Materials Management & Inventory Control

Definition
The American Production & Inventory
Control society defines
“Material Management as grouping of
management functions related to complete
cycle of material flow, from purchase &
internal control of production materials to the
planning & control of work in process to
warehousing, shipping & distribution of
finished product”.

Material Management includes:

1. Materials planning & programming
2. Store-keeping
3. Purchasing
4. Inventory Control
5. Simplification, codification & standardization in stores
6. Transportation
7. Material Handling
8. Disposal of scrap & surplus

Types of Materials
1. Raw Material
2. Purchased parts
3. In-process material
4. Finished products
5. Supplies
6. Equipment items
Purchasing
Purchasing refers to “the act of buying an
item at a price”

In managerial sense it is “an activity

which goes beyond the simple act of
buying & includes the planning & policy
activities covering a wide range of related
& complementary activities.
Sections in a purchasing dept.
1. Buying section : for purchasing all types of
materials required by the factory

2. Follow up section: to ensure quick supply of

material by the supplier

3. Invoice section: record of material coming & going

out of the factory

4. Stenographic section: for follow up, invoice

checking, stenographic work & filing

5. Records & Filing section: only found in large

factories otherwise the stenographer carries out
these activities.
6. salvaged material disposal section: selling of scrap

Contd.
7. Purchase research section: only found in big
factories

8. Traffic section: when incoming materials are larger

than the outgoing goods, this section is set up
Purchasing Procedure
1. Initiation of purchase requisition
2. Selection of supplier
3. Placing the purchase order
4. Receiving & inspection of materials
5. Passing the invoice received on to the account
Purchasing System:
1. Centralised Purchasing

2. Decentralised Purchasing

3. Centralised-Decentralised Purchasing

Storage
It refers to the art of preserving the
goods until required in production.

Store keeping aims at safeguarding the

materials from all kinds of loss and
damage and ensuring smooth &
continuous flow of materials into the
production activities.
Inventory Control
It is defined as “the systematic location
storage and recording of goods in such a
way that desired degree service can be
made to the operating shops at minimum
ultimate cost”.
Functions:
*To run the stores effectively
*Ensure timely availability of material
*Technical responsibility for the state of material
*Stock control system
*Maintenance
*Protection through proper handling
*Estimating material cost

Inventory could be raw materials, work-

in-process, finished products or the spare
parts or other indirect materials.
Measure of performance:
Annual Demand
Inventory turnover ratio=--------------------
Average Inventory
Techniques of Tools for Inventory control
1. Setting Stock levels or Re-order level:
The item under this system is replenished as
soon as it’s stock level falls to or below re-
order level. ROL is the sum total of minimum
stock and lead time consumption.
ROL = m + (L * C)
Minimum stock = m
Lead time = L
Daily/weekly/monthly consumption = C

2. Economic Order Quantity (EOQ)

EOQ is the optimum or the most favorable
quantity to be bought at each order.

EOQ= Sqrt (2 * R* S /K *C)

Where
R= Annual requirement
S=Procurement cost or set up cost
K =carrying cost as percentage of average inventory cost
C = unit cost of item.

3. ABC Analysis
It classifies stock items on the basis of
value or importance.

A - high priced large value items

- 5 to 10% of total items in the store
- 70 to 80% of total inventory value
B- medium priced & intermediate value
items
- 20 to 30% of the inventory items
- 25 to 30% of store value

C – low priced & low value item

- 70 to 80% of the inventory items
- 5 to 10% of store value

4. VED Analysis
The items can be classified according to
their use, consumption, values etc.

V – Vital items, without which production

will come to halt
E - Essential items, without which
dislocation of production work occurs.
D - Desirable items, items which do not
cause any immediate loss.

5. SDE Analysis
Analysis is based on availability position
of each item.

S – Scarce items, which are in short supply & their

availability is scarce.
D – Difficult items, which cannot be procured easily
E – Easily available items
6. MNG Analysis
M – refers to moving items, these items are
consumed time to time
N – refers to non-moving items, items which are not
consumed in last one year.

G – refers to ghost items, which had nil balance both

at the beginning & end of financial year.

7. Perpetual Inventory System:

A system of record maintained by
controlling department, which reflects the
physical movement of stock & their
current balances.
It has two important features:
i. continuous inventory system
ii. Continuous stock verification
i. Inventory recording
A. Bin Card:
B. Stores Ledger
FIFO (First in First Out)
LIFO (Last in First Out)
Simple Average
Weighted Average
ii. Continuous stock verification
Periodic Inventory system: physical stock
checking is done at the end of accounting
period

Perpetual inventory: verification

conducted through out the year.