Techniques of material control
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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.
Techniques of material control
- 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