This document discusses various techniques used for effective material control, including: 1) Setting reorder levels, minimum levels, and maximum levels to ensure adequate stock levels. 2) Determining economic order quantities to minimize ordering and carrying costs. 3) Just-in-time inventory systems which aim to deliver materials as needed to reduce stock levels. 4) ABC analysis which categorizes materials based on value to prioritize control of high-value items.

1. TECHNIQUES OF MATERIAL
CONTROL
DR. MOHAMED KUTTY KAKKAKUNNAN
Associate Professor
P.G. Dept of Commerce
NAM COLLEGE KALLIKKANDY
Kannur –Kerala – India

2. TECHNIQUES OF MATERIAL CONTROL
Material control aims at minimizing or eliminating the all
kinds of wastes and losses so as to reduce material cost and
total cost
Material control will be exercised in each stage of material
handling
Different tools and techniques are used for effective material
control
I. Level Setting (stock levels)
II. Economic Order Quantity (EOQ)
III. Just-in-time Inventory System
IV. ABC Analysis
V. VED Analysis
VI. Perpetual Inventory System
VII. Double Bin System
VIII.FSND Analysis

3. 1. Level Setting
(a). Re-order level
(b) Minimum Level
(c) Maximum Level
(d) Danger Level and
(e) Average Stock Level

4. (a). Re-order Level
The point (level or quantity) at which if the stock of a
particular material in the store approaches, the
storekeeper takes initiatives for getting fresh supply of
commodities.
Store keeper prepares purchase requisitions for fresh
supply of materials (takes initiative for getting fresh
supply)
Fixed :-
Between the maximum level and minimum level
After considering the production requirements during
the period to get fresh supply, the time required for
fresh supply etc.

5. Re-order Level =
Minimum consumption + Consumption
during the time period to get fresh
supply
or
Maximum consumption x Maximum re-
order period to get fresh supply

6. b). Minimum Level or Safety Level
The quantity of materials to be maintained in hand at all
time.
Ensures availability of materials at all times and production
activity is not interrupted due to lack or shortage of
materials
This level is determined by considering –
• The lead time – time lag between indenting and
receiving material or the time required to replenish the
supply
• Rate of consumption during the lead time and
• Nature of the material
Minimum Level = Reordering Level – (Normal
Consumption X Normal Re-order Period)

7. C. Maximum Level
The maximum quantity of an item of material
which can be held in stock at any time
Stock should not exceed this level and helps in
avoiding overstocking of an item
Reduces or eliminates problems of
Overstocking
Maximum Level= Reordering Level + Reordering
Quantity - (Minimum Consumption X Minimum
Reordering Period)

8. Maximum level is determined after considering
• Amount of capital available for maintaining stock
• Availability o storage space
• Maximum quantity of the material for production purposes,
• Lead time and consumption during the lead time
• Nature of materials,
• Holding and carrying costs,
• Fluctuation in prices,
• Seasonal nature of supply,
• Legal restrictions (maximum qty that can be kept – fireworks,
explosives),
• Possibility of obsolescence

9. d. Danger Level
• The level at which normal issues of material are
stopped and issues are made only under specific
instructions.
• The purchasing department will make special
arrangements to get the materials which so that
production may not be affected due to shortage of
materials
• Danger Level = Average Consumption X Maximum
Reorder Period For Emergency Purchases
e. Average Stock Level = Minimum Stock Level + ½
of the Reordering Quantity

10. The quantity of a commodity to be ordered at a time is known as
the EOQ. Answers how much to be ordered?
Determined after considering the carrying costs and ordering
costs
Fixed in such a manner as to minimize the costs associated with
ordering and carrying the stock
Total cost of a particular material consists of its cost of
acquisition, carrying costs and ordering costs
Total cost of material = Cost of acquisition + Ordering cost +
Carrying cost
Since the cost of acquisition remain the same at different levels
(except when discount varies), for determining the EOQ, only
carrying and ordering costs are considered

11. The cost of holding the material in the store. It includes :-
• Cost of storage space, which can be used for other
purposes
• Cost of bins and racks for keeping the material
• Cost of maintaining material to avoid wastage
• Interest payable on the money locked in material
• Cost of spoilage in stores and handling
• Transportation costs of materials
• Cost of obsolescence
• Insurance and other clerical costs
All these costs are taken together

12. The cost of placing orders for purchase of materials –
includes:-
• Cost of staff posted in the purchasing department,
inspection section and payment department etc.
related with materials
• Cost of stationery, postage, telephone charges etc.
related with purchase of materials
Thus, include cost of floating tenders, cost of comparative
evaluation of quotations, cost of paperwork, postage,
inspection of materials, cost of accounting and making
payments etc.
The ordering cost varies with the number of orders

13. EOQ –the quantity of material that can
economically ordered at a time.
Major purpose of determining EOQ is to minimize
the carrying and ordering costs and ensuring that
there is no heavy investment in stock
Where
C = Consumption of material in units during a year
O= Cost of placing an order or cost of getting an
item to the firm’s inventory
I= interest payment including variable costs of
storing per unit per year (holding cost)

14. Costs
Quantity
Carrying cost
ordering cost
Total Cost of
Carrying
and
Ordering
EOQ

15. Assumptions of EOQ
• The firm can place any number of orders as it needs
• Prices of the items remain stable which keep carrying
cost constant
• The quantity of the item to be consumed during a
particular period is totally known or the quantity to be
consumed is certain
Difference between EOQ and Re-ordering quantity
Re-order quantity is the quantity for which purchase
order is actually given – may or may not be equal to
the EOQ
In the absence or information of EOQ, Re-order quantity
may be taken as the EOQ

