the receipt of these documents are particularly ensured and transferred to Accounts in time to claim
the CenVAT/ VAT credit. In case of not reciving these documents the same is recorded on the
suppliers challan & the supplier is not reimbursed these charges as per Purchase Order stipulations.
Lead time of Receipt accounting :
The material received from various sources are verified and accounted for in the Stores only after
which the materials can be made available for the use by the user department and the payment to the
supplier can be made or regularised. So, the timely accounting of the receipt of the material is very
important. The time taken in accounting & taking the material on charge from the time it is received i n
Stores is known as Lead time of Receipt accounting or GRN/SRV lead time . Every plant tries to
make this GRN/SRV lead time as minimum as possible to ensure timely accountal of material,
availability of received material for use and the timely payment/ regularization of payment to the
suppliers .
2.6 Storage of Materials - Stores Custody
Safe custody of materials received in stores happens to be the foremost activity and concern of any
stores.
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Materials received from various sources need to be stored properly in Stores for ensuring the proper
upkeep of material till its use, to ensure security and safety of the material, the ease of retrieval and
handling. The various aspects considered in the storage of material are as given below:
Codification / Cataloguing of items:
While using large number of items it is difficult to identify, account and handle the material by its
nomenclature alone. There can be near similar nomenclature yet items may be different. So, in order
to identify , each item is given a unique code representing that item alone for enabling easy
identification, accounting and handling it. The item code thus becomes a the communicating mode for
the item in the company and even outside. These item codes while associated with full description o f
the item are also known as catalogue number of the item. Thus for a scientific management , the
items being handled by a stores need to be properly codified. The codes are specific to an item and
therefore are non repetitive and unique for each item.
Preservation of material :
In any Stores, there is a time lag between the receipt & actual use of the material. Different materials
get deteriorated to different extent during the storage period based on the nature of items. So, the
items need to be preserved to maintain their useful life. The action taken to maintain the useful life of
the material to avoid its deterioration and maintaining its useful life is known as preservation of
material. The useful life is also referred to as Shelf life. Items need to be initially preserved to avoid
deterioration during storage and subsequently they need to be verified for any change in their
conditions and corrective actions need to be taken to restore the preservation.
Usually, preservation of materials is done in the following manner:
1. Shelf life items monitoring :
Some items have fixed useful life beyond which they become useless. Such items are known as shelf
life items & the period within which they continue to have their useful life is known as shelf life. Some
of the items having shelf life are : Medicines, chemicals, rubber items, chemicals and reagents etc.
The shelf life information of these items need to be maintained on the bin card or the tags on them so
that they can be issued for use before they get deteriorated.
2. Proper Storage :
For maintaining the useful life of the items stored for future use proper storage needs to be ensured.
Different materials have different storage requirement for ensuring their useful life & to avoid damage
/loss. The items which gets affected by keeping in open weather needs to be stored in the closed
storage spaces. Also, there has to be a customised storage for hazardous materials.
2.7 Security & safety aspects of Storage :
While Storing the items care needs to be taken to ensure the security of the items so that the items
are available when required. Proper security needs to be maintained to ensure avoidance of
theft/pilferage of items. Costly & pilfer-able items may have to be stored in strong rooms, Safes with
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lock and key. The movement of items in a store needs to be with proper documentation to ensure
accountability as well as precaution against pilferage/damages.
While storing the items it also need to be ensured that these material will not be a safety threat to the
persons handling them or the other material in the vicinity. Thus Storage of materials , also known as
Stores Custody is a critical activity of any Stores.
2.8 Disposal of materials in Stores
In the course of running an Organisation, particularly a manufacturing unit there arise some
defectives ,surplus and obsolete items. These items not only have significant economic value they
also occupy valuable space. It requires efforts to clear off spaces and free the blocked money to be
used as working capital.
The activities viz. identifying, segregating and finally selling off such items is usually referred to as
disposal. There are different categories of disposable items :
1 Obsolete-Surplus-Non-moving.
2 Unserviceable
3 Waste arising out of production.
4 By-products
Disposable item have no use and thus need to be removed from the premises. These are often sold
out through the following method :
Tendering
Fixed price sales
Contracts
Online Auctioning through Ecommerce portal
Under Tendering, a Tender catalogue is prepared which contains the detailed list of the items
earmarked for disposal such as description, unit , quantity and location within the premises etc. The
catalogue is sold to the prospective buyers, who submit their best offer in a sealed envelope, on a
fixed date.
All envelopes are opened at a stipulated date and time in presence of the Tenderers. Comparative
statement of quoted rates is prepared and those lots where the Highest bid , known as H1 bids are
within a specified percentage of the acceptable price , called Reserve price, are sold.
Under Fixed Price Sale, material is offered for sale at a fixed price decided by competent authority.
Interested vendors can lift material after depositing payment at the fixed price.

