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PROCUREMENT AND
INVENTORY MANAGEMENT
BY
MWL NYIRENDA
PRINCIPAL LECTURER- FINANCE
Contacts: nyirendamathews@sdi.ac.mw
0999237528
STAFF DEVELOPMENT INSTITUTE
SDI
BUSINESS SUCCESS IS IN
STAFF DEVELOPMENT
Specific objectives
 Explain how stores is accounted
for and the reasons behind that.
 Understand how inventory is
classified.
 Explain how disposal of stores is
done.
2
3
Introduction
Procurement and stores
management is concerned with;
Acquisition, supply, custody,
accounting, and disposal of
Inventory.
What do you think are the
definitions of such words as:
Procurement, supply, custody,
accounting and disposal of Inventory
DEFINITION OF PROCUREMENT
Procurement is “the acquisition of
appropriate goods, services and works
at the best possible total cost of
ownership to meet the needs of the
purchaser”.
• Supply is the total amount of a product (good or
service) available for purchase at any specified
price.
• Custody is the keeping, care, & control of
Inventory (i.e. goods) by someone.
• Accounting for stores is the process of recording
details of stock movement and balances in
quantity and value.
5
DEFINITION OF OTHER TERMS
INVENTORY MANAGEMENT

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Inventory or stores management

  • 1. 1 PROCUREMENT AND INVENTORY MANAGEMENT BY MWL NYIRENDA PRINCIPAL LECTURER- FINANCE Contacts: nyirendamathews@sdi.ac.mw 0999237528 STAFF DEVELOPMENT INSTITUTE SDI BUSINESS SUCCESS IS IN STAFF DEVELOPMENT
  • 2. Specific objectives  Explain how stores is accounted for and the reasons behind that.  Understand how inventory is classified.  Explain how disposal of stores is done. 2
  • 3. 3 Introduction Procurement and stores management is concerned with; Acquisition, supply, custody, accounting, and disposal of Inventory. What do you think are the definitions of such words as: Procurement, supply, custody, accounting and disposal of Inventory
  • 4. DEFINITION OF PROCUREMENT Procurement is “the acquisition of appropriate goods, services and works at the best possible total cost of ownership to meet the needs of the purchaser”.
  • 5. • Supply is the total amount of a product (good or service) available for purchase at any specified price. • Custody is the keeping, care, & control of Inventory (i.e. goods) by someone. • Accounting for stores is the process of recording details of stock movement and balances in quantity and value. 5 DEFINITION OF OTHER TERMS
  • 7. INTRODUCTION  Inventory is material that the firm obtains in advance of need, holds until it is needed, and then used, consumed, incorporated into a product, sells, or otherwise disposes it off.  A business inventory is temporary in nature.  Inventories are stock of any kind like fuel and lubricants, spare parts and semi-processed materials to be stored for future use mainly in the process of production or it can be known as the ideal resource of any kind having some economic values.
  • 8. COMPONENTS OF THE INVENTORY MANAGEMENT • Inventory management is therefore concerned with “ receiving materials, protecting them while in storage from damage & unauthorized removal, issuing the material in the right quantities, at the right time to the right place and to provide these service promptly and at least cost”.
  • 9. 9 IMPORTANCE OF INVENTORY  Inventory represent cash in another form, therefore, proper systems for management and control are as essential as for cash.  Supply of inventory is of vital importance for effective performance of the organisational programmes.  Expenditure on inventory forms a major component of organisational expenditure therefore, offers considerable scope for economy
  • 10. 10 TYPES OF INVENTORY  There are a number of ways of classifying stores.  This may be in terms of whether they are totally expended in use or not.  where such is the basis, stores are classified as: a. Consumable Inventory – for those that are totally expended or lose their separate identity in use. b. Non-consumable Inventory to refer to those that are useable over a period of time.
