Lecture 16

Materials & Inventory Management

Course Leader
R Arun

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Faculty of Engineering & Technology Ramaiah University of Applied Sciences
 Lecture Objectives
At the end of this lecture, the students would be able to

Define materials management and inventory control

Explain the objectives and functions of materials

management and inventory control

Discuss the types of inventories and costs associated with

inventory

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 Materials
Basically inputs to a production process

Embodied in the finished products being manufactured

Materials may be unprocessed, semi-finished, finished

goods, spare parts and components etc

It may also be operating supplies such as lubricating oil,

cleaning materials and other materials which are required
for maintenance and repairs

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 Materials Management

Materials management is a concept that deals with controlling

and regulating the flow of materials in relation to changes in
variables like demand, prices, availability, quality, delivery
schedules etc.

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 Materials Management Contd

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 Objectives of Materials Management
Minimization of material costs

Reduction in inventory for use in production process and to

develop high inventory turnover ratios

Procuring materials of desired quality at the right time and

at the least possible cost

Reducing paper-work in order to reduce delays in

procurement of materials

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 Objectives of Materials Management Contd
Analyze changes in market conditions and other factors
affecting the concern

Efficient purchasing, receipt, transportation and storage of

materials

Reduction of cost through simplification, standardization,

value analysis etc

Carry out studies in new areas to minimize production costs

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 Functions of Materials Management

Planning of material requirements

Purchasing and inspection of materials

Classification, codification and standardization in stores

Receipt, storage and issue of materials for production

Maintenance of proper inventory records

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 Inventory
A vast spectrum of materials that is being transferred,
stored, consumed, packaged, or sold one way or the other
during a firms normal curse of business

A comprehensive list of movable items required for

manufacturing the products and to maintain the plant
facilities in working condition

Inventory has a financial value, which for the purpose of

accounting is considered under floating assets

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 Inventory Control
Inventories represent the largest single investment in assets
from many manufacturers, retailers, and wholesalers

Inventory investment represents over 20% of the total assets

of a manufacturer and over 50% of the total assets of
wholesalers and retailers

Thus holding inventories is connected with significant costs

Therefore, keeping the level of inventory in a supply chain to

as low as possible is one of the key goals of an organization
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 Inventory Control Contd

Inventory control is defined as the systematic location, storage

and recording of goods in such a way that the desired degree
of service can be made to the operating stores at the minimum
ultimate cost

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Faculty of Engineering & Technology Ramaiah University of Applied Sciences
 Objectives of Inventory Control
Support production departments with materials of the right
quality in the right quantity, at the right time and right price,
from the right supplier

Minimize investments on materials by ensuring economies

of storage and ordering costs

Avoid accumulation of work-in-process

Ensure economy of costs by processing economic order

quantities
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 Objectives of Inventory Control Contd
Maintain adequate inventory at the required sales outlets to
meet the market needs promptly, thus avoiding excessive
stocks or shortages at any given time

Contribute directly to the overall profitability of the

organization

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 Functions of Inventory Control
Develop policies, plans and standards to achieve objectives

Build a logical and workable plan of organization for doing

the job satisfactorily

Develop procedure and methods that will produce the

desired results economically

Provide necessary physical facilities

Monitor results periodically and take corrective actions

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 Types of Inventories
By position in a companys production/operation process
Raw materials
Work-in-process (WIP)
Finished Goods

By Estonian financial accounting rules

Raw materials
Work-in-process
Finished Goods
Goods purchased for resale
Advance payments to suppliers

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 Types of Inventories Contd
Cycle Stock Inventory for satisfying usual demand between
replenishments

In-transit inventories Also known as pipeline stock, they

are materials enroute from one location to another

Safety or buffer stock Held in excess of cycle stock because

of uncertainty in demand or lead time

Speculative Stock Held for reasons other than satisfying

customer demand (quantity discounts, strikes, calamities)
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 Types of Inventories Contd
Seasonal stock Form of speculative stock that involves
accumulation of inventory before a seasonal period begins

Dead stock Products for which no demand has been

registered for a certain period of time

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 Types of costs associated with inventories
Ordering costs
Also called setup costs, or cost of replenishing inventory covers the
costs incurred every time an order is placed

Carrying costs
Cost of having inventory in the organization, independent of the
inventory flow

Stock out costs

This is the cost incurred when shortage of materials take place

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 Factors affecting inventory costs
Sales characteristics
Size and frequency of orders, uniformity of sales, service requirement
in filling orders, pattern of distribution, accuracy of sales forecast

Production characteristics
Type of production, number of processes involved, capacity of
production, type of processing, processing time, obsolescence risks

Material characteristics
Procurement cycle, internal lead time, Terms of payment, Discounts,
Speculative buying, Imported material

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 Summary
Materials management deals with controlling and regulating
flow of materials

Inventory control is the systematic storage and recording of

goods in order to provide optimum service to customers at
the least possible cost

There are various types of costs associated with inventory

and each type of cost is influenced by different factors

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