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Under Contract system of disposal, contracting is done with prospective buyers who lift the materials
within a given period at a pre-decided value. For items arising in huge quantities like slag, fly ash etc.
long term contracts are entered into with parties for lifting total quantities of such arisings.
Under Online Auctioning through an E-commerce portal, called Service provider, the disposable lots
are declared to the general public by uploading the Auction Catalogue on a popular website offering
for sale through the Internet. In India , portals offered by companies such as Mjunction is highly
popular and more and more such auctions , also called Forward auctions are conducted through
them.
Each vendor who shows a willingness to participate in the forward auction for the declared items, by
submitting the required EMD, is given a unique user name and password, through which they can
access the online auction and bid for the eligible lots.
The bidding for the given lots implies increase in bid value by each bidder till the time bidding stops at
the highest value for the given lots. After completion of auction, the Service provider submits lot-wise
H-1 bid report to the seller. The H-1 bids are compared with the lot-wise Reserve price and those lots
which are within a specified percentage of the reserve price are sold.
Sale Orders for sold lots are issued in favour of the highest bidder (H1), asking them to deposit the lot
value. On receipt of lot value, Delivery Order is issued in favour of the highest bidder, who then lifts
the sold lot within the stipulated time.
2.9 Stores Location :
Location of an item in stores is the place where it is stored. The location of the stock of each item is
maintained so that any item can be easily traced , located for transactions like receipt & issue.
There are two ways of maintaining item locations: Fixed location & random locations. In case of fixed
location system the item is stored in a specific place every time it is received. This fixed location is
maintained in bin cards. In case of random location system, items are stored in different locations
based on the availability of space and corresponding location reference is given on the bin card
against the corresponding stock.
The location of stores should be carefully planned for a maximum efficiency. Store should be located
near the materials receiving departments and materials user departments. The following factors are
important for deciding the location of the store.
* Heavy and bulky items should be stocked very close to user department.
* The store should be located near a road or railway.
* The receiving department should also be in proximity to the store god owns
* The store should be centrally situated so as to be easily accessible.
* Similar types of materials should be stored in one place.
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* Stores should be situated in safe places.


Stores relations with other functions
Stores, apart from Finance function, is one that comes in contact with all the major functions of any
organization or business. In its daily working , it is closely related to Purchase function that virtually
feeds it with its Purchase orders and the user departments, on the other hand, which draw materials
from it on daily basis. In addition, it is the Finance function which is fed by stores many information
on daily basis.
One of the major roles of Stores , in any business, is Inventory Control. This vital function of Stores, in
itself , affects many functions of business by decoupling many activities and functions.
Stores serves all departments of an organization, but the highest degree of relations are between
Purchase who feeds the stores, and Production whom the Stores supplies various materials.
Stores and Purchase:
The two functions of materials management, Stores and Purchase, are complementary to each other.
Apart from the close relationship that exits on a day-to-day basis in the purchase of various items of
stores there are other important activities which can best be done by close cooperation between
stores and purchase. These are :

Identification i.e. coding of material

Variety reduction

Inventory control value analysis

Salvaging operations etc.

Stores sends indents to purchase based on inventory levels determined in accordance with usage
and delivery lead times.
Correct specification writing, code numbers, mention of units (e.g. pounds instead of kilos) etc., are all
vital in this regard.
Determination of lot sizes for purchase which should suit production requirements, transport,
handling and storage space is to be planned.
Purchase informs stores of orders placed and stores informs purchase of receipts, rejections,
shortages, breakages, theft and loss, if any.
Stores should inform purchase of changing production trends, slow or non-moving stock, obsolete or
surplus stock, scrap, etc.

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Stores and Production:


