Material Control- techniques

labor materials overheads Increase in profits by 30% Monika kansal

Techniques of material control

Learning Objectives

After going through this module you shall be able to

Know meaning of inventories and their need

Get a feel of various techniques of material control

Judge their applicability in various situations

Know their respective advantages and disadvantages

What are inventories?

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

Today’s inventory is tomorrow production.

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

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

Why inventories No production is possible without the inventories. Companies have to make the buffer stocks for production.

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

What is inventory control ?

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

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

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

Inventories are necessary evil.

Why selective inventory control`

Extremely large variety of items

so

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

Put limited control efforts more judicially over significant items

Main techniques in selective inventory control

ABC Analysis

VED Analysis

FSDN Analysis

JIT Analysis

HML analysis

ABC-Always better control Money value of consumption

Basis of classification

Value of usage

Or

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

Let us define ABC

A - significant few ,

items few in number contributing high proportion of value of inventories

B- not few, not too many

neither very cheap nor very costly

C- Insignificant many

relatively large no. of items

normally inexpensive

Mechanism of ABC

Group % of items (number) % of costs

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

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

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

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

Control by Importance and exceptions

Graphical presentation

Control mechanism of ABC Fully deleagted Middle level managers Senior officials Handled by minimum moderate Rigorous Value analysis Expediting exceptionally periodic Maximum Follow up high Low No or very low Safety stock “ C” “ B” “ A” ITEM

Advantages of ABC Analysis

1. Strict control is exercised

2.Investment in inventory is

reduced

3. Storage cost is reduced

4. Management time is saved

Just in time inventory:

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

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

Advantages of JIT

1. Investment in inventory is reduced.

2.Carrying cost is reduced.

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

4. Minimum possible wastage

Perpetual Inventory System :

It is a system of records.

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

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

Records of all issues and balances.

Also includes

Continuous stock taking

Surprise checks

Merits:

Provides better control

Acts as an internal check mechanism

Assures minimum of investment at least cost

Timely detection of errors & discrepancies.

Preparation of final accounts at any time is possible.

Demerits:

Not suitable for small units

More paper work

Actual stock taking may not be

possible in true sense

control for spares ?

VED Analysis:

VED- vital, essential & desirable- analysis is used primarily for control of spare parts. The spare parts can be divided into 3 categories-

1-Vital

2-Essential

3-Desirable

Depending upon their criticality for production.

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

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

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

FNSD Analysis:

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

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

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

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

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

HML Classification :

The HML classification is similar to the ABC classification, except for the fact that instead of consumption values of items, their units values are considered.Items are classified on the basis of their unit value into:

H= High value items

M= Medium value items

L=Low value items

XYZ Classification :

B ased on the closing inventory value of different items.

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

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

Let us recaptualise

ABC - emphasizes % value of consumption

JIT - purchase only when demanded

VED - criticality for production

FSDN - frequency of use

HML – unit value of stock

XYZ – closing value of different items

Perpetual Inventory system

Maintenance of records of all physical movements of stock

Continuous stock -taking

Surprise checks

An automobile assembling company

(requires 20,000 to 22,000 components )

A case study

Bibliography:

COST ACCOUNTING

OPERATION RESEARCH

PRODUCTION MANAGEMENT

Thanks

Types of inventory

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

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

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

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

Functions of Inventory control

Effective use of financial resources : Effective inventory control system and its use lessens the investment in inventories, inventory carrying cost.

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

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

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

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

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

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

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

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

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

Why business units have inventories?

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

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

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

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

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

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

To meet other requirement :

Seasonal availability such as oil seeds , coconut , mangoes , tomatoes which are seasonable goods and not available in market during off season

Government regulation

Scope of inventory control

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

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

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

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

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

Factors determining the optimum level of inventory