  • 11. 11 Alternatively stores may be classified based on the intended use and the following classifications are identified: i. Raw materials ii. Packaging materials iii. Maintenance materials iv. Patterns and tools TYPES OF INVENTORY
  • 12. FUNCTIONS OF INVENTORY/STORES MANAGEMENT 1. Receipting 2. Storage 3. Retrieval 4. Issuing 5. Records Management 6. Housekeeping 7. Stock Control 8. Surplus management 9. Verification 10.Interaction & coordination
  • 13. 1. RECEIPT ING • Any item of goods or material that enters the organization always enters through the stores. Similarly, every item unless specifically excluded, has to leave through the store. Stores is the final account keeper of all materials. • Material sent by any supplier after the security clearance comes to the stores. Stores check the document carried by the carrier, known as Delivery Note, against the copy of the Local Purchase Order placed on the supplier by the organization.
  • 14. 1. RECEIPTING • Once the adequacy is established and quantity is verified the material is sent for testing for quality parameters. • Some times quality control tests are elaborate and time consuming. If the policy of receipt is to unload the material subject to quality control acceptance, it is cleared for unloading. • Unloaded material is kept on the hold if it is not yet cleared by quality control department. If the material is rejected it is sent back to the supplier after clear documentation.
  • 15. STORAGE • Once the unloaded material is approved by the quality control department, as per the quality plan in the quality system, it is moved to a specific place in the stores layout. • The material is so stored that it becomes easy to retrieve and issue subsequently. • Storage should also ensure protection against deterioration, damage and pilferage.
  • 16. STORAGE • Detailed system is adopted for location and labeling of items while in storage. Storage plan is made keeping in mind, 1. nature of the product- physical state, toxicity, inflammability and other hazards 2. volume and weight- heavy or light 3. movement frequency- fast moving or slow moving 4. point of use
  • 17. RETRIEVAL • Easy and quick retrievability of items that are demanded by the internal customers is necessary. • Easy identification, maximum space utilization and minimum handling are key factors to retrieval functions. • It is common knowledge in many of the departments that after hours of searching for the item, it is declared to be out of stock. This causes hold-up of production process and/or programme implementation and unavoidable urgent purchase of out of stock material. • This function takes place as per established retrieval system.
  • 18. ISSUING • Fulfilling customer demand for the item in minimum time, keeping quality high and cost minimum is an issue. • An internal customer doesn’t pay the price but he has to fulfill requirement of authorization for the demand. • A duly authorized indent or requisition for the item is the key
  • 19. RECORDS • This involves maintaining records of receipt and issue. • Updating the stock levels as per movement of materials. • Basic records of store are bin card and stock register. –Bin card is placed on the bin in which items are stored. This gives information about receipt, issue and balance. –stock register gives all the information in the bin card and also the value.
  • 20. HOUSEKEEPING • Maintenance of spic and span cleanliness in the store and ensuring principle of Place for Everything and Everything in its place is fully implemented. • Good housekeeping ensures satisfactory work practices
  • 21. CONTROL • This means taking measures to ensure material plan is being adhered to. • Any changes in consumption pattern or replenishment pattern are closely monitored for corrective action. • Material movement is watched to identify nonmoving material for disposal. • Effective control puts into effect management objective of ‘no shortage and no excess’.
  • 22. SURPLUS MANAGEMENT • Effective disposal system for unneeded material to reduce inventory cost and proactive measures to eliminate deterioration and obsolescence. • Obsolete items are goods in all respect but have no useful role in the organisation due to changes that have occurred in the course of time.
  • 23. SURPLUS MANAGEMENT • Surplus items are those that have accumulated due to faulty planning, forecasting and purchasing. Hence a usage value is associated with these items. • Scrap is wastage generated due to processes like turning, boring drilling etc. and also due to bad manufacturing. • It was learnt that nearly MK. 30 Billion were tied up as obsolete, surplus and scrap items in our stores by 1996.
  • 24. VERIFICATION • Stock verification is done to eliminate gap between information and physical stock. • In stores some items are maintained as stock items. The stores triggers the procurement cycle for such items when a predetermined reorder level is reached. • Hence correct stock position through verification is critical to ensure ‘no shortage and no excess’ for the item.