The production or the user department happens to be the main customer of stores. In production
meetings, if stores is represented, coordination can be excellent. Any change in a production
schedule needs to be communicated to stores to enable prompt corrective action. After all it is Stores
that has to cater to the needs of the user departments.
Stores and Sales:
The strong relationship between stores and sales exists in the marketing scenario where Sales is the
chief customer of the finished goods store.
The sales department wants to ensure stocks at all times and this might be a costly philosophy in
terms of inventory holdings. Close cooperation and an integrated approach can increase profitability.
Stores and Accounts:
Usually the accounts department does all the stores accounting ensuring a day-to-day working
relationship.
Stores and personnel:
Selection of the right person for stores work and an adequate training in storage, preservation and
accounting techniques is vital.
2.10 Stores Responsibilities
Interestingly, Stores is a function that is visible in probably any physical house. Be it a hotel, a
hospital, a shop or industrial set up Stores is found every where. Its presence every where
adequately underlines the responsibility of Stores. Depending upon where it is located a Stores has to
burden from minor to major responsibilities.
1. Receipt of incoming goods
2. Inspection of all receipts
3. Storage and preservation
4. Identification of all materials stored
5. Materials handling
6. Packaging
7. Issue and despatch
8. Maintenance of stock records
9. Stores accounting
10. Inventory control
11. Stock-taking
Receipt is the process of checking and accepting, from all sources (vendors, production units, repair
units etc.), all materials and parts which are used in the organisation. These include supplies for
manufacturing or operating processes, plant maintenance, offices and capital installations.
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Identification is the process of systematically defining and describing all items of materials in stock.
It includes the preparation of a Stores Code or Vocabulary, the adoption of materials specifications
and the introduction of a degree of standardisation. In certain cases, part of this work may be done by
the design, planning or standards departments or sometimes the purchase department.
Inspection involves the examination of incoming consignments for quality. Very often there is a
separate Quality Control or inspection department, which undertakes this work for most, materials.
Otherwise goods are inspected by Stores to ensure that the inspection procedures laid down are
carried out before materials are accepted into stock.
Storage and preservation involves items to be binged and kept in storage bins and impounds; as
usually indicated in the yard. The location is usually indicated in the transaction card. The storage
period may vary between one day and one year or more, depending upon recoupment
procedures/safety stock required, etc. storage is the physical act of storing the materials. The general
rule is: "A place for everything in its place". Presentation involves the maintenance, of materials to
retain their quality. Quite often, temperature, humidity, dust and other factors cause deterioration of
materials.
Materials handling involves movement and handling. This can be manual or mechanical (e.g. by
use of forklifts) heavy items, dangerous or inflammable goods, and delicate merchandise have all to
be handled differently.
Packaging : Materials dispatched to customers from the finished goods store or from one store to
another at different location require to be packed. Materials required packing according to their nature
and this may vary from heavy wooden crates to ordinary paper cartons.
Issue and Despatch is the process of receiving demands, selecting the items required and handling
them over to users, or despatching them to customers.
Stock Records are the documents which record, form day to day, full particulars of individual receipts,
issues and balances of materials in stock.
Stores accounting is the process of recording details of stock movements and balances in terms of
financial value. It is sometimes undertaken by accounts department, but there is much to be said for it
being handled by stores. In practice, it is often found that such an arrangement saves a good deal of
work and duplication. It has the added advantage of making Stores personnel responsible for
providing their own financial information, which they require for the purpose of inventory control
Inventory control is the operation of continuously arranging receipts and issues in such a way so as
to ensure that stock balances in quantity and/or value are adequate to support the current rate of
consumption at all times with due regard to economy. It involves the related process of provisioning,
which is the means whereby instructions are given for the placing of orders to correspond with future
estimated requirements. In some industrials concerns, the production control department may have a
large share in provisioning, at least as far as production materials are concerned. Nevertheless this
should always ultimately be the function of Stores.
Stock-taking is the process of physical verification of the quantity and condition of goods in store.
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A Stores manager, therefore, is responsible for carrying out the following functions:
1. Receive incoming goods
2. Supervise unloading of material Count, tally
3. Check for damage/shortage and prepare report
4. Fill Goods Inward / Day Book/ Daily Collection Register
5. Complete Vendors Consignment Note (Challan)
6. Arrange for inspection and complete the inspection
7. Prepare Goods Receipt Note (GRN)
8. Prepare Goods Rejection Memo (in case of goods rejected)
9. Send goods to stores
10. Send other documents to respective departments
11. Ensure all storage facilities are in proper working order e.g. check for loose racks, damaged
pallets etc.
12. Ensure goods housekeeping (i.e. check for spillage of oils, dirty walls, obstructions).
13. Ensure all materials handling equipment are in goods condition
14. Check and count goods before issue
15. Make entries Bin/Kardex (stock) cards promptly
16. Ensure Receipts and Issues are correctly documented
17. Ensure that rules and regulations relating to physical custody and preservation of stores are
followed
18. Ensure correct accounting of stores.

2.11 Stock Accounting and Verification


A Stores is a virtual money that can be encashed. However, this money needs to be properly counted
or accounted for. Stock accounting is thus a systematic way of assessing the money value of the
items lying in stores as also the items under transaction through stores. Transactions, in terms of
receipts and issues are a regular feature in any stores and therefore Stock accounting process , in
most of the cases, concentrates only on the stock in hand, lying in Stores.
The most popular methods of accounting are, FIFO i.e First In First Out and LIFO, Last In First Out.
FIFO and LIFO Methods as accounting techniques are used in managing inventory (Stock lying in
Stores for future use) and financial matters involving the amount of money a company has tied up
within inventory of produced goods, raw materials, parts, components, or feed stocks. These methods
are used to manage assumptions of cost flows related to inventory, stock repurchases (if purchased
at different prices), and various other accounting purposes.
FIFO standing for first-in, first-out, implies that the oldest inventory items are recorded as sold first but
do not necessarily mean that the exact oldest physical object has been tracked and sold.
LIFO stands for last-in, first-out, meaning that the most recently produced items are recorded as sold
first. Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces their
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income taxes in times of inflation, but with International Financial Reporting Standards banning the
use of LIFO, more companies have gone back to FIFO. LIFO is only used in Japan and the U.S.
The difference between the cost of an inventory calculated under the FIFO and LIFO methods is
called the LIFO reserve. This reserve is essentially the amount by which an entity's taxable income
has been deferred by using the LIFO method.
Stock Verification & reconciliation:
For maintaining the continuous accountability of items under storage, it is essential to periodically
verify the stock of the items with respect to their storage record.
The process of physically verifying the stock of items with respect to the stock on record is known as
stock verification. The correction of the record to take care of any observed discrepancy in stock is
known as reconciliation of stock. The periodicity of stock verification depends on the value of the item
and also nature of the item. High value & pilfer-able items are verified more frequently.
Physical verification of stores is the process of actual counting, weighing and measuring all items of
stock, recording the results and to ensure that the materials are according to the nomenclature,
description, specification shown in the stock ledgers and the actual balances of such stocks agree
with balances appearing in the books and are confirmed and authenticated. The excess or shortage if
any brought to notice on such verification is properly investigated, accounted for and reconciled.
Purpose

It is an audit requirement that physical verification of all stores shall be carried out at least once
in a year.

