Organization of Material Management

Chief executive
Personnel Manager Financial Manager Material Manager Production Manager

Marketing Manager

Purchase

Stores Dept.

Material Handling

Research

Shipping section

Receiving

Storage

Issuing

Inventory Management
Inventory is a stock of goods and resources that are stored for future productions or for meeting future demand. Inventory management is art and science of planning and controlling inventories. What includes in Inventories : Raw materials; Semi-finished goods; Finished goods; Tools; Spares; Consumables etc..

According to J. David Viale Inventory is a very expensive asset that can be replaced with a less expensive asset called information. In order to this, the information must be timely, accurate, reliable and consistent. When this happens, you carry less inventory, reduce cost and get products to customer faster.

It is the process of maintaining sufficient inventory level to meet customer needs, keeping in mind the cost of carrying inventory to determine an appropriate inventory level. Shortage of Supplies due to strikes, public unrest; Bad weather, Natural calamity, War, Hoarding etc.. Surplus stores, Out of stocks, long procurement lead-time, Suppliers minimum quantity, Packing restrictions etc..

 The

primary objective of inventory management is to ensure continuous supply of raw materials and facilitate uninterrupted production. Maintain sufficient finished goods for smooth sales operation and efficient customer service.

1.

 2.

Inventories permit the procurement of raw material in Economic lot size. 3. Helps reducing material handling costs 4. It facilitates product display and service to customers 5. Effective use of Capital 6. Allow flexibility in production schedule

 7.

Economy in buying : Taking advantage of favourable market conditions 8. Reduce surplus stock to reduce interest costs, holding costs, carrying costs & damage 9. Service to customers

Direct Inventory

Raw materials; Work-in-progress& Finished goods Those items that play a direct role in the manufacturing Buffer inventories which prevent stock-out conditions Lot size inventories help reducing ordering & set-up costs, also get discounts Decoupling Inventories serve the function of decoupling operations in a production system Transit or pipeline inventories Seasonal Inventories Fluctuation inventories Necessary to keep machinery and processes productive

Indirect Inventory

MRO (Maintenance, repair & operating)

 Procurement

Cost & Inventory carrying costs Cost of item : Cost of an item sometimes includes
the transportation, receiving and inspection cost
Procurement

Cost : Print, stationary, telephone,

telegram, telex, postage, travelling, transport(ordering cost)

Inventory carrying Cost : Capital cost, Holding, Carrying costs, Taxes, Insurance, Obsolescence & deterioration loss Stock-out Cost : loss of demand due to stock depletion, margin loss, goodwill loss, re-ordering goods & notifying customer costs

Capital Space Insurance Procurement cost Transportation Cost Variable demand Demand during lead time Quantity discounts Obsolescence, Spoilage

It is the time which the stock takes to reach from recorder point to minimum stock level. It may include following activities: 1. Raising of a purchase requisition. 2. Inquiries, quotations scrutiny and approval 3. Placement of an order on supplies. 4. Suppliers time to make the goods ready. 5. Transportation or clearing. 6. Receipt of goods at company stores. 7. Receiving inspection 8. Taking into stocks. In order to receive supplies before the stock reaches to zero level, it is necessary to order the material much in advance i.e. the stock available is sufficient and last during the lead time.

Units in stocks

Order here to receive supply at C

300

----------------------------------------

ROL=300

MB =NC = 15 Days = Lead time

200 100 0 A M B N C Time in days

In fig. Re-order level (ROL) = Stock sufficient to last during lead time=300 units Suppose an item has a lead time of 15 days and monthly consumption of the item is 600 units, then a recorder must be placed at 300 units.

Re-order level is the sum of safety stock and the average consumption during led time.

Re-order

level

= Avg. daily usage of inventory x Lead time Also another formula is = Max. reorder period x Max. usages
Calculate

the re-order level of an item when its annual consumption is 2400 units and lead time is half month.

When there is shortage of material for production or services to be rendered it is called stock out.

Safety Stock
Safety stock is the lower limit of stock below which the stock should not be allowed to fall under normal circumstances. Factors affecting safety stock 1. Number of suppliers 2. Lead time 3. Criticality of the item 4. Annual usage 5. Type of items 6. Service level desired by management 7. Order quantity 8. Risk of deterioration 9. Space restrictions.

Cycle time 95%

Input Wait for inspection Wait to be moved

5%
Output

Move Wait in queue Setup Run time for operator time time

Holding (or carrying) costs.

Costs for capital, taxes, insurance, etc. (Dealing with storage and handling) Costs for arranging specific equipment setups, etc. Costs of someone placing an order, etc. Costs of canceling an order, customer goodwill, etc.