16. Find out the EOQ from the following, and also show a graph
identifying EOQ
Annual usage :6000 units
Cost of material per unit: Rs. 20
Cost of placing and receiving an order : Rs. 60
Annual carrying cost of one unit : 10% of inventory value
Answer:
C = Annual Usage of material = 6000 units; O = Cost of placing
one order Rs. Rs. 60; I = annual carrying cost 20X(10/100) = Rs.
2.00
EOQ=

17. 1 2 3 4 5 6 7 8
Annual
Usage
Order Per
Year
Units Per
Order
1÷2
Values Per
Order @
Per Unit 3 X
20
3x2
Average
Inventory
Value
3x20x½
Carrying
Cost
10% of 5
Order
Placing Cost
60per Per
Order
7
Total Cost
6+7
6000 1 6000 120000 60000 6000 60 6060
6000 2 3000 60000 30000 3000 120 3120
6000 3 2000 40000 20000 2000 180 2180
6000 4 1500 30000 15000 1500 240 1740
6000 5 1200 24000 12000 1200 300 1500
6000 6 1000 20000 10000 1000 360 1360
6000 7 857 17143 8571 857 420 1277
6000 8 750 15000 7500 750 480 1230
6000 9 667 13333 6667 667 540 1207
6000 10 600 12000 6000 600 600 1200
6000 11 545 10909 5455 545 660 1205
6000 12 500 10000 5000 500 720 1220
6000 13 462 9231 4615 462 780 1242
6000 14 429 8571 4286 429 840 1269
6000 15 400 8000 4000 400 900 1300

18. 0
1000
2000
3000
4000
5000
6000
7000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Carryingandorderingcosts
Number of orders per year
Carrying Cost
Ordering Cost
Total Cost
EOQ

19. C. JUST-IN-TIME INVENTORY SYSTEM
• High cost of stores carrying and handling costs
• JIT system become popular
• In this system materials or stores are purchased in such a
way that delivery of purchased items is assured before
their use or demand
• Requires better relationship between the supplier for
making timely supply of materials
• The supplier supplies material as and when required
without any delay so that there is no need for keeping
large quantities of materials at the same time will not
interrupt production process due to shortage of
materials
• Supplier need be a trusty person in all respects

20. C. STOCK CONTROL THROUGH ABC ANALYSIS
• Stores maintain and handle different quantities of materials
with different cost or values
• In ABC Analysis the stores are divided into three categories
(ABC) on the basis of their values and quantities handled by
the store
• Category A consists of materials of high value but constitute a
small percentage of total handling of materials. These are high
priced materials and important items. Eg:- constitute 70% of
value of stores but consists of 10% of total material handled.
• Category B consists of materials which constitutes more or less
the same percentage of value and handling of materials.
Relatively less important materials. Eg:- 20% of value of stores
and 20% of handling
• Category C -are materials of less value but constitute a major
part of the materials handled by the store Eg- 10% value but
70% of the total material handled

21. ABC contd…
Such an analysis is known as ABC analysis, Stock Control according to
Value Method, Always Better Control Method or Proportional Parts
Value Analysis Method
Under this technique of material control, materials are listed in “A”, “B”,
and “C” categories in descending order based on money value of
consumption
This technique measures the cost significance of each item
Gives importance to control of items of material belonging to Category
A, then Category B and then category C
Thus, this technique is also known as Control by Importance and
Exception (CIE).
All types of material control (purchase, issue and stores) are strictly
applied to material belonging to Category A
Such elaborate controls are not exercised in the case of materials
belonging to Category C due to their small value

22. D. VED ANALYSIS
• Primarily used for control of spare parts
• Spare parts are divided into three categories (Vital, Essential
and Desirable – VED)on the basis of their relative importance
or criticality in production process
• Vital parts are those, the stock-out of which even for a short
time will stop production for quite some time and where the
cost of the stock-out is very high
• Essential parts are those, the absence of which cannot be
tolerated for more than a few hours or a day and the cost of
lost production is high, and which are essential for the
production to continue
• Desirable parts are those, which are needed but the absence
for a week or so will not lead to stoppage of production
• Some spares, though negligible value may be vital and thus
proper control over them is essential
• This technique can also be applied for materials also whose
procurement is difficult

23. E. PERPETUAL INVENTORY SYSTEM
“A system of records maintained by the controlling department,
which reflects the physical movement of stocks and their current
balance”
Bin cards and stores ledger make the record of physical movement
and balance of materials
Balance of materials is ascertained after each receipt and issue
through stock records to facilitate regular checking to avoid
closing down of the firm for stock taking.
To ensure accuracy of stock records (bin card and stores ledger)
physical verification of stock is also made through continuous
stock taking.
Thus, perpetual inventory system comprises :-
1. Bin Card (quantitative perpetual inventory)
2. Store ledger (quantitative cum value perpetual inventory) and
3. Continuous stock taking (physical perpetual inventory)

24. E. DOUBLE BIN SYSTEM
• Adopted by small firms
• The bin where material stored is divided into two parts or
compartments – materials are issued from the first part-
materials kept in the second part are not generally touched in
the ordinary course- issued only in case of emergencies – the
second part is just like reserve system of fuel in case of motor
bikes
First part
(ordinary issues)
Second part
(emergency)

25. F. FNSD ANALYSIS
Materials are categorized in 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
one year or
S-stands for slow moving items which are not issued at frequent
intervals and expected to exhaust over a period of two years or more
D- stands for dead items and consumption of such items are almost nil –
can also be taken as obsolete items
Stock of fast moving items shall be taken care of continuously and orders
are to be placed very often to avoid stock out such items
Stock of normal items need to checked regularly and orders are to be
placed at regular intervals
Stock of slow moving items are to be reviewed carefully and orders are
to be given carefully to avoid over stocking
While alternative uses are to be found for dead items