It is essential as it checks the accuracy of stores records and brings about an overhaul of the
stores section specially its physical condition.

It is useful as it discloses any weakness or defects in the system for the custody and control of
stock besides bringing the stock accounts up-to-date.

It reveals the possibility of frauds, theft or loss and suggests adoption of additional preventive
measures to stop them.

It reveals losses due to wrong issues, negligence, misappropriations, misuse, leakage,


pilferage and theft etc. and suggests measures to stimulate better control.

It helps in clearing up surplus and obsolete items thus avoiding locking up of resources.

It ensures that the stores are well preserved against any damage or deterioration due to wrong
storage or other hazards.

It is valuable as it greatly assists in training the staff and making them more conversant with
stores keeping methods and techniques.

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Pre-requisites of verification.

The verification shall be conducted in the presence of the official responsible for the custody of
stores or any other responsible person deputed by him who should make himself available to
the stock verifier till the verification is over.

Stores must be arranged properly with locations marked on the ledger folios and identification
labels be tagged thereon for quick and easy verification.

Items which are not the inventory of the shop ought to be marked or labeled in advance

List separately any goods that are under inspection.

List out items sent for repairs or processing or stocks lying at project sites and obtain their
confirmation.

Stores issued on loan must be accounted for before the stock verification takes place.

Staff connected with verification should not be permitted to proceed on leave during the period
of verification.