Setup (or production change) costs. (manufacturing)

Ordering costs (services & manufacturing)

Shortage (backordering) costs.

Ensures adequate supply of materials Investment in Inventories at appropriate level Eliminates duplicate ordering Inter deptt transfers permits better utilisation of available stocks Enables Mgmt to make cost and consumption comparisons between operations and periods

Means for location & disposition of inactive and obsolete items of stores Provides control against loss of materials, pilferage Facilitates purchasing economics through records Perpetual inventory values provide a consistent and reliable basis for financial statements

(Always Better Control) This is based on cost criteria. ABC analysis tends to segregate all items into three categories: A B and C on the basis of their annual usage. To control and focus his attention only on few items A-control inventories and show visible results in shorter span Reduces clerical work

ABC Analysis

 a. b. c. d. e. f. g. h. i. j. k. l.

Small in numbers (10%)but consume large amount of resources (70%). Must have Tight control Rigid estimates of requirement As many sources as possible for each item Strict and close watch Low safety stock Frequently ordering or weekly deliveries Maximum follow up and expending Accurate forecasts in material planning Minimisation of waste, obsolete and surplus Central purchasing Maximum efforts to reduce lead time. Managed by top management.

These items are generally 20% of total items and represent 10-15% of total expenditure. Intermediate items. Not as detailed and rigid as A items. Moderate control and low safety stock Once in three months Monthly control reports Periodic follow-up Moderate value analysis Two or more reliable sources Estimates based on past data on present plans Can be handled by middle management

 a) b) c) d) e) f) g) h) i)

Larger in number but consume less amount of resources. Must have Ordinary control measures Purchase based on usage estimates High safety stocks Bulk ordering once in a 6 months Minimum value analysis Two reliable sources of each item Group postings Decentralization purchasing Minimum clerical efforts.

Colour Coding
A-item: Red colour B-item: Pink colour C-item: Blue colour

1.

Prepare a list of items and estimate their annual consumption (Units) Determine unit price of each item Multiply each annual consumption by its unit price to obtain its annual consumption in Rs.

2. 3.

4.

Arrange items in the descending order of their annual usage starting with highest annual usage down to the smallest usage. Calculate cumulative annual usage and express the same as cumulative usage percentage. Also express number of items into cumulative item percentage.

5.

6. Plot cumulative usage percentage against cumulative item percentages and segregate the items into A, B and C categories.

Make Notes : Items of category A should be given the utmost attention and their levels of stocks should be strictly maintained. Items of category B, ordinary store routines should be observed. Category C may be considered as free issue items and even normal accounting procedure may be adopted, so that fresh supplies may be obtained in time. Advantages of ABC analysis : . ABC analysis does not stress on items those are less costly but may be vital.

Steps in controlling Inventory Determination of optimum Inventory levels Determination of degree of control Planning & design of the inventory control

Various other techniques :

ABC; HML; VED; SDE; FSN; EOQ; Max-Min Two

High-Medium-Low Vital-Essential-Desirable Scarce-Difficult- Easy to obtain Fast-Slow-Non Moving

Bin System

F.W. Harris developed the EOQ model in 1913. Later R.H. Wilson performed the in-depth analysis of the model.

Economic Order Quantity is the point at which the costs of procuring the inventory and costs of holding the inventory are minimum.

EOQ is the resultant quantity derived when the procurement cost per period and the inventory carrying cost are at the optimum balance and the total cost is minimum.

 The

demand is known The lead time is fixed & Known The receipt of the order occurs in a single instant Quantity discounts are not calculated No shortage of items occurred

Annual Cost ($) Minimum Total Annual Stocking Costs Total Annual Stocking Costs Annual Carrying Costs Annual Ordering Costs Smaller EOQ Larger Order Quantity

Lower

Higher

Annual consumption of the items (Units)

AC Unit Price (Rs) U Order quantity (units) OQ Procurement cost/order (Rs) Cp Inventory Carrying cost as %age Ci

Annual Procurement cost = (AC x Cp)/OQ Annual Inv carrying cost

= Avg. Inv investment x Inv carrying cost = x Order qty. x Price/Unit x Inventory carrying cost = x OQ x U x Ci

Total Annual Cost

= Annual ordering cost + Annual inventory carrying cost = (AC x Cp)/OQ + (OQ x U x Ci)/2

EOQ = {(2.AC.Cp)/(U.Ci)}

Measurement of the effectiveness of inventory management

Overall

inventory turnover ratio

Cost of goods sold

Average inventory cost Weeks inventory of raw material on hand