MATERIAL COST CONTROL

Presented By: Akhila Sudhakar (09) Akshat Modi (10) Akshita Tomar (11) Aleesha Sharma (12) Alok Jain(13)

Material cost control

Material control is planning , ordering and scheduling of material used in manufacturing. It means right quantity of material is available in right time. systematic control over the purchasing, storing and using of material.so as to minimize possible cost.

Objectives of material control

Ensuring non-stop production Low investment in inventory Purchase only on proper Authorization Purchase at minimum cost and at Economic Order Quantity Issue of Material on Proper Authorization Fixing Up Responsibility for Material Ensuring Proper payment & Maintenance of Records

PURCHASE DEPARTMENT
Elements of Purchase Department: Purchasing Department (Purchase) Receiving & Inspection Department Store-Keeping Department (Storing, Issue and Accounting for Material Production department (Receipt of Material) Costing Department (Perpetual Inventory)

CENTRALISED PURCHASING

Centralized purchasing refers to the purchase of materials by a single purchase department.

This department is headed and managed by a purchasing manager.

Under this system, the purchasing department purchases the required materials for all the departments and branches of the company to
avoid duplication, overlapping and the nonuniform procurements.

Merits of Centralized Purchasing

Uniformity in purchasing policies. Discourages duplications of efforts Transportation costs can be reduced because bulk quantity of materials purchased. Bulk quantity of materials can be purchased at a low price Expert staff for buying Maintenance of complete records in one departments

Demerits of Centralized Purchasing

High initial investment in setting up of a new department. Delay in receiving materials. Not suitable if branches are located at different geographical locations. Defective materials can not be replace immediately. Difficulty in maintaining records of different departments.

Decentralized Purchasing

Refers to purchasing materials by all departments and branches independently to fulfil their needs. Under decentralized purchasing, there is no one purchasing manager who has the right to purchase materials for all departments and divisions. Decentralized purchasing helps to purchase the materials immediately in case of an urgent situation.

Merits of Decentralized Purchasing

Materials can be purchased by each department locally as and when required. Right quantity of right quality for each department. No heavy investment is required initially. Purchase orders can be placed quickly. Less replacement time. Technical expertise.

Demerits of Decentralized Purchasing

Organization losses the benefit of a bulk purchase. There is a chance of over and underpurchasing of materials. Fewer chances of effective control of materials. Lack of proper co-operation and coordination among various departments.

Procedure for Procurement of Material

1.

Receiving Purchase Requisition Selection of Sources of Supply

2.

3.

Placing the Orders

Receiving & Inspection of Materials

4.

Step 1: Receiving Purchase requisition

Received from: Store-Keeper for Regular Items Production Departments for Special Material Maintenance Department for material needed for repairs & maintenance Any Departmental Head like Marketing Manager, Finance Manager etc.

STEP 2: Selection of Sources of Supply

Inquiry for Tenders & Quotations. b. Receipt of Quotations & Tenders. c. Comparison of Tenders Received. d. Selecting the Best Source.
a.

Step 3: Placing the Order

A) Purchase Order : 5 copies to -supplier - retained by purchase department -department initiating purchase -Receiving Department - Finance Department B) Follow-Up

Step 4: Receiving & Inspection of Material

Unloading the material Unpacking Checking the number of units, weight, measure, quality as per Purchase Order Reporting the Shortage and Breakage Preparing Material Inspection Note and Goods Received Note Sending MIN to Supplier & Stores Department

Economic Order Quantity (EOQ)

EOQ or Fixed Order Quantity system is the technique of ordering materials whenever stock reaches the reorder point. Economic order quality deals when the cost of procurement and handling of inventory are at optimum level and total cost is minimum. In this technique, the order quantity is larger than a single periods ne requirement so that ordering costs & holding costs balance out.

Tc (Total Cost) Cost (Rs.)

Carrying Cost (Q/2)H

DS/Q (Ordering Cost) EOQ

Order Quantity Size (Q)

Assumptions of EOQ
Demand for the product is constant Lead time is constant Price per unit is constant Inventory carrying cost is based on average inventory Ordering costs are constant per order All demands for the product will be satisfied (no back orders)

Basic Fixed Order Quantity Model (EOQ)

Annual Annual Total Annual Cost =Purchase + Holding Cost Cost Annual + Ordering Cost

Q D TC DC 2 H Q S
TC D C Q S H = Total annual cost = Demand = Cost per unit = Order quantity = Cost of placing order/setup cost = Annual holding and storage

Deriving the EOQ

Q OPT =

2DS = H

2( Annual Demand )(Order or Setup Cost ) Annual Holding Cost

The calculation: 1. Z: NORMSINV(Service level) , for example Z=1.64 for a 95% service level

2. Safety stock: {Z*SQRT(Avg. Lead Time * Standard Deviation of Demand^2 + Avg. Demand^2 * Standard Deviation of Lead Time^2)} 3. Re-order Point (ROP): Average Lead Time*Average Demand + Z*SQRT(Avg. Lead Time * Standard Deviation of Demand^2 + Avg. Demand^2 * Standard Deviation of Lead Time^2)

Stock Levels

Minimum Level It is the minimum stock to be maintained for smooth production.

Minimum limit or level = Re-order level Average or normal usage Normal re-order period

Maximum Level It is the level of stock, beyond which a firm should not maintain the stock.
Maximum limit or level = Re-order level Minimum usage Minimum re-order period + Re-order quantity

Reorder Level The stock level at which an order should be placed.

Re-order level = Maximum usage Lead time

Danger Level Below it stock should never

Stock Levels
Q
Quantity on hand Profile of Inventory Level Over Time

Usage rate

Reorder point

Receive order

Place Receive order order

Place Receive order order

Time

Lead time

Safety Stock
Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stock outs due to uncertainties in supply and demand.

Why is it used?
Adequate safety stock levels permit business operations to proceed according to their plans.

By creating a safety stock, you will also prevent stock-outs from other variations :
An upward trend in the demand A problem in the incoming product flow (machinery breakdown, supplies delayed, strike etc.)

The amount of safety stock in an organization can dramatically affect their business: Too much safety stock can result in high holding costs of inventory. In addition, products which are stored for too long a time can spoil, expire, or break during the warehousing process.

Too little safety stock can result in decrease in sales and, thus, a higher rate of customer turnover.

Calculation of Safety Stock

Demand rate: the amount of items consumed by customers, on average, per unit time.

Lead time: Time between the placement of an order and delivery of raw material.
Service level: the desired probability that a chosen level of safety stock will not lead to a stock out Naturally, when the desired service level is increased, the required safety stock increases as well.

Forecast error: an estimate of how far actual demand may be from forecasted demand. Expressed as the standard deviation of demand.

THANK YOU HAVE A NICE DAY