Preparation of the verification report


The report may generally consist of the following three parts:
1. List of discrepancies.
The list of discrepancies will show the balance available in the ledgers and the balance found
physically.
2. Narrative report.
The narrative report shall include a critical observation on the system of stock control, custody of
stores giving suggestions/ recommendations etc. for improving the working of stores and measure for
avoiding such lapses/ discrepancies in future.
3. Matters which the verifier may like to bring to the notice of the authorities confidentially.
The report will be submitted to the higher authorities for further action.
Consumption budget monitoring :
Each User department is allocated the Budget for the consumption of various commodities of items in
the beginning of the financial year. Issue of material to the user department is made after ensuring
the availability of budget for that department for that commodity.
Once the issue of material is made the budget of the department is updated. Once the budget is
exhausted the user departments need to take additional budget provision or clearance of competent
authority to draw further material from Stores.
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This consumption budget monitoring is done to ensure proper control on the expenditure and cost
incurred by the user department.
2.12 Concept And Meaning Of Value Engineering
Value engineering is also known as value analysis. Value engineering is a systematic examination of
factors affecting the cost of a product or a service in order to devise means of achieving the specified
purpose at the required standard of quality and reliability of the target cost.
The main aim of value engineering is to achieve a product's target cost, by:
* Identifying improved product designs that reduce the product's cost without sacrificing its
functionality
* Eliminating unnecessary functions that increase the cost of product.
Value engineering requires the use of functional analysis. This process involves segregating a
product into its many elements. For example, in the case of automobiles, the function might consist of
style, comfort, performance, reliability, quality, attractiveness and other aspects. A price or a value for
each element is determined, which reflects the amount the customer is willing to pay for the product.
To obtain this information, companies normally conduct surveys and interviews with customers. The
total of the values for each function gives the estimated selling price from which the target profit is
deducted to derive the target cost. The cost of each function of a product is compared with the
benefits perceived by the customers. If the cost of the function exceeds the benefits to the customer,
then the function should be eliminated, modified to reduce its cost, or enhanced in terms of its
perceived value so that its value exceeds the cost.
Therefore, value engineering is the technique applied to analyze all the aspects of an existing product
or component to determine the minimum cost necessary for specific functional requirements.
Process Of Value Engineering
1. Functional Analysis
2. Standardization Of Components And Parts
3. Alternatives Of Functions
4. Value-cost Analysis
5. Re-engineering
Areas Of Value Engineering
1. Improvements in product designs
2. Changes in materials' specifications
3. Modification in process methods
4. Decision to make or buy a component
Advantages of Value Engineering
The following are the advantages of value engineering:
* Value engineering helps achieve an improved product design and quality.
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* Value engineering suggests eliminating the unnecessary functions in the organization that increase
costs and have complex ties.
* Value engineering enhances the customers' satisfaction and sales by determining the exact need
and expectation of customers.
* Value engineering emphasizes on seeking the alternatives for achieving the function and on
applying the best alternative among the various courses of actions available.
* Value engineering provides competitive advantages to the firm in the areas of product quality, costs
and customer's satisfaction.
* Value engineering focuses on standardization of the parts and components by identifying the
possibility of using the same component or function in different products of the company. This brings
economy in the cost of manufacturing the parts and components.
Measurement Of Value In Value Engineering
Value engineering measures the price cost ratio for each function of the product. Value is, in fact,
utility or the level of satisfaction to be acquired from a product.
Value = Price Of The Function/Cost Of The Function
Price of the function is expected price for a particular function which the customers are ready to pay.
Cost of the function is the expected expenses to be made by the company to achieve that function.
It is obvious that price must exceed cost; therefore value should be greater than one. The higher the
value, the higher will be the contribution of the function towards the product's profitability.
Tools And Techniques Of Cost Reduction
The following are the widely used techniques of cost reduction:
1. Just-In-Time (JIT) System
The main aim of JIT is to produce the required items, at the required quality and quantity, at the
precise time they are required. JIT purchasing requires for the items where too much carrying costs
associated with holding high inventory levels. purchasing system reduces the investment in
inventories because of frequent order of small quantities.
2. Target Costing
Target costing refers to the design of product, and the processes used to produce it, so that ultimately
the product can be manufactured at a cost that will enable the firm to make profit when the product is
sold at an estimated market-driven price. This estimated price is called target price.
3.Activity Based Management(ABM)
Activity based management is the use of activity based costing to improve operations and to eliminate
non-value added cost. The main goal of ABM is to identify and eliminate non-value added activities
and costs.
4.Life Cycle Costing
Life cycle costing estimates and accumulates costs over a product's entire life cycle in order to
determine whether the profits earned during the manufacturing phase will cover the costs incurred
during the pre-and-post manufacturing stage.
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5. Kaizen Costing
Kaizen costing is the process of cost reduction during the manufacturing phase of an existing product.
The Japanese word 'Kaizen' refers to continual and gradual improvement through small activities,
rather than large or radical improvement through innovation or large investment technology.
6.Business Process-re-engineering
Re-engineering is a complete redesign of process with an emphasis on finding creative new ways to
accomplish an objective. The aim of business process re-engineering is to improve the key business
process in an organization by focusing on simplification, cost reduction, improved quality and
enhanced customer satisfaction.
7.Total Quality Management(TQM)
Under the TQM approach, all business functions are involved in a process of continuous quality
improvement.
8. Value chain
Value chain analysis is a means of achieving higher customer satisfaction and managing costs more
effectively. The value chain is the linked set of value creating activities all the way from basic raw
materials' sources, component suppliers, to the ultimate end-use product or service delivered to the
customer.
9. Bench Marking
Bench marking is a continual search for the most effective method of accomplishing a task by
comparing the existing methods and performance levels with those of other organizations or other
sub-units within the same organization.
10. Management Audits
Management audits, also known as performance audits, can be used to facilitate cost reduction in
both profit and non-profit organizations. Management audits are intended to help management to do
a better job by identifying waste and inefficiency and recommending a corrective action.
2.13 CODIFICATION OF THE MATERIALS
Due to the growth of industrial activity and diverse kind of industrial requirements, a large no.
of organizations have to store a large number of items, often running into several thousands and even
lacs. Therefore, there should be some means of identifying them. A common practice is to describe
the items by names. Since several departments use the same item, they call the same item by
different names and store them in different places. One of the most useful techniques of Materials
Management is a rationalized codification system for properly classifying equipments, raw materials,
components and spares to suit to the particular needs of any organization. Old system of functional
codification is no longer suitable for the already large and increasing inventory range of stocks and
stores. It has come across several instances of duplication of stock of the same item under different
nomenclature and codes and under different stores categories where such items are common to
more than one consumption center. It is necessary that items are brought together for the purpose
standardization, variety reduction and the application of other modern materials management
techniques such as value analysis, operational research etc. so that the maximum return could be
secured with the minimum of inventory range and values. Standardisation leads to cheaper &easier
procurement and cost of replacement can also be reduced.
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Objectives:
Need and role of codification
Standardisation and simplification of materials from the viewpoint of the functions of planning,
control, purchases, inventory, stores, etc.
Importance of codification;
Describe the design and implementation of codification systems.
Portray the use of computerization of materials using codification.
CODIFICATION
The process of giving
alphabet or both.

name or symbol or numerical code to a particular item. This code can be a no .

Eg. Blue colour for painting iron parts is used and its code no. can be

pb2054.

To avoid confusion and to purchase , store and supply to production department a specific item of
recquired quality and characteristic. The material management identify every item by unique code.
An article of stores is identified by its simple description or nomenclature. Difficulty arises when the
same article is known by different names.
For example;
chipping goggles, grinder goggles, or white goggles are one item but may be
stored separately under same nomenclature as different items.
One storekeeper might classify an item as Sal Ammoniac, whereas a research
chemist might identify it under the name of Ammonium Chloride, only to be told
that it is not available.
A classic example comes from the U.K. An electric firm found that a simple item
of a screw with a width of 3/8 and length of 6 had as many as 118 names
depending on the type of usage and the department using the screw. A few
names are:
Plunger, dowel pin, roller, locating peg, drive pin, armature stud
pin mould holding, motor drive spindle, etc

pinion spindle,

.
Two firms in Western India have been able to reduce the variety of lubricating oils from 30 and
32 to 9 and 7 respectively.
At a control depot of State Road Transport Authority, 583 hardware items were reduced to 105
through codification. In a large electrical firm, it was found that excessive stocks of copper items were
due to designers specifying too many sizes.