  • 25. INTERACTION & COORDINATION • Very close interaction between Purchasing, user departments, quality control and engineering functions is obviously needed in the discharge of the inventory management functions discussed above. • It also becomes necessary to coordinate the flow of material samples and information through a network of departments for performance of stores functions. • Besides, every management function being an internal customer, interaction is very important.
  • 26. 26 ACCOUNTING FOR INVENTORY Accounting for inventory is the process of recording details of stock movement and balances in quantity and value This Involves: i. Preparation of relevant document to support receipt and issues of stock ii. Recording on Bin cards and Inventory ledgers iii. Verifying book balances with actual stock balance
  • 27. 27 INVENTORY/STORES LEDGERS Stores ledger may either be manual or electronic version In a manual system a stores ledger may be kept in a form of: Registers loose leaf ledgers held in a binder Stock cards
  • 28. 28 PARTICULARS OF INVENTORY / STORES LEDGER Date. Ref No. Quantity Remarks Receipt Issued Balance 12/09/2016 00231 140 Nil 140 In good condition 13/09/2016 R 15 - 10 130 Requisitioner Signature Name of Article Stock level Size Unit Max. Min. Unit Price
  • 29. STOCK CONTROL LEVELS • Maximum level- level selected as a maximum desirable which is used as an indicator to show when inventory have risen too high • Minimum level - warning level to draw management attention to the fact that inventory are approaching a dangerous low level
  • 30. • Reorder level - where inventory have to be replenished • Reorder Quantity - Quantity of inventory to be ordered when the inventory reaches reorder level. 30
  • 31. Inventory Control Demand rate 0 Time Lead time Lead time Order Placed Order Placed Order Received Order Received Inventory Level Reorder point, R Order qty, Q As Q increases, average inventory level increases, but number of orders placed decreases
  • 32. CLASSIFICATION OF INVENTORY COSTS: Inventories’ cost are traditionally categorized into four basic types: i. Purchase costs ii. Ordering costs iii. Holding costs iv.Shortage Costs
  • 33. PURCHASE COST: For items that are purchased from outside the firms, this is usually the unit price that the firm pays to its vendor. As an item moves through the logistics system of the firms, its purchase cost in the inventory analysis should reflect its fully landed cost, by which is meant the cost to acquire and move the item to that point in the system.
  • 34. ORDERING COST: In addition to the per unit purchase cost, there is usually an additional cost which is incurred whenever we order, reorder or replenish the inventory. If we produce items internally then there will be an organization set up cost. This happens because we have to shut down the manufacturing line and change over, reconfigure the line to make a specific item. This is the cost involved with processing the order, involving paying the bill, auditing, and so forth.
  • 35. HOLDING COST: The cost that accrue due to the actual holding of the inventory over a time period. Many different kinds of cost can be considered as holding cost. The key characteristics of holding cost varies with the amount of inventory being held and the time that the inventory is held. The holding cost can further be classified as follows: • Storage cost • Service cost • Risk cost • Capital cost.
  • 36. SHORTAGE COST: When a demand arises which cannot be satisfied from available inventory an inventory shortage occurs. Purchase, ordering and holding cost can be thought of as the cost of having inventories, while shortage cost result for not having inventory, or for not having enough inventory at the right place at the right time
  • 37. FOUR SPECIFIC CASES WHERE SHORTAGE COST MAY EXIST ARE:  Back orders  Lost sales  Lost customer cost  Disruption cost
  • 38. 38 Potential fraud involving stores fraud safeguard (i) Ordering goods at inflated prices (i) Fictitious purchases (iii) Shortage on receipt (iv) Loss from stock Use of standard costs for standard purchases and get quotations for special items Separation of responsibilities of stores functions Checking-in all goods inwards at gate delivery signature Regular stock-taking and physical security
  • 39. 39 FRAUD SAFEGUARD (v) Writing off good stock as obsolete or damage (vi) Losses after issue to user department Designating an official outside stock handling for control over write-offs Records of all issues and install standard usage allowance
  • 40. Thank You for Your Attention Any Questions?