This document discusses procurement and inventory management. It defines key terms like procurement, supply, custody, accounting, and disposal. It also covers types of inventory like consumable and non-consumable, classification based on intended use, and functions of inventory management including receipt, storage, retrieval, issuing, records keeping, and control. Inventory is accounted for by recording stock movements and balances. Different inventory costs like purchase, ordering, holding and shortage costs are also outlined.

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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

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

6. INVENTORY MANAGEMENT

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”.

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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

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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.

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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.

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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

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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

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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

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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

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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?