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A planned reduction of say 20 per cent in number of items would not only reduce the material cost,
but would also correspondingly bring about reduction in routine work, stores purchase, inspection,
production and accounts. In short, a rationalized system of codification would reduce the number
substantially and at the same time make their identification an easier job avoiding lengthy description
and confusion.
The need for Codification arises because of the following reasons:
(i) Speed,
(ii) Unambiguity,
(iii) Saving of Effort,
(iv) Space Saving on forms,
(v) Ease of classification,
(vi) Mechanization.
Characteristics of Codes
As far as possible uniform dimension say, the metric system should be adopted.
i) Code should be Simple.
ii) Code should be unique.
iii) Coding should be compact, concise and consistent.
iv) Code should be sufficiently flexible to meet future demands.
Basic Requirements of a Code
i) Identify commodities
ii) Name commodities
iii) Specify commodities
iv) Classify commodities
v) Indicate inter-relationships between commodities
vi) Indicate the source of origin of commodities
vii) Refer specifically to an individual and unique commodity.
Objectives of Codification
In order to identify the items correctly and logically for processing the transactions, and to facilitate
easy location in stores, a codification system should be evolved with the following objectives.
Accurate and logical identification:
A separate code allotted to each of the items available in the warehouse indicating the size, quality
price, usability, special characteristics, specification etc.

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Prevention of duplication:
All items are separately codified and are arranged in a logical order. Similar materials are grouped
together (such as stationery items, hardware items) and given a code.
Standardisation and reduction of varieties:
For codification, grouping of identical item is done and it enables the stores to examine the entire
range of items. It facilitates the elimination of those varieties in place of which other varieties of the
same quality can be used. This reduces the number of varieties to a minimum. If proper
standardisation is achieved and the number of items is kept at the minimum, it will considerably
reduce investment in various items as well as the cost of inventory carrying.
Efficient purchasing:
The filling up of purchase requisition, and preparation of purchase orders are simplified by the use of
codes which easily indicates the materials required. Buying instructions to the suppliers become easy
and quick if there is proper understanding of codification by the suppliers.
Efficient recording and accounting codes leads to effective stock
control, efficient recording and it
results in yielding accounting. Chances of mistakes are minimized. Pricing and valuation also become
more accurate and reliable.
Easy locating, indexing and inspection of all materials is possible.
Easy computerization:
The computer work better with codes then with long description of materials.
CODIFICATION SYSTEMS
One of the prerequisites of classification and codification is to know the basic nature and
characteristics of all materials used in an enterprise and then classify them in broad categories and
then to group and sub-group them in logical progression of kinds, type and sizes etc.
Raw materials, Semi processed Materials, Mechanical (Products and equipment), Electrical (products
and equipments), Chemicals (Allied products and chemical processing equipment), Laboratory and
office (equipment and supplies) etc. can be classified, grouped and sub-grouped first. After
classification in a broad way, a code or symbol is allocated to each of element, the code or symbol so
allotted should be simple, flexible and it should be easily adaptable in order to exploit the full
advantages of codification.
Therefore, codification is a process of representing each item by a number, the digits of which
indicate the group, the subgroup, the type and the dimension of item. The first two digits normally
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groups, such as ferrous, non-ferrous, etc. Dimensional characteristics of length, width, head diameter
usually constitute the further three digits and the last digit is reserved for minor variations.
Many organizations in the private and public sectors like, Railways and DGSD have their own system
of codification. The number of digits in a code may typically be somewhere between eight to thirteen.
There are several methods of codification but the most useful method is that,which give along with
standard form, the history size and type of material.However, a great care should be taken to develop
the code to satisfy a variety of users.
Some of the systems of codification are:
1) Arbitrary system
2) Numerical System
3) Mnemonic system or alpha numeric system
4) Decimal system
5) Brisch system
6) Kodak system
Arbitrary Systems
Arbitrary system as the word arbitrary indicates, is based on the serial number under which a
material is received and the same is allotted as a code number.
Using this approach, all inventory items are simply assigned arbitrary numbers in sequence as they
are added to the stores account. Each item thus has a discrete number, but it bears no systematic
relationship to the numbers assigned to related items. Two similar items or two mating parts may
have numbers several thousand digits apart. For example, if bearings are received and suppose a
number 5090 has already been allotted to the previous item received, then the code number of these
bearings will be 5091. This system has the advantage that there is no fixed limit for codifying any
number of items. Moreover, one cannot know the history of the items. This is the reason why the
system is not popular.
Numerical System
A numerical system assigns a six to ten digit code number to each item. The first several numbers
usually indicate the classification to which the item belongs, the next several numbers typically
indicate the sub-class, and the last three numbers are usually uncoded. The following example
illustrates the concept:
3

129

General Class

Generic Class

017
Sub-class

503
Specific item number

This ten digit code number is one firms stock number for a by inch
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stainless steel square neck carriage bolt. The first digit indicates that the item is a purchased part as
per the following general classification :
1) Raw material
2) Manufactured parts
3) Purchased parts
4) MRO supplies
5) Work in process
The next three digits indicate the generic classification of the item. In this case it is a fastener, code
number 129. All items are generically classified by their nature and carry a number from 000 to 999.
The next three digits indicate the sub-class to which the item belongs. In this case, 017 is a carriage
bolt with a square neck. All fasteners are sub-classified into a class bearing number from 000 to 999.
The last three digits indicate the specific part number of the item. In this case,all part numbers under
500 designate plain steel and numbers over 500 represent various alloys; 503 is stainless steel, by
inch.
Mnemonic System
A mnemonic system functions much like a numerical system. However, it combines numeric and
alphabetic notations in its symbols. For example, the carriage bolt described under the numerical
system in the following manner :
P Fa BCS 503
P denotes a purchased part,
Fa is a fastener,
BCS stands for bolt, carriage, with a square neck, and
503 represents the specific number of the bolt.
Mnemonic systems, particularly where a small number of items are involved,frequently make visual
identification easier because they are more descriptive and they are often shorter. As more and
different types of items are added to the inventory, however, this advantage diminishes because the
number of good symbols are limited.

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Decimal System
Decimal system of codification may said to be the universal in its working. It is simple and easy to
codify items under this system. Day by day, the number of items in almost every sphere of industry is
increasing. Hence, codifications should be such as may meet the increasing requirements and it
should also be simple, handy and easily adaptable. Under this system items up to 5,00,000 can be
easily codified and at the same time each symbol will give the history, size, specification and
complete picture of the item. Modern industrial concerns are generally adopting 7 to 11 digits for
codifying the materials.
In the decimal codification system, each digit indicates some thing or the other.
For example :

1st digit Section

4th digit -Type of materials


Example:
Section

2nd digit-Class

3rd digit Group

5th digit -Size, part no. specification or any other details required

0 Plants and machinery


1 Machine and hand tools
2 Construction materials etc.

Class
(For section-1)

0 Hand tools
1 Machine tools
2 Holding tools
3 Cutting tools
4 Tripped cutting tools etc.

0 Cutters
1 Files
2 Knurls
3 Scrapper etc.
Suppose a file flat, single cut smooth, size 25 mm is to be codified.
It will be indicated by 1st, 2nd and 3rd digits as 131.
Group
(For section-1)

Further fourth and fifth digit will be classified as :


4th digit to indicate the shape of the file, thus
0 for flat
1 for hand
2 for sqaure
3 for round
4 for tappered etc.
5the digit to indicate the teeth of file, thus
0 for single cut, rough
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1 for single cut, coarse


2 for single cut, smooth
3 for double cut, coarse etc.
The 6th, 7th and 8th digits indicate the size of the file in mm.
Therefore, file flat,single cut smooth size 25 mm will be codified as
13102025.
Brisch System
The Brisch system consist of seven digits applied in three stages. The items are grouped into
suitable preliminary categories, such as assemblies, sub-assemblies,components and off the shelf
items. After these preliminary categories, items are grouped within the respective class in order to
bring similar items together. The Brisch system through it consists only of seven digits, is quite
comprehensive as the basis is on logical major groupings.
Kodak System
The Kodak system consists of 10 digits of numerical code. The logic of major grouping is based on
sources of supply. All materials are divided into 100 basic classifications, contributed only by
procurement considerations. For instance, a bolt is listed as hardware item if this is listed in hardware
catalogues and available with hardware suppliers. If this bolt is available as a part of the machine, it
will be available under maintenance.
ADVANTAGES OF CODIFICATION
a) As a result of rationalized codification, many firms have reduced the number of items.
b) It enables systematic grouping of similar items and avoids confusion caused by long description of
the items.
c) Since standardisation of names is achieved through codification, it serves as the starting point of
simplification and standardization.
d) It helps in avoiding duplication of items and results in the minimization of the number of items,
leading to accurate records.
e) Codification enables easy recognition of an item in stores, thereby reducing clerical efforts to be
minimum.
f) If items are coded according to the sources, it is possible to bulk the items while ordering.
Process of codification:

List the inventory items


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Define the class of items such as (for example) :

Abrasives

Bearings

Belt and beltings

Bolts, nuts & washers

Brooms & brushes

Cans & containers

Chemicals & reagents

Cloth, leather & rubber

Electricals

Raw Materials

Glasswares

Oil & lubricants

Pipe & Pipe fittings

Photographic items

Safety items

Tools & tackles

Stationeries

Welding materials

Refractory

Building materials

Define the sub class under each class

Depending upon the number of classes , their subclasses and probable number of items under each
sub class decide the length of codes which shall remain fixed for all the inventory items (10 digit,
alphanumeric etc.)

Start assigning codes as per the detailed list of inventory

Who does the codification?


Normally, it is the custodian who does the codification for the items he keeps in his inventory.
However, in firms of substantial sizes where good number of items are received on regular basis ,
codification is usually done by a team consisting of representatives drawn from Stores, user
department and Industrial engineering department. Still, for Automatic procurement items the
responsibility lies with the Stores department.
When codification?
Codification identifies an item. Also it acts as a communicating medium for an item among the
different users of that item in whatever way such as Stores, User department, Planning department,
Finance, Purchasing etc.
Thus , as soon as the item enters into Stores (if item is a new one), it is codified. Once codified, the
same code is used in the cycle of procurement, throughout and for ever.
2.14 Meaning Of Store Routing
Store Routing
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The process set by a manufacturing company to control materials is called store routing. Store routing
consists of all the process involved in proper purchasing, storing, and issuing of materials to the
concerned departments. The store routing can be summarized as follows.
1. Purchasing and receiving of materials
* Request for purchase of materials
* Inquiry and tender quotation forms issued to potential suppliers
* Selecting suitable supplier
* Placing order
2. Storing of materials
* Classification and codification of materials
* Keeping records of materials in Bin cards, store ledger and so on.
3. Issuing of materials
* Requisition form
* Pricing of materials issued
2.15 Concept Of Materials control
Material Control
Materials control can be defined as a systematic control over purchasing, storing and consumption of
materials. Materials control helps to maintain a regular and timely supply of materials by avoiding
over and under-stocking. Materials control ensures that the right quality and quantity of materials is
available to the company at the right time. Materials control helps to reduce the losses and wastage
of materials by maintaining their efficient purchase, storage and use or consumption in the factory.
The importance of materials control lies in its role in reducing the cost of production and increasing
the profitability of the company.
Types Of Materials
Manufacturing a product needs input of raw materials. Raw materials are main component of the
product. There are two types of materials.
1. Direct Materials

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The materials required for producing a product are called direct materials. Direct materials are also
known as raw materials or input materials. Direct raw materials constitute the main component or part
of a finished product. It is identified in terms of cost per unit of output. Wood for furniture industry,
sugarcane for sugar mills. textile for garment industry are some of the examples of direct materials.
2. Indirect Materials
The materials that can not be form as the main part of a finished product are called indirect materials.
Therefore, such materials can not be easily identified with the product. Nails used in furniture industry
and threads used in garment industry are some example of indirect materials.
Essentials Of Materials Control
The main essentials of materials control are as follows.
* There should be a proper co-operation and co-ordination among the departments dealing with
material purchasing, receiving, testing, storing, production planning and accounting.
* There should be a centralized purchasing department.
* There should be a proper perpetual inventory system, which reflects physical movement of stocks
and their current balance.
* There should be a good method of classification and codification of materials.
* There should be a standard forms for requisitions, order, issue, return and transfer of materials.
* There should be carefully planned materials storage facilities to avoid losses from damage,
evaporation, pilferage, theft and deterioration.
* Materials and supply should be properly stored.
* Stock of different levels should be fixed to ensure that there is no under and over-stocking of
materials.
* The quantity of each type of materials to be ordered should be fixed to reduce the ordering and
carrying costs.
* There should be an effective system of internal check to ensure that all transactions relating to
materials are automatically checked.
* Receiving and inspecting procedures must be fixed in advance.
Objectives Of Materials Control
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Material controls basically aims at efficient purchase, storage and consumption of materials. The
following are the major objectives of materials control.
1. To ensure better quality of materials at right quantity at right time for efficient and uninterrupted
production of output.
2. To maintain the cost of materials at the minimum level.
3. To purchase materials at a reasonable price.
4. To minimize the handling cost and time in storing and using the materials.
5. To provide information to the management about raw materials, their costs and availability.
6. To protect materials against loss by fire, theft and leakage.
7. To avoid obsolescence of materials by adopting an appropriate method of materials issue.
Need For Materials Control
Materials control is necessary for making efficient purchase, storing and consumption of materials.
Every manufacturing company requires to maintain a materials control system that facilitates efficient
purchase, storage and use of the materials. The needs for materials control system in the company
arise due to the following reasons.
1. Economical Purchase
Every manufacturing company should purchase high quality materials at the most economical price.
An efficient materials control system ensures how better quality materials can be bought at the
economical price, which will finally help reduce the total cost of the production.
2. Minimum Investment
The over-stocking of materials is undesirable to the company, as it raises the cost of production.
Therefore, an efficient materials control system helps to avoid over-stocking of materials and thus
keeps the investment in materials to minimum.
3. Minimum Wastage
An efficient materials control system helps to carefully handle the materials to and from store houses
and factory by trained and efficient store keepers and workers. With the help of an efficient materials
control system, therefore , the wastage and losses of materials by fire, theft, leakage and so on can
be kept at minimum.
4. Balance On Hand
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An efficient materials control system is one which always provides the ready balance of materials on
hand in terms of their quantity and value. The perpetual system of inventory control always shows the
physical movement of stocks of materials and their current balance in terms of quantity and value.
5. Source Of Information
A proper system of recording materials is a great source of information of materials which helps in the
preparation of materials purchasing and production